UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended August 31, 2005

Commission file number 0-28839

AUDIOVOX CORPORATION

(Exact name of registrant as specified in its charter)


Delaware 13-1964841
(State of incorporation) (I.R.S. Employer
Identification No.)
180 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code    (631) 231-7750

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   [X]                                    No   [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes   [X]                                    No   [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes   [ ]                                    No   [X]

Number of shares of each class of the registrant's Common Stock outstanding as of the latest practicable date.


Class Outstanding at October 4, 2005
Class A Common Stock 21,545,838 Shares
Class B Common Stock   2,260,954 Shares


AUDIOVOX CORPORATION

INDEX


      Page
Number
PART I – FINANCIAL INFORMATION      
  ITEM 1. FINANCIAL STATEMENTS   3  
    Consolidated Balance Sheets at November 30, 2004 and August 31, 2005
    (unaudited)		   3  
    Consolidated Statements of Operations (unaudited) for the Three and
    Nine Months Ended August 31, 2004 and 2005		   5  
    Consolidated Statements of Cash Flows (unaudited) for the Nine Months
    Ended August 31, 2004 and 2005		   6  
    Notes to Consolidated Financial Statements   7  
  ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   20  
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   33  
  ITEM 4. CONTROLS AND PROCEDURES   34  
PART II – OTHER INFORMATION   36  
  ITEM 1. LEGAL PROCEEDINGS   36  
  ITEM 6. EXHIBITS   37  
SIGNATURES       38  

2



PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)


  November 30,
2004		 August 31,
2005
    (unaudited)
Assets            
Current assets:            
Cash and cash equivalents $ 43,409   $ 18,099  
Restricted cash   8,264     1,463  
Short-term investments   124,237     140,001  
Accounts receivable, net   118,388     95,787  
Inventory   139,307     147,915  
Receivables from vendors   7,028     7,286  
Prepaid expenses and other current assets   14,057     8,332  
Deferred income taxes   6,873     7,508  
Current assets of discontinued operations   20,582     3,793  
Total current assets   482,145     430,184  
Investment securities   5,988     6,214  
Equity investments   12,878     12,076  
Property, plant and equipment, net   19,707     20,464  
Excess cost over fair value of assets acquired   7,019     19,028  
Intangible assets   8,043     8,182  
Deferred income taxes   6,220     3,893  
Other assets   413     344  
Non-current assets of discontinued operations   925     777  
Total assets $ 543,338   $ 501,162  

See accompanying notes to consolidated financial statements.

3



AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets  (continued)
(In thousands, except share and per share data)


  November 30,
2004		 August 31,
2005
    (unaudited)
Liabilities and Stockholders' Equity            
Current liabilities:            
Accounts payable $ 26,004   $ 27,797  
Accrued expenses and other current liabilities   32,814     22,587  
Accrued sales incentives   7,584     7,919  
Income taxes payable   42,790     2,998  
Bank obligations   5,485     3,941  
Current portion of long-term debt   2,497     1,407  
Current liabilities of discontinued operations   2,953     3,146  
Total current liabilities   120,127     69,795  
Long-term debt   7,709     6,910  
Capital lease obligation   6,001     6,018  
Deferred compensation   4,888     5,887  
Total liabilities   138,725     88,610  
Minority interest   426     363  
Commitments and contingencies            
Stockholders' equity:            
Preferred stock $50 par value; 50,000 shares authorized and outstanding, liquidation preference of $2,500   2,500     2,500  
Series preferred stock $.01 par value, 1,500,000 shares authorized; no shares issued or outstanding   —     —  
Common stock:            
Class A $.01 par value; 60,000,000 shares authorized; 20,859,846 and 21,513,346 shares issued at November 30, 2004 and August 31, 2005, respectively   209     215  
Class B $.01 par value; convertible 10,000,000 shares authorized; 2,260,954 shares issued and outstanding   22     22  
Paid-in capital   253,959     262,902  
Retained earnings   157,835     158,540  
Accumulated other comprehensive loss   (1,841 )    (3,493 ) 
Treasury stock, at cost, 1,070,957 shares of Class A common stock   (8,497 )    (8,497 ) 
Total stockholders' equity   404,187     412,189  
Total liabilities and stockholders' equity $ 543,338   $ 501,162  

See accompanying notes to consolidated financial statements.

4



AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three and Nine Months Ended August 31, 2004 and 2005
(In thousands, except share and per share data)
(unaudited)


