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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

Commission File Number 0-511

COBRA ELECTRONICS CORPORATION

(Exact name of Registrant as specified in its Charter)

Registrant’s telephone number, including area code: (773) 889-8870

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $.33 ¹/3 Per Share

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨        NO  x

The aggregate market value of the voting and non-voting common equity (only Common Stock) held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on June 30, 2003, was $44,489,055.

The number of shares of Registrant’s Common Stock outstanding as of March 17, 2004 was 6,419,777.

Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 11, 2004, are incorporated by reference into Part III of this Report.

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PART I

Item 1 .  Business

Ge neral

Cobra Electronics Corporation (the “Company” or “Cobra”), which was incorporated in Delaware in 1961, is a public company traded on The NASDAQ Stock Market under the symbol “COBR”. The Company is a leading manufacturer of two-way mobile communications products in the United States, Canada and Europe, holding the number one or strong number two-position in each of its longstanding product lines and targeting a similar position for businesses entered in 2003, namely hand-held Global Positioning Systems (“GPS”), marine VHF radios and marine power inverters. The Company has a 40-year track record of innovation and the development of award-winning products, and is an industry leader in developing technology applications that serve consumers’ needs. Management believes that the Company’s future success depends upon its ability to predict and respond in a timely and effective manner to changes in the markets it serves. Product performance, reliability, price, availability and service are the main competitive factors. Also, sales are dependent upon timely introduction of new products, which incorporate new features desired by consumers, at competitive prices. Cobra is the number one brand in Citizens Band radios and radar detectors and a strong number two in the worldwide Family Radio Service/General Mobile Radio Service (“FRS/GMRS”) two-way radio category. In 2003, Cobra introduced a line of hand-held GPS devices for recreational use and a line of marine radios and power inverters. In 2004, Cobra will enter into the mobile navigation market with the introduction of its “Plug and Go” mobile navigation devices.

Recent Developme nts

Innovation remains the hallmark of Cobra’s success, as demonstrated by just a few of its recent product introductions and other recent developments.

The PR 4000-2WX model two-way radio, which delivers up to a seven mile range, was one of only 17 products selected to receive Popular Mechanics’ prestigious “Editor’s Choice” award at the 2003 International Consumer Electronics Show.

In the second quarter of 2003, the GPS 100 was introduced followed closely by the introduction of the GPS 500. Both models feature exclusive Accelerated Satellite Acquisition Protocol^™ (A.S.A.P^™), a technology that uses 18 channels, as opposed to the category standard of 12, to locate a user’s position up to twice as fast as any hand-held GPS technology currently on the consumer market. Additional features of the GPS 100 include 500 waypoints, a route feature and waterproofing. The GPS 500 has two megabytes of built-in memory and features a basemap of the United States, Canada and Europe and a routing feature for up to 20 routes.

Cobra began selling two new radar detectors, the ESD 9570 CS and the ESD 9870 CS, in June and August of 2003, respectively. These two cutting edge models feature an 11^th band —the Spectre Alert^™ system—that gives an audio and visual alert when it senses the Spectre technology used to detect vehicles using radar detectors. In addition, both models are undetectable by Spectre devices, as are all current Cobra models. Both models received the Design & Engineering Innovations Award at the 2003 International Consumer Electronics Show.

Additionally, in the fourth quarter of 2003, Cobra introduced its first line of marine electronics. The new product line is distinguished by premium features and industry firsts focused on usability and safety. The marine product line consists of fixed and hand-held dual power marine transceivers, as well as marine power inverters.

The GPS 1000 DLX is expected to be available in the first half of 2004, and will mark Cobra’s most advanced entry into the hand-held GPS market. This model incorporates street level mapping capability distinguishing it from the GPS 100 and 500, while including a United States highway map featuring all interstates and downloadable street-level software.

