**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

**FORM 10 -Q**

| **x********QUARTERLY REPORT UNDER SECTION  13 OR 15(d)**         |
|------------------------------------------------------------------|
| **OF THE SECURITIES EXCHANGE ACT OF 1934.**                      |
| ** **                                                       |
| **For the quarterly period ended June 30, 2007**                 |
| ** **                                                       |
| **OR**                                                           |
| ** **                                                       |
| **o****TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d)** |
| **OF THE SECURITIES EXCHANGE ACT OF 1934**                       |

 

**Forthe transition periodfrom                to                **

**CommissionFile Number - 001-32217**

**InfoSonics Corporation**

(Exact name 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             AcceleratedFiler  o             Non-AcceleratedFiler  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 of August 10, 2007, theRegistrant had 14,474,353 shares outstanding of its $.001 par value commonstock.

 

----

**InfoSonics Corporation and Subsidiaries**

**QuarterlyReport on Form 10-Q For The Period Ended****June 30, 2007**

**Table ofContents**
| **PART I. FINANCIAL  INFORMATION** | 3      |
|------------------------------------|--------|
|                               |   |   |   |
| Item 1.                            |   | Financial Statements | 3 |
|                               |   |   |   |
| ·                             |   | Consolidated  Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006 | 3 |
|                               |   |   |   |
| ·                             |   | Consolidated  Statements of Income (Loss) for the Three and Six Months Ended June 30, 2007  and 2006 (unaudited) | 4 |
|                               |   |   |   |
| ·                             |   | Consolidated  Statements of Comprehensive Operations for the Three and Six Months Ended  June 30, 2007 and 2006 (unaudited) | 5 |
|                               |   |   |   |
| ·                             |   | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006  (unaudited) | 6 |
|                               |   |   |   |
| ·                             |   | Condensed  Notes to Consolidated Financial Statements (unaudited) | 7 |
|                               |   |   |   |
| Item 2.                            |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14 |
|                               |   |   |   |
| Item 3.                            |   | Quantitative  and Qualitative Disclosures About Market Risk | 23 |
|                               |   |   |   |
| Item 4.                            |   | Controls and  Procedures | 24 |
|                               |   |   | ** ** |
| **PART II. OTHER  INFORMATION**    | 24     |
|                               |   |   |   |
| Item 1.                            |   | Legal  Proceedings | 24 |
|                               |   |   |   |
| Item 1A.                           |   | Risk Factors | 25 |
|                               |   |   |   |
| Item 2.                            |   | Unregistered  Sales of Equity Securities and Use of Proceeds | 27 |
|                               |   |   |   |
| Item 3.                            |   | Defaults Under  Senior Securities | 27 |
|                               |   |   |   |
| Item 4.                            |   | Submission of  Matters to a Vote of Security Holders | 27 |
|                               |   |   |   |
| Item 5.                            |   | Other Information | 27 |
|                               |   |   |   |
| Item 6.                            |   | Exhibits | 27 |

 

2

----

**Part I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Balance Sheets**
| ** **                                                                                                                                          | ** ** | **June 30,  2007** | ** **     | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|----------------|-----------------------------|------------|
| ** **                                                                                                                                          | ** ** | **(unaudited)**         | ** **     | ** **                  | ** ** |
| **ASSETS**                                                                                                                                          | ** ** | ** **              | ** **     | ** **                  | ** ** |
| **Current assets:**                                                                                                                                 |       |                    |           |                        |       |
| Cash and cash  equivalents                                                                                                                          |       | $                       | 12,988,390     |                        | $          | 30,243,392 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $656,775 (unaudited)  and $679,552                                            |       | 38,685,362              |           | 37,798,284                  |       |
| Inventory, net of  reserves of $550,913 (unaudited) and $254,508                                                                                    |       | 21,811,646              |           | 11,174,200                  |       |
| Prepaid inventory                                                                                                                                   |       | 930,897                 |           | 162,146                     |       |
| Prepaid expenses                                                                                                                                    |       | 631,318                 |           | 316,919                     |       |
| Prepaid taxes                                                                                                                                       |       | 1,345,587               |           | 973,749                     |       |
| Net assets of  discontinued operations                                                                                                              |       | 4,209                   |           | 4,209                       |       |
| Deferred tax asset –  current                                                                                                                  |       | 1,025,586               |           | 1,041,000                   |       |
|                                                                                                                                                |       |                    |           |                        |       |
| Total current assets                                                                                                                                |       | 77,422,995              |           | 81,713,899                  |       |
|                                                                                                                                                |       |                    |           |                        |       |
| Property and equipment,  net                                                                                                                        |       | 1,807,447               |           | 615,185                     |       |
| Intangible assets                                                                                                                                   |       | 504,000                 |           | 504,000                     |       |
| Deferred tax asset –  non-current                                                                                                              |       | 719,359                 |           | —                      |       |
| Other assets                                                                                                                                        |       | 182,215                 |           | 137,381                     |       |
|                                                                                                                                                |       |                    |           |                        |       |
| **Total assets**                                                                                                                                    | ** ** | **$**                   | **80,636,016** | ** **                  | **$**      | **82,970,465** | ** ** |
|                                                                                                                                                |       |                    |           |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                      | ** ** | ** **              | ** **     | ** **                  | ** ** |
|                                                                                                                                                |       |                    |           |                        |       |
| **Current liabilities:**                                                                                                                            |       |                    |           |                        |       |
| Line of credit                                                                                                                                      |       | $                       | 19,436,000     |                        | $          | 25,648,614 |   |
| Accounts payable                                                                                                                                    |       | 21,949,241              |           | 18,099,985                  |       |
| Accrued expenses                                                                                                                                    |       | 1,889,649               |           | 1,261,988                   |       |
| Income taxes payable                                                                                                                                |       | 21,040                  |           | 17,100                      |       |
|                                                                                                                                                |       |                    |           |                        |       |
| Total current liabilities                                                                                                                           |       | 43,295,930              |           | 45,027,687                  |       |
|                                                                                                                                                |       |                    |           |                        |       |
| Deferred tax liability  non-current                                                                                                                 |       | —                  |           | 36,000                      |       |
| ** **                                                                                                                                          | ** ** | ** **              | ** **     | ** **                  | ** ** |
| **Total liabilities**                                                                                                                               |       | 43,295,930              |           | 45,063,687                  |       |
| ** **                                                                                                                                          |       |                    |           |                        |       |
| **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, $0.001  par value 40,000,000 shares authorized (14,474,353 and 14,180,068 shares  issued and outstanding as of applicable period end) |       | 14,474                  |           | 14,180                      |       |
| Additional paid-in  capital                                                                                                                         |       | 31,209,012              |           | 30,751,372                  |       |
| Accumulated other  comprehensive loss                                                                                                               |       | (28,116                 | )              | (8,865                      | )          |
| Retained earnings                                                                                                                                   |       | 6,144,716               |           | 7,150,091                   |       |
|                                                                                                                                                |       |                    |           |                        |       |
| Total stockholders’  equity                                                                                                                    |       | 37,340,086              |           | 37,906,778                  |       |
|                                                                                                                                                |       |                    |           |                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                 | ** ** | **$**                   | **80,636,016** | ** **                  | **$**      | **82,970,465** | ** ** |