  Three Months Ended Nine Months Ended
  August 31, August 31,
  2004 2005 2004 2005
Net sales $ 132,600   $ 122,937   $ 414,840   $ 383,426  
Cost of sales   109,452     110,672     349,168     332,291  
Gross profit   23,148     12,265     65,672     51,135  
Operating expenses:                        
Selling   8,300     7,258     22,944     23,564  
General and administrative   12,830     12,497     35,702     37,040  
Engineering and technical support   935     1,514     3,404     4,752  
Total operating expenses   22,065     21,269     62,050     65,356  
Operating income (loss)   1,083     (9,004 )    3,622     (14,221 ) 
Other income (expense):                        
Interest expense and bank charges   (833 )    (552 )    (2,662 )    (1,923 ) 
Equity in income of equity investees   1,041     849     3,591     1,945  
Other, net (note 18)   372     2,190     1,568     9,815  
Total other income, net   580     2,487     2,497     9,837  
Income (loss) from continuing operations before income taxes   1,663     (6,517 )    6,119     (4,384 ) 
Income taxes (benefit)   832     (2,926 )    3,042     (6,003 ) 
Minority interest   (794 )    —     (754 )    —  
Net income (loss) from continuing operations   37     (3,591 )    2,323     1,619  
Net income (loss) from discontinued operations, net of tax   5,307     (126 )    8,568     (914 ) 
Net income (loss) $ 5,344   $ (3,717 )  $ 10,891   $ 705  
Net income (loss) per common share (basic):                        
From continuing operations $ 0.00   $ (0.16 )  $ 0.11   $ 0.07  
From discontinued operations   0.24     (0.01 )    0.39     (0.04 ) 
Net income (loss) per common share (basic) $ 0.24   $ (0.17 )  $ 0.50   $ 0.03  
Net income (loss) per common share (diluted):                        
From continuing operations $ 0.00   $ (0.16 )  $ 0.10   $ 0.07  
From discontinued operations   0.24     (0.01 )    0.39     (0.04 ) 
Net income (loss) per common share (diluted) $ 0.24   $ (0.17 )  $ 0.49   $ 0.03  
Weighted-average common shares outstanding (basic)   21,962,843     22,353,876     21,945,364     22,155,235  
Weighted-average common shares outstanding (diluted)   22,400,415     22,353,876     22,363,733     22,388,714  

See accompanying notes to consolidated financial statements.

5



AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended August 31, 2004 and 2005
(In thousands)
(unaudited)


  Nine Months Ended
August 31,
  2004 2005
Cash flows from operating activities:            
Net income $ 10,891   $ 705  
Net (income) loss from discontinued operations   (8,568 )    914  
Net income from continuing operations   2,323     1,619  
Adjustments to reconcile net income to net cash used in continuing operating activities:            
Depreciation and amortization   2,351     2,445  
Provision for (recovery of) bad debt expense   (168 )    185  
Equity in income of equity investees   (3,591 )    (1,945 ) 
Minority interest   754     —  
Deferred income tax expense, net   731     1,984  
Tax benefit on stock options exercised   107     1,348  
Non-cash compensation   179     419  
Unrealized gain on trading securities and warrants   —     (4,971 ) 
Changes in operating assets and liabilities, net of assets and liabilities acquired:            
Accounts receivable   41,864     32,064  
Inventory   (12,574 )    (185 ) 
Receivables from vendors   (3,262 )    (278 ) 
Prepaid expenses and other   13,285     (2,202 ) 
Investment securities-trading   (809 )    (990 ) 
Accounts payable, accrued expenses, accrued sales incentives and other current liabilities   (19,046 )    (21,248 ) 
Income taxes payable   (742 )    (39,997 ) 
Change in assets and liabilities of discontinued operations   (91,270 )    16,652  
Net cash used in operating activities   (69,868 )    (15,100 ) 
Cash flows from investing activities:            
Purchases of property, plant and equipment   (2,895 )    (2,101 ) 
Proceeds from sale of property, plant and equipment   173     17  
Proceeds from distribution from an equity investee   3,609     719  
Purchase of subsidiary shares   (1,410 )    —  
Purchase of short-term investments   —     (115,075 ) 
Sale of short-term investments   —     106,175  
Proceeds from sale of Cellular business   —     16,735  
Purchase of patent   —     (150 ) 
Escrow payment for minority interest   —     (1,702 ) 
(Purchase) proceeds of acquired businesses   513     (15,447 ) 
Net cash used in investing activities   (10 )    (10,829 ) 
Cash flows from financing activities:            
Borrowings from bank obligations   1,006,160     —  
Repayments on bank obligations   (928,321 )    (5,263 ) 
Principal payments on capital lease obligations   (48 )    (45 ) 
Proceeds from exercise of stock options   534     7,601  
Principal payments on debt   (4,324 )    (1,528 ) 
Payment of guarantee   (291 )    —  
Net cash provided by financing activities   73,710     765  
Effect of exchange rate changes on cash   58     (146 ) 
Net increase (decrease) in cash and cash equivalents   3,890     (25,310 ) 
Cash and cash equivalents at beginning of period   4,702     43,409  
Cash and cash equivalents at end of period $ 8,592   $ 18,099  

See accompanying notes to consolidated financial statements.

6



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
Three and Nine Months Ended August 31, 2004 and 2005

(Dollars in thousands, except share and per share data)
(unaudited)

(1)  Basis of Presentation

The accompanying consolidated financial statements of Audiovox Corporation and subsidiaries ("Audiovox" or the "Company") were prepared in accordance with accounting principles generally accepted in the United States of America and include all adjustments (consisting of normal recurring adjustments), which, in the opinion of management, are necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year.

These consolidated financial statements do not include all disclosures associated with consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Accordingly, these statements should be read in conjunction with the Company's consolidated financial statements and notes thereto contained in the Company's Form 10-K for the year ended November 30, 2004.

A summary of the Company's significant accounting policies is disclosed in Note 1 to the consolidated financial statements included in the Company's 2004 Annual Report filed on Form 10-K. There have been no changes to the Company's significant accounting policies subsequent to November 30, 2004.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates and assumptions. Significant estimates made by the Company include the allowance for doubtful accounts, inventory valuation, recoverability of net deferred tax assets, valuation of long-lived assets, accrued sales incentives and warranty reserves.

The Company has one reportable segment ("Electronics") which is organized by product class. The Electronics Segment sells mobile electronics and consumer electronics, primarily to mass merchants, specialty retailers, new car dealers, original equipment manufacturers ("OEM"), independent installers of automotive accessories and the U.S. military to domestic and international customers.

