** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10 -Q**

**x********QUARTERLY REPORT UNDER SECTION 13OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934.**

** **

**For thequarterly period ended September 30, 2006**

**OR**

 

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**Forthe transition periodfrom                to                **

Commission File Number -**001-32217**

**InfoSonics Corporation**

(Exactname of registrant as specified in its charter)

 

| **Maryland**                                                     |   | **33-0599368**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification Number) |

 

**5880 Pacific Center Blvd SanDiego, CA 92121**

(Address of principal executive offices including zip code)

**(858) 373-1600**

(Registrant’s telephone number, includingarea code)

**NotApplicable**

(Former Name or Former Address, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes   x   No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer (as defined in Rule12b-2 of the Exchange Act).

Large Accelerated Filer o  Accelerated Filer o  Non-Accelerated Filer x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes  o   No x

As ofNovember 10, 2006, the Registrant had 14,120,068 shares outstanding of its$.001 par value common stock.

 

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**InfoSonics Corporation and Subsidiaries**

**QuarterlyReport on Form 10-Q For The Period Ended****September 30, 2006**

**Table ofContents**
| **PART I.  FINANCIAL INFORMATION** |
|------------------------------------|
|                               |   |
| Item 1.                            | Financial Statements |
|                               |   |
| ·                             | Consolidated Balance  Sheets as of September 30, 2006 (unaudited) and December 31, 2005 |
|                               |   |
| ·                             | Consolidated  Statements of Income for the Three and Nine Months Ended September 30, 2006  and 2005 (unaudited) |
|                               |   |
| ·                             | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2006 and  2005 (unaudited) |
|                               |   |
| ·                             | Condensed  Notes to Consolidated Financial Statements (unaudited) |
|                               |   |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                               |   |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk |
|                               |   |
| Item 4.                            | Controls and  Procedures |
|                               |   |
| **PART II. OTHER INFORMATION**     |
|                               |   |
| Item 1.                            | Legal Proceedings |
|                               |   |
| Item 1A.                           | Risk Factors |
|                               |   |
| Item 2.                            | Unregistered  Sales of Equity Securities and Use of Proceeds |
|                               |   |
| Item 3.                            | Defaults Under  Senior Securities |
|                               |   |
| Item 4.                            | Submission of  Matters to a Vote of Security Holders |
|                               |   |
| Item 5.                            | Other Information |
|                               |   |
| Item 6.                            | Exhibits |

 

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**Part I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Balance Sheets**
| ** **                                                                                                                                          | ** ** | **September 30,  2006** | ** **     | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|-----------------------------|------------|
| ** **                                                                                                                                          | ** ** | **(unaudited)**              | ** **     | ** **                  | ** ** |
| **ASSETS**                                                                                                                                          | ** ** | ** **                   |           |                        |       |
| **Current assets:**                                                                                                                                 |       |                         |           |                        |       |
| Cash and cash equivalents                                                                                                                           |       | $                            | 16,195,030     |                        | $          | 7,712,915 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $904,552 (unaudited)  and $552,993                                            |       | 44,527,077                   |           | 19,962,630                  |       |
| Inventory, net of  reserves of $176,798 (unaudited) and $249,476                                                                                    |       | 5,178,079                    |           | 5,612,343                   |       |
| Prepaid inventory                                                                                                                                   |       | 5,823,217                    |           | 1,680,086                   |       |
| Prepaid expenses                                                                                                                                    |       | 350,353                      |           | 231,400                     |       |
| Prepaid taxes                                                                                                                                       |       | 555,499                      |           | 246,796                     |       |
| Net assets of  discontinued operations                                                                                                              |       | 4,210                        |           | 18,931                      |       |
| Deferred tax assets —  current                                                                                                                 |       | 552,000                      |           | 550,000                     |       |
|                                                                                                                                                |       |                         |           |                        |       |
| Total current assets                                                                                                                                |       | 73,185,465                   |           | 36,015,101                  |       |
|                                                                                                                                                |       |                         |           |                        |       |
| Property and equipment,  net                                                                                                                        |       | 637,866                      |           | 426,917                     |       |
| Intangible assets                                                                                                                                   |       | 504,000                      |           | 504,000                     |       |
| Other assets                                                                                                                                        |       | 137,474                      |           | 90,791                      |       |
|                                                                                                                                                |       |                         |           |                        |       |
| **Total assets**                                                                                                                                    | ** ** | **$**                        | **74,464,805** | ** **                  | **$**      | **37,036,809** | ** ** |
|                                                                                                                                                |       |                         |           |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                      | ** ** | ** **                   | ** **     | ** **                  | ** ** |
|                                                                                                                                                |       |                         |           |                        |       |
| **Current liabilities:**                                                                                                                            |       |                         |           |                        |       |
| Line of credit                                                                                                                                      |       | $                            | 20,890,100     |                        | $          | 10,000,000 |   |
| Accounts payable                                                                                                                                    |       | 15,545,038                   |           | 5,986,890                   |       |
| Accrued expenses                                                                                                                                    |       | 1,784,271                    |           | 2,983,880                   |       |
| Income taxes payable                                                                                                                                |       | 95,850                       |           | —                      |       |
|                                                                                                                                                |       |                         |           |                        |       |
| Total current  liabilities                                                                                                                          |       | 38,315,259                   |           | 18,970,770                  |       |
|                                                                                                                                                |       |                         |           |                        |       |
| Deferred tax liability  non-current                                                                                                                 |       | 26,000                       |           | 22,207                      |       |
| ** **                                                                                                                                          |       |                         |           |                        |       |
| **Total liabilities**                                                                                                                               |       | 38,341,259                   |           | 18,992,977                  |       |
| ** **                                                                                                                                          |       |                         |           |                        |       |
| **Commitments and contingencies**                                                                                                                   |       |                         |           |                        |       |
|                                                                                                                                                |       |                         |           |                        |       |
| **Stockholders’ equity:**                                                                                                                      |       |                         |           |                        |       |
| Preferred stock, $0.001  par value 10,000,000 shares authorized (no shares issued and outstanding as  of applicable period end)                     |       | —                       |           | —                      |       |
| Common stock, $0.001  par value 40,000,000 shares authorized (14,064,068 and 11,252,844 shares  issued and outstanding as of applicable period end) |       | 14,064                       |           | 11,252                      |       |
| Additional paid-in  capital                                                                                                                         |       | 29,527,750                   |           | 13,421,311                  |       |
| Retained earnings                                                                                                                                   |       | 6,581,732                    |           | 4,611,269                   |       |
|                                                                                                                                                |       |                         |           |                        |       |
| Total stockholders’  equity                                                                                                                    |       | 36,123,546                   |           | 18,043,832                  |       |
|                                                                                                                                                |       |                         |           |                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                 | ** ** | **$**                        | **74,464,805** | ** **                  | **$**      | **37,036,809** | ** ** |

 

*Accompanyingnotes are integral part of these financial statements.*

3

----

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements of Income**

**(unaudited)**
| ** **                                                               | ** ** | **For the Three Months  Ended September 30,** | ** **  | **For the Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------|-------------|-----------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                                               | ** **  | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | ** **                                                             | ** **  | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                                            |       | $                                                                      | 67,568,847  |                                                                  | $          | 54,237,278 |   | $ | 179,975,494 |   | $ | 110,789,125 |   |
| **Cost of  sales**                                                       |       | 62,154,069                                                             |        | 50,047,209                                                            |       | 166,049,196 |   | 101,811,213 |   |
|                                                                     |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Gross  profit**                                                        |       | 5,414,778                                                              |        | 4,190,069                                                             |       | 13,926,298 |   | 8,977,912 |   |
| **Operating  expenses**                                                  |       | 4,439,674                                                              |        | 2,970,160                                                             |       | 11,555,769 |   | 6,517,853 |   |
|                                                                     |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Operating  income from continuing operations**                         |       | 975,104                                                                |        | 1,219,909                                                             |       | 2,370,529 |   | 2,460,059 |   |
|                                                                     |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Other  income (expense)**                                              |       |                                                                   |        |                                                                  |       |   |   |   |   |
| Change in fair value of derivative liability                             |       | —                                                                 |        | —                                                                |       | 399,009 |   | — |   |
| Interest income (expense)                                                |       | 47,189                                                                 |        | (147,301                                                              | )          | (152,368 | ) | (233,277 | ) |
|                                                                     |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Income  from continuing operations before provision for income taxes** |       | 1,022,293                                                              |        | 1,072,608                                                             |       | 2,617,170 |   | 2,226,782 |   |
| **Provision  for income taxes**                                          |       | 345,074                                                                |        | 290,478                                                               |       | 638,614 |   | 704,793 |   |
|                                                                     |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Income  from continuing operations**                                   |       | 677,219                                                                |        | 782,130                                                               |       | 1,978,556 |   | 1,521,989 |   |
| **Gain  (loss) net of income tax expense from discontinued operations**  |       | (40                                                                    | )           | 391,563                                                               |       | (692 | ) | 374,479 |   |
| ** **                                                               | ** ** | ** **                                                             | ** **  | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  income**                                                          | ** ** | **$**                                                                  | **677,179** | ** **                                                            | **$**      | **1,173,693** | ** ** | **$** | **1,977,864** | ** ** | **$** | **1,896,468** | ** ** |
|                                                                     |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Basic  earnings per share**                                            |       |                                                                   |        |                                                                  |       |   |   |   |   |
| From continuing operations                                               | ** ** | **$**                                                                  | **0.05**    | ** **                                                            | **$**      | **0.07** | ** ** | **$** | **0.15** | ** ** | **$** | **0.14** | ** ** |
| From discontinued operations                                             | ** ** | **$**                                                                  | **(0.00**   | **)**                                                                 | **$**      | **0.04** | ** ** | **$** | **(0.00** | **)** | **$** | **0.04** | ** ** |
| Net income                                                               | ** ** | **$**                                                                  | **0.05**    | ** **                                                            | **$**      | **0.11** | ** ** | **$** | **0.15** | ** ** | **$** | **0.18** | ** ** |
| **Diluted  earnings per share**                                          | ** ** | ** **                                                             | ** **  | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| From continuing operations                                               | ** ** | **$**                                                                  | **0.04**    | ** **                                                            | **$**      | **0.07** | ** ** | **$** | **0.13** | ** ** | **$** | **0.13** | ** ** |
| From discontinued operations                                             | ** ** | **$**                                                                  | **(0.00**   | **)**                                                                 | **$**      | **0.03** | ** ** | **$** | **(0.00** | **)** | **$** | **0.03** | ** ** |
| Net income                                                               | ** ** | **$**                                                                  | **0.04**    | ** **                                                            | **$**      | **0.10** | ** ** | **$** | **0.13** | ** ** | **$** | **0.16** | ** ** |
|                                                                     |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Basic  weighted-average number of common shares outstanding**          | ** ** | **13,989,980**                                                         | ** **  | **10,664,000**                                                        | ** ** | **13,494,168** | ** ** | **10,664,000** | ** ** |
|                                                                     |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Diluted weighted-average number  of common shares outstanding**        | ** ** | **16,278,809**                                                         | ** **  | **11,935,340**                                                        | ** ** | **15,828,263** | ** ** | **11,745,586** | ** ** |

 

*Accompanyingnotes are integral part of these financial statements*.