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The development of Cobra-branded after-market mobile navigation products continued in 2003 in conjunction with Cobra’s exclusive product development and licensing agreement with Horizon Navigation, Inc. The SKYNAV^™ 2000 and 3000, which are both expected to be available in mid-2004, were both awarded the International Consumer Electronics Show Innovations Design and Engineering Showcase Honoree Awards. Also, the SKYNAV 3000 gained national recognition when it was named one of the top 10 products at the 2004 International Consumer Electronics Show by Time Magazine and received an award for best in mobile electronics at the International Consumer Electronics Show. Both the SKYNAV 2000 and 3000 contain street-level detail of the entire United States on an internal hard drive, eliminating the need to download maps from computers. Additionally, “go to” addresses can be easily beamed from a Palm Pilot and similar devices to the SKYNAV 3000. The “Plug and Go” system provides turn-by-turn directions and clear voice guidance to a specific address, intersection, or almost two million points of interest.

Cobra will further its leadership role in extended range two-way radios with the introduction of its redesigned 2004 microTALK^™ line. The new product line consists of four 22-channel radios that provide the longest available range in the FRS/GMRS two-way radio category, up to ten miles for the most powerful unit. Along with an extended range, the overall size of the radios has been made smaller, while being redesigned with a more high-tech, contemporary look. Cobra radios feature 22 channels with 38 privacy codes for 836 possible channel combinations, roger beep, call alert and battery saving technology.

Suppliers

One of the Company’s fundamental strengths is its product sourcing ability. Substantially all of the Company’s products are manufactured to its specifications and engineering designs by a number of suppliers, primarily in China, Hong Kong, South Korea and the Philippines. The Company maintains control over the design and production quality of its products through its wholly owned subsidiary in Hong Kong which seeks out new suppliers, monitors technological changes, performs source inspection of key suppliers, provides selected engineering services and expedites shipments from vendors.

Over a period of years, the Company has developed a network of suppliers for its products. To maintain flexibility in product sourcing, all of the Company’s supply contracts with its vendors are terminable by the Company “at will.” While it is the Company’s goal to maintain strong relationships with its current suppliers, management believes that, if necessary, alternate suppliers could be found. The extent to which a change in a supplier would have an adverse effect on the Company’s business depends upon the timing of the change, the product or products that the supplier produces for the Company and the volume of that production. The Company also maintains insurance coverage that would, under certain limited circumstances, reimburse the Company for lost profits resulting from a vendor’s inability to fulfill its commitments to the Company. The Company negotiates substantially all of its purchases in U.S. dollars to protect itself from currency fluctuations. Assets located outside of the United States, principally Company-owned tooling at suppliers, had a net book value of $2.6 million at December 31, 2003.

Research, engineering and product development expenditures are expensed as incurred. These expenditures amounted to approximately $1,958,000 in 2003, $1,480,000 in 2002 and $1,209,000 in 2001.

Products

The Company operates only in the consumer electronics industry. Principal products include:

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The Company competes primarily in the United States with various manufacturers and distributors of consumer electronics products, principally on the basis of product features and price, and expects the market for its products to remain highly competitive. The Company also markets its products in over 30 countries around the world through distributors.

Other than GPS products, the Company does not believe that patents and other intellectual property are of material importance to its products. However, when the Company develops a unique technology (such as VibrAlert^™ vibrating technology for two-way radios), patents are applied for to preserve exclusivity, wherever possible. The Company has entered into agreements with various providers and/or developers of intellectual property used in connection with its GPS products, including Horizon Navigation. The Company has negotiated long-term agreements with these parties that guarantee exclusivity with respect to certain product categories and distribution channels, which management believes protect the Company’s rights to the underlying intellectual property. The Company’s microTALK FRS/GMRS two-way radios, 9 Band, 10 Band, and 11 Band detectors with exclusive Strobe Alert technology, SoundTracker and NightWatch Citizens Band radios, HighGear accessories, and GPS devices are marketed under the Cobra brand name.

In 1997, the Company entered the FRS two-way radio market and in the fall of 1998 began selling its new microTALK line. The Company has attained a strong number two market position in the FRS/GMRS two-way radio market. The Company estimates that the domestic market for FRS/GMRS two-way radios in factory net sales in 2003 was approximately $235 million (based on Consumer Electronics Association (CEA) data) compared to $253 million in 2002 (based on CEA data).