On November 1, 2004, the Company completed the divestiture of its Cellular business (formerly known as "ACC", "Cellular" or "Wireless"). In addition, on February 25, 2005, the Company entered into a plan to discontinue ownership of the Company's majority-owned subsidiary, Audiovox Malaysia ("AVM"). Accordingly, the Company has presented the financial results of Cellular and AVM as discontinued operations for all periods presented (see Note 3). In addition, certain reclassifications have been made to the 2004 consolidated financial statements in order to conform to the current period presentation.

(2)  Accounting for Stock-Based Compensation

The Company applies the intrinsic value method as outlined in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related interpretations in accounting for stock options and share units granted under these programs. Under the intrinsic value method, no compensation expense is recognized if the exercise price of

7



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (continued)
Three and Nine Months Ended August 31, 2004 and 2005

the Company's employee or independent director's stock options equals the market price of the underlying stock on the date of grant. SFAS No. 123, "Accounting for Stock-Based Compensation", requires that the Company provide pro-forma information regarding net income (loss) and net income (loss) per common share as if compensation cost for the Company's stock option programs had been determined in accordance with the fair value method prescribed therein. The Company adopted the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation – Transition and Disclosure" requiring more prominent pro-forma disclosures as described in SFAS No. 123. The following table illustrates the effect on net income (loss) and net income (loss) per common share as if the Company had measured the compensation cost for the Company's stock option programs under the fair value method in each period presented:


  For the
Three Months Ended
August 31,		 For the
Nine Months Ended
August 31,
  2004 2005 2004 2005
Net income (loss):                        
As reported $ 5,344   $ (3,717 )  $ 10,891   $ 705  
Stock based compensation expense   —     —     —     (44 ) 
Pro-forma $ 5,344   $ (3,717 )  $ 10,891   $ 661  
Net income (loss) per common share (basic):                        
As reported $ 0.24   $ (0.17 )  $ 0.50   $ 0.03  
Pro-forma   0.24     (0.17 )    0.50     0.03  
Net income (loss) per common share (diluted):                        
As reported $ 0.24   $ (0.17 )  $ 0.49   $ 0.03  
Pro-forma   0.24     (0.17 )    0.49     0.03  
(3)  Discontinued Operations

On February 25, 2005, the Company entered into a plan to discontinue ownership of the Company's majority owned subsidiary, AVM, and sell its ownership to the current minority interest shareholder. The Company has planned to discontinue ownership of AVM due to increased competition from non local OEM's and deteriorating credit quality of local customers. The Company plans to sell its remaining equity in AVM for $550 during the fourth quarter of fiscal 2005, at which time the Company will be released from all of its Malaysian liabilities including bank obligations. As a result of the planned sale of AVM, the Company compared the carrying value of AVM's assets on the Company's consolidated balance sheets to their estimated fair value. As a result of this review, the Company recorded an impairment charge of $408 within discontinued operations for the nine months ended August 31, 2005 as the carrying value of AVM's assets exceeded their estimated fair value.

On November 1, 2004, the Company completed the divestiture of its Cellular business (formerly known as "ACC" or "Wireless") to UTStarcom, Inc. In connection with the divestiture of Cellular, the Company recorded a receivable for the net working capital adjustment of $8,472, which has been included in prepaid expenses and other current assets on the accompanying consolidated balance sheet at November 30, 2004. In addition, the Company was required to deposit 5% of the purchase price for Cellular in an escrow account, which was reflected as restricted cash on the accompanying consolidated balance sheet at November 30, 2004. During the nine months ended August 31, 2005, the Company received the working capital adjustment and escrow amount in full.

8



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (continued)
Three and Nine Months Ended August 31, 2004 and 2005

In accordance with Financial Accounting Standards Board ("FASB") Statement No. 144, "Accounting for the Impairment of Long-lived Assets," the Company reclassified all associated assets and liabilities of AVM and Cellular as assets and liabilities of discontinued operations for all periods presented. The following sets forth the carrying amounts of the major classes of assets and liabilities, which are classified as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets.


  November 30,
2004		 August 31,
2005
Assets            
Accounts receivable, net $ 18,534   $ 1,429  
Inventory   1,432     936  
Prepaid expenses and other current assets   616     1,428  
Current assets of discontinued operations $ 20,582   $ 3,793  
Property, plant and equipment, net $ 711   $ 572  
Other assets   214     205  
Non-current assets of discontinued operations $ 925   $ 777  
Liabilities            
Accounts payable $ 172   $ 338  
Accrued expenses and other current liabilities   572     748  
Bank obligations   2,209     2,060  
Current liabilities of discontinued operations $ 2,953   $ 3,146  

Included in current assets of discontinued operations at November 30, 2004 is $16,958 of Cellular accounts receivable which was collected during the nine months ended August 31, 2005.

The following is a summary of financial results included within discontinued operations:


  Three Months Ended
August 31,		 Nine Months Ended
August 31,
  2004 2005 2004 2005
Net sales from discontinued operations $ 314,965   $ 1,323   $ 847,808   $ 2,780  
Income (loss) from discontinued operations before income taxes   5,739     (254 )    8,884     (1,124 ) 
Income taxes (benefit)   432     (128 )    316     (210 ) 
Net income (loss) from discontinued operations, net of tax $ 5,307   $ (126 )  $ 8,568   $ (914 ) 

Interest expense of $1,028 and $2,411 was allocated to discontinued operations for the three and nine months ended August 31, 2004, respectively. This allocation represents consolidated interest that cannot be attributed to other operations of the Company and such allocations were based on the required working capital needs of the Cellular business.