4

----

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(unaudited)**

** **
| ** **                                                                                                             | ** ** | **For the Nine Months Ended  September 30,** | ** **     |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|----------------|
| ** **                                                                                                             | ** ** | **2006**                                                              | ** **     | **2005** | ** ** |
| **Cash  flows from operating activities:**                                                                             |       |                                                                  |           |   |   |
| Net income from continuing operations                                                                                  |       | $                                                                     | 1,977,864      |   | $ | 1,521,989 |   |
| Adjustments to reconcile net income from continuing  operations to net cash provided by (used in) operating activities |       |                                                                  |           |   |   |
| Depreciation and amortization                                                                                          |       | 108,220                                                               |           | 59,929 |   |
| Provision for bad debt                                                                                                 |       | 351,560                                                               |           | 749,560 |   |
| Provision for obsolete inventory                                                                                       |       | (72,679                                                               | )              | (1,001 | ) |
| Stock option expense                                                                                                   |       | 1,376,512                                                             |           | — |   |
| Tax benefit from stock option exercises                                                                                |       | 514,402                                                               |           | — |   |
| Change in fair value of derivative liability                                                                           |       | (399,009                                                              | )              | — |   |
| (Increase) decrease in                                                                                                 |       |                                                                  |           |   |   |
| Trade accounts receivable                                                                                              |       | (24,916,006                                                           | )              | (29,384,723 | ) |
| Inventory                                                                                                              |       | 506,943                                                               |           | (221,618 | ) |
| Prepaid inventory                                                                                                      |       | (4,143,131                                                            | )              | (1,317,276 | ) |
| Prepaid expenses                                                                                                       |       | (427,657                                                              | )              | 174,249 |   |
| Deferred tax asset current                                                                                             |       | (2,000                                                                | )              | (310,000 | ) |
| Deferred tax asset non current                                                                                         |       | 3,793                                                                 |           | 59,000 |   |
| Other assets                                                                                                           |       | (46,684                                                               | )              | (17,358 | ) |
| Increase (decrease) in                                                                                                 |       |                                                                  |           |   |   |
| Accounts payable                                                                                                       |       | 9,559,557                                                             |           | 6,980,943 |   |
| Accrued expenses                                                                                                       |       | (1,201,019                                                            | )              | 2,788,570 |   |
| Income tax liabilities                                                                                                 |       | 95,851                                                                |           | 368,880 |   |
|                                                                                                                   |       |                                                                  |           |   |   |
| Cash provided by  (used in) continuing operations                                                                      |       | (16,713,483                                                           | )              | (18,548,856 | ) |
| Cash provided by  (used in) discontinued operations                                                                    |       | 14,722                                                                |           | (156,479 | ) |
|                                                                                                                   |       |                                                                  |           |   |   |
| Net cash  provided by (used in) operating activities                                                                   |       | (16,698,761                                                           | )              | (18,705,335 | ) |
|                                                                                                                   |       |                                                                  |           |   |   |
| **Cash  flows from investing activities:**                                                                             |       |                                                                  |           |   |   |
|                                                                                                                   |       |                                                                  |           |   |   |
| Purchase of property and equipment                                                                                     |       | (319,170                                                              | )              | (280,060 | ) |
|                                                                                                                   |       |                                                                  |           |   |   |
| Net cash  provided by (used in) investing activities                                                                   |       | (319,170                                                              | )              | (280,060 | ) |
|                                                                                                                   |       |                                                                  |           |   |   |
| **Cash  flows from financing activities:**                                                                             |       |                                                                  |           |   |   |
| Borrowings from line of credit                                                                                         |       | 91,635,941                                                            |           | 72,315,463 |   |
| Payments on line of credit                                                                                             |       | (80,745,841                                                           | )              | (57,151,304 | ) |
| Cash paid for offering costs                                                                                           |       | (1,005,582                                                            | )              | — |   |
| Cash received for stock                                                                                                |       | 15,622,930                                                            |           | — |   |
|                                                                                                                   |       |                                                                  |           |   |   |
| Net cash provided by (used in) financing activities                                                                    |       | 25,507,448                                                            |           | 15,164,159 |   |
|                                                                                                                   |       |                                                                  |           |   |   |
| Effect of exchange rate changes on cash                                                                                |       | (7,402                                                                | )              | — |   |
|                                                                                                                   |       |                                                                  |           |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                                  |       | 8,482,115                                                             |           | (3,821,236 | ) |
|                                                                                                                   |       |                                                                  |           |   |   |
| **Cash and cash equivalents, beginning of period**                                                                     |       | 7,712,915                                                             |           | 5,183,876 |   |
|                                                                                                                   |       |                                                                  |           |   |   |
| **Cash  and cash equivalents, end of period**                                                                          | ** ** | **$**                                                                 | **16,195,030** | ** ** | **$** | **1,362,640** | ** ** |

 

*Accompanyingnotes are integral part of these financial statements*.

5

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** **

**InfoSonicsCorporation**

**Condensed Notes to Unaudited Consolidated FinancialStatements**

**as of andat September 30, 2006**

**(unaudited)**

**NOTE 1. Basis of Presentation**

The accompanying unaudited consolidated financialstatements and these condensed notes have been prepared in accordance withaccounting principles generally accepted in the United States (“GAAP”) forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended(the “Exchange Act”). Accordingly, they do not include all of the informationand footnotes required by GAAP for complete financial statements. Thepreparation of financial statements requires management to make estimates andassumptions that affect amounts reported in the financial statements andaccompanying notes. Actual results are likely to differ from those estimates,but management does not believe such differences will materially affect thefinancial position or results of operations of InfoSonics Corporation (the “Company”),although they may. These unaudited consolidated financial statements andcondensed notes should be read in conjunction with the financial statements andnotes as of and for the year ended December 31, 2005 included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2005.  These unaudited consolidated financialstatements reflect all adjustments considered, in the opinion of the Company’smanagement, necessary to fairly present the results for the periods coveredherein and such adjustments are considered of a normal recurring nature.

The unauditedconsolidated financial statements include the accounts of the Company and itssubsidiaries, Axcess Mobile LLC, InfoSonics De Mexico, InfoSonics de Guatemala,InfoSonics El Salvador and InfoSonics S.A., all of which are wholly owned.Significant intercompany accounts and transactions have been eliminated inconsolidation of these consolidated financial statements.

The unaudited Consolidated Balance Sheet at September 30,2006 does not include all of the information and footnotes required by GAAP forcomplete financial statements. Due to seasonality of the Company’s business andother factors, the Company’s interim results may not be indicative of thecondition at or the results for the full fiscal year of 2006 or at or for anyother future period. The unaudited Consolidated Statements of Income for thethree and nine months ended September 30, 2006 and the unaudited ConsolidatedStatement of Cash Flows for the nine months ended September 30, 2006 are notnecessarily indicative of the operating results or cash flows that may beexpected for the full fiscal year of 2006 or for any future period.

Share and pershare amounts for all periods presented in this report (unless otherwisestated) have been adjusted to reflect the two-for-one common stock split in theform of a stock dividend effected on June 19, 2006.  See Note 10 below for additional information.

**NOTE 2.****Acquisition**

On January 19, 2005, the Company purchased PrimaselS.A., from Fanrock Investments Limited for up to 240,000 shares of the Company’scommon stock, based on sales of certain levels being achieved in the next threeyears.  During the year ended December31, 2005, 240,000 shares of stock were issued in full satisfaction of theCompany’s potential share issuance in connection with this transaction.  In addition, under the terms of theacquisition, the Company is obligated to share certain profits based on salesand profitability achieved in Argentina. During the three and nine months endedSeptember 30, 2006, the Company recorded expense and related accrual of$677,000 and $1.5 million, respectively, related to these profit-sharing terms.The Company accounted for the transaction as a stock purchase. The purchaseprice has been recorded as an intangible asset on the Consolidated BalanceSheet.  Primasel had a distributionagreement and a management agreement which was the purpose for the transaction,and the implied value of those agreements is the value of the 240,000 sharesissued in October 2005.  The Companyallocated 75% of the non-cash cost of this stock issuance towards themanagement agreement and 25% towards the distribution agreement. In February2005, Primasel S.A. changed its name to InfoSonics S.A.

**NOTE 3. Discontinued Operations**

During the quarterended September 30, 2004, the Company’s Board of Directors reviewed AxcessMobile, LLC and its mall-based kiosk locations and implemented actionsnecessary to close the Company’s mall-based kiosk locations. On October 28,2004, the Company assigned the leases for nine of its mall-based kiosklocations to an unrelated assignee; 

 

6

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however, theassignment did not release the Company from its future lease obligations,including up to $702,975 as of September 30, 2006. The assignee operatesapproximately 400 mall-based kiosks in 28 states. A third party is holding inescrow two months rent for the assigned locations  from the assignee, and in the event ofdefault by the assignee, those funds will be released to the Company.  The Company’s other four lease locations wereclosed in October 2004.  SFAS No. 142, “Goodwilland Other Intangible Assets” prohibits the amortization of goodwill, butrequires that it be reviewed for impairment at least annually or on an interimbasis if an event occurs or circumstances change that could indicate that itsvalue has diminished or been impaired. As a result of the discontinuedoperations, the Company has reassessed the goodwill and written down the valueassociated with its mall-based kiosk locations to zero.  This write-down was recorded as an operatingexpense in the year ended December 31, 2004.

**NOTE 4. Stock-Based Compensation**

TheCompany has three equity incentive plans, the 2006 Equity Incentive Plan (2006Plan), the 2003 Stock Option Plan (2003 Plan) and, the 1998 Stock Option Plan(1998 Plan).  Each of the plans has beenapproved by our shareholders. The 2006 Plan is the only plan from whichadditional equity incentives will be granted. The 2006 Plan authorizes thegrant of up to 1,000,000 equity incentives. The Company is also a party tonon-plan option agreements with several institutions.

Priorto December 31, 2005, the Company accounted for employee stock option plansbased on the intrinsic value method in accordance with Accounting PrinciplesBoard (APB) Opinion No. 25, “*Accounting forStock Issued to Employees,”*and related Interpretations, and hadadopted the disclosure requirements of SFAS No. 123, “*Accounting for Stock-Based Compensation”*as amended by SFAS No. 148, “*Accounting forStock-Based Compensation—Transition and Disclosure.*” Accordingly,compensation cost for stock options was measured as the excess, if any, of thequoted market price of the Company’s stock at the grant date over the amount anemployee must pay to acquire the stock. The Company granted stock options withexercise prices equal to the market price of the underlying stock on the dateof grant; therefore, the Company did not record stock-based compensationexpense under APB Opinion No. 25.

InDecember 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.123R, “ *Share-Based Payments,”*torequire that compensation cost relating to share-based payment arrangements berecognized in the financial statements. As of January 1, 2006, the Companyadopted SFAS 123R using the modified prospective method, which requiresmeasurement of compensation cost for all stock-based awards at fair value onthe date of grant and recognition of compensation over the service period forawards expected to vest. The fair value of stock options was determined usingthe Black-Scholes valuation model, which is consistent with our valuationtechniques previously utilized for stock options in footnote disclosures requiredunder SFAS 123, as amended by SFAS 148. Such fair value is recognized asexpense over the service period, net of estimated forfeitures.

If the Company had adopted SFAS 123R as of January 1, 2005for its stock-based compensation plans, then the Company’s net income for thethree and nine months ended September 30, 2005 would have been adjusted to thepro forma amounts indicated below:

 
| ** **                                                                                                                                                                                 | ** ** | **Three Months ended  September 30,**                                                                                                     | ** ** | **Nine Months ended  September 30,**                                                                                                      | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **            2005            ** | ** ** | **            2005            ** | ** ** |
| Net income as reported                                                                                                                                                                     |       | $                                                                                                                                                        | 1,173,693  |                                                                                                                                                     | $          | 1,896,468 |   |
|                                                                                                                                                                                       |       |                                                                                                                                                     |       |                                                                                                                                                     |       |
| Stock-based employee compensation cost, net of related  tax effects, that would have been included in the determination of net income  if the SFAS 123R fair value method had been applied |       | (60,748                                                                                                                                                  | )          | (572,070                                                                                                                                                 | )          |
| Pro forma                                                                                                                                                                                  |       | $                                                                                                                                                        | 1,112,945  |                                                                                                                                                     | $          | 1,324,398 |   |
|                                                                                                                                                                                       |       |                                                                                                                                                     |       |                                                                                                                                                     |       |
| Basic earnings per common share as reported                                                                                                                                                |       | $                                                                                                                                                        | 0.11       |                                                                                                                                                     | $          | 0.18 |   |
| Stock-based employee compensation cost, net of related  tax effects, that would have been included in the determination of net income  if the SFAS 123R fair value method had been applied |       | $                                                                                                                                                        | (0.01      | )                                                                                                                                                        | $          | (0.05 | ) |
| Pro forma                                                                                                                                                                                  |       | $                                                                                                                                                        | 0.10       |                                                                                                                                                     | $          | 0.13 |   |
| Diluted earnings per common share as reported                                                                                                                                              |       | $                                                                                                                                                        | 0.10       |                                                                                                                                                     | $          | 0.16 |   |
| Stock-based employee compensation cost, net of related  tax effects, that would have been included in the determination of net income  if the SFAS 123R fair value method had been applied |       | $                                                                                                                                                        | (0.01      | )                                                                                                                                                        | $          | (0.05 | ) |
| Pro forma                                                                                                                                                                                  |       | $                                                                                                                                                        | 0.09       |                                                                                                                                                     | $          | 0.11 |   |

 

7

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OnSeptember 27, 2001, the FASB Emerging Issues Task Force (“EITF”) issued EITFIssue 96-18 “*Accounting for Equity Instruments That areIssued to Other than Employees for Acquiring, or in Conjunction with Selling,Goods or Services*,” which requires that equity instruments issued inexchange for certain services be valued at the more accurate of the fair valueof the services provided or the fair value of the equity instrumentsissued.  For equity instruments issuedthat are subject to a required service period the expense associated with theequity instruments is recorded as the instruments vest or the services areprovided.  The Company has grantedoptions and warrants to non-employees and recorded the fair value of the equityinstruments on the date of issuance using the Black-Scholes valuation model.  For grants subject to vesting or servicerequirements, the expense is deferred and is recognized over the moreappropriate of the vesting period or as the services are provided.

OnMarch 29, 2005, the Securities and Exchange Commission (“SEC”) published StaffAccounting Bulletin (“SAB”) No. 107, which provides the SEC Staff’s views on avariety of matters relating to stock-based payments. SAB 107 requiresstock-based compensation to be classified in the same expense line items ascash compensation. Information about stock-based compensation included in the resultsof operations for the three and nine months ended September 30, 2006 is asfollows:
| ** **                                                        | ** ** | **Three months ended  September 30, 2006** | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Officer  compensation                                             |       | $                                                              | 79,654     |                                                          | $          | 116,248 |   |
| Non-employee  directors                                           |       | 1,726                                                          |       | 1,139,904                                                     |       |
| Sales, general  and administrative                                |       | 52,068                                                         |       | 120,360                                                       |       |
| Total stock option  expense, included in total operating expenses |       | $                                                              | 133,448    |                                                          | $          | 1,376,512 |   |

 

Our stock options vest on an annual or a monthly basis. As of September30, 2006, there was $762,000 of total unrecognized compensation costs relatedto the non-vested stock options.  The Company recognizes stock-basedcompensation costs on a straight-line basis over the requisite service periodof the award, which is generally the option vesting term.   That cost is expected to be recognized overthe next weighted-average period of 2.5 years. Such amounts may change as a result of additional grants, forfeitures,modifications in assumptions and other factors. SFAS 123R provides that incometax effects of share-based payments are recognized in the financial statementsfor those awards which will normally result in tax deductions under existingtax law. During the third quarter of 2006, we recorded an expense of $133,448,related to options granted to our non-employee directors.  These options had been previously granted orwere granted during the current quarter. Under current U.S. federal tax law, wewould receive a compensation expense deduction related to non-qualified stock optionsonly when those options are exercised and vested shares are received.Accordingly, the financial statement recognition of compensation cost fornon-qualified stock options creates a deductible temporary difference whichresults in a deferred tax asset and a corresponding deferred tax benefit in theincome statement.