FRS/GMRS two-way radios operate on UHF FM frequencies, which allow for an extremely small hand-held radio and exceptionally clear sound that penetrates through buildings and other obstacles. Unlike cellular phones, these radios require no monthly fee and provide coverage even in the most remote areas. Because of their range—up to ten-miles (for certain 2004 GMRS models, which require a license)—and exceptionally clear sound quality, the radios enable families and friends to easily keep in touch in the many situations where they typically get separated and are out of earshot, such as in shopping malls, amusement parks and ski resorts. FRS/GMRS two-way radios also provide parents with an easy way to maintain contact with children when they are outside playing.

In 2001, GMRS two-way radios started to become more of a factor in the market place as consumers demanded a greater operating range than conventional FRS radios could provide. Up until 2004, GMRS radios provided up to a seven-mile range in contrast to the two-mile range of FRS radios; however, in 2004 Cobra will begin selling eight-mile and ten-mile range GMRS two-way radios.

Another key to Cobra’s success in the FRS/GMRS market has been its emphasis on value packs, which include battery chargers, rechargeable batteries and other accessories along with the radios.

The Company’s microTALK two-way radios have innovative features, including incoming call alert that lets one user “ring” another user and talk confirmation tones that subtly let users know when the other party is done talking. Certain models even have a patented VibrAlert^™ feature that works like a silent vibrating pager, which makes it perfect for situations where noiseless operation is important or where a ring alert cannot be easily heard. Also, certain models incorporate a ten-channel NOAA all hazards alert radio, which warns of weather, chemical and other civilian emergencies.

In 1999, the Company launched its European line of microTALK radios in the United Kingdom, France, Spain, Germany, Sweden and Finland, and now holds a leading share in the European market. In 2000, as part of its European strategy to be closer to its customers, the Company formed an Irish subsidiary, Cobra Electronics Europe Limited, which is headquartered in Dublin, Ireland. As of December 31, 2003, the Company had 11 distributors serving approximately 22 countries in Europe.

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In the second quarter of 2000, Cobra began selling its microTALK FRS radios in Canada, which approved the technology in March 2000, and now holds the number one share of this market. Additionally, Canada is expected to approve the sale of GMRS products sometime in late 2004.

Cobra is the number one brand in the domestic market for integrated radar/laser detectors, which in factory net sales, the Company estimates was approximately $59 million (based on CEA data) in 2003 and $70 million in 2002 (based on CEA data). Cobra commands the number one market share by offering innovative products with the latest technology.

The Company has been a leader in applying laser detection technology, including introducing the industry’s first laser-signal detector and the industry’s first integrated radar/laser detector with 360 degree laser detection capability. The Company was also the first to introduce to the retail channel “intelligent” detection systems capable of alerting drivers with a differentiated signal for each of the frequencies emitted by the Company’s patented, FCC-approved Safety Alert^™ transmitter. The Company’s Safety Alert Traffic Warning System is designed to help drivers avoid potentially serious accidents with police, fire, EMS and public utility vehicles.

In late 1999, the Company introduced the world’s first and, then, only line of 9 Band radar detection systems. This line provided detection of two laser systems, Ultra Lyte and ProLaser. In addition, this line was the first to incorporate the exclusive Strobe Alert feature. This technology alerts drivers to the presence of high-speed emergency vehicles equipped with strobe transmitters to control traffic signals. In 2000, the Company introduced the world’s first 10 Band radar detection system, which features a high-speed RISC processor and offers 10 bands of protection, including Cobra’s patented Safety Alert warning system and exclusive Strobe Alert detection. Unlike competing radar detection systems, 10 Band radar detectors enable motorists to detect eight speed-monitoring systems and distinguish between four types of laser systems on the road today, including, LTI 20/20, Ultra Lyte, ProLaser and ProLaser III. In 2001, Cobra introduced the world’s first radar detector incorporating a 10-channel weather radio.

In 2002, the Company introduced the innovative SmartMute^™ feature that is standard on Cobra’s 10 Band and 11 Band radar/laser detectors. An enhanced SmartMute feature called Intellimute^™ has been made available in 2004. This technology automatically mutes unwanted audible alerts below a driver-set speed, based on engine revolutions per minute.