The Company had previously established valuation allowances for state net operating loss carryforwards as well as other deferred tax assets of Cellular. The net change in the total valuation allowance, which resulted from the utilization of previously fully reserved net operating loss carryforwards of Cellular, for the three and nine months ended August 31, 2004 was a

9



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (continued)
Three and Nine Months Ended August 31, 2004 and 2005

decrease of $3,622 and $5,262, respectively. Such change positively impacted the provision for income taxes from discontinued operations during the period indicated.

(4)  Net Income (Loss) Per Common Share

Basic net income (loss) per common share is based upon the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.

A reconciliation between the denominator of basic and diluted net income (loss) per common share is as follows:


  Three Months Ended
August 31,		 Nine Months Ended
August 31,
  2004 2005 2004 2005
Weighted average number of common shares outstanding (denominator for net income (loss) per common share, basic)   21,962,843     22,353,876     21,945,364     22,155,235  
Effect of dilutive securities:                                    
Stock options and warrants   437,572     —     418,369     233,479  
Weighted average number of common shares and potential common shares outstanding (denominator for net income (loss) per common share, diluted)   22,400,415     22,353,876     22,363,733     22,388,714  

Stock options and warrants totaling 2,222,852 for the three months ended August 31, 2005 were not included in the net income (loss) per diluted share calculation because the inclusion of these options would be anti-dilutive. Stock options and warrants totaling 483,450 and 2,058,146 for the nine months ended August 31, 2004 and 2005, respectively, were not included in the net income (loss) per diluted share calculation because the exercise price of these options and warrants was greater than the average market price of the common stock during the period. There were no anti-dilutive options or warrants for the three months ended August 31, 2004.

(5)  Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss of $1,841 and $3,493 at November 30, 2004 and August 31, 2005, respectively, includes the net accumulated unrealized loss on the Company's available-for-sale investment securities of $796 and $1,279 at November 30, 2004 and August 31, 2005, respectively, and foreign currency translation loss of $1,045 and $2,214 at November 30, 2004 and August 31, 2005, respectively.

10



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (continued)
Three and Nine Months Ended August 31, 2004 and 2005

The Company's total comprehensive income (loss) was as follows:


  Three Months Ended
August 31,		 Nine Months Ended
August 31,
  2004 2005 2004 2005
Net income (loss) $ 5,344   $ (3,717 )  $ 10,891   $ 705  
Other comprehensive income (loss):                        
Foreign currency translation adjustments   (34 )    32     257     (1,169 ) 
Unrealized holding loss on available-for-sale investment securities arising during period, net of tax   (242 )    (37 )    (1,713 )    (483 ) 
Other comprehensive income (loss), net of tax   (276 )    (5 )    (1,456 )    (1,652 ) 
Total comprehensive income (loss) $ 5,068   $ (3,722 )  $ 9,435   $ (947 ) 

The change in the net unrealized loss arising during the periods presented above are net of tax benefits of $148 and $23 for the three months ended August 31, 2004 and 2005, respectively, and $1,051 and $296 for the nine months ended August 31, 2005, respectively.

(6)  Supplemental Cash Flow Information / Changes in Stockholders' Equity

The following is supplemental information relating to the consolidated statements of cash flows:


  Nine Months Ended
August 31,
  2004 2005
Cash paid during the period:            
Interest $ 3,231   $ 1,296  
Income taxes $ 4,274   $ 31,222  

Non-Cash Transactions

During the nine months ended August 31, 2004 and 2005, the Company recorded an unrealized holding loss relating to available-for-sale marketable investment securities of $1,713 and $483, respectively, as a component of accumulated other comprehensive loss.

During the nine months ended August 31, 2004 and 2005, the Company recorded a non-cash compensation charge of $179 and $419, respectively, related to the rights under the call/put options previously granted to certain employees of Audiovox German Holdings GmbH ("Audiovox Germany").

Changes in Stockholders' Equity

During the nine months ended August 31, 2005, 653,500 stock options were exercised into shares of Class A common stock aggregating proceeds of $7,601 and a related tax benefit of $1,348 to the Company.

(7)  Business Acquisition

On January 4, 2005, the Company's wholly-owned subsidiary, Audiovox Electronics Corporation, signed an asset purchase agreement to purchase certain assets of Terk Technologies Corp. ("Terk"). The purchase price was subject to a working capital adjustment based on the working

11



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (continued)
Three and Nine Months Ended August 31, 2004 and 2005

capital of Terk at the time of closing, plus contingent debentures with a maximum value of $9,280 based on the achievement of future revenue targets. The total purchase price, which includes a working capital adjustment of $1,730 and acquisition costs of $520, approximated $15,447. No amount has been recorded with respect to the debentures and any amount paid under the debentures would be recorded as additional goodwill.

The following summarizes the preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed at the date of acquisition:


Assets acquired:      
Accounts receivable $ 10,943  
Inventory   9,591  
Prepaid expenses and other current assets   293  
Property, plant and equipment and other assets   1,210  
Goodwill   11,759  
Total assets acquired $ 33,796  
Liabilities assumed:      
Accounts payable, accrued expenses and other liabilities $ 14,250  
Bank obligations   4,099  
Total liabilities assumed   18,349  
Cash paid $ 15,447  

The excess of the purchase price over the estimated fair value of assets and liabilities acquired of $11,759 has been preliminarily allocated to goodwill. The allocation of the purchase price to assets and liabilities acquired is not final and is subject to the completion of an independent valuation study.