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted-average assumptions used for grantsin 2006 and 2005: risk-free interest rate of between 4.88% to 5.04% in 2006 and3.22% to 4.41% in 2005 based on the U.S. Treasury yields in effect at the timeof grant; expected dividend yields of 0 percent as the Company has not, anddoes not intend to, issue dividends; and expected lives of 3 to 7 years in 2006and 2005 based upon the historical life of options. For grants in 2006 and2005, the expected volatility used ranged from 62% to 91%, based on the Company’shistorical stock price fluctuations for a period matching the expected life ofthe options.

A summary of optionactivity under all of the above plans as of September 30, 2006, and changesduring the nine months then ended is presented in the table below:
| ** **                         | ** ** | **Shares** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** | **Wtd. Avg.  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2006    |       | 3,598,500  |       | $                                       | 2.15       |                                                 | 3.48       |                            |       |   |
| Granted                            |       | 287,000    |       | $                                       | 6.77       |                                                 | 3.04       |                            |       |   |
| Exercised                          |       | 569,398    |       | $                                       | 4.26       |                                                 | —     |                            |       |   |
| Forfeited                          |       | 51,778     |       | $                                       | 3.94       |                                                 | —     |                            |       |   |
| Outstanding at  September 30, 2006 |       | 3,264,324  |       | $                                       | 2.53       |                                                 | 3.67       |                            | $          | — |   |
| Vested and  expected to vest       |       | 3,264,324  |       | $                                       | 2.53       |                                                 | 3.67       |                            | $          | — |   |
| Exercisable at  September 30, 2006 |       | 3,004,951  |       | $                                       | 1.97       |                                                 | 3.40       |                            | $          | — |   |

 

8

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A summary of the statusof the Company’s non vested options at September 30, 2006, and changes duringthe nine months ended September 30, 2006, is presented below:
| ** **                        | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|-----------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Nonvested at  December 31, 2005   |       | $          | 462,834    |                                                  | $          | 2.61 |   |
| Granted                           |       | 287,000    |       | $                                                     | 6.77       |   |
| Vested                            |       | 445,184    |       | $                                                     | 3.51       |   |
| Forfeited                         |       | 45,278     |       | $                                                     | 3.49       |   |
| Non-vested at September  30, 2006 |       | 259,372    |       | $                                                     | 5.07       |   |
|                                   |            |            |            |                                                       |            |  |  |

 

The weighted-averagegrant-date fair value of options granted during the three and nine months endedSeptember 30, 2006 was $5.44 and $6.77, respectively. The total intrinsic valueof options exercised during the three and nine months ended September 30, 2006was $0 and $0 respectively. There was $276,000 and $1.2 million cash receivedfrom options exercised for the three and nine months ended September 30, 2006,respectively. There were no options exercised in the three and nine monthsended September 30, 2005. The stock based compensation unrecognized expense forfuture periods as of September 30, 2006 is approximately $762,000 with aweighted average remaining vesting period of 2.5 years.

**NOTE 5. Earnings Per Share**

The Company utilizes SFAS No. 128, ‘‘*Earnings perShare*.’’ Basic earnings per share is computed by dividing incomeavailable to common stockholders by the weighted-average number of commonshares outstanding. Diluted earnings per share is computed similarly to basicearnings per share, except that the denominator is increased to include thenumber of additional common shares that would have been outstanding if thepotential additional common shares that were dilutive had been issued. Commonshare equivalents are excluded from the computation if their effect isanti-dilutive. The Company’s common share equivalents consist of stock optionsand warrants.

The following table represents a reconciliation of theshares used to calculate basic and diluted earnings per share for therespective periods indicated:
| ** **                                                                                                                             | ** ** | **       Three Months Ended       ** | ** ** | **       Nine Months Ended       ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **September 30,  2006**                                                                                         | ** ** | **September 30,  2005**                                                                                        | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|                                                                                                                                   |       |                                                                                                                 |       |                                                                                                                |       |   |   |   |   |
| Numerator: Net income                                                                                                                  |       | $                                                                                                                    | 677,179    |                                                                                                                | $          | 1,173,693 |   | $ | 1,977,864 |   | $ | 1,896,468 |   |
| Denominator:                                                                                                                           |       |                                                                                                                 |       |                                                                                                                |       |   |   |   |   |
| Denominator for basic earnings per share —  weighted-average shares                                                               |       | 13,989,980                                                                                                           |       | 10,664,000                                                                                                          |       | 13,494,168 |   | 10,664,000 |   |
| Effect of dilutive securities                                                                                                          |       |                                                                                                                 |       |                                                                                                                |       |   |   |   |   |
| Employee  stock options and warrants                                                                                                   |       | 2,288,829                                                                                                            |       | 1,271,340                                                                                                           |       | 2,334,095 |   | 1,081,586 |   |
|                                                                                                                                   |       |                                                                                                                 |       |                                                                                                                |       |   |   |   |   |
| Denominator for diluted earnings per share — adjusted  weighted-average shares and assumed exercise of stock options and warrants |       | 16,278,809                                                                                                           |       | 11,935,340                                                                                                          |       | 15,828,263 |   | 11,745,586 |   |
|                                                                                                                                        |            |                                                                                                                      |            |                                                                                                                     |            |  |  |  |  |  |  |  |  |

 

9

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Certain potential common sharesfrom exercise of options and warrants have been excluded from the computationof diluted earnings per share due to their exercise price being greater thanthe Company’s weighted-average stock price for the period. For the three monthsended September 30, 2006 and 2005, the number of shares excluded were 1,894,583and 1,881,726, respectively, and for the nine months ended September 30, 2006and 2005, the number of shares excluded were 1,849,317 and 2,070,814,respectively.

**NOTE 6. Income Taxes**

SFAS No. 109, “*Accounting for IncomeTaxes,*” establishes financial accounting and reporting standards forthe effect of income taxes. The objectives of accounting for income taxes areto recognize the amount of taxes payable or refundable for the current year anddeferred tax liabilities and assets for the future tax consequences of eventsthat have been recognized in an entity’s financial statements or tax returns.Judgment is required in assessing the future tax consequences of events thathave been recognized in our financial statements or tax returns. Fluctuationsin the actual outcome of these future tax consequences could materially impactour financial position or our results of operations.

**NOTE 7. Inventory**

Inventory is valued at the lower of cost or market usingstandard costs that approximate average cost. Inventories are reviewedperiodically and items considered to be slow moving or obsolete are reduced toestimated net realizable value through an appropriate reserve.  In addition, included in our prepaidinventory at September 30, 2006, we had consigned inventory of $1.5 million,which is located at the distribution center and retail locations of a certaincarrier.  This inventory is owned by theCompany until it is sold by the carrier. There was no consigned inventory at December 31, 2005. Inventory consistsof the following:

 

|                   | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------|------------|------------------------------|------------|-----------------------------|------------|
| Finished goods    |       | $                            | 5,354,877  |                        | $          | 5,861,819 |   |
| Inventory reserve |       | (176,798                     | )          | (249,476                    | )          |
| Net inventory     |       | $                            | 5,178,079  |                        | $          | 5,612,343 |   |

** **

**NOTE 8. Property and Equipment**

Property and equipmentare primarily located in the United States, with the exception of $258,000 ofmachinery and equipment located at our Mexico facility (installed in June 2006and included in table below) and consisted of the following as of the dates presented:

 

|                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Machinery and  equipment       |       | $                            | 763,936    |                        | $          | 487,998 |   |
| Furniture and  fixtures        |       | 160,313                      |       | 117,082                     |       |
| Subtotal                       |       | 924,249                      |       | 605,080                     |       |
| Less accumulated  depreciation |       | (286,383                     | )          | (178,163                    | )          |
| Total                          |       | $                            | 637,866    |                        | $          | 426,917 |   |

 

Depreciation expense was $34,269 and $29,392 for the threemonths ended September 30, 2006 and 2005, respectively Depreciation expense was$108,220 and $59,929 for the nine months ended September 30, 2006 and 2005,respectively.

**NOTE 9. Line of Credit**

The Company has a line of credit from Wells Fargo HSBCTrade Bank N.A., which provides for advances not to exceed 80% of eligibledomestic accounts receivable and 85% of foreign-insured accounts receivable(depending on the country of the debtor), up to a maximum of $25,000,000. As ofSeptember 30, 2006, the majority of our debt was based on foreign accountsreceivable.

10

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Interest is payable on a monthly basis (i) at Wells Fargo’sprime (8.25% at September 30, 2006) or (ii) at the one-month LIBOR (5.32% atSeptember 30, 2006) plus 1.50%. The interest rate is floating at Wells Fargo’sprime rate or is at LIBOR plus 1.5% if the debt is a fixed amount drawdown.  The line of credit iscollateralized by substantially all of the assets of the Company, and expires November1, 2006. In addition to reporting and other non-financial covenants, the lineof credit contains certain financial covenants which require the Company tomaintain a tangible net worth of not less than $12,500,000, a pre-tax profit ofnot less than $1 on a rolling four quarter basis, a quick ratio of not lessthan one-to-one, a debt-to-net worth ratio of not greater than two-to-one, andan annual net income after taxes of at least $1. Management believes theCompany was in compliance with these covenants at September 30, 2006. AtSeptember 30, 2006 and December 31, 2005, the amounts drawn against the line ofcredit were $20,890,100 and $10,000,000, respectively.  See Note 13 Subsequent Events for additionalinformation regarding the amendment of this line of credit in October 2006.

The Company has no other notes payable.

**NOTE 10. Stockholders’ Equity**

Stock Split as Dividend

On May 30, 2006, theCompany’s Board of Directors approved a two-for-one stock split of the Company’s outstanding commonstock.  The stock split was accomplishedthrough a 100% stock dividend, providing the Company’s stockholders with oneadditional share of common stock for every one share held as of the recorddate.  The split was paid onJune 19, 2006 to stockholders of record as of June 9, 2006.  Immediately following the stock split, theCompany’s outstanding shares of common stock increased from 6,948,034 shares to13,896,068 shares of common stock.

Sale of Common Stock

On January 30, 2006**,**the Company sold an aggregate of2,200,000 shares of its common stock at $6.55 per share, for total grossproceeds of $14,410,000.  The purchasers were also issued warrants asdescribed below.

Stock Options

EffectiveApril 13, 2006 and June 1, 2006, the Company granted options to purchase anaggregate of 32,000 and 50,000 of its common stock to certain employees,including one inducement grant to a newly-hired Company officer (the “Employee Options”).One-third of the total options subject to these option grants becomeexercisable one year from the employee grantee’s first date of employment, and1/36th of the total options become exercisable each month thereafter untilfully vested.  The Employee Options haveexercise prices of $5.33 and $15.17 per share, which were the closing pricesper share of the Company’s common stock on April 13, 2006 and June 1,2006.  The Employee Options expirefive years from the date of grant.

EffectiveJune 12, 2006, the stockholders of the Company approved previously grantedoptions to purchase an aggregate of 180,000 of the Company’s common stock tocertain non-employee Directors (the “Director Options”). These grants had vested 90,000 onJanuary 21, 2005 and 90,000 on December 30, 2005. The Director Options haveexercise prices of $1.65 and $8.12, per share, which were the closing pricesper share of the Company’s common stock on the original grant dates of January21, 2005 and December 30, 2005, respectively. The Director Optionsexpire three and five years, respectively, from the date of grant.

EffectiveAugust 14, 2006 and August 29, 2006, the Company granted options to purchase anaggregate of 15,000 and 10,000, respectively of its common stock to certainemployees (the “Employee Options” and a non-employee Director (the “DirectorOptions”). One-thirdof the Employee Options subject to these option grants become exercisable oneyear from the employee grantee’s first date of employment, and 1/36th of thetotal options become exercisable each month thereafter until fully vested.  One third of the Director Options subject tothis grant become exercisable at each of December 31, 2006, 2007 and 2008.  The Employee and Director Options haveexercise prices of $5.12 and $5.91 per share, which were the closing prices pershare of the Company’s common stock on August 14, 2006 and August 29, 2006,respectively.  The EmployeeOptions expire seven years from the date of grant.

Warrants

In June 1998, FASB issued SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*.SFAS 133 establishes accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts (collectively referred to as derivatives) and for hedging activities.It requires that an entity recognize all derivatives as either assets orliabilities in the statement of financial position and measure thoseinstruments at fair value.

11

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In January 2006, theCompany sold shares of common stock and warrants to purchase common stock.  The Company evaluated the warrants in thetransaction as derivative liabilities in accordance with SFAS No. 133until the date that the Company’s registration statement registering the sharesof common stock underlying such warrants was declared effective on February 17,2006, after which such warrants were classified as equity.  The change in the fair value of the warrants,determined under the Black- Scholes option pricing formula from the initialtransaction date to the effectiveness date of the registration statementis recorded as an adjustment to the liability. The income relating to thechange in the fair value of the Company’s stock reflected in the change in thefair value of the warrants is included as other income (expense). As thewarrants have been classified as equity, the Company will no longer need to “markto market” the change in fair value of such warrants.