 

*Accompanyingnotes are an integral part of these financial statements.*

3

----

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements of Income (Loss)**

**(unaudited)**
| ** **                                                                      | ** ** | **For the Three Months  Ended June 30,** | ** **   | **For the Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|--------------|-----------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2007**                                                          | ** **   | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                      | ** ** | ** **                                                        | ** **   | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  sales**                                                                  |       | $                                                                 | 58,260,701   |                                                            | $          | 58,279,558 |   | $ | 116,664,311 |   | $ | 112,406,647 |   |
| **Cost of  sales**                                                              |       | 55,063,950                                                        |         | 53,947,902                                                      |       | 110,318,696 |   | 103,895,126 |   |
|                                                                            |       |                                                              |         |                                                            |       |   |   |   |   |
| **Gross  profit**                                                               |       | 3,196,751                                                         |         | 4,331,656                                                       |       | 6,345,615 |   | 8,511,521 |   |
| **Operating  expenses, including non-cash expense for stock options**           |       | 3,782,717                                                         |         | 4,019,995                                                       |       | 7,814,010 |   | 7,116,095 |   |
|                                                                            |       |                                                              |         |                                                            |       |   |   |   |   |
| **Operating  income (loss) from continuing operations**                         |       | (585,966                                                          | )            | 311,661                                                         |       | (1,468,395 | ) | 1,395,426 |   |
|                                                                            |       |                                                              |         |                                                            |       |   |   |   |   |
| **Other  income (expense)**                                                     |       |                                                              |         |                                                            |       |   |   |   |   |
| Change in fair value of derivative liability                                    |       | —                                                            |         | —                                                          |       | — |   | 399,009 |   |
| Interest income (expense)                                                       |       | (215,614                                                          | )            | (118,991                                                        | )          | (271,086 | ) | (199,557 | ) |
|                                                                            |       |                                                              |         |                                                            |       |   |   |   |   |
| **Income  (loss) from continuing operations before provision for income taxes** |       | (801,580                                                          | )            | 192,670                                                         |       | (1,739,481 | ) | 1,594,878 |   |
| **Provision  (benefit) for income taxes**                                       |       | (354,337                                                          | )            | 66,502                                                          |       | (734,105 | ) | 293,540 |   |
|                                                                            |       |                                                              |         |                                                            |       |   |   |   |   |
| **Income  (loss) from continuing operations**                                   |       | (447,243                                                          | )            | 126,168                                                         |       | (1,005,376 | ) | 1,301,338 |   |
| **Gain  (loss) from discontinued operations, net of tax**                       |       | —                                                            |         | 1,192                                                           |       | — |   | (652 | ) |
| ** **                                                                      | ** ** | ** **                                                        | ** **   | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  income (loss)**                                                          | ** ** | **$**                                                             | **(447,243** | **)**                                                           | **$**      | **127,360** | ** ** | **$** | **(1,005,376** | **)** | **$** | **1,300,686** | ** ** |
|                                                                            |       |                                                              |         |                                                            |       |   |   |   |   |
| **Basic  earnings per share**                                                   |       |                                                              |         |                                                            |       |   |   |   |   |
| From continuing operations                                                      | ** ** | **$**                                                             | **(0.03**    | **)**                                                           | **$**      | **0.01** | ** ** | **$** | **(0.07** | **)** | **$** | **0.10** | ** ** |
| From discontinued operations                                                    | ** ** | **$**                                                             | **0.00**     | ** **                                                      | **$**      | **0.00** | ** ** | **$** | **0.00** | ** ** | **$** | **(0.00** | **)** |
| Net income (loss)                                                               | ** ** | **$**                                                             | **(0.03**    | **)**                                                           | **$**      | **0.01** | ** ** | **$** | **(0.07** | **)** | **$** | **0.10** | ** ** |
| **Diluted  earnings per share**                                                 |       |                                                              |         |                                                            |       |   |   |   |   |
| From continuing operations                                                      | ** ** | **$**                                                             | **(0.03**    | **)**                                                           | **$**      | **0.01** | ** ** | **$** | **(0.07** | **)** | **$** | **0.08** | ** ** |
| From discontinued operations                                                    | ** ** | **$**                                                             | **0.00**     | ** **                                                      | **$**      | **0.00** | ** ** | **$** | **0.00** | ** ** | **$** | **(0.00** | **)** |
| Net income (loss)                                                               | ** ** | **$**                                                             | **(0.03**    | **)**                                                           | **$**      | **0.01** | ** ** | **$** | **(0.07** | **)** | **$** | **0.08** | ** ** |
|                                                                            |       |                                                              |         |                                                            |       |   |   |   |   |
| **Basic  weighted-average number of common shares outstanding**                 | ** ** | **14,453,992**                                                    | ** **   | **13,686,300**                                                  | ** ** | **14,386,825** | ** ** | **13,242,672** | ** ** |
|                                                                            |       |                                                              |         |                                                            |       |   |   |   |   |
| **Diluted weighted-average number  of common shares outstanding**               | ** ** | **14,453,992**                                                    | ** **   | **16,267,032**                                                  | ** ** | **14,386,825** | ** ** | **15,766,957** | ** ** |

 

*Accompanyingnotes are an integral part of these financial statements*.