The results of operations of this acquisition have been included in the consolidated financial statements from the date of acquisition. The purpose of this acquisition is to increase the Company's market share for satellite radio products as well as accessories for antennas and HDTV products.

The following unaudited pro-forma financial information for the nine months ended August 31, 2004 and 2005 represents the combined results of the Company's operations and Terk as if the Terk acquisition had occurred at the beginning of fiscal 2004. The unaudited pro-forma financial information does not necessarily reflect the results of operations that would have occurred had the Company constituted a single entity during such periods.


  For the Nine Months Ended
August 31,
  2004 2005
  (unaudited)
Net sales $ 449,343   $ 387,260  
Net income   10,197     628  
Net income per share-diluted $ 0.46   $ 0.03  

12



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (continued)
Three and Nine Months Ended August 31, 2004 and 2005

(8)  Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill is as follows:


Balance at November 30, 2004 $ 7,019  
Goodwill from purchase of Terk (see Note 7)   11,759  
Purchase of minority interest (see Note 15)   250  
Balance at August 31, 2005 $ 19,028  

At November 30, 2004, intangible assets consisted of the following:


  Gross
Carrying
Value		 Accumulated
Amortization		 Total Net
Book Value
Patents subject to amortization $ 677   $ 677   $ —  
Trademarks not subject to amortization   8,043     —     8,043  
Total $ 8,720   $ 677   $ 8,043  

At August 31, 2005, intangible assets consisted of the following:


  Gross
Carrying
Value		 Accumulated
Amortization		 Total Net
Book Value
Patents subject to amortization $ 827   $ 688   $ 139  
Trademarks not subject to amortization   8,043     —     8,043  
Total $ 8,870   $ 688   $ 8,182  
                   

During the nine months ended August 31, 2005, the Company purchased $150 of patents which expire in February of 2015. The estimated aggregate amortization expense for all amortizable intangibles for the succeeding years ending August 31, 2010 amounts to $75.

(9)  Equity Investments

The Company has a 50% non-controlling ownership interest in Audiovox Specialized Applications, Inc. ("ASA") which acts as a distributor to specialized markets for specialized vehicles, such as RV's and van conversions, of televisions and other automotive sound, security and accessory products.

The following presents summary financial information for ASA. Such summary financial information has been provided herein based upon the individual significance of ASA to the consolidated financial information of the Company.


  November 30,
2004		 August 31,
2005
Current assets $ 22,008   $ 24,720  
Non-current assets   4,425     4,432  
Current liabilities   4,710     5,001  
Members' equity $ 21,723   $ 24,151  

13



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (continued)
Three and Nine Months Ended August 31, 2004 and 2005


  Nine Months Ended
August 31,
  2004 2005
Net sales $ 42,554   $ 37,981  
Gross profit   13,331     11,978  
Operating income   4,696     3,126  
Net income $ 6,591   $ 3,865  

The Company's share of income from ASA for the nine months ended August 31, 2004 and 2005, was $3,296 and $1,933, respectively. In addition, the Company received distributions from ASA totaling $719 during the nine months ended August 31, 2005, which was recorded as a reduction to equity investments on the accompanying consolidated balance sheet.

(10)  Bliss-tel Initial Public Offering

On December 13, 2004, one of the Company's former equity investments, Bliss-tel Public Company Limited ("Bliss-tel"), issued 230,000,000 shares on the SET (Security Exchange of Thailand) for an offering price of 6.20 baht per share. Prior to the issuance of these shares, the Company was a 20% shareholder in Bliss-tel and, subsequent to the offering, the Company owns 30,000,000 shares (or approximately 13%) of Bliss-tel's outstanding stock. In addition, on July 21, 2005, the Company received 9,000,000 warrants ("the warrants") which may be exercised beginning on September 29, 2006, and expire on July 17, 2012. Each warrant is exercisable into one share of Bliss-tel common stock at an exercise price of 8 baht per share. As a result, the Company now accounts for the Bliss-tel investment as a trading security in accordance with FASB Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities" whereby the unrealized holding gains and losses on Bliss-tel stock and warrants are included in earnings.

As a result of this transaction, the Company recorded a net gain of $597 and $4,971 for the three and nine months ended August 31, 2005, respectively, representing the initial value of the Bliss-tel warrants and the change in value of the underlying stock and warrant during the period, which is included in other income on the accompanying statement of operations.

As of August 31, 2005, the Bliss-tel investment (including both the stock and warrants) had a quoted market value of $6,987 and is reflected within short-term investments on the accompanying consolidated balance sheet.

(11)  Income Taxes

Quarterly tax provisions are based upon an estimated annual effective tax rate per taxable entity, including evaluations of possible future events and transactions, and are subject to subsequent refinement or revision. When the Company is unable to estimate a part of its annual income or loss, or the related tax expense or benefit, the tax expense or benefit applicable to that item is reported in the interim period in which the income or loss occurs.