**NOTE 11. Recent Accounting Pronouncements**

InDecember 2004, the FASB issued SFAS 123R. SFAS 123R supersedes APBOpinion No. 25 and amends SFAS No. 95, “*Statement ofCash Flows*.” Generally, the fair value approach in SFAS 123R issimilar to the fair value approach described in SFAS 123. In 2005, theCompany used the Black-Scholes formula to estimate the fair value of stockoptions granted to employees. The Company adopted SFAS 123R, using themodified-prospective method, beginning January 1, 2006.  Based on the terms of our stock option plans,there was no cumulative effect upon adoption. The Company elected to continueto estimate the fair value of stock options using the Black-Scholes formula. Inthe first nine months of 2006, the adoption of SFAS 123R included anoperating expense of $1,376,512. Further, we believe the adoption ofSFAS 123R could have a material impact on our Company’s future stock-basedcompensation expense.  As of September30, 2006, there was $762,000 of total unrecognized compensation cost related tononvested share-based compensation arrangements granted under our plans. Thatcost is expected to be recognized over the next three and one-half years. Thisexpected cost does not include the impact of any future stock-basedcompensation awards.

In May 2005, theFASB issued FASB Statement No. 154, “*Accounting Changes andError Corrections*.” SFAS 154 applies to all voluntary changes inaccounting principle as well as to changes required by an accountingpronouncement that does not include specific transition provisions. SFAS 154eliminates the requirement in APB Opinion No. 20, “*AccountingChanges*,” to include the cumulative effect of changes in accountingprinciple in the income statement in the period of change and, instead,requires changes in accounting principle to be retrospectively applied.Retrospective application requires the new accounting principle to be appliedas if the change occurred at the beginning of the first period presented bymodifying periods previously reported if an estimate of the prior period impactis practicable and estimable. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. We do not currently anticipate any changes in accounting principle otherthan the adoption of SFAS 123R discussed above, which has its own adoptiontransition provision and is therefore not within the scope of SFAS 154. As aresult, we do not believe the adoption of SFAS 154 has had a material impact onthe Company’s consolidated financial statements.

In March 2005, theFASB issued FASB Interpretation (“FIN”) No. 47, “*Accountingfor Conditional Asset Retirement Obligations*.” FIN 47clarifies that the term conditional asset retirement obligation asused in SFAS Statement No. 143, “*Accounting for AssetRetirement Obligations*,” refers to a legal obligation toperform an asset retirement activity in which the timing and/or method of settlementare conditional on a future event that may or may not be within the control ofthe entity.  The obligation to performthe asset retirement activity is unconditional even though uncertainty existsabout the timing and/or method of settlement. Uncertainty about the timing and/or method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists. This interpretationalso clarifies when an entity would have sufficient information toreasonably estimate the fair value of an asset retirement obligation**.**FIN 47 became effective in December2005. Retrospective application of interim financial information is permittedbut is not required.  Management does notexpect adoption of FIN 47 to have a material impact on the Company’s financialstatements.

In September 2005,EITF ratified EITF Issue No. 04-13, “*Accounting for Purchasesand Sales of Inventory with the Same Counterparty*.” BeginningApril 1, 2006, EITF 04-13 requires arrangements whereby purchase and salestransactions with the same counterparty that are entered into in contemplationof one another to be combined (i.e., net basis). The Company has had sucharrangements whereby it purchases wireless devices from certain counterpartiesand sells similar items to the same counterparties. These arrangements havebeen and are accounted for on a net basis within logistic services. Therefore,the effect of adopting EITF 04-13 will have no impact on the Company’s resultsof operations.

 

12

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In February 2006 theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards (SFAS) 155 “Accounting for Certain Hybrid FinancialInstruments”.  SFAS 155 amends SFAS 133to narrow the scope exception for interest-only and principal-only strips ondebt instruments to include only such strips representing rights to receive aspecified portion of the contractual interest or principal cash flows. SFAS 155also amends SFAS 140 to allow qualifying special-purpose entities to hold apassive derivative financial instrument pertaining to beneficial interests thatitself is a derivative financial instrument. Generally, FASB Statement ofFinancial Accounting Standards SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, requires that a derivative embedded in ahost contract that does not meet the definition of a derivative be accountedfor separately (referred to as bifurcation) under certain conditions. Thatgeneral rule notwithstanding, SFAS No. 133 (prior to amendments made to it bySFAS No. 155) provides a broad exception for interest-only and principal-onlystrips initially resulting from the separation of rights to receive contractualcash flows of a financial instrument that itself does not contain an embeddedderivative that would have been accounted for separately. SFAS 155 amends SFAS133 to restrict the scope exception to strips that represent rights to receiveonly a portion of the contractual interest cash flows or of the contractualprincipal cash flows of a specific debt instrument.  Prior to amendments made by SFAS 155 , SFAS140 , “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities”, permitted a qualifying special-purpose entity(SPE) to hold only passive derivative financial instruments pertaining tobeneficial interests (other than another derivative financial instrument)issued or sold to parties other than the transferor. SFAS 155 amends SFAS 140to allow a qualifying SPE to hold a derivative instrument pertaining tobeneficial interests that itself is a derivative financial instrument.

In March 2006, the FASB issued SFAS No. 156, “Accounting forServicing of Financial Assets” (“SFAS NO. 156”), which provides an approach tosimplify efforts to obtain hedge-like (offset) accounting.  This Statement amends FASB Statement No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities”, with respect to the accounting for separately recognizedservicing assets and servicing liabilities. The Statement (1) requires an entity to recognize a servicing asset orservicing liability each time it undertakes an obligation to service afinancial asset by entering into a servicing contract in certain situations;(2) requires that a separately recognized servicing asset or servicingliability be initially measured at fair value, if practicable;  (3) permits an entity to choose either theamortization method or the fair value method for subsequent measurement foreach class of separately recognized servicing assets or servicing liabilities;(4) permits at initial adoption a one-time reclassification ofavailable-for-sale securities to trading securities by an entity withrecognized servicing rights, provided the securities reclassified offset theentity’s exposure to changes in the fair value of the servicing assets orliabilities; and (5) requires separate presentation of servicing assets andservicing liabilities subsequently measured at fair value in the balance sheetand additional disclosures for all separately recognized servicing assets andservicing liabilities.  SFAS No. 156 iseffective for all separately recognized servicing assets and liabilities as ofthe beginning of an entity’s fiscal year that begins after September 15, 2006,with earlier adoption permitted in certain circumstances.  The Statement also describes the manner inwhich it should be initially applied. The Company does not believe that SFAS No. 156 will have a materialimpact on its financial position, results of operations or cash flows.

In September 2006, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (“SFAS 157”), which defines the fair value, establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements.  This statement iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  Early adoption is encouraged, provided thatthe registrant has not yet issued financial statements for that fiscal year,including any financial statements for an interim period within that fiscalyear.

In September 2006, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans” (“SFAS 158”), which improves financial reporting by requiring anemployer to recognize the over or under funded status of a defined benefitpostretirement plan as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through comprehensive income of a business entity or changesin unrestricted net assets of a not-for-profit organization.  This statement also improves financialreporting by requiring an employer to measure the funded status of a plan as ofthe date of its year end statement of financial position, with limitedexceptions.  This Statement amendsStatement 87, FASB Statement No. 88, “Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits”,Statement 106, and FASB Statement No. 132 (revised 2003), “Employers’ Disclosuresabout Pensions and Other Postretirement Benefits”.  Upon the initial application of thisstatement and subsequently, and employer should continue to apply theprovisions in Statements, 87, 88, and 106 in measuring plan assets and benefitobligations as of the date of its statement of financial position and indetermining the amount of net periodic benefit cost.  An employer with publicly traded equitysecurities is required to initially recognize the funded status of a definedbenefit postretirement plan and to provide the required disclosures as of theend of the fiscal year ending after December 31, 2006.  An employer without publicly traded equitysecurities is required to recognize the funded status of a defined benefitpostretirement plan and to provide the required disclosures as of the end ofthe fiscal year ending after June 15, 2007. Early application of the recognition or measurement date provisions isencouraged; however, early application must be for all of an employer’s benefitplans.  Retrospective application of theStatement is not permitted.

13

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InSeptember 2006, the United States Securities and Exchange Commission (SEC)issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements.” This SAB provides guidance on the consideration of theeffects of prior year misstatements in quantifying current year misstatementsfor the purpose of a materiality assessment. SAB 108 establishes an approachthat requires quantification of financial statement errors based on the effectsof each of the Company’s balance sheet and statement of operations financialstatements and the related financial statement disclosures. The SAB permitsexisting public companies to record the cumulative effect of initially applyingthis approach in the first year ending after November 15, 2006 by recording thenecessary correcting adjustments to the carrying values of assets andliabilities as of the beginning of that year with the offsetting adjustmentrecorded to the opening balance of retained earnings. Additionally, the use ofthe cumulative effect transition method requires detailed disclosure of thenature and amount of each individual error being corrected through thecumulative adjustment and how and when it arose. We are currently evaluatingthe impact SAB 108 may have to our consolidated balance sheet and statement ofoperations.

In July2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes” (FIN 48).  FIN 48clarifies the accounting for income taxes by prescribing a minimum probability thresholdthat a tax position must meet before a financial statement benefit isrecognized.  The minimum threshold isdefined in FIN 48 as a tax position, that based solely on its technical meritsis more likely than not to be sustained upon examination by the applicabletaxing authority.  The tax benefit to berecognized is measured as the largest amount of benefit that is greater thanfifty percent likely of being realized upon ultimate settlement.  FIN 48 must be applied to all existing taxpositions upon initial adoption.  Thecumulative effect of applying FIN 48 at adoption, if any, is to be reported asan adjustment to opening retained earnings for the year of adoption.  FIN 48 is effective for fiscal yearsbeginning after December  15, 2006,although early adoption is permitted. The Company does not believe that FIN 48 will have a material impact onits financial statements.

**NOTE 12. GeographicInformation**

The Company currently operates in one businesssegment.  All fixed assets are located inCompany facilities in the Untied States and Mexico. Net sales by geographicalarea for the three and nine months ended September 30, 2006 and September 30,2005 were:
| ** **      | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|-----------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **      | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| United States   |       | $                                | 2,085,463  |                             | $          | 8,577,711 |   | $ | 7,047,776 |   | $ | 35,202,481 |   |
| South America   |       | 49,102,375                       |       | 37,651,593                       |       | 113,186,445 |   | 56,776,041 |   |
| Central America |       | 16,381,009                       |       | 8,097,974                        |       | 59,741,273 |   | 18,900,603 |   |
| Total           |       | $                                | 67,568,847 |                             | $          | 54,327,278 |   | $ | 179,975,494 |   | $ | 110,879,125 |   |

 

**NOTE 13.Subsequent Events**

On October 12, 2006, the Companyamended its line of credit with Wells Fargo HSBC Trade Bank N.A., to increasethe maximum borrowing amount to $30,000,000 and extend the term to October 1,2008.  In addition, the followingcovenants apply to the line of credit. Interest is payable on a monthly basis(i) at Wells Fargo’s prime minus 0.25% (8.25% at October 12, 2006) or (ii) atthe one-month LIBOR (5.33% at October 12, 2006) plus 1.50%. The interest rateis floating at Wells Fargo’s prime rate or is at LIBOR plus 1.5% if the debt isa fixed amount draw down.  The line ofcredit is collateralized by substantially all of our assets, and expires inOctober 2008. In addition to reporting and other non-financial covenants, theline of credit contains certain financial covenants which require us to maintaina tangible net worth of not less than $30,000,000 through December 31, 2006 andnot less than $30,000,000 plus 50% of net profit after tax from January 1, 2007and thereafter, a quick ratio of not less than one-to-one, a debt-to-net worthratio of not greater than two-to-one, and an annual net income after taxes ofat least $1 on a rolling four quarter basis.

**NOTE 14. Commitments and Contingencies**

*Securities Class Actions*

Between June 13, 2006 andJuly 14, 2006, seven securities class actions were filed in the United StatesDistrict Court for the Southern District of California against us and certainof our officers and directors.  One ofthese securities class actions was voluntarily dismissed, and the remaining sixlawsuits were consolidated before Judge Moskowitz in the Southern District ofCalifornia.    The longest class periodalleged in the securities cases is from May 8, 2006 to June 12, 2006. Each of the substantially similar consolidated lawsuits allege that thedefendants violated Sections 10(b), 20(a) and/or 20A of the Exchange Act, aswell as the associated Rule 10b-5, in connection with our restatement announcedon June 12, 2006.  In the  lawsuits,plaintiffs seek declarations that each action is a proper class action,unspecified damages, interest, attorneys’ fees and other costs,equitable/injunctive relief, and/or such other relief as is just andproper.  On October 23, 2006, the Courtappointed Robert Sibley as lead plaintiff in the consolidated suits andappointed lead counsel.  The Company iswaiting for plaintiffs to file a consolidated complaint.  When required to respond to a consolidatedcomplaint, the defendants anticipate filing a motion to dismiss on the groundsthat the plaintiffs have failed to adequately plead violations of thesecurities laws.

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*Derivative Lawsuits*

The derivative lawsuitfiled on July 12, 2006 in the California Superior Court, in the County of SanDiego, by Peter J. Cunningham, purportedly on behalf of the Company againstcertain officers and directors of the Company, and the Company as a nominaldefendant, was dismissed.