4

----

**InfosonicsCorporation and Subsidiaries**

**Consolidated Statements of Comprehensive Operations**

**(unaudited)**
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss)                       |       | $                                | (447,243   | )                              | $          | 127,360 |   | $ | (1,005,376 | ) | $ | 1,300,686 |   |
| Other  comprehensive loss:               |       |                             |       |                           |       |   |   |   |   |
| Foreign currency translation adjustments |       | (4,070                           | )          | (9,615                         | )          | (19,252 | ) | (9,615 | ) |
| Comprehensive income  (loss)             |       | $                                | (451,313   | )                              | $          | 117,745 |   | $ | (1,024,628 | ) | $ | 1,291,071 |   |

 

*The accompanying notes are anintegral part of these financial statements*

5

----

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(unaudited)**
| ** **                                                                                                                    | ** ** | **For the Six Months Ended June 30,** | ** **     |
|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|----------------|
| ** **                                                                                                                    | ** ** | **2007**                                                            | ** **     | **2006** | ** ** |
| **Cash  flows from operating activities:**                                                                                    | ** ** | ** **                                                          | ** **     | ** ** | ** ** |
| Net income (loss)                                                                                                             |       | $                                                                   | (1,005,376     | ) | $ | 1,301,338 |   |
| Adjustments to reconcile net income (loss) from  continuing operations to net cash provided by (used in) operating activities |       |                                                                |           |   |   |
| Depreciation and amortization                                                                                                 |       | 122,236                                                             |           | 68,339 |   |
| Provision for bad debt                                                                                                        |       | (22,778                                                             | )              | 276,632 |   |
| Provision for obsolete inventory                                                                                              |       | 296,405                                                             |           | 169,722 |   |
| Tax benefit from stock option exercises                                                                                       |       | —                                                              |           | 440,940 |   |
| Stock option expense                                                                                                          |       | 194,897                                                             |           | 1,243,064 |   |
| Change in fair value of derivative liability                                                                                  |       | —                                                              |           | (399,009 | ) |
| (Increase) decrease in                                                                                                        |       |                                                                |           |   |   |
| Trade accounts receivable                                                                                                     |       | (864,300                                                            | )              | (17,649,173 | ) |
| Inventory                                                                                                                     |       | (10,933,851                                                         | )              | (2,343,530 | ) |
| Prepaid inventory                                                                                                             |       | (768,751                                                            | )              | (1,492,211 | ) |
| Prepaid expenses (including taxes)                                                                                            |       | (686,236                                                            | )              | (541,282 | ) |
| Other assets                                                                                                                  |       | (44,834                                                             | )              | (23,540 | ) |
| Deferred tax asset current                                                                                                    |       | 15,414                                                              |           | (107,000 | ) |
| Deferred tax asset non current                                                                                                |       | (755,359                                                            | )              | (41,207 | ) |
| Increase (decrease) in                                                                                                        |       |                                                                |           |   |   |
| Accounts payable                                                                                                              |       | 3,849,256                                                           |           | 10,637,367 |   |
| Accrued expenses                                                                                                              |       | 627,661                                                             |           | 1,318,910 |   |
| Income tax liabilities                                                                                                        |       | 3,940                                                               |           | 73,386 |   |
|                                                                                                                          |       |                                                                |           |   |   |
| Cash provided by  (used in) continuing operations                                                                             |       | (9,971,676                                                          | )              | (7,067,254 | ) |
| Cash provided by  discontinued operations                                                                                     |       | —                                                              |           | 654 |   |
|                                                                                                                          |       |                                                                |           |   |   |
| Net cash  provided by (used in) operating activities                                                                          |       | (9,971,676                                                          | )              | (7,066,600 | ) |
|                                                                                                                          |       |                                                                |           |   |   |
| **Cash  flows from investing activities:**                                                                                    | ** ** | ** **                                                          | ** **     | ** ** | ** ** |
|                                                                                                                          |       |                                                                |           |   |   |
| Purchase of property and equipment                                                                                            |       | (1,314,497                                                          | )              | (295,367 | ) |
|                                                                                                                          |       |                                                                |           |   |   |
| Net cash  provided by (used in) investing activities                                                                          |       | (1,314,497                                                          | )              | (295,367 | ) |
|                                                                                                                          |       |                                                                |           |   |   |
| **Cash  flows from financing activities:**                                                                                    | ** ** | ** **                                                          | ** **     | ** ** | ** ** |
| Borrowings from line of credit                                                                                                |       | 313,110,207                                                         |           | 70,745,841 |   |
| Payments on line of credit                                                                                                    |       | (319,322,821                                                        | )              | (60,745,841 | ) |
| Cash paid for offering costs                                                                                                  |       | —                                                              |           | (1,005,582 | ) |
| Cash received for stock, options and warrants                                                                                 |       | 263,037                                                             |           | 15,346,569 |   |
|                                                                                                                          |       |                                                                |           |   |   |
| Net cash provided by (used in) financing activities                                                                           |       | (5,949,577                                                          | )              | 24,340,987 |   |
|                                                                                                                          |       |                                                                |           |   |   |
| Effect of exchange rate changes on cash                                                                                       |       | (19,252                                                             | )              | (9,615 | ) |
|                                                                                                                          |       |                                                                |           |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                                         |       | (17,255,002                                                         | )              | 16,969,405 |   |
|                                                                                                                          |       |                                                                |           |   |   |
| **Cash and cash equivalents, beginning of period**                                                                            |       | 30,243,392                                                          |           | 7,712,915 |   |
|                                                                                                                          |       |                                                                |           |   |   |
| **Cash  and cash equivalents, end of period**                                                                                 | ** ** | **$**                                                               | **12,988,390** | ** ** | **$** | **24,682,320** | ** ** |

 

*Accompanying notes are an integral part ofthese financial statements.*

6

----

**InfoSonicsCorporation**

**Condensed Notes to Consolidated Financial Statements**

**(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 notes required by GAAP for complete financial statements. The preparationof financial statements requires management to make estimates and assumptionsthat affect amounts reported in the financial statements and accompanyingnotes. Actual results are likely to differ from those estimates, but managementdoes not believe such differences will materially affect the financial positionor results of operations of InfoSonics Corporation (the “Company”), althoughthey may. These unaudited consolidated financial statements and condensed notesshould be read in conjunction with the financial statements and notes as of andfor the year ended December 31, 2006 included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2006. These unaudited consolidated financial statements reflect alladjustments considered, in the opinion of the Company’s management, necessaryto fairly present the results for the periods covered herein and suchadjustments are considered of a normal recurring nature.