In 2003, the Company introduced the market’s first 11 Band models, which alert drivers to the Spectre devices used to detect the presence of radar detectors in vehicles. These models also employ SmartPower^™ technology, which avoids inadvertent car battery draining that could occur in certain automobiles by not turning the detector off when the vehicle has been turned off.

In 2004, the Company is introducing a new line of radar detectors that incorporates industry-leading technology that increases range and detects the new K and Ka POP Modes. The line will also include IntelliShield^™ software that significantly reduces false alerts in densely populated urban areas. The “city mode” has three settings for enhanced false signal rejection.

Because of the popularity of the Company’s unique 9 Band, 10 Band and 11 Band technologies and continued innovations, Cobra was the fastest growing radar detector brand over the past several years and is the market leader.

Cobra is the leading brand in the domestic Citizens Band radio market, which the Company estimates to be approximately $44 million in factory net sales (based on Industrial Marketing Research (IMR) data) in 2003 and $42 million in 2002 (based on IMR data). Approximately 90 percent of this market is for mobile Citizens Band radios, most of which are purchased by professional truck drivers. The remaining part of the domestic market is for hand-held Citizens Band radios used for sport and recreational activities.

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The Company has a history of being the technology leader in the Citizens Band radio market. The Company was the first Citizens Band radio marketer to combine a National Weather Service receiver with a mobile Citizens Band radio, enabling motorists to obtain weather and travel information broadcasts. As a major enhancement of this feature, the Company also introduced the industry’s first mobile Citizens Band radio that incorporated an automatic alert feature to warn of National Weather Service emergency advisories. In 1997, the Company introduced its SoundTracker technology. This patented noise reduction technology, which dramatically improved the sound quality of the Citizens Band radios when the Citizens Band radio is in receiving mode, was the first significant product innovation in this category in several years. Additionally, SoundTracker technology allows the user’s voice to break through cluttered airwaves and to be more easily heard when transmitting.

In 1999, the Company introduced a new line of Citizens Band radios featuring an adjustable illuminated front panel. The NightWatch line enhanced drivers’ safety by making it dramatically easier for them to see and adjust their Citizens Band radio controls at night. The vast majority of the nine million mobile Citizens Band radios used by professional truck drivers today are not illuminated despite the fact that these drivers spend a significant amount of time driving at night. In 2003, Cobra introduced its neon-illuminated Streetxtreme^™ two-way mobile Citizens Band radio, which is aimed at “Generation Y” drivers as a way to keep in touch while cruising without the expense of monthly service fees.

Additionally, in 2000 Cobra started its HighGear accessories division to develop and market high quality Citizens Band radio microphones and external speakers.

In 2003, Cobra introduced a new line of GPS models incorporating the industry’s first truly user-friendly features, which addressed what has traditionally been the primary barrier to consumer acceptance. The Company estimates that the domestic market for hand-held GPS receivers in factory net sales in 2003 was approximately $325 million (based on data from Allied Business and Frost & Sullivan). The company projects retail growth at 15% to 19% through 2008.

The GPS 100 and GPS 500 models include Cobra’s exclusive A.S.A.P, a technology that accesses 18 channels, as opposed to the category standard of 12, to locate a user’s position up to twice as fast as any other GPS technology in the consumer market. The soon to be introduced GPS 1000 DLX uses A.S.A.P. II technology, which matches the performance of 18 channel technology, but only requires 12 channels, thus reducing power requirements and extending battery life. In addition, Cobra’s GPS 500 and GPS 1000 DLX models include Rand McNally^™ mapping software, with worldwide city and state coordinates, Canadian province and European national boundaries. Both models allow users to download points of interest from a personal computer using the optional Rand McNally software and the GPS 1000 DLX allows users to download street-level detail.

In the fourth quarter of 2003, Cobra introduced its first line of entry-level and professional-grade marine electronics. The new product line is distinguished by premium features and industry firsts focused on usability and safety. The marine product line consists of fixed and hand-held dual power marine VHF transceivers, as well as marine power inverters.

Competition

Major competitors of the Company are Motorola, Audiovox and Uniden (FRS/GMRS); Whistler and Escort/Beltronics (Detectors); Uniden, Midland and Radio Shack (Citizens Band radios); Garmin and Magellan (GPS receivers); Icom, Uniden and Standard Radio (Marine products).