The three derivativelawsuits originally filed on June 27, 2006, July 14, 2006, and July 28, 2006 inthe United States District Court for the Southern District of California,purportedly on behalf of the Company against certain of our officers anddirectors, and the Company as a nominal defendant, have been consolidated as *In Re InfoSonics Corporation Derivative Litigation*, LeadCase No. 06 CV 1336, and transferred to Judge Moskowitz in the SouthernDistrict of California.  Plaintiffs’consolidated derivative complaint was received on November 8, 2006.  The consolidated complaint asserts claims fordisgorgement under the Sarbanes-Oxley Act of 2002, violation of Section 14(a)of the Exchange Act, violation of California Corporations Code section 25402,violation of California Corporations Code section 25403, breach of fiduciaryduty, abuse of control, gross mismanagement, waste of corporate assets, unjustenrichment, and an accounting, in connection with the Company’s restatement offirst quarter 2006 earnings and in connection with allegations of wrongdoingwith respect to granting, exercising, accounting and reporting of the stockoptions that the Company granted in December 2005.  Plaintiffs seek unspecified damages,declaratory relief regarding the Sarbanes-Oxley Act of 2002, Section 14(a) ofthe Exchange Act, and the legality of stock options, a constructive trust,restitution, disgorgement, modification of certain corporate governance and internalprocedures, extraordinary equitable and/or injunctive relief, costs, and suchother relief as is just and proper.

When required to respondto these derivative lawsuits, the defendants anticipate filing a motion todismiss on the ground, among others, that the plaintiff has failed to make ademand on the Company’s board of directors.

While the above lawsuitsare in their early stages, at this time we do not believe they will have amaterial adverse effect on our financial condition.  However, the ultimate legal and financialliability with respect to such matters cannot be estimated with certainty andrequires the use of estimates in recording liabilities for potential litigationsettlements.  Estimates for losses fromlitigation are disclosed if considered reasonably possible and accrued ifconsidered probable after consultation with outside counsel.  If estimates of potential losses increase orthe related facts and circumstances change in the future, the Company may berequired to record additional litigation expense.  The Company intends to expense legal costs asincurred related to this matter.

**Item 2. Management’s Discussion and Analysisof Results of Operations and Financial Condition**

**Forward-Looking Statements and Other General Information**

This discussion and analysis shouldbe read in conjunction with the accompanying unaudited consolidated financialstatements and condensed notes thereto included in this report and with ourAnnual Report on Form 10-K for the year ended December 31, 2005 (includingour 2005 audited financial statements and related notes thereto). InfoSonicsCorporation’s (“InfoSonics” or the “Company”) discussion and analysis offinancial condition and results of operations are based upon consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States (“GAAP”). The preparation offinancial statements in conformity with GAAP requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosure of any contingent liabilities as of and at the financial statementdate, and reported amounts of revenue and expenses during the reporting period.On an ongoing basis we review our estimates and assumptions. Our estimates arebased on our historical experience and other assumptions that we believe to bereasonable under the circumstances. Although management believes thesejudgments, estimates and assumptions to be reasonably accurate, actual resultsmay differ significantly. Our critical accounting policies, the policies webelieve are most important to the presentation of our financial statements andrequire the most difficult, subjective and complex judgments, are outlinedbelow in “—Critical Accounting Policies.’’

The matters inthis report that are forward-looking statements, including without limitationto statements about future revenues, sales levels, operating income andmargins, wireless handset sales, stock-based compensation expense, gain (loss)in value of derivatives, cost synergies, operating efficiencies, profitability,market share and rates of return, are based on current management expectationsthat involve certain risks which, if realized, in whole or in part, could causesuch expectations to fail to be achieved and have a material adverse effect onInfoSonics’ business, 

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financial condition andresults of operations, including, without limitation: (1) intense competition,regionally and internationally, including competition from alternative businessmodels, such as manufacturer-to-carrier sales, which may lead to reducedprices, lower sales or reduced sales growth, lower gross margins, extendedpayment terms with customers, increased capital investment and interest costs,bad debt risks and product supply shortages; (2) inability to secure adequatesupply of competitive products on a timely basis and on commercially reasonableterms; (3) foreign exchange rate fluctuations, devaluation of a foreigncurrency, adverse governmental controls or actions, political or economicinstability, or disruption of a foreign market, and other related risks of ourinternational operations; (4) the ability to attract new sources of profitablebusiness from expansion of products or services or risks associated with entryinto new markets, including geographies, products and services; (5) aninterruption or failure of our information systems or subversion of access orother system controls may result in a significant loss of business, assets, orcompetitive information; (6) significant changes in supplier terms andrelationships; (7) termination of a supply or services agreement with a majorsupplier or product supply shortages; (8) continued consolidation in thewireless handset carrier market; (9) extended general economic downturn; (10)loss of business from one or more significant customers; (11) customer andgeographical accounts receivable concentration risk; (12) rapid productimprovement and technological change resulting in inventory obsolescence; (13)future terrorist or military actions; (14) the loss of a key executive officeror other key employees; (15) changes in consumer demand for multimedia wirelesshandset products and features; (16) our failure to adequately adapt to industrychanges and to manage potential growth and/or contractions; (17) futureperiodic assessments required by current or new accounting standards such asthose relating to long-lived assets, goodwill and other intangible assets andexpensing of stock options and valuing gain or loss on fair value ofderivatives may result in additional non-cash income or expenses; (18) seasonalbuying patterns; (19) dependency on Latin American sales; and (20) uncertainpolitical and economic conditions internationally; (21) the impact, if any, ofchanges in EITF 00-19 or SFAS 133 guidance as it relates to warrants andregistration rights; and (22) the resolution of any litigation against thecompany.  Our actual results could differmaterially from those anticipated in our forward looking statements*.*

InfoSonics has institutedin the past and continues to institute changes to its strategies, operationsand processes to address risks and uncertainties and to mitigate their impacton InfoSonics’ results of operations and financial condition. However, no assurancescan be given that InfoSonics will be successful in these efforts. For a furtherdiscussion of significant factors to consider concerning InfoSonics, see “Item1A. Risk Factors” of InfoSonics’ Annual Report on Form 10-K for the year endedDecember 31, 2005 and “Part II. Item 1A. Risk Factors” of this report. Inaddition, other risks or uncertainties may be detailed from time to time inInfoSonics’ future SEC filings.

**Overview**

We are one of the fastestgrowing distributors of wireless handsets and accessories in Latin America andwe distribute wireless handsets and accessories in the United States. Weprovide end-to-end wireless handset and wireless terminal solutions forcarriers in both Latin America and the United States. We distribute products ofseveral key manufacturers, including Samsung, Alcatel, Motorola, VK Mobile, i-mate and Novatel, and others.As an integral part of our customers’ supply chain, we perform value addedservices and solutions, including product approval and certification, lightassembly, warehousing, logistics services (packing, shipping and delivery),marketing campaigns, warranty services and end-user support. We provide theseservices and solutions to wireless telecommunications manufacturers in order tofacilitate sales to carriers (network operators), agents, resellers,distributors, independent dealers and retailers in Latin America and the UnitedStates.  During 2005, we significantlychanged our business model from selling products to dealers and agents in LatinAmerica and the United States to providing products, services and solutionsprimarily to carriers in such regions. As a result, we believe that this shift in customer focus enables us tobetter service our customers and vendors as we play a more important role inthe supply chain for wireless handsets and accessories.

Our corporate headquarters is in San Diego,California, and from our facility in Miami Florida, where we have our LatinAmerica sales and executive offices, we operate our main warehouse anddistribution center. This warehouse and distribution center services ourcustomers in the United States and Latin America. In addition, we havewarehouse and office facilities in Mexico. We have wholly-owned subsidiaries inLatin America, which conduct some of our business activities in theirrespective regions of Latin America, including InfoSonics Colombia S.A.,InfoSonics El Salvador, InfoSonics de Guatemala, InfoSonics de Mexico andInfoSonics S.A.

Due toseasonal and other factors, our interim condition or results may not beindicative of fiscal year 2006 or other future condition or results. Ourfinancial condition and operating results are influenced by several seasonaland other factors, which may cause our financial condition and operatingresults to fluctuate on a quarterly basis, including, but not limited to, thetiming and introduction of new products by our suppliers and competitors, promotionsand subsidies by network operators, technical and certification delays byindustry bodies as well as the operators, purchasing patterns of customers, andthe timing of holidays and other events affecting consumer demand.

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On May 30, 2006, our Board of Directors approveda two-for-one stock split of ouroutstanding common stock.  The stocksplit was accomplished through a 100% stock dividend, providing ourstockholders with one additional share of common stock for every one share heldas of the record date.  The split waspaid on June 19, 2006 to stockholders of record as of June 9,2006.  Immediately following the stocksplit, our outstanding shares of common stock increased from 6,948,034 sharesto 13,896,068 shares of common stock.

**Areas of Management Focus and PerformanceIndicators**

We focus on the needs of our customers, developing andmaintaining close relationships with manufacturers, expanding in and enteringinto new markets, and sourcing new and innovative products, while maintainingclose attention to operational efficiencies and costs. We are striving toincrease shipping volumes and improve efficiencies to enable higher levels ofprofitability and earnings growth.

Performance indicators that are key for the monitoringand management of our business include operating and net income, cost of salesand gross profit percentage, operating expenses as a percent of net sales, andoverall net sales growth. We make extensive use of our customized informationsystem to closely monitor all aspects of our business, including customerrelationship management, intelligent purchasing, inventory control and flow,line item margin control for orders, and weighted-average cost and statisticaldata for products, customers and suppliers.

Management spends a significant amount of timetraveling with the purpose of spending time with key customers, suppliers andemployees. We believe that these relationships are vital to our success, and wewill continue to dedicate a significant amount of time to this area.

**Industry Trends and Risks**

According to an October 2006 report by Deutsche Bank,overall worldwide wireless handset sales are forecasted to increase by 20% in2006 and 12% in 2007. However, a rapid decline in wireless handset sales growthcould negatively impact our net sales.

Excess supply conditions could reduce the marketprices of wireless handsets and the related products we sell and thereby affectour ability to generate net sales and gross profit at historical levels, aswell as affect the value of our inventory. Conversely, should manufacturers beunable to respond to an unanticipated increase in demand of wireless handsetsand related products on a timely basis, we, along with others in our industry,could experience supply constraints that would affect our ability to deliverproducts.

We are unable to quantify the potential effects ofthese trends and risks on our business, as it is difficult to predict futuresupply conditions and demand patterns which may affect our ability to meetcustomer demand for wireless handsets and related products at acceptable grossprofits.

**Company Specific Trends and Risks**

Our strategy incorporates overall market growthelements for each aspect of our business, which we hope will result incontinued growth. In the quarter ended September 30, 2006, our net salesincreased by 25% and year-to-date 62%, and wireless handset units soldincreased by 55% and year-to-date 125%, compared with the quarter endedSeptember 30, 2005. Although we have incorporated growth into our strategy,there can be no assurances that these trends will continue.

During the quarter ended September 30, 2006, weexperienced significant growth in our South American and Central Americanregions.  These regions accounted for 97%of net sales for the third quarter of 2006, compared to 84% for the thirdquarter of 2005. This increase was primarily the result of our increased salesand marketing efforts in both of those regions, as well as the general increasein wireless handsets sold in those regions in the recent past. By contrast,U.S. regional net sales decreased to 3% of our net sales for the quarter endedSeptember 30, 2006, from 16% of net sales for the quarter ended September30, 2005, due to the factors discussed below. 

|                           | ** ** | **Quarter Ended September 30,**                | ** ** |
|---------------------------|------------|---------------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Net sales                 |       | $                                                             | 67,569     |   | $ | 54,237 |   |
| Increase over prior  year |       | 25                                                            | %          | 211 | % |
|                           |            |                                                               |            |  |  |  |  |

 

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We continue to experience strong growth in our businessand expect significant revenue growth year-over-year in the fourth quarter,however we also expect to experience the same seasonality as in the fourthquarter of 2005.

**Results of Operations:**

***Three Months EndedSeptember 30, 2006 and 2005***

For the quarter ended September 30, 2006, our netsales of $67.6 million represents an increase of 25% compared to $54.2 millionfor the same period of 2005, this increase was primarily attributable to a 55%increase in wireless handset volume, partially offset by a 16% decrease inaverage selling price per unit sold. The geographic mix of net sales shifted inthe first three quarters of 2006 as sales in South America and Central Americaincreased substantially.  These tworegions represented 97% (73% for South America and 24% for Central America) ofnet sales in the quarter ended September 30, 2006, compared to 84% (69% forSouth America and 15% for Central America) in the quarter endedSeptember 30, 2005. This increase was primarily the result of ourincreased sales and marketing efforts in both of those regions, which resultedin additional penetration of existing markets and addition of new carriercustomer and new territories,  as well asthe general increase in wireless handsets sold in those regions. Sales in theUnited States made up the remainder of our sales in the quarter ended September30, 2006, declining 76% to $2.1 million, or 3% of net sales, compared to thesame period in 2005. The decrease in our U.S. sales resulted from increasedcompetition and product delays from our primary vendors, as well as longer thanexpected certification processes.  In thequarter we had income from continuing operations of $677,000, or $0.04 perdiluted share, which is a dollar decrease of 13% from the quarter endedSeptember 30, 2005 of $782,000 or $0.07 per diluted share. The number ofdiluted shares increased to 16.3 million at September 30, 2006 as compared to11.9 million shares in the same period prior year primarily as a result of thefinancing completed in the first quarter of 2006. 

|                                                        | ** ** | **Quarter ended September 30,**                                             | ** ** | **Increase/** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                             | ** ** | **2006**                                                                                   | ** ** | **2005**      | ** ** | **(Decrease)** | ** ** |
| ** **                                             | ** ** | **(Dollar amounts in thousands,  except per share amounts)** | ** ** | ** **    | ** ** |
| ** **                                             | ** ** | **(unaudited)**                                                                            | ** ** | ** **    | ** ** |
| Net sales                                              |       | $                                                                                          | 67,569     |          | $          | 54,237 |   | 25 | % |
| Gross profit                                           |       | 5,415                                                                                      |       | 4,190         |       | 29 | % |
| Income from  continuing operations                     |       | 677                                                                                        |       | 782           |       | (13 | )% |
|                                                   |       |                                                                                       |       |          |       |   |   |
| Diluted earnings  per share from continuing operations |       | $                                                                                          | 0.04       |          | $          | 0.07 |   | (43 | )% |

Net sales by geographic region

|                 | ** ** | **Quarter ended September 30,**                | ** ** | **Increase** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2006**                                                      | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| United States   |       | $                                                             | 2,086      |         | $          | 8,578 |   | (76 | %) |
| Central America |       | 16,381                                                        |       | 8,098        |       | 102 | % |
| South America   |       | 49,102                                                        |       | 37,651       |       | 30 | % |
| Total           |       | $                                                             | 67,569     |         | $          | 54,327 |   | 25 | % |

** **

**Cost ofSales, Gross Profit and Gross Margin**

For the quarter ended September 30, 2006, cost ofsales was $62.2 million, or 92.0% of net sales, compared with $50.0 million, or92.3% of net sales, for the quarter ended September 30, 2005. The increase inour cost of sales was a direct result of the increased sales during the quarterended September 30, 2006, compared to the same quarter in 2005. The increase ingross margin was primarily the result of the change of product and regional mixof our sales, including higher sales in Central and South America, as differentproducts and different regions can have varying margins.