The unauditedconsolidated financial statements include the accounts of the Company and itssubsidiaries, Axcess Mobile LLC, InfoSonics Latin America, Inc., InfoSonics deMexico S.A. de C.V., InfoSonics de Guatemala S.A., InfoSonics El Salvador S.A.de C.V., InfoSonics S.A., InfoSonics Chile y Compania Limitada and InfoSonicsColombia S.A., all of which are wholly owned. Significant intercompany accountsand transactions have been eliminated in consolidation of these consolidatedfinancial statements.

The unaudited consolidated balance sheet at June 30, 2007does not include all of the information and notes required by GAAP for completefinancial statements. Due to seasonality of the Company’s business and otherfactors, the Company’s interim results may not be indicative of the conditionat the end of or the results for the full fiscal year of 2007 or at or for anyother future period. The unaudited consolidated statements of income and theconsolidated statements of comprehensive operations for the three and sixmonths ended June 30, 2007 and the unaudited Consolidated Statement of CashFlows for the six months ended June 30, 2007 are not necessarily indicative ofthe operating results or cash flows that may be expected for the full fiscalyear of 2007 or for any future period.

Share and pershare amounts for all periods presented in these consolidated financialstatements and the accompanying notes (unless otherwise stated) have beenadjusted to reflect the two-for-one common stock split in the form of a stockdividend effected on June 19, 2006.

**NOTE 2.****Stock-BasedCompensation**

The Company has three equity incentive plans, the 2006Equity Incentive Plan (“2006 Plan”), the 2003 Stock Option Plan (“2003 Plan”)and the 1998 Stock Option Plan (“1998 Plan”). Each of the plans has been approved by our stockholders. The 2006 Planis the only plan from which additional equity incentives will be granted. The2006 Plan authorizes the grant of up to 1,000,000 shares for equity incentives.The Company is also a party to non-plan option agreements with severalnon-employee directors and several institutions.

Effective January 1, 2006 the Company adoptedFinancial Accounting Standards Board (“FASB”) SFAS No. 123R, “Share BasedPayments” using the modified prospective method, which requires measurement ofcompensation cost for all stock-based awards at fair value on the date of grantand recognition of compensation over the service period for awards expected tovest. The fair value of stock options was determined using the Black-Scholesvaluation model, which is consistent with our valuation techniques previouslyutilized for stock options in footnote disclosures required under SFAS 123, asamended by SFAS 148. Such fair value is recognized as an expense over theservice period, net of estimated forfeitures.

On September 27, 2001, the FASB Emerging Issues TaskForce (“EITF”) issued EITF Issue 96-18 “*Accounting for EquityInstruments That are Issued to Other than Employees for Acquiring, or inConjunction with Selling, Goods or Services*,” which requires thatequity instruments issued in exchange for certain services be valued at themore accurate of the fair value of the services provided or the fair value ofthe equity instruments issued.  Forequity instruments issued that are subject to a required service period theexpense associated with the equity instruments is recorded as the instrumentsvest or the services are provided.  TheCompany has granted options and warrants to non-employees and recorded the fairvalue of the equity instruments on the date of issuance using the Black-Scholesvaluation model.  For grants subject tovesting or service requirements, the expense is deferred and is recognized overthe more appropriate of the vesting period or as the services are provided.

7

----

On March 29, 2005, theSecurities and Exchange Commission (“SEC”) published Staff Accounting Bulletin(“SAB”) No. 107, which provides the SEC Staff’s views on a variety of mattersrelating to stock-based payments. SAB 107 requires stock-based compensation tobe classified in the same expense line items as cash compensation. Informationabout stock-based compensation included in the results of operations for thethree and six months ended June 30, 2007 and 2006 is as follows:
|                                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| Officer  compensation                                             |       | $                                | 46,018     |                           | $          | 18,297 |   | $ | 92,036 |   | $ | 36,594 |   |
| Non-employee  directors                                           |       | 3,451                            |       | 1,138,178                      |       | 6,902 |   | 1,138,178 |   |
| Sales, general  and administrative                                |       | 47,980                           |       | 34,146                         |       | 95,959 |   | 68,292 |   |
| Total stock option  expense, included in total operating expenses |       | $                                | 97,449     |                           | $          | 1,190,621 |   | $ | 194,897 |   | $ | 1,243,064 |   |

 

Our stock options vest onan annual or a monthly basis. As of June 30, 2007, there was $611,000 of totalunrecognized compensation costs related to the non-vested stock options.  TheCompany recognizes stock-based compensation costs on a straight-line basis overthe requisite service period of the award, which is generally the optionvesting term.   That cost isexpected to be recognized over the next weighted-average period of 3.5years.  Such amounts may change as aresult of additional grants, forfeitures, modifications in assumptions andother factors. SFAS 123R provides that income tax effects of share-basedpayments are recognized in the financial statements for those awards which willnormally result in tax deductions under existing tax law. During each of thefirst and second quarter of 2007, we recorded an expense of $97,449 related tooptions previously granted. Under current U.S. federal tax law, we wouldreceive 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 ourconsolidated statements of income.

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 2007 and 2006: risk-free interest rate of 4.66% in 2007 and ranging from4.88% to 5.04% in 2006 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 basedupon the historical life of options. For grants in 2007 and 2006, the expectedvolatility used ranged from 62% to 91%, based on the Company’s historical stockprice fluctuations for a period matching the expected life of the options.

Asummary of option activity under all of the above plans as of June 30, 2007 andchanges during the six 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, 2007 |       | 3,117,324  |       | $                                       | 2.56       |                                             |       |                            | —     |   |
| Granted                         |       | 40,000     |       | $                                       | 3.79       |                                             | 5.70       |                            | —     |   |
| Exercised                       |       | 268,285    |       | $                                       | 1.23       |                                             |       |                            | —     |   |
| Forfeited                       |       | 25,000     |       | $                                       | 3.79       |                                             |       |                            | —     |   |
| Outstanding at  June 30, 2007   |       | 2,864,039  |       | $                                       | 2.73       |                                             | 3.04       |                            | —     |   |
| Vested and  expected to vest    |       | 2,864,039  |       | $                                       | 2.73       |                                             | 3.04       |                            | —     |   |
| Exercisable at June 30,  2007   |       | 2,789,470  |       | $                                       | 2.57       |                                             | 3.01       |                            | —     |   |

 