Sales and Distribution

Demand for consumer electronics products is somewhat seasonal and varies according to channel of distribution. Historically, sales in the last half of the year are significantly greater than in the first half, reflecting increasing purchases by retailers for various promotional activities that begin mainly in the second quarter and culminate

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with the holiday selling season. Also, because mass retail accounts make up an increasing portion of the Company’s business, the Company has experienced a shift in orders from the third quarter to the fourth quarter when the mass retailers normally begin their load-in for the holiday selling season. In 2004, the Company is focusing on developing new customers in the marine/outdoor channel that will over time, reduce the fourth quarter seasonality, as sales in this channel tend to peak in the first and second quarters.

Cobra products are distributed through a strong, well-established network of over 300 retailers and distributors located primarily in the United States. Approximately 70 percent of the Company’s sales are made directly to mass marketers, such as consumer electronics specialty stores, large department store-chains, warehouse clubs, office supply chains, television home-shopping, direct-response merchandisers, home centers and specialty stores. Most of the remaining sales are through two-step wholesale distributors that carry Cobra products to fill orders for travel centers, truck stops, small department stores, appliance dealers, duty-free shops on cruise lines and for export. Cobra’s primary sales force is composed of independent sales representatives who work on a straight commission basis. They do not sell products of the Company’s competitors. The Company now estimates that its products are available in more than 38,000 retail outlets. In both Canada and Europe, the Company utilizes distributors, which sell primarily to retailers.

The Company’s mix of customers can shift significantly from year to year and two to three customers generally comprise 25% to 35% of net sales in any one year. However, the specific retailers and distributors that represent those significant customers also vary year to year given the Company’s broad customer base. Customers which exceeded 10% of net sales in any one year are as follows: In 2003, sales to Wal-Mart and Best Buy were 22.3 percent and 13.0 percent of net sales, respectively. In 2002, sales to Best Buy and Wal-Mart were 14.3 percent and 13.3 percent of net sales, respectively. In 2001, sales to Costco Wholesale, K-Mart and Best Buy were 14.4 percent, 12.5 percent and 10.4 percent of net sales, respectively.

International sales, primarily in Canada and Europe, were $14.4 million, $15.1 million and $12.9 million in 2003, 2002 and 2001, respectively. For additional financial information about geographic areas, see Note 11 to the Consolidated Financial Statements.

The Company’s return policies and payment terms are similar to those of other companies serving the consumer electronics market. The Company’s products generally must be shipped within a short time after an order is received and, as a result, order backlog is not significant.

The Company has registered the Cobra trademark in the U.S., most European countries and various other jurisdictions. The Company believes the Cobra trademark, which is indefinitely renewable by the Company, is a significant factor in the successful marketing of its products.

Employees

As of December 31, 2003, the Company employed 132 persons in the U.S. and 15 in its international operations. None of the Company’s employees is a member of a union.

Available Information

The Company’s website address is “www.Cobra.com”. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through our website, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Item 2.  Properties

The Company owns one building in Chicago, Illinois containing a total of approximately 93,000 sq. feet of office and warehouse space. The Company has approximately 7,000 sq. feet of leased office space in Hong Kong for its international operations and 1,650 sq. feet of leased office space in Dublin, Ireland for its European operations. The Company believes that these facilities are adequate to meet its current needs.

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Item 3.  Legal Proceedings

The Company is subject to various unresolved legal actions and proceedings, which arise, in the normal course of its business. None of these actions is expected to have a material adverse effect on the Company’s business or financial condition.

Item 4.  Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter of 2003.

Item 4A.  Executive Officers of the Registrant

The executive officers of the Company are as follows:

PART II

Item 5.  Market for the Registrant’s Common Equity and Related Shareholder Matters

The Company’s common stock trades on The NASDAQ Stock Market under the symbol COBR. As of March 5, 2004, the Company had approximately 768 shareholders of record and approximately 1,838 shareholders for whom securities firms acted as nominees. The Company’s common stock is the only class of equity securities outstanding.

Under the terms of its credit agreement, the Company may not pay cash dividends.