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For the quarter ended September 30, 2006, our grossprofit increased to $5.4 million from $4.2 million, compared with the samequarter last year, an increase of 29%. This increase in gross profit wasprimarily the result of increased wireless handset sales levels, as well as anincrease in gross margin.

|               | ** ** | **Quarter Ended September 30,**                | ** ** | **Increase** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2006**                                                      | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Cost of sales |       | $                                                             | 62,154     |         | $          | 50,047 |   | 24 | % |
| Gross margin  |       | 8.0                                                           | %          | 7.7          | %          | 4 | % |
| Gross profit  |       | $                                                             | 5,415      |         | $          | 4,190 |   | 29 | % |

 

**OperatingExpenses and Operating Income from Continuing Operations**

For the quarter ended September 30, 2006, operatingexpenses were $4.4 million, an increase of 49%, compared with the same quarterlast year. As a percentage of net sales, operating expenses were 6.6% in thequarter ended September 30, 2006, compared with 5.5% in the same quarter lastyear.  Pursuant to SFAS 123R, during thequarter ended September 30, 2006, we incurred $133,000, or 0.2% of net sales,of non-cash expense relatingto stock options granted in the third quarter of 2006, compared to nosuch expense in the same quarter of last year. Excluding the non-cash expenserelated to SFAS 123R, operating expenses as a percentage of net sales were6.4%, a significant increase from the prior period.  This increase was primarily the result ofinvestments in marketing engineering and product and market development, predominantlyattributable to product introduction in Chile and infrastructure build out inMexico.  We believe such investments arenecessary to help build a solid foundation in these regions to supportpotential future growth.  See GAAP tonon-GAAP reconciliation below.

For the quarter ended September 30, 2006, ouroperating income from continuing operations was $975,000 (including thenon-cash expense of $133,000 relating to stock option previously granted and granted inthe third quarter of 2006) compared with $1.2 million for the quarterended September 30, 2005, a decrease of 20%. As a percentage of net sales,operating income from continuing operations was 1.4% for the quarter endedSeptember 30, 2006, compared to 2.2% for the quarter ended September 30, 2005.The decrease in operating income from continuing operations as a percentage ofnet sales for the quarter ended September 30, 2006 was a result of the non-cashexpense related to SFAS 123R and the increase in operating expenses discussedabove, partially offset by an increase in gross margin.  Excluding the non-cash expense related toSFAS 123R, income from continuing operations decreased slightly to $1.1 millioncompared to $1.2 million.

**Operating Expenses**

 

|                         | ** ** | **Quarter Ended September 30,**                | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Operating  expenses     |       | $                                                             | 4,440      |   | $ | 2,970 |   |
| Percentage of net sales |       | 6.6                                                           | %          | 5.5 | % |
|                         |            |                                                               |            |  |  |  |  |

** **

**OperatingIncome from Continuing Operations**

|                                              | ** ** | **Quarter Ended September 30,**                | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Operating income  from continuing operations |       | $                                                             | 975        |   | $ | 1,220 |   |
| Percentage of net sales                      |       | 1.4                                                           | %          | 2.2 | % |
|                                              |            |                                                               |            |  |  |  |  |

 

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**Other Income (Expense)**

Duringthe quarter ended September 30, 2006, we earned $47,000 of interest income, compared to interest expense of $147,000 thesame period last year.  This shift wasprimarily related to increased credit limits provided by our vendor partnerscompared to the same period of 2005 thus resulting in less borrowings from ourbank required to purchase products.  Weexpect these increased limits to remain in place as we continue to do businesswith these vendors.

**OtherIncome**

|                            | ** ** | **Quarter Ended September 30,**                    | ** ** |
|----------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(Dollar amounts in thousands)**

**(unaudited)** | ** ** |
| Interest income  (expense) |       | 47                                                                |       | (147 | ) |

 

**Net Income**

Duringthe quarter ended September 30, 2006, our net income was $677,000, a decreaseof 42% compared to the same period last year. This decrease was primarily related to our gain from discontinuedoperation in 2005 as well as our non-cash expense related to stock optionsunder SFAS 123R.  See below for adiscussion of our net income as adjusted for the effects of SFAS 123R on ourresults for the three months ended September 30, 2006.

**Reconciliation of Non-GAAPFinancial Measures to the Corresponding GAAP Financial Measures for the ThreeMonths ended September 30, 2006 (unaudited)**

The following areselected results including and excluding the impact of SFAS 123R: 

| Three months ended  September 30, 2006 | ** ** | **Actual** | ** ** | **Adjustment** | ** ** | **Non-GAAP  results** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------|------------|-----------------------|------------|
| Operating income  from continuing operations               |       | $          | 975,104    |           | $          | 133,448               | (a)        | $ | 1,108,552 |   |
|                                                       |       |       |       |           |       |                  |       |
| Net income                                                 |       | $          | 677,179    |           | $          | 133,448               | (a)        | $ | 810,627 |   |
| Diluted earnings per  share                                |       | $          | 0.04       |           | $          | 0.01                  |       | $ | 0.05 |   |

 

(a)          Toeliminate stock-option compensation charges under SFAS 123R recorded in thethird quarter of 2006.

Effective January1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS)No. 123R, “Share-Based Payment,” which requires the cost relating toshare-based payment transactions in which an entity exchanges its equityinstruments for goods or services from either employees or non-employees to berecognized in the consolidated financial statements as the goods or servicesare rendered.  The cost is measured atthe fair value of the equity instrument issued as it vests.  The Company is no longer permitted to followthe intrinsic value accounting method under previous accounting guidance, whichpreviously resulted in no expense for stock options for which the exerciseprice was equal to the fair value of the underlying stock on the date of grant.

The Company believes thatexcluding the incremental impact of SFAS 123R from net income providesmeaningful supplemental information regarding its financial results for thethree and nine months ended September 30, 2006 as compared to the same periodin 2005 since the Company’s consolidated financial statements issued prior toJanuary 1, 2006 did not change as a result of adopting SFAS 123R.  The Company also believes that this financialinformation is useful in assessing the Company’s historical performance andyear-over-year growth and when planning, forecasting and analyzing futureperiods.  The incremental impact of SFAS123R during the three and nine months ended September 30, 2006 represents thestock option expense related to stock options issued prior to the adoption ofSFAS 123R and vested during the three and nine months ended September 30, 2006and the impact of estimating forfeitures related to nonvested shares.

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***Nine Months Ended September 30, 2006 and 2005***

For the nine months ended September 30, 2006, we hadincome from continuing operations of $2.0 million, or $0.13 per diluted share(including a non-cash expense pursuant to SFAS 123R of $1.4 million relating tostock option grants approved by our stockholders in the second quarter of 2006,in addition to non-cash income of $399,000 related to change in fairvalue of derivative liability under SFAS 133), on net sales of $180.0 million. This is anincrease of 30%, compared to the nine months ended September 30, 2005. Our netsales increase of 62% for the nine months ended September 30, 2006 compared tothe same period of 2005 was primarily attributable to a 125% increase inwireless handset volume, partially offset by a 25% decrease in average sellingprice per unit sold.  During the ninemonths ended September 30, 2006, the geographic mix of net sales shifted significantlyas sales in South America and Central America increased substantially. Thesetwo regions represented 96% (63% for South America and 33% for Central America)of net sales for the nine months ended September 30, 2006, compared to 68%  (51% for South America and 17% for CentralAmerica) for the nine months ended September 30, 2005. This increase wasprimarily the result of our increased sales and marketing efforts in both ofthose regions, as well as the general increase in wireless handsets sold inthose regions so far this year. Sales in the United States made up theremainder of our sales for the nine months ended September 30, 2006, declining80% to $7.0 million, or 4% of net sales, compared to the same period in 2005.The decrease in our United States sales resulted from increased competition andproduct delays from our primary vendors as well as longer than expectedcertification processes.

|                                                        | ** ** | **Nine Months ended  September 30,**                                                             | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                             | ** ** | **2006**                                                                                                        | ** ** | **2005**   | ** ** | **Increase** | ** ** |
| ** **                                             | ** ** | **(Dollar amounts in   thousands, except per   share amounts)  (unaudited)** | ** ** | ** ** | ** ** |
| Net sales                                              |       | $                                                                                                               | 179,975    |       | $          | 110,789 |   | 62 | % |
| Gross profit                                           |       | 13,926                                                                                                          |       | 8,978      |       | 55 | % |
| Income from continuing operations                      |       | 1,979                                                                                                           |       | 1,522      |       | 30 | % |
|                                                   |       |                                                                                                            |       |       |       |   |   |
| Diluted earnings per share from continuing  operations |       | $                                                                                                               | 0.13       |       | $          | 0.13 |   | 0 | % |

Net sales by geographic region

|                 | ** ** | **Nine Months ended September 30,**       | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|
| ** **      | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| United States   |       | $                                                             | 7,048      |   | $ | 35,202 |   |
| Central America |       | 59,741                                                        |       | 18,901 |   |
| South America   |       | 113,186                                                       |       | 56,776 |   |
| Total           |       | $                                                             | 179,975    |   | $ | 110,879 |   |

 

**Cost ofSales, Gross Profit and Gross Margin**

For the nine months ended September 30, 2006, cost ofsales was $166.0 million, or 92.3% of net sales, compared with $101.8 million,or 91.9% of net sales, for the nine months ended September 30, 2005. Theincrease in our cost of sales was a direct result of the increased wirelesshandset sales volume during the nine months ended September 30, 2006, comparedto the same period in 2005.  The decreasein gross margin was primarily the result of the change of product and regionalmix of our sales, including higher sales in Latin America, as differentproducts and different regions can have varying margins.

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For the nine months ended September 30, 2006, ourgross profit increased to $13.9 million from $9.0 million,  compared with the same period last year, anincrease of 55%. The increase in gross profit was primarily the result ofincreased wireless handset sales levels, partially offset by the decrease ingross margin.

 

|               | ** ** | **Nine Months Ended September 30,**       | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Cost of sales |       | $                                                             | 166,049    |   | $ | 101,811 |   |
| Gross margin  |       | 7.7                                                           | %          | 8.1 | % |
| Gross profit  |       | $                                                             | 13,926     |   | $ | 8,978 |   |

 

**OperatingExpenses and Operating Income from Continuing Operations**

For the nine months ended September 30, 2006,operating expenses were $11.6 million, an increase of 77%, compared with $6.5million for the nine months ended September 30, 2005. As a percentage of netsales, operating expenses were 6.4% and 5.9% respectively in each of the ninemonths ended September 30, 2006 and 2005. The increase is primarily the resultof SFAS 123R, as we incurred $1.4 million, or 0.8% of net sales, of non-cashexpense relatingto stock option granted, compared to no such expense in the same periodof last year. Excluding the non-cash expense related to SFAS 123R, non-GAAPoperating expenses as a percentage of net sales were 5.7% for the nine monthsended September 30, 2006 as compared to 5.9% for the same period of the prioryear.  See GAAP to non-GAAPreconciliation below.

For the nine months ended September 30, 2006, ouroperating income from continuing operations was $2.4 million (including anon-cash expense of $1.4 million relating to stock option granted before December 31, 2005 andduring the first three quarters of 2006), compared with $2.5 million forthe nine months ended September 30, 2005. As a percentage of net sales,operating income from continuing operations was 1.3% for the nine months endedSeptember 30, 2006, as compared to 2.2% for the nine months ended September 30,2005.   The decrease in operating incomefrom continuing operations as a percentage of net sales for the nine monthsended September 30, 2006 was a result of the non-cash expense related to SFAS123R and the decrease in gross margin.