8

----

A summary of the statusof the Company’s non-vested options at June 30, 2007 and changes during the sixmonths ended June 30, 2007 is presented below:
|                                  | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|----------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Non-vested at  December 31, 2006 |       | 177,269    |       | $                                                     | 6.65       |   |
| Granted                          |       | 40,000     |       | $                                                     | 3.79       |   |
| Vested                           |       | 117,700    |       | $                                                     | 3.95       |   |
| Forfeited                        |       | 25,000     |       | $                                                     | 3.79       |   |
| Non-vested at June 30,  2007     |       | 74,569     |       | $                                                     | 9.35       |   |

 

The weighted-averagegrant-date fair value of options granted during the six months ended June 30,2007 was $3.79. The total intrinsic value of options granted during the sixmonths ended June 30, 2007 and 2006 was $0 and $0, respectively. There was$263,000 and $937,000 cash received from options exercised for the six monthsended June 30, 2007 and 2006, respectively. The stock based compensationunrecognized expense for future periods as of June 30, 2007 is approximately$611,000 with a weighted-average remaining vesting period of 3.5 years.

**NOTE 3. 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 the respectiveperiods indicated:
|                                                                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                 | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
|                                                                                                       |       |                             |       |                           |       |
| Numerator: Net income (loss)                                                                               |       | $                                | 127,360    |                           | $          | 1,300,696 |   |
| Denominator:                                                                                               |       |                             |       |                           |       |
| Denominator for basic earnings per share – weighted  average shares                                   |       | 13,686,300                       |       | 13,242,672                     |       |
| Effect of dilutive securities – employee stock options                                                |       | 2,580,732                        |       | 2,524,285                      |       |
| Denominator for diluted earnings per share – adjusted  weighted average shares and assumed conversion |       | 16,267,032                       |       | 15,766,957                     |       |
|                                                                                                       |       |                             |       |                           |       |
| Basic earnings (loss)  per share                                                                           |       | $                                | 0.01       |                           | $          | 0.10 |   |
|                                                                                                       |       |                             |       |                           |       |
| Diluted earnings (loss)  per share                                                                         |       | $                                | 0.01       |                           | $          | 0.08 |   |

 

Common shares from exercise ofcertain options and warrants have been excluded from the computation of dilutedearnings per share because their exercise prices are greater than the Company’sweighted-average stock price for the period. For the three months ended June 30, 2006, the numberof shares excluded were 1,810,292.  For the six months ended June 30, 2006,the number of shares excluded were 1,866,739.

Since their effect would have been anti-dilutive, 2,371,252and 2,247,871, stock options and warrants to purchase shares of common stockhave been excluded from the computation of net loss per share for the three andsix months ended June 30, 2007, respectively.

9

----

**NOTE 4. Income Taxes**

The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company concluded that at this time there are no uncertain tax positions. As a result of applying the provisions of FIN 48, there was no cumulative effect on retained earnings.

The Company is subject to US federal income tax as well asincome tax in multiple states and foreign jurisdictions. For all major taxingjurisdictions, the tax years 2002 through 2006 remain open to examination. Asof June 30, 2007, the Company does not expect any material changes tounrecognized tax positions within the next twelve months.

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 5. 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.  At June 30, 2007, we had in-transit inventoryof $15,000, which is under the control of a common freight carrier until itarrives at one of our customer facilities. This inventory is owned by the Company while it is in-transit. Inaddition, as of June 30, 2007 and 2006, the Company had prepaid inventory of$930,897 and $162,146, respectively. Prepaid inventory represents cash advancesfor goods that have not yet been received by the Company and the Company isshowing these balances as a separate line item on the accompanying balancesheet.  Inventory consists of thefollowing:
|                   | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished goods    |       | $                       | 22,362,559 |                        | $          | 11,428,708 |   |
| Inventory reserve |       | (550,913                | )          | (254,508                    | )          |
| Net inventory     |       | $                       | 21,811,646 |                        | $          | 11,174,200 |   |

 

**NOTE 6. Property and Equipment**

Property andequipment are primarily located in the United States, with the exception of $278,000of machinery and equipment located at our Mexico facility and $19,945 locatedin Korea (installed in June 2007 and included in table below), and consisted ofthe following as of the dates presented:
|                                | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Machinery and  equipment       |       | $                       | 822,696    |                        | $          | 774,465 |   |
| Furniture and  fixtures        |       | 194,552                 |       | 166,921                     |       |
| Tooling and  molds             |       | 1,238,636               |       | —                      |       |
| Subtotal                       |       | 2,255,884               |       | 941,386                     |       |
| Less accumulated  depreciation |       | 448,437                 |       | 326,201                     |       |
| Total                          |       | $                       | 1,807,447  |                        | $          | 615,185 |   |

 

Depreciation expense was $79,204 and $36,404 for the threemonths ended June 30, 2007 and 2006 respectively. Depreciation expense was $122,236and $68,339 for the six months ended June 30, 2007 and 2006, respectively.

**NOTE 7. 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 up to 85% of foreign-insured accountsreceivable (depending on the country of the debtor), up to a maximum of$30,000,000. As of June 30, 2007, the majority of our debt was based on foreignaccounts receivable.

10

----

Interest is payable on a monthly basis (i) at Wells Fargo’sprime rate minus 0.25% (8.25% at June 30, 2007) or (ii) at the one-month LIBORplus 1.50% (5.32% at June 30, 2007). The interest rate is floating at WellsFargo’s prime rate or is at LIBOR plus 1.5% if the debt is a fixed amount drawnupon.  The line of credit iscollateralized by substantially all of the assets of the Company, and expiresOctober 1, 2008. In addition to reporting and other non-financial covenants,the line of credit contains certain financial covenants which require theCompany to maintain a tangible net worth of not less than $30,000,000 plus 50%of net profit after tax from January 1, 2007, a pre-tax profit of not less than$1 on a rolling four quarter basis, a quick ratio of not less than one-to-one,a debt-to-net worth ratio of not greater than two-to-one, and an annual netincome after taxes of at least $1. The Company was in compliance with thesecovenants at June 30, 2007. At June 30, 2007 and December 31, 2006, the amountsdrawn against the line of credit were $19,436,000 and $25,648,614,respectively.

The Company has no other notes payable.