STOCK PRICE DATA

Note: Data compiled from The NASDAQ Stock Market Monthly Summary of Activity Reports.

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Item 6.  Selected Financial Data

FIVE-YEAR FINANCIAL SUMMARY

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Net sales in 2003 decreased 15.5% to $114.8 million for the year ended December 31, 2003, compared to 2002 as a result of a significant decline in two-way radio sales, both in units and price per unit, reflecting changes in the two-way radio category as a whole. Gross margin increased from 25.2% to 26.7% driven primarily by improved margins in Detection and Citizens Band radios. Operating expenses declined by $3.6 million or 11.5%, reflecting lower sales and the Company’s shift to customers using fewer advertising programs. Net income in 2003 was $1.8 million, or $0.28 per diluted share, compared to $1.7 million, or $0.26 per diluted share for 2002.

The declining trend in the two-way radio market is expected to continue in 2004, albeit at a slower pace. The Company anticipates that this revenue decline will be offset by increased sales in new product categories entered in 2003 and 2004. The Company also expects improvements in gross margins and operating margins, resulting in higher net income in 2004 versus 2003.

Results of Operations

2003 Compared to 2002

The $21.0 million decrease in net sales primarily reflected a significant decline in sales in two-way radio category, both in units and in price per unit. Nearly three-quarters of the decline in Cobra’s two-way radio sales was due to a decline in units sold, mirroring the overall market trends in the category. The remainder of the decline was due to continued declines in average selling prices, again reflecting market trends. Management believes that the industry decline in average selling price was offset somewhat by Cobra’s product mix and merchandising initiatives, including the introduction of longer range GMRS units and the use of value packs.

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Certain customers also contributed to the decline in two-way radio sales. Merchandising choices by Costco Wholesale, which selected a competitor for placement in 2003, and Best Buy, which selected certain low-price point models from competitors, contributed to a decline in sales from 2002 of $10.8 million. Additionally, sales to K-Mart declined by $3.1 million, as Cobra imposed credit restrictions subsequent to this company’s bankruptcy filing. Offsetting these declines and providing a market share gain was an increase in two-way radio sales to Wal-Mart, with unit sales increasing by approximately 10%.

Partially offsetting the decline in sales of two-way radios was an increase in sales of Citizens Band radios, driven by the Harley Davidson and Dale Earnhardt limited edition models, and sales from Cobra’s new product categories, hand-held GPS and marine VHF radios and power inverters.

The declining trend in the two-way radio market is expected to continue in 2004, albeit at a slower pace. However, in 2004, the Company expects that increases in sales of new products, including mobile navigation, hand-held GPS and marine radios and inverters, will offset the impact to both net sales and net income of declining two-way radio sales.

Gross margin for 2003 was 26.7% compared to 25.2% in 2002. The increase primarily reflected improved Detection and Citizens Band radio margins on newer models, as well as lower defective return rates for both two-way radios and Detection products. Additionally, the 2002 gross margin was negatively impacted by the Federal Communication Commission’s (“FCC’s”) decision to limit radar detector emissions in the frequency band used by VSAT satellite communications providers as some non-compliant Detection products had to be sold off more quickly at lower prices. Finally, a stronger euro favorably impacted gross margin in 2003.

Selling, general and administrative expense decreased $3.6 million, or 11.5%, and as a percentage of net sales, increased to 24.0% in 2003 from 22.9% in 2002. The decrease reflected lower overall sales, a shift in customer mix to customers using fewer programs, a decline in advertising programs at certain customers and the reversal of $1.2 million of unclaimed program funds from 2002. This decrease was partially offset by increases in bad debt and research and development (“R&D”) expenses. The higher bad debt expense resulted from a one-time reduction of $772,000 in the allowance for claims and doubtful accounts in 2002. The Company purchased insurance on a portion of the outstanding accounts receivable balance beginning in 2000. In 2002, the Company increased the insurance coverage, which resulted in the large reduction in the allowance for claims and doubtful accounts. R&D expense was higher by $478,000, which reflected headcount additions for new product development, both in the U.S. and Hong Kong. The Company anticipates that R&D costs will continue to increase as resources are acquired to support the anticipated growth of the Company’s GPS and marine products.