**Operating Expenses**

 

|                         | ** ** | **Nine Months Ended September 30,**       | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Operating expenses      |       | $                                                             | 11,556     |   | $ | 6,518 |   |
| Percentage of net sales |       | 6.4                                                           | %          | 5.9 | % |
|                         |            |                                                               |            |  |  |  |  |

** **

**OperatingIncome from Continuing Operations**

** **

 

|                                              | ** ** | **Nine Months Ended September 30,**       | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Operating income from  continuing operations |       | $                                                             | 2,371      |   | $ | 2,460 |   |
| Percentage of net sales                      |       | 1.3                                                           | %          | 2.2 | % |
|                                              |            |                                                               |            |  |  |  |  |

 

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**Other Income (expense)**

Duringthe nine months ended September 30, 2006, we had income from a non-cash changein fair value of derivative liability relating to the January 2006financing-related warrants of $399,009. This derivative liability related tothe warrants was classified as equity as of February 17, 2006 in accordancewith SFAS 133, the date on which the registration statement registering thecommon stock underlying the warrants was declared effective by the SEC.  As the warrants have been classified asequity, we will no longer need to “mark to market” the change in fair value ofsuch warrants.

 

|                                               | ** ** | **Nine Months Ended September 30,**       | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Change in fair value of  derivative liability |       | $                                                             | 399        |   | $ | — |   |
| Interest expense                              |       | (152                                                          | )          | (233 | ) |
| Other Income (expense) total                  |       | $                                                             | 247        |   | $ | (233 | ) |

 

**NetIncome**

During the ninemonths ended September 30, 2006, our net income was $2.0 million, an increaseof 4.3% compared to the same period last year. This slight increase primarily resulted from our increased net salesoffset by the expense factors mentioned above.    See below for a discussion of our netincome adjusted for the effects of SFAS 123R and SFAS 133 on our results forthe nine months ended September 30, 2006.

**Reconciliation of Non-GAAPFinancial Measures to the Corresponding GAAP Financial Measures for the NineMonths ended September 30, 2006 (unaudited)**

The following areselected results including and excluding the impact of SFAS 123R and SFAS 133: 

| Nine Months ended  September 30, 2006 | ** ** | **Actual** | ** ** | **Adjustment** | ** ** | **Non-GAAP  results** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------------|------------|-----------------------|------------|
| Operating expenses                                        |       | $          | 11,555,769 |           | $          | (1,376,512            | )(a)       | $ | 10,179,257 |   |
|                                                      |       |       |       |           |       |                  |       |
| Operating income from  continuing operations              |       | $          | 2,370,529  |           | $          | 1,376,512             | (a)        | $ | 3,747,041 |   |
|                                                      |       |       |       |           |       |                  |       |
|                                                      |       |       |       | $              | 1,376,512  | (a)                   |       |   |
|                                                      |       |       |       | (399,009       | )(b)       |                  |       |
| Net income                                                |       | $          | 1,977,864  |           | $          | 977,503               |       | $ | 2,955,367 |   |
| Diluted earnings per share                                |       | $          | 0.13       |           | $          | 0.06                  |       | $ | 0.19 |   |

 

(a)          Eliminatesnon-cash stock-option compensation charges under SFAS 123R recorded in the ninemonths ended September 30, 2006.

(b)         To eliminate non-cashchange in fair value of derivative liability under SFAS 133 recorded in thenine months ended September 30, 2006. This derivative liability was reclassified to equity on February 17,2006.

See abovediscussion of the impact of SFAS 123R on the Company’s net income.

The Company believes thatexcluding the incremental impact of SFAS 133 from net income providesmeaningful supplemental information regarding its financial results for thenine months ended September 30, 2006 as compared to the same period in 2005since the Company’s consolidated financial statements issued prior to January1, 2006 were not impacted by adopting SFAS 133. The Company also believes that this financial information is useful inassessing the Company’s historical performance and year-over-year growth andwhen planning, forecasting and analyzing future periods.  The incremental impact of SFAS 133 during thenine months ended September 30, 2006 represents the change in fair value of thederivative liability (for the January 2006 financing related warrants).  The warrants were marked to market as ofFebruary 17, 2006 and thereafter classified as equity.

In September 1998, FASB issued SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*.SFAS 133 establishes accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts (collectively referred to as derivatives) and for hedging activities.It requires that an entity recognize all derivatives as either assets orliabilities in the statement of financial position and measure thoseinstruments at fair value.

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InJanuary 2006, the Company sold shares of common stock and warrants topurchase common stock.  The Companyevaluated the warrants in the transaction as derivative liabilities in accordancewith SFAS No. 133 until the date that the Company’s registration statementregistering the shares of common stock underlying such warrants was declaredeffective on February 17, 2006, after which such warrants were classified asequity.  The change in the fair value ofthe warrants, determined under the Black- Scholes option pricing formula fromthe initial transaction date to the effectiveness date of the registrationstatement is recorded as an adjustment to the liability. The income relating tothe change in the fair value of the Company’s stock reflected in the change inthe fair value of the warrants is included as other income (expense). As thewarrants have been classified as equity, the Company no longer “marks tomarket” the change in fair value of such warrants.  See Note 10 of the notes to our unauditedconsolidated financial statements for the quarter ended September 30, 2006.

**Financial Condition, Liquidity and CapitalResources**

At September 30, 2006, we had $16.2 million in cash.In January 2006, we raised $14.4 million gross proceeds from the sale of ourcommon stock and related warrants for our common stock. We believe that our existingcash resources, together with our projected cash flow from operations and thenet proceeds from our bank line of credit, will be sufficient to allow us toimplement our strategy and growth plan.

During the nine months endedSeptember 30, 2006, in addition to capital raised from equity sales, wecontinued to leverage our bank and vendor lines of credit to help fund ourgrowth. The net cash used by operating activities was $16.7 million for thenine months ended September 30, 2006, which resulted primarily from increasedaccounts receivable and increased inventory levels. Our accounts receivableincreased $24.9 million during the nine months ended September 30, 2006 due toincreased sales and increased net payment terms (see below) to certain regionsduring that period. The $0.4 million decrease in inventory was offset by a $4.1million increase in prepaid inventory, resulting in a net increase of inventoryduring the nine months ended September 30, 2006 and was due to higher saleslevels and buying opportunities which were available to us at September 30,2006. Allowance for doubtful accounts at September 30, 2006 increased to$905,000, compared to $553,000 at December 31, 2005. This increase****was related to our increased sales levelsand increased accounts receivable balance during the nine months endedSeptember 30, 2006. We believe that at September 30, 2006, our reserve fordoubtful accounts was adequate. Our increase in accounts payable of $9.6million and decrease in accrued expenses of $1.2 million at September 30, 2006compared to December 31, 2005 was an offset to the cash used for increasedaccounts receivable and inventory.

Days of sales outstanding (theaverage number of days it takes to collect revenue after a sale is made) atSeptember 30, 2006 were 55 days, compared with 74 days at December 31, 2005.Normal payment terms require our customers to pay on a net 30-day or net 60-daybasis depending on the region. We are constantly working with our customers toreduce our days of sales outstanding. The extension of net 60-day terms wasrequired to remain competitive in several of the regions we currently operate,most notably in Central and South America.

The net cash used in investingactivities was $319,000 for the nine months ended September 30, 2006, comparedwith $280,000 for the nine months ended September 30, 2005. This use of cash isprimarily the result of expenditures for new furniture and fixtures related toour facility in Mexico and our office, technical assembly and warehouse space,as well as the technical tools and equipment necessary for the customizationprocess of wireless handsets.

The net cash provided by financingactivities for the nine months ended September 30, 2006 of $25.5 million wasprimarily the result of the January 2006 sale of 2.2 million shares of ourcommon stock and 717,200 warrants to purchase our common stock for net proceedsof $13.4 million,  we also receivedapproximately $1.2 million from the exercise of employee stock options inaddition to borrowings on our bank line of credit.

Our net working capital atSeptember 30, 2006 was $34.9 million, compared with $17.0 million at December31, 2005. This increase was primarily due to our January 2006 sale ofcommon stock and related warrants to purchase our common stock and net incomefor the nine months ended September 30, 2006.

**Borrowings**

We have a fully collateralized line of credit with Wells Fargo HSBCTrade Bank N.A. (“Wells Fargo”) that allows us to borrow up to a maximum of $25million.  This line of credit has amaturity date of November 1, 2006.  OnOctober 12, 2006, this line of credit was amended as described below.    Under this line of credit, ouradvances cannot exceed 80% of eligible domestic accounts receivable or 85% ofeligible foreign-insured accounts receivable.

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Interest is payable on a monthlybasis (i) at Wells Fargo’s prime (8.25% at September 30, 2006) or (ii) at theone-month LIBOR (5.32% at September 30, 2006) plus 1.50%. The interest rate isfloating at Wells Fargo’s prime rate or is at LIBOR plus 1.5% if the debt is afixed amount draw down.  The line ofcredit is collateralized by substantially all of the assets of the Company, andexpires November 1, 2006. In addition to reporting and other non-financialcovenants, the line of credit contains certain financial covenants whichrequire the Company to maintain a tangible net worth of not less than$12,500,000, a pre-tax profit of not less than $1 on a rolling four quarterbasis, a quick ratio of not less than one-to-one, a debt-to-net worth ratio of notgreater than two-to-one, and an annual net income after taxes of at least $1.Management believes the Company was in compliance with these covenants atSeptember 30, 2006. At September 30, 2006 and December 31, 2005, the amountsdrawn against the line of credit were $20,890,100 and $10,000,000,respectively. See ‘Subsequent Events” below for additional informationregarding the amendment of this line of credit in October 2006.

We have no other notes payable.

For the quarter ended September 30, 2006 and the yearended December 31, 2005, amounts advanced against our line of credit were $20.9million and $10.0 million. Our credit lines have been important parts ofgrowing our business, and market changes affecting accounts receivable coulddiminish the borrowing base of available funds. At September 30, 2006 andDecember 31, 2005, advances were 84% and 71% of the available borrowingbase.

**Subsequent Events**

On October 12, 2006, the Company amended its a line ofcredit from Wells Fargo HSBC Trade Bank N.A., to increase the maximum borrowamount to $30,000,000 and extend the term to October 1, 2008.  In addition the following covenants apply tothe line of credit Interest is payable on a monthly basis (i) at Wells Fargo’sprime minus 0.25% (8.25% at October 12, 2006) or (ii) at the one-month LIBOR(5.33% at October 12, 2006) plus 1.50%. The interest rate is floating at Wells Fargo’s prime rate or is at LIBORplus 1.5% if the debt is a fixed amount draw down.  The line of credit is collateralized bysubstantially all of our assets, and expires in October 2008.  In addition to reporting and othernon-financial covenants, the line of credit contains certain financialcovenants which require us to maintain a tangible net worth of not less than$30,000,000 through December 31, 2006 and not less than $30,000,000 plus 50% ofnet profit after tax from January 1, 2007 and thereafter, a quick ratio of not lessthan one-to-one, a debt-to-net worth ratio of not greater than two-to-one, andan annual net income after taxes of at least $1 on a rolling four quarterbasis.

***CriticalAccounting Policies***

We believe the following critical accounting policiesare important to the presentation of our financial condition and operatingresults, and require management’s judgments to make assumptions and estimatesabout the effects of matters that are inherently uncertain.

*RevenueRecognition and Accrued Chargebacks*

Revenues are recognized: (1) upon shipment of theproducts to customers, (2) when collection of the outstanding receivablesis probable; and (3) when the final price of the product has beendetermined. Any value added services provided by the Company are related toservices leading up to the sale of the products and there are no value addedservices provided once the products have been delivered.  A carrier has nine months from the date ofactivation of a wireless handset to charge back amounts previously credited tous if a customer terminates its service. We provide an allowance for estimatedreturns based on our experience, which estimate is recorded as a contra assetagainst accounts receivable. A provision for returns is provided in the sameperiod in which the related commission revenue is recorded. Customercreditworthiness and economic conditions may change, including increasing therisk of collectibility and contract terminations, and may require additionalprovisions, which could negatively impact our operating results.

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*Allowance forDoubtful Accounts and Sales Return Reserve*

Credit evaluations are undertaken for all major saletransactions before shipment is authorized. Normal payment terms requirepayment on a net 30 or 60 day basis depending on the customer. On an ongoingbasis, we analyze the payment history of customer accounts, including recentcustomer purchases. We evaluate aged items in accounts receivable and providereserves for doubtful accounts and estimated sales returns. Customercreditworthiness and economic conditions may change, including increasing therisk of collectibility and sales returns, and may require additionalprovisions, which could negatively impact our operating results.

*InventoryWrite-Off and Effect on Gross Margin*

We regularly monitor inventory quantities on hand andrecord a provision for excess and obsolete inventories based primarily onhistorical usage rates and our estimated forecast of product demand for aperiod of time, generally nine months. Because of obsolescence, we will generallyprovide a full reserve for the costs of our inventories in excess of ourrelevant demand forecast for the applicable period. We attempt to control ourinventory levels so that we limit inventories in excess of demand for thesucceeding nine months. However, because we need to place non-cancelable orderswith significant lead time and because it is difficult to estimate productdemand, we sometimes build inventories in excess of demand for the applicablefuture periods. If this occurs, we provide a reserve, which may have a negativeimpact on our reported results of operations and financial condition.

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

The primary objective of thefollowing information is to provide forward-looking quantitative andqualitative information about our potential exposure to market risks. The term“market risk” for us refers to the risk of loss arising from adverse changes ininterest rates and various foreign currencies. The disclosures are not meant tobe precise indicators of expected future losses, but rather indicators ofreasonably possible losses. This forward-looking information providesindicators of how we view and manage our ongoing market risk exposures.

**Interest Rate**

We are exposed to market risk from changes in interestrates on our outstanding revolving line of credit. At September 30, 2006, wehad $20.9 million outstanding, which could be affected by changes in short-terminterest rates. The interest rate for our revolving line of credit is (i) WellsFargo’s prime rate minus 0.25 (8.25% at September 30, 2006) or LIBOR plus 1.50%(5.32% at September 30, 2006). For every 1% increase in Wells Fargo’s primerate or one-month LIBOR, our interest expense increases by $209,000 assuming$20.9 million remained outstanding for the entire year.