**NOTE 8. Stockholders’ Equity**

Stock Options

EffectiveMarch 9, 2007, the Company granted options to purchase an aggregate of 40,000of its common stock to certain foreign contractors (the “Contractor Options”).One-fourth of the total options subject to these option grants becomeexercisable one year from the contractor grantee’s first date of duties, and1/48th of the total options become exercisable each month thereafter untilfully vested.  These options haveexercise prices of $3.79 per share, which was the closing price per share ofthe Company’s common stock on March 9, 2007, and expire six years fromthe date of grant. See Note 2 for Stock Based Compensation discussion.

**NOTE 9. Recent Accounting Pronouncements**

In February 2006 theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards (SFAS) 155 “Accounting for Certain Hybrid FinancialInstruments.”  SFAS 155 amends SFAS 133 to narrow the scope exception forinterest-only and principal-only strips on debt instruments to include onlysuch strips representing rights to receive a specified portion of thecontractual interest or principal cash flows. SFAS 155 also amends SFAS 140 toallow qualifying special-purpose entities to hold a passive derivativefinancial instrument pertaining to beneficial interests that itself is aderivative financial instrument. Generally, FASB Statement of FinancialAccounting Standards SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” requires that a derivative embedded in a host contractthat does not meet the definition of a derivative be accounted for separately(referred to as bifurcation) under certain conditions. That general rulenotwithstanding, SFAS No. 133 (prior to amendments made to it by SFAS No. 155)provides a broad exception for interest-only and principal-only stripsinitially resulting from the separation of rights to receive contractual cashflows 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 amendmentsmade by SFAS 155 , SFAS 140 , “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities,” permitted a qualifyingspecial-purpose entity (SPE) to hold only passive derivative financialinstruments pertaining to beneficial interests (other than another derivativefinancial instrument) issued or sold to parties other than the transferor. SFAS155 amends SFAS 140 to allow a qualifying SPE to hold a derivative instrumentpertaining to beneficial interests that itself is a derivative financialinstrument.

In March 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS NO.156”), which provides an approach to simplify 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 anentity to recognize a servicing asset or servicing liability each time itundertakes an obligation to service a financial asset by entering into aservicing contract in certain situations; (2) requires that a separatelyrecognized servicing asset or servicing liability be initially measured at fairvalue, 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 

11

----

subsequently measured atfair value in the balance sheet and additional disclosures for all separatelyrecognized servicing assets and servicing 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 Statementalso describes the manner in which it should be initially applied.  TheCompany does not believe that SFAS No. 156 will have a material impact on itsfinancial position, results of operations or cash flows.  As a result, wedo not believe the adoption of SFAS 156 has a material impact on the Company’sConsolidated Financial Statements.

In September 2006, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), whichdefines the fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements.  This statement iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  Earlyadoption is encouraged, provided that the registrant has not yet issuedfinancial statements for that fiscal year, including any financial statementsfor an interim period within that fiscal year.

In September 2006, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans” (“SFAS 158”), which improves financialreporting by requiring an employer to recognize the over or under funded statusof a defined benefit postretirement plan as an asset or liability in itsstatement of financial position and to recognize changes in that funded statusin the year in which the changes occur through comprehensive income of abusiness entity or changes in unrestricted net assets of a not-for-profit organization. This statement also improves financial reporting by requiring an employer tomeasure the funded status of a plan as of the date of its year end statement offinancial position, with limited exceptions.  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’Disclosures about Pensions and Other Postretirement Benefits”.  Upon theinitial application of this statement and subsequently, and employer shouldcontinue to apply the provisions in Statements, 87, 88, and 106 in measuringplan assets and benefit obligations as of the date of its statement of financialposition and in determining the amount of net periodic benefit cost.  Anemployer with publicly traded equity securities is required to initiallyrecognize the funded status of a defined benefit postretirement plan and toprovide the required disclosures as of the end of the fiscal year ending afterDecember 31, 2006.  An employer without publicly traded equity securitiesis required to recognize the funded status of a defined benefit postretirementplan and to provide the required disclosures as of the end of the fiscal yearending after June 15, 2007.  Early application of the recognition ormeasurement date provisions is encouraged; however, early application must befor all of an employer’s benefit plans.  Retrospective application of the Statementis not permitted.

In September 2006, theUnited States Securities and Exchange Commission (SEC) issued Staff AccountingBulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements.” This SABNo. 108 provides guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment. SAB No. 108 establishes an approach that requiresquantification of financial statement errors based on the effects of each ofthe Company’s balance sheet and statement of operations financial statementsand the related financial statement disclosures. The SAB No. 108 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.  The adoption of SAB 108 did not have amaterial impact on the Company’s results of operations and financial position.

In July 2006, the FASBissued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing aminimum probability threshold that a tax position must meet before a financialstatement benefit is recognized. The minimum threshold is defined in FIN 48 asa tax position, that based solely on its technical merits is more likely thannot to be sustained upon examination by the applicable taxing authority. Thetax benefit to be recognized is measured as the largest amount of benefit thatis greater than fifty percent likely of being realized upon ultimatesettlement. FIN 48 must be applied to all existing tax positions upon initialadoption. The cumulative effect of applying FIN 48 at adoption, if any, is tobe reported as an adjustment to opening retained earnings for the year of adoption.FIN 48 is effective for fiscal years beginning after December 15, 2006,although early adoption is permitted. The adoption of FIN 48 did not have a material impact on the Company’sresults of operations and financial position.

12

----

In October 2006, theEmerging Issues Task Force (EITF) issued EITF 06-3, How Taxes Collectedfrom Customers and Remitted to Governmental Authorities Should Be Presented inthe Income Statement (That is, Gross versus Net Presentation) to clarifydiversity in practice on the presentation of different types of taxes in thefinancial statements. The Task Force concluded that, for taxes within the scopeof the issue, a company may adopt a policy of presenting taxes either grosswithin revenue or net. That is, it may include charges to customers for taxeswithin revenues and the charge for the taxes from the taxing authority withincost of sales, or, alternatively, it may net the charge to the customer and thecharge from the taxing authority. If taxes subject to EITF 06-3 are significant,a company is required to disclose its accounting policy for presenting taxesand the amounts of such taxes that are recognized on a gross basis. Theguidance in this consensus is effective for the first interim reporting periodbeginning after December 15, 2006 (the first quarter of our fiscal year2007). The adoption of EITF 06-3 did not have a material impact on theCompany’s results of operations, financial position or cash flow.