Interest expense for 2003 was $162,000, which was $66,000 lower than 2002, because of significantly lower average debt in 2003.

Other income increased by $74,000 compared to 2002 primarily due to a higher gain on the cash surrender value of life insurance policies.

Income tax expense decreased $44,000 to $1.3 million in 2003 due to higher deductible permanent items. The effective tax rate was 41.4% in 2003 compared to 43.9% in 2002.

2002 Compared to 2001

The $14.2 million decline in net sales mostly reflected a $15.7 million drop in sales to K-Mart due to the restrictions the Company imposed on this account subsequent to its bankruptcy filing, as well as the difficult economy, which intensified pressure for reduced prices, particularly in the two-way FRS/GMRS radio market. Another factor in the decline in 2002 net sales was the selection by Costco Wholesale of a competitor for an FRS promotion, resulting in a decline in net sales to this account of $15.6 million. Partially offsetting the overall decrease were sales to Wal-Mart, which increased $13.2 million in 2002 and increased international sales (from $12.9 million to $15.1 million), primarily from sales to Canada.

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Gross margin for 2002 was 25.2% compared to 26.0% in 2001. The decrease primarily reflected a decline in liquidation prices for FRS and Detection units that were returned by consumers and liquidated, as well as increases in the return rates of FRS and Detection products. Additionally, the FCC’s decision to limit radar detector emissions in the frequency band used by VSAT satellite communications providers affected it to a lesser degree (and was offset by several other items) as some non-compliant Detection products had to be sold off more quickly at lower prices.

Selling, general and administrative expense, excluding the expenses for the terminated acquisition of Lowrance Electronics, Inc. in 2001, increased $2.7 million, or 9.4%, and as a percentage of net sales increased to 22.9% in 2002 from 18.9% in 2001. Approximately $2.3 million of the increase reflected additional variable selling expenses incurred in connection with marketing support that the Company provided its retail customers as it shifted away from promotional pricing towards more cooperative advertising and similar programs to build store traffic. Also, the Company purchased insurance on a portion of the outstanding accounts receivable balance beginning in 2000. In 2002, the Company increased the insurance coverage, permitting a reduction of $772,000 in the allowance for claims and doubtful accounts.

Interest expense for 2002 was $228,000, which was $559,000 lower than 2001, because of significantly lower average debt in 2002.

Other income for 2002 was $91,000 compared to an expense of $117,000 in 2001. The difference represented losses incurred in 2001 on disposal of fixed assets in conjunction with the remodeling of the Company’s Chicago headquarters.

Income tax expense decreased $2.2 million to $1.3 million in 2002 due to lower pre-tax income. The effective tax rate was 43.9% in 2002 compared to 43.4% in 2001.

Liquidity and Capital Resources

On January 31, 2002, the Company executed a new three-year revolving credit agreement for $55 million with three financial institutions. Borrowings and letters of credit issued under the agreement are secured by substantially all of the assets of the Company, with the exception of real property and the cash surrender value of certain life insurance policies owned by the Company. The credit agreement was amended as of February 18, 2003 to address certain covenant violations then existing and decrease the earnings requirements for each calendar quarter through March 31, 2004 and to provide for increased permitted capital expenditures in 2003. The credit agreement was further amended on February 18, 2004 to extend the term of the agreement to January 31, 2006, address certain covenant violations that would otherwise have occurred, reduce the cost of the credit facility by reducing its size to $45 million and reducing the applicable interest rates, and modify the earnings requirements for each calendar quarter through January 31, 2006. Loans outstanding under the credit agreement, as amended, bear interest, at the Company’s option, at 25 basis points below the prime rate or at LIBOR plus 175 basis points. The credit agreement specifies that the Company may not pay cash dividends and contains certain financial and other covenants, including a requirement that James R. Bazet continue as CEO of the Company. At December 31, 2003, the Company had no interest bearing debt outstanding and approximately $29.2 million available under this credit line based on asset advance formulas.

Net cash flows generated in operating activities were $5.6 million for the year ended December 31, 2003. Operating cash flows were derived principally from net income of $1.8 million, depreciation and amortization of $2.7 m