The above sensitivity analysis for interest rate riskexcludes accounts receivable, accounts payable and accrued liabilities becauseof the short-term maturity of such instruments. The analysis does not considerthe effect interest rate movement may have on other variables relating to ourbusiness, including changes in sales volumes that could be indirectlyattributed to changes in interest rates. The actions that we would take inresponse to such a change are also not considered. If it were possible toquantify this impact, the results could differ from the sensitivity effectsshown above.

**Market Risk**

Substantial portions of our revenue and expenses aretransacted in markets outside the United States; however, all salestransactions and accounts receivable are denominated in U.S. dollars. As aresult of our international sales, our future operating results could beadversely affected by a variety of factors, including changes in specificcountries’ political, economic or regulatory conditions, and trade protectionmeasures.  Our market risk managementincludes an accounts receivable insurance policy for both our domestic andforeign sales.  However, there can be noassurance that our insurance policy will substantially offset the impact offluctuations in currency exchange rates, political, economic or regulatoryconditions on its results of operations and financial position. Foreigncurrency fluctuations did not have a material impact on our financial resultsduring the nine months ended September 30, 2006.

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**Item 4. Controls and Procedures**

**Disclosure Controls**

Pursuant to Rule 13a-15(e) and 15d-15(e) under theExchange Act, an evaluation was performed under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and President and the Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures asof the end of the period covered by this report.  Based on the evaluation, the Chief ExecutiveOfficer and President and the Chief Financial Officer, concluded that theCompany’s disclosure controls and procedures were effective as of the end ofthe period covered by the report.

**Changes in Internal Control Over FinancialReporting**

The Chief Executive Officer and President and theChief Financial Officer conducted an evaluation of our internal control overfinancial reporting (as defined in Exchange Act Rule 13a-15(f)) (“InternalControl”) to determine whether any changes in Internal Control occurred duringthe quarter ended September 30, 2006, that have materially affected or whichare reasonably likely to materially affect Internal Control. Based on thatevaluation, no such change occurred during such period.

The Company is not an “accelerated filer”(i.e. theCompany’s public float is less than $75 million) for the fiscal year 2006;hence, the internal controls certification and attestation requirements ofSection 404 of the Sarbanes-Oxley act will not be applicable to the Companyuntil the fiscal year ended December 31, 2007. Notwithstanding the fact that these internal control requirements arenot applicable to the Company at this time, the Company has been reviewing itsinternal control procedures and it has retained an outside firm to assist inthis process.

**PART II. OTHERINFORMATION**

**Item 1. Legal Proceedings**

*Securities Class Actions*

Between June 13, 2006 andJuly 14, 2006, seven securities class actions were filed in the United StatesDistrict Court for the Southern District of California against us and certainof our officers and directors.  One ofthese securities class actions was voluntarily dismissed, and the remaining sixlawsuits were consolidated before Judge Moskowitz in the Southern District ofCalifornia.  The longest class periodalleged in the securities cases is from May 8, 2006 to June 12, 2006. Each of the substantially similar consolidated lawsuits allege that thedefendants violated Sections 10(b), 20(a) and/or 20A of the Exchange Act, as wellas the associated Rule 10b-5, in connection with our restatement announced onJune 12, 2006.  In the  lawsuits,plaintiffs seek declarations that each action is a proper class action,unspecified damages, interest, attorneys’ fees and other costs, equitable/injunctiverelief, and/or such other relief as is just and proper.  On October 23, 2006, the Court appointedRobert Sibley as lead plaintiff in the consolidated suits and appointed leadcounsel.  The Company is waiting forplaintiffs to file a consolidated complaint. When required to respond to a consolidated complaint, the defendantsanticipate filing a motion to dismiss on the grounds that the plaintiffs havefailed to adequately plead violations of the securities laws.

*Derivative Lawsuits*

The derivative lawsuitfiled on July 12, 2006 in the California Superior Court, in the County of SanDiego, by Peter J. Cunningham, purportedly on behalf of the Company againstcertain officers and directors of the Company, and the Company as a nominaldefendant, was dismissed.

The three derivativelawsuits originally filed on June 27, 2006, July 14, 2006, and July 28, 2006 inthe United States District Court for the Southern District of California,purportedly on behalf of the Company against certain of our officers anddirectors, and the Company as a nominal defendant, have been consolidated as *In Re InfoSonics Corporation Derivative Litigation*, LeadCase No. 06 CV 1336, and transferred to Judge Moskowitz in the SouthernDistrict of California.  Plaintiffs’consolidated derivative complaint was received on November 8, 2006.  The consolidated complaint asserts claims fordisgorgement under the Sarbanes-Oxley Act of 2002, violation of Section 14(a)of the Exchange Act, violation of California Corporations Code section 25402,violation of California Corporations Code section 25403, breach of fiduciaryduty, abuse of control, gross mismanagement, waste of corporate assets, unjustenrichment, and an accounting, in connection with the Company’s restatement offirst quarter 2006 earnings and in connection with allegations of wrongdoingwith respect to 

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granting, exercising, accounting and reporting of thestock options that the Company granted in December 2005.  Plaintiffs seek unspecified damages,declaratory relief regarding the Sarbanes-Oxley Act of 2002, Section 14(a) ofthe Exchange Act, and the legality of stock options, a constructive trust,restitution, disgorgement, modification of certain corporate governance andinternal procedures, extraordinary equitable and/or injunctive relief, costs,and such other relief as is just and proper.

When required to respondto these derivative lawsuits, the defendants anticipate filing a motion todismiss on the ground, among others, that the plaintiff has failed to make ademand on the Company’s board of directors.

While the above lawsuitsare in their early stages, at this time we do not believe they will have amaterial adverse effect on our financial condition.

We may become involved in certainother legal proceedings and claims which arise in the normal course ofbusiness. Other than as described above, as of September 30, 2006, we did nothave any significant litigation outstanding.

**Item 1A.  Risk Factors**

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in “Part I. Item 1A. Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2005, whichcould materially affect our business, financial condition or operating results.The risk factors and uncertainties described in our Annual Report on Form 10-Kare not the only risks and uncertainties facing us. Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially affect our business, financial condition oroperating results.  Except as set forthbelow, there have been no material changes to the risk factors included in ourAnnual Report on Form 10-K during the period covered by this report.

***We buy a significant amount of our products from a limitednumber of suppliers, who may not provide us with competitive products atreasonable prices when we need them in the future.***

We purchase wireless handsets and accessoriesprincipally from wireless communications equipment manufacturers and distributors.We depend on these suppliers to provide us with adequate inventories ofcurrently popular brand name products on a timely basis and on favorablepricing and other terms, as well as depending on our suppliers’ abilities andfinancial stability. For the quarter ended September 30,2006, two suppliers accounted for 68% and 13% respectively of our total cost ofsales.  We currently have one exclusive and severalnon-exclusive agreements with our principal suppliers, which can be terminatedon short notice and provide for certain territorial restrictions. Our suppliersmay not offer us competitive products on favorable terms or with timelydelivery. In addition new products from other manufacturers could impact thedemand for products from manufacturers we represent. From time to time, we havebeen unable to obtain sufficient product supplies. Any failure or delay by oursuppliers, particularly our three primary vendors, in supplying us withproducts on favorable terms may severely diminish our ability to obtain anddeliver products to our customers on a timely and competitive basis. If we loseany of our principal suppliers, or if these suppliers are unable to fulfill ourproduct needs, or if any principal supplier imposes substantial price increasesand alternative sources of supply are not readily available, it would have amaterial adverse effect on our results of operations.

***The loss or reduction in orders from principal customers ora reduction in prices we are able to charge these customers will have anegative impact upon our revenues and could cause our stock price to decline.***

Our three largest customers in the quarter endedSeptember 30, 2006 represented 21%, 21% and 21% of our net sales.  These customers are carriers in South America.The markets we serve are subject to significant price competition.Additionally, our customers are not contractually obligated to purchaseproducts from us. For these and other reasons, such as competitive pricing andcompetitive pressures, customers may seek to obtain products or services fromus at lower prices than we have been able to obtain from these customers in thepast. This could occur, for example, in the case of a customer purchasing largequantities of a product from us, who then terminates this relationship becausethe customer can obtain a lower price by buying directly from the manufactureror other supplier. The loss of any of our principal customers, a reduction inthe amount of product or services our principal customers order from us or theinability to maintain current terms, including price, with these or othercustomers could have an adverse effect on our financial condition, results ofoperations and liquidity. In addition, we have experienced losses of certaincustomers through industry consolidation and in the ordinary course ofbusiness. There can be no assurance that any of our customers will continue topurchase products or services from us or that their purchases will be at thesame or greater levels than in prior periods.

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***Approximately 97% of our revenues during thequarter ended September 30, 2006 were generated outside of the United States incountries that may have volatile currencies or other risks.***

We engage in significant sales activities interritories and countries outside of the United States, particularly LatinAmerican countries, including Argentina. All our sales transactions are completed in U.S. dollars. The fact thatwe distribute products into a number of territories and countries exposes usto, among other things, increased credit risks, customs duties, import quotasand other trade restrictions, potentially greater and more unpredictableinflationary pressures, and shipping delays. Changes may occur in social,political, regulatory and economic conditions or in laws and policies governingforeign trade and investment in the territories and countries where wecurrently distribute products. United States laws and regulations relating toinvestment and trade in foreign countries could also change to our detriment.Any of these factors could have material adverse effects on our business andoperations. Although we purchase and sell products and services in U.S. dollarsand do not engage in exchange swaps, futures or options contracts or otherhedging techniques, fluctuations in currency exchange rates could reduce demandfor products sold in U.S. dollars. We cannot predict the effect that futureexchange rate fluctuations will have on our operating results. We may in thefuture engage in currency hedging transactions, which could result in ourincurring significant additional financial risks, including losses.

***We have outstanding indebtedness, which is secured bysubstantially all our assets and could prevent us from borrowing additionalfunds, if needed.***

Wehad outstanding debt in the amount of $20.9 million and $10.0 million atSeptember 30, 2006 and December 31, 2005 in the form of a bank line ofcredit of up to $30 million based on a borrowing base, which is based on apercentage of eligible accounts receivable. Any significant decrease in our level ofeligible accounts receivable will reduce our ability to borrow additional fundsto adequately finance our operations and expansion strategies.If we violate ourloan covenants, default on our obligations or become subject to a change ofcontrol, our indebtedness would become immediately due and payable. The termsof our credit facility restrict us from incurring additional indebtedness,which could limit our ability to expand our operations. We are also subject tonegative covenants that, among other things, limit our ability to sell certainassets and make certain payments, including but not limited to, dividends,repurchases of common stock and other payments outside the normal course ofbusiness, as well as prohibiting us from merging or consolidating with anothercorporation or selling all or substantially all of our assets.

***Stockholders have been and may be diluted as a result ofpast or future offerings or other financings or equity grants.***

We may in the future raise additional capital throughone or more public offerings, private placements or other financings involvingour securities or make stock option or other equity grants. As a result ofthese financings or grants, ownership interests in us may be diluted, potentiallysubstantially.

***Classaction and derivative lawsuits have been filed against us, our board ofdirectors and certain of our officers, and other lawsuits may be institutedagainst us from time to time.***

We are currently, and from time to time in the futuremay become, subject to claims and litigation, which could be expensive,lengthy, and disruptive to our normal business operations.  In addition, the outcome of any claims orlitigation may be difficult to predict and could have a material adverse effecton our business, operating results or financial condition.  For further information regarding certainclaims and litigation in which we are currently involved, see “Part II — Item1.  Legal Proceedings” above.

**Item 2.    Unregistered Sales Of Equity Securities AndUse Of Proceeds**

None.

**Item 3.    Defaults on Senior Securities**

None.

**Item 4.    Submission of Matters to a Vote of SecurityHolders**

## **None**

**Item 5.    Other Information**

None.

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**Item 6.****   ****Exhibits**

 
| Exhibit Number | ** ** | **Description of Exhibit**                                                                                                                                                             |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1           |       | Amendment to Credit Agreement with Wells Fargo HSBC  Trade Bank, N.A. (incorporated by reference to Current Report on for 8-K  filed by the Company October 5, 2006                    |
| 10.2           |       | Fifth Amendment to Credit Agreement with Wells Fargo  HSBC Trade Bank, N.A. (incorporated by reference to a Current Report on  Form 8-K filed by the Company on October 13, 2006) |
| 31.1           |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing  Section 302 of Sarbanes-Oxley Act of 2002 (*)          |
| 31.2           |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing  Section 302 of Sarbanes-Oxley Act of 2002 (*)          |
| 32.1           |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (*)                               |
| 32.2           |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (*)                               |

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(*)  Filed herewith.

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**SIGNATURE**

Pursuant to the requirementsof the Securities Exchange Act of 1934, as amended, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                                                       | **InfoSonics Corporation** |
|-------------------------------------------------------|----------------------------|
|                                                  |                       |
|                                                  |                       |
| Date:     November  14, 2006 | By:                        | /s/  Joseph  Ram |   |
|                                                  |                       | Joseph  Ram |   |
|                                                  |                       | Chief  Executive Officer |   |
|                                                  |                       |
|                                                  |                       |
| Date:     November  14, 2006 | By:                        | /s/  Jeffrey  Klausner |   |
|                                                  |                       | Jeffrey  Klausner |   |
|                                                  |                       | Chief  Financial Officer |   |

 

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