In February 2007, theFASB issued Statement No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement No. 115* “ (“SFAS 159”).  Thisstandard amends FASB Statement No. 115, “*Accounting for Certain Investment in Debt and Equity Securities* ,”with respect to accounting for a transfer to the trading category for allentities with available-for-sale and trading securities electing the fair valueoption.  This standard allows companies to elect fair value accounting formany financial instruments and other items that currently are not required tobe accounted as such, allows different applications for electing the option fora single item or groups of items, and requires disclosures to facilitatecomparisons of similar assets and liabilities that are accounted for differentlyin relation to the fair value option.  SFAS 159 is effective for fiscalyears beginning after November 15, 2007. If elected, the implementation of FAS159 is not expected to have a material impact on the Company’s consolidatedfinancial statements.

**NOTE 10. Geographic Information**

The Company currently operates in one businesssegment.  All fixed assets are located inCompany facilities in the United States, Korea and Mexico. Net sales  by geographical area for the three and sixmonths ended June 30, 2007 and 2006 were:
|                 | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **      | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
| United States   |       | $                                | 5,435,998  |                           | $          | 3,241,614 |   | $ | 17,594,253 |   | $ | 4,962,316 |   |
| Central America |       | 20,323,908                       |       | 23,985,049                     |       | 31,184,242 |   | 43,360,261 |   |
| South America   |       | 32,500,795                       |       | 31,052,895                     |       | 67,885,816 |   | 64,084,070 |   |
| Total           |       | $                                | 58,260,701 |                           | $          | 58,279,558 |   | $ | 116,664,311 |   | $ | 112,406,647 |   |

 

**NOTE 11.  Commitments andContingencies**

*Securities Class Actions*

In the securities classaction, captioned *In Re: InfoSonics Corporation SecuritiesLitigation*, Lead Case No. 06 CV 1231, pending before Judge Moskowitzin the United States District Court for the Southern District of California,Plaintiffs filed a consolidated complaint on February 14, 2007 against theCompany and certain of its officers and directors.  The consolidated complaint alleges violationsof Section 10(b) of the Exchange Act and associated Rule 10b-5, Section 20(a)and Section 20A in connection with the Company’s restatement announced on June12, 2006 and allegedly false and/or misleading statements related to theCompany’s distribution of the VK Mobile phone. Plaintiffs seek a declaration that their action is a proper class actionpursuant to Rule 23(a) and (b)(3), unspecified damages, prejudgment andpost-judgment interest, attorneys’ fees, expert witness fees, other costs, andother unspecified relief.  The plaintiffspurport to represent a class of purchasers of the Company’s stock during the periodFebruary 6, 2006 to August 9, 2006.

The defendants filed amotion to dismiss the consolidated complaint on the grounds, among others, thatthe plaintiffs had failed to adequately plead violations of the securitieslaws.  After a hearing, the Court issuedan order on August 7, 2007 granting in part and denying in part defendants’motion.  To the extent plaintiffs’ claimsare based on an alleged delay in issuing a restatement for the first quarter2006, the Court’s order dismissed them without prejudice.  To the extent that plaintiffs’ claims arebased on various statements related to the VK Mobile phone, the Court’s orderdismissed selected portions of the claims (one with and the others withoutprejudice), and allowed other portions of the claims to stand.  The Court ordered plaintiffs to file anyamended complaint by September 10, 2007, and ordered defendants to file anymotion to dismiss such amended complaint by October 1, 2007.  At this time, discovery has not begun and notrial date has been set by the Court.

13

----

*Derivative Action*

In the derivative action,captioned *In Re InfoSonics Corporation Derivative Litigation*,Lead Case No. 06 CV 1336, pending before Judge Moskowitz in the United StatesDistrict Court for the Southern District of California, plaintiffs filed aconsolidated complaint on November 6, 2006 purportedly on behalf of the Companyagainst certain of its officers and directors, and the Company as a nominaldefendant.  The consolidated complaintalleges claims for violations of Section 14(a) of the Exchange Act, Sections25402 and 25403 of the California Corporations Code, disgorgement under theSarbanes-Oxley Act of 2002, breach of fiduciary duty, abuse of control, grossmismanagement, waste of corporate assets, unjust enrichment, rescission, aconstructive trust, and an accounting, in connection with the Company’srestatement of first quarter 2006 earnings and in connection with allegationsof wrongdoing with respect to granting, exercising, accounting and reporting ofthe stock 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.

Defendants filed a motionto dismiss the consolidated complaint on the grounds, among others, that theplaintiffs had failed to make a demand on the Company’s board of directors andto adequately allege their other purported claims.  The Court took this motion to dismiss undersubmission on April 27, 2007.  The twonon-resident director defendants also filed motions to dismiss based upon alack of personal jurisdiction in California. The Court took the non-resident director defendants’ motion to dismissunder submission on June 22, 2007.  Atthis time, the Court has not set a date for completion of discovery or trial.

We maybecome involved in certain other legal proceedings and claims which arise inthe normal course of business. Other than as described above, as of June 30,2007, we did not have any significant litigation outstanding.

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

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

This discussion and analysis offinancial condition and results of operations should be read in conjunctionwith the accompanying unaudited consolidated financial statements and condensednotes thereto included in this report and with our Annual Report on Form 10-Kfor the year ended December 31, 2006 (including our 2006 audited consolidatedfinancial statements and related notes thereto). InfoSonics Corporation’s(“InfoSonics” or the “Company”) discussion and analysis of financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States (“GAAP”). The preparation of financial statementsin conformity with GAAP requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosure of anycontingent liabilities as of and at the financial statement date, and reportedamounts of revenue and expenses during the reporting period. On an ongoingbasis we review our estimates and assumptions. Our estimates are based on ourhistorical experience and other assumptions that we believe to be reasonableunder the circumstances. Actual results are likely to differ from theseestimates under different assumptions or conditions, but we do not believe suchdifferences will materially affect our consolidated statement of operations,although they may. Our critical accounting policies, the policies we believeare most important to the presentation of our financial statements and requirethe most difficult, subjective and complex judgments, are outlined below in“—Critical Accounting Policies.’’  Allreferences to results of operations in this discussion are to results fromcontinuing operations, unless otherwise noted.