A reconciliation of the provision for (benefit of) income taxes from continuing operations computed at the Federal statutory rate to the reported provision for (benefit of) income taxes is as follows:

14



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements  (continued)
Three and Nine Months Ended August 31, 2004 and 2005


  Three Months Ended
August 31,		 Nine Months Ended
August 31,
  2004 2005 2004 2005
Tax provision at Federal statutory rate $ 563     35.0 %  $ (2,281 )    (35.0 )  $ 2,123     35.0 %  $ (1,534 )    (35.0 )% 
State income taxes, net of Federal benefit   609     37.9     (224 )    (3.4 )    797     13.1     (148 )    (3.4 ) 
Foreign tax rate differential   (248 )    (15.4 )    (46 )    (0.7 )    (106 )    (1.8 )    (57 )    (1.3 ) 
Reversal of accruals due to completion
of audits		   —     —     —     —     —     —     (3,307 )    (75.4 ) 
Permanent items   —     —     (287 )    (4.4 )    —     —     (768 )    (17.5 ) 
Changes in rates and other, net   (92 )    (5.7 )    (88 )    (1.4 )    228     3.8     (189 )    (4.3 ) 
  $ 832     51.8 %  $ (2,926 )    (44.9 )  $ 3,042     50.1 %  $ (6,003 )    (136.9 )% 

Changes in rates and other, net, is a combination of various factors, which include changes in the taxable income or loss between various tax entities with differing effective tax rates, changes in the allocation and apportionment factors between taxable jurisdictions with differing tax rates of each tax entity, changes in tax rates and other legislation in the various jurisdictions, and other items. A valuation allowance is provided when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.

The effective benefit rate for the three and nine months ended August 31, 2005, was 44.9% and 136.9%, respectively, compared to an effective tax rate of 51.8% and 50.1% for the comparable prior period. The effective benefit rate for the nine months ended August 31, 2005 was primarily due to the favorable outcome of $3,307 in tax accrual reductions due to the completion of certain tax examinations for the years 1994 through 2000.

(12)  Accrued Sales Incentives

A summary of the activity with respect to the Company's sales incentives is provided below:


  Three Months Ended
August 31,		 Nine Months Ended
August 31,
  2004 2005 2004 2005
Opening balance $ 6,984   $ 5,890   $ 14,604   $ 7,584  
Accruals   3,980     4,555     12,014     14,191 * 
Payments   (3,296 )    (2,342 )    (15,880 )    (11,688 ) 
Reversals for unearned sales incentives   (105 )    (4 )    (1,923 )    (737 ) 
Reversals for unclaimed sales incentives   (144 )    (180 )    (1,396 )    (1,431 ) 
Ending balance $ 7,419   $ 7,919   $ 7,419   $ 7,919  

*   Includes $1,255 of accrued sales incentives acquired from Terk (see Note 7).

15



AUDIOVOX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
Three and nine months ended August 31, 2004 and 2005

(13)  Product Warranties and Product Repair Costs

The following table provides a summary of the activity with respect to the Company's product warranties and product repair costs:


  Three Months Ended
August 31,		 Nine Months Ended
August 31,
  2004 2005 2004 2005
Opening balance $ 13,244   $ 11,304   $ 14,695   $ 11,794  
Liabilities accrued for warranties issued during the period   (760 )    1,491     1,796     3,964  
Warranty claims paid during the period   (1,439 )    (1,481 )    (5,446 )    (4,444 ) 
Ending balance $ 11,045   $ 11,314   $ 11,045   $ 11,314  

During the three months ended August 31, 2004, the Company received a credit of $1,517 from a vendor as a result of re-negotiating return charges for defective inventory. This credit has been included as a reduction to the liabilities accrued for warranties issued during the three and nine months ended August 31, 2004.

(14)  Financing Arrangements

The Company has the following financing arrangements:


  November 30,
2004		 August 31,
2005
Bank Obligations            
Domestic bank obligation (a)   —     —  
Euro asset-based and factoring obligation (b) $ 5,485   $ 3,941  
Debt            
Euro term loan agreement (c)   9,377     7,154  
Other (d)   829     1,163  
Total debt $ 10,206   $ 8,317  
(a)  Domestic Bank Obligations

At November 30, 2004 and August 31, 2005, the Company has an unsecured credit line to fund the temporary short-term working capital needs of the domestic operations. This line expires on February 28, 2006 and allows aggregate borrowings of up to $25,000 at an interest rate of Prime (or similar designations) plus 1%. As of November 30, 2004 and August 31, 2005, no direct amounts are outstanding under this agreement.

(b)  Euro Asset-Based Lending Obligation

The Company has a 16,000 Euro accounts receivable factoring arrangement and a 6,000 Euro Asset Based Lending ("ABL") (finished goods inventory and non factored accounts receivable) credit facility for the Company's subsidiary, Audiovox Germany which expires on October 25, 2005 and is renewable on an annual basis. Selected accounts receivable are purchased from the Company on a non-recourse basis at 85% of face value and payment of the remaining 15% upon receipt from the customer of the balance of the receivable purchased. In respect of the ABL credit facility, selected finished goods are advanced at a 60% rate and non factored accounts receivables are advanced at a 50% rate. The rate of interest is the three months Euribor plus 2.5%, and the Company pays 0.4% of its gross

16



Notes to Consolidated Financial Statements (continued)
Three and nine months ended August 31, 2004 and 2005

sales as a fee for the accounts receivable factoring arrangement. As of November 30, 2004 and August 31, 2005, the amount of accounts receivable and finished goods available for factoring exceeded the amounts outstanding under this obligation.

(c)  Euro Term Loan Agreement

On September 2, 2003, Audiovox Germany borrowed 12 million Euros under a new term loan agreement. This agreement was for a 5 year term loan with a financial institution consisting of two tranches. Tranche A is for 9 million Euros and Tranche B is for 3 million Euros. Tranche B has been fully repaid. Payments under Tranche A are due in monthly installments and interest accrues at 2.75% over the Euribor rate for Tranche A. Any amount repaid may not be reborrowed. The term loan becomes immediately due and payable if a change of control occurs without permission of the financial institution. In April 2005, the maturity of the term loan was prolonged to August 30, 2010 with a pre-payment option.

Audiovox Corporation guarantees 3 million Euros of this term loan. The term loan is secured by the pledge of the stock of Audiovox German Holdings GmbH and on all brands and trademarks of the Audiovox German Holdings Group. The term loan requires the maintenance of certain yearly financial covenants that are calculated according to German Accounting Standards for Audiovox German Holdings. Should any of the financial covenants not be met, the financial institution may charge a higher interest rate on any outstanding borrowings. The short and long term amounts outstanding under this agreement were $2,497 and $6,880, respectively, at November 30, 2004 and $1,407 and $5,747, respectively, at August 31, 2005.

(d)  Other Debt

This amount is the accumulated compensation obligation resulting from the rights under the call put option granted to certain employees of Audiovox Germany and is included in long term debt in the accompanying consolidated balance sheets.

(15)  Contingencies and Legal Matters

The Company is currently, and has in the past been, a party to various routine legal proceedings incident to the ordinary course of business. If management determines, based on the underlying facts and circumstances, that it is probable a loss will result from a litigation contingency and the amount of the loss can be reasonably estimated, the estimated loss is accrued for. The Company believes the specific litigation matters disclosed below will not have a material adverse effect on the Company's financial statements, individually or in the aggregate.

During the fourth quarter of 2004, several purported derivative and class actions were filed in the Court of Chancery of the State of Delaware, New Castle County. On January 10, 2005, Vice Chancellor Steven Lamb of the Court of Chancery of the State of Delaware, New Castle County, granted an order permitting the filing of a Consolidated Complaint by several shareholders of Audiovox Corporation derivatively on behalf of Audiovox Corporation against Audiovox Corporation, ACC and the directors of Audiovox Corporation captioned "In Re Audiovox Corporation Derivative Litigation". The complaint seeks (a) rescission of: agreements; amendments to long-term incentive awards; and severance payments pursuant to which Audiovox and ACC executives were paid from the net proceeds of the sale of certain assets of ACC to UTStarcom, Inc., (b) disgorgement to ACC of $16,000 paid to Philip Christopher pursuant to a Personally Held Intangibles Purchase Agreement in connection with the

17



Notes to Consolidated Financial Statements (continued)
Three and nine months ended August 31, 2004 and 2005

UTStarcom transaction, (c) disgorgement to Audiovox of $4,000 paid to Philip Christopher as compensation for termination of his Employment Agreement and Award Agreement with ACC, (d) disgorgement to ACC of $1,916 paid to John Shalam pursuant to an Award Agreement with ACC, and (e) recovery by ACC of $5,000 in severance payments distributed by Philip Christopher to ACC's former employees. Defendants filed a motion to dismiss the complaint, which was withdrawn. The Company understands that the individual defendants intend to vigorously defend this matter; however, no assurances regarding the outcome of this matter can be given at this point in the litigation. The Company anticipates that defense costs, in excess of any applicable retention, will be covered by the Company's insurance policies. Any damages recovered by plaintiffs will be paid to the Company. Accordingly, no estimated loss has been recorded for the aforementioned case.

During the third quarter of 2004, an arbitration proceeding was commenced by the Company and several of its subsidiaries against certain Venezuelan employees and two Venezuelan companies ("Respondents") before the American Arbitration Association, International Centre in New York, New York, seeking recovery of monies alleged to have been wrongfully taken by individual Respondents and damages for fraud. Respondents asserted counterclaims alleging that the Company engaged in certain business practices that caused damage to Respondents. The matter was submitted to mediation during the fourth quarter of fiscal 2004 and settled subsequent to year end. The agreement provides, in pertinent part, for a payment (to be made upon satisfaction of certain pre-closing conditions) from the Company to the Respondents of $1,700 in consideration of which the Company will acquire all of Respondents' ownership. In addition, the Company and Respondents will release all claims. As of August 31, 2005, $250 was paid to the Respondents and the remaining balance, which is included in restricted cash on the accompanying consolidated balance sheet, will be released upon satisfaction of the aforementioned pre-closing conditions. The Company recorded a $400 reduction to general and administrative expenses during the nine months ended August 31, 2005 as a result of a legal claim which was withdrawn from the court.

The consolidated class actions transferred to a Multi-District Litigation Panel of the United States District Court of the District of Maryland against the Company and other suppliers, manufacturers and distributors of hand-held wireless telephones alleging damages relating to exposure to radio frequency radiation from hand-held wireless telephones is still pending. On March 16, 2005, the United States Court of Appeals for the Fourth Circuit reversed the District Court's order dismissing the complaints on grounds of federal pre-emption. The Fourth Circuit remanded the actions to each of their respective state courts, except for the Naquin litigation which was remanded to the local Federal Court. Defendants intend to file a petition for certiorari with the U.S. Supreme Court. No assurances regarding the outcome of this matter can be given, as the Company is unable to assess the degree of probability of an unfavorable outcome and estimated loss or liability, if any. Accordingly, no estimated loss has been recorded for the aforementioned case.

The products the Company sells are continually changing as a result of improved technology. As a result, although the Company and its suppliers attempt to avoid infringing known proprietary rights, the Company may be subject to legal proceedings and claims for alleged infringement by its suppliers or distributors, of third partys patents, trade secrets, trademarks or copyrights. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert managements attention and resources, or require the Company to either enter into royalty or license agreements which are not advantageous to the Company or pay material amounts of damages.

18



Notes to Consolidated Financial Statements (continued)
Three and nine months ended August 31, 2004 and 2005

Under the asset purchase agreement for the sale of the Cellular business to UTStarcom, Inc. ("UTSI"), the Company agreed to indemnify UTSI for any breach or violation by ACC and its representations, warranties and covenants contained in the asset purchase agreement and for other matters, subject to certain limitations. Significant indemnification claims by UTSI could have a material adverse effect on the Company's financial condition. The Company is not aware of any such claim(s) for indemnification.

(16)  New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123R ("Statement 123R"), "Share Based Payment". Statement 123R is a revision of FAS Statement 123, "Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock issued to Employees" (APB No. 25). Statement 123R requires a public entity to measure the cost of employee services recognized in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Statement 123R is effective the first annual period that begins after June 15, 2005 or the Company's first quarter of fiscal 2006. The adoption of Statement 123R will rescind the Company's current accounting for stock based compensation under the intrinsic method as outlined in APB No. 25. Under APB No. 25, the issuance of stock options to employees generally resulted in no compensation expense to the Company. The adoption of Statement 123R will require the Company to measure the cost of stock options based on the grant-date fair value of the award as discussed in Note 2.

(17)  Inventory Writedown

During the three and nine months ended August 31, 2005 the Company recorded a $3,789 inventory writedown primarily related to Satellite Radio and other inventory categories as a result of competitive pricing pressures by the market.

(18)  Other Income

Other income is comprised of the following:


  For the Three Months
Ended
August 31,		 For the Nine Months
Ended
August 31,
  2004 2005 2004 2005
Bliss-tel (see Note 10) $ —   $ 597   $ —   $ 4,971  
Interest Income   18     1,063     637     2,940  
Rental Income   19     141     44     447  
Royalties and other   335     389     887     1,457  
Total Other Income $ 372   $ 2,190   $ 1,568   $ 9,815  

19



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except share and per share data)

We begin Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with an overview of the business. This is followed by a discussion of the critical accounting estimates that we believe are important in understanding the assumptions and judgments incorporated in our reported financial results. In the next section, we discuss our results of operations for the three and nine months ended August 31, 2004 compared to the three and nine months ended August 31, 2005. We then provide an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the sections entitled "Liquidity and Capital Resources, including Contractual and Commercial Commitments," We conclude this MD&A with a discussion of "Related Party Transactions" and "Recent Accounting Pronouncements".

Business Overview and Strategy

The Company through its four wholly-owned subsidiaries: Audiovox Electronics Corporation, American Radio Corp., Code Systems, Inc. ("Code") and Audiovox German Holdings GmbH and three majority-owned subsidiaries: Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd. and Audiovox Venezuela, C.A. markets its products under the Audiovox® brand name and other brand names, such as Jensen®, Prestige®, Pursuit®, Rampage™, Code-Alarm®, Car Link®, Movies 2 Go®, Magnate®, Mac Audio®, Heco®, Acoustic Research®, Advent®, and Phase Linear®, as well as private labels through a large and diverse distribution network both domestically and internationally.

On November 1, 2004, the Company completed the divestiture of its Cellular business (formerly known as "ACC", "Cellular" or "Wireless"). In addition, on February 25, 2005, the Company entered into a plan to discontinue ownership of the Company's majority-owned subsidiary, Audiovox Malaysia ("AVM"). Accordingly, the Company has presented the financial results of Cellular and AVM as discontinued operations for all periods presented (see Note 3 of the Notes to the Consolidated Financial Statements). In addition, certain reclassifications have been made to the 2004 consolidated financial statements in order to conform to the current period presentation.

On January 4, 2005, the Company's wholly-owned subsidiary, Audiovox Electronics Corporation, signed an asset purchase agreement to purchase certain assets of Terk Technologies Corp. ("Terk"). The purpose of this acquisition is to increase the Company's market share for satellite radio products as well as accessories for antennas and HDTV products. The purchase price is subject to a working capital adjustment based on the working capital of Terk at the time of closing, plus contingent debentures with a maximum value of $9,280 based on the achievement of future revenue targets. The total purchase price, which includes a working capital adjustment of $1,730 and acquisition costs of $520, approximated $15,447. The results of operations of this acquisition have been included in the consolidated financial statements from the date of acquisition (see Note 7 of the Notes to the Consolidated Financial Statements).

Management reviews the financial results of the Company based on the performance of the Electronics Group and Administrative Group. The Electronics Group is comprised of operating subsidiaries that sell mobile and consumer electronics. The Administrative Group consists of treasury, legal, human resources, Information Technology ("IT") and accounting services that are provided to the Electronics Group. In prior years, the Electronics Group had three sales categories (Mobile, Consumer and Sound). Based on the current marketplace and management's overall assessment of the Company, the sales categories have been reclassified into Mobile Electronics and Consumer Electronics, therefore eliminating the Sound category.

Mobile Electronics products include:

•  mobile video products, including overhead, headrest and portable mobile video systems,
•  autosound products including mobile multi-media products, radios, speakers, amplifiers, CD changers,

20



•  satellite radios including plug and play models and direct connect models,
•  automotive security and remote start systems,
•  navigation systems,
•  rear observation systems, collision avoidance systems and
•