**Safe Harbor Statement**

The matters inthis report that are forward-looking statements, including, without limitation,statements about future revenues, sales levels, operating income and margins,wireless handset sales, stock-based compensation expense, gain (loss) in valueof derivatives, cost synergies, operating efficiencies, profitability, marketshare, and rates of return, are based on current management expectations thatinvolve certain risks and uncertainties these risks and uncertainties, in wholeor in part, could cause such expectations to fail to be achieved and have amaterial adverse effect on InfoSonics’ business, 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, 

14

----

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; (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 instituted in the past and continues toinstitute changes to our strategies, operations and processes to address risksand uncertainties and to mitigate impact on InfoSonics’ results of operationsand financial condition. However, no assurances can be given that InfoSonicswill be successful in these efforts. For a further discussion of significantfactors to consider concerning InfoSonics, see “Item 1A. Risk Factors” ofInfoSonics’ Annual Report on Form 10-K for the year ended December 31, 2006 and“Part II. Item 1A. Risk Factors” of this quarterly report and thequarterly report on Form 10-Q for the three months ended March 31, 2007. Inaddition, other risks or uncertainties may be detailed from time to time inInfoSonics’ future SEC filings.

**Overview**

We are one of thepremier distributors and providers of wireless handsets and accessories inLatin America and the United States. We provide end-to-end handset andwireless terminal solutions for carriers in both Latin America and the UnitedStates.   We distribute products ofseveral key original equipment manufacturers, including Samsung, Alcatel/TCL,VK Corporation, LG, Novatel and others. We also distribute semi-proprietary products under the Disney brand inLatin America, and are designing and distributing our recently announced proprietaryline of products under our own *verykoolTM*brand, which will include entry level, mid-tier and high-end products.

As an integralpart of our customers’ supply chain, we perform value added services andsolutions, including product approval and certification, light assembly,warehousing, logistics services (packing, shipping and delivery), marketingcampaigns, warranty services and end-user support. We provide these servicesfor wireless handset manufacturers in order to facilitate sales to carriers,agents, resellers, distributors, independent dealers and retailers in LatinAmerica and the United States. During 2006, we introduced a proprietary line ofhandsets and accessories under the*verykoolTM*brand and a semi-proprietary Disney branded handset for Latin America.

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.

Due toseasonal and other factors, our interim financial condition or operatingresults may not be indicative of fiscal year 2007 or other future financialcondition or operating results. Our financial condition and operating resultsare influenced by several seasonal and other factors, which may cause ourfinancial condition and operating results to fluctuate on a quarterly basis,including, but not limited to, the timing and introduction of new products byour suppliers and competitors, promotions and subsidies by network operators,technical and certification delays by industry bodies as well as the operators,purchasing patterns of customers, the timing of holidays, the introduction ofour proprietary *verykoolTM* products line and otherevents affecting consumer demand.

15

----

**Areas of Management Focus and PerformanceIndicators**

We focus on theneeds of our customers, developing and maintaining close relationships with manufacturers,expanding in and entering into new markets, and sourcing and developing new andinnovative products, while maintaining close attention to operationalefficiencies and costs. We intend to increase shipping volumes and improveefficiencies to enable higher levels of profitability and earnings growth.  We provide distribution and other servicesfor original equipment manufacturers, such as Samsung and LG, as well assemi-proprietary products, such as Disney branded products in Latin America,and our own proprietary line of *verykoolTM*handsets.  Performance indicators thatare key for the monitoring and management of our business include operating andnet income, cost of sales and gross margin percentage, operating expenses as apercent of revenues, and overall net sales growth as well as balances ofaccounts receivable and inventory. We make extensive use of our customizedinformation system to closely monitor all aspects of our business, includingcustomer relationship management, intelligent purchasing, inventory control, inventoryflow, line item margin control for every order, and weighted average cost andstatistical data for every product, customer and supplier. We believe a strongfocus on providing better service to customers leads to increased customersatisfaction and retention and potential increases in sales.

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 aJune 2007 report by Cowen and Company, overall worldwide wireless handset salesincreased in 2006 by approximately 21%, and are forecasted to increase 10% in2007 and 10% in 2008. The bulk of this growth, we believe, came from developingmarkets in which we do not currently operate, such as India and China. A rapiddecline in wireless handset sales growth could negatively impact our net sales.Excess supply conditions, as those experienced in Central America during thequarter ended March 31, 2007, can reduce the market prices of the products wesell and therefore affect our ability to generate net sales and gross profit athistorical levels and could affect the value of our inventory. Conversely,should manufacturers be unable to respond to an unanticipated increase indemand on a timely basis, we, along with others in our industry, couldexperience supply constraints that would affect our ability to deliverproducts. We are unable to quantify these effects, as it is difficult topredict future supply conditions and demand patterns which affect our abilityto meet customer demand or sell handsets at an acceptable gross profit.

**Company Specific Trends and Risks**

Our strategy incorporates overall market growthelements for each aspect of our business, which we hope will result incontinued growth.  During the first halfof 2007, we increased our inventory levels in anticipation and preparation forpotential future sales. Although we have incorporated growth into our strategy,there can be no assurances that this trend of increased sales will continue.

During the quarter ended June 30, 2007, we experienceda significant sequential increase in net sales in Central America accountingfor 35% of our total net sales, as compared to 19% for the quarter ended March31, 2007.  This increase was primarilythe result of the regional inventory levels returning to a more normalizedlevel enabling our sales efforts to return net sales to their historicalquarterly levels.  Our South Americaregion continued to show strong sales, accounting for 56% of our net sales inthe quarter ended June 30, 2007, after accounting for 61% of net sales for thequarter ended March 31, 2007.  Thisdecrease in the South America region is primarily due to increased sales inCentral America.  In the United States,we experienced a significant sequential decrease in net sales, accounting for9% of our total net sales, as compared to 21% for the quarter ended March 31,2007.  We believe our United Statescustomer base is in a transitional stage as regional carriers, including anInfoSonics customer, have entered into agreements to be acquired by AT&T Inc.and Verizon Wireless.  We are currentlyevaluating the potential impact of these announced acquistions and ouropportunities in the United States.

**Results of Operations**

***Three Months EndedJune 30, 2007 and 2006***

**Net Sales**

For the three monthsended June 30, 2007, our net sales of $58.3 million is comparable to our salesof $58.3 million for the same period of 2006. Handsets sold in the second quarter 2007 increased 16% as compared tothe second quarter of 2006; however, this increase was offset by a decrease inthe average selling price of 9%. The geographic mix of net sales shifted in thesecond quarter of 2007 as sales in the United States increased to 9% of netsales, as compared to 6% of net sales 

16

----

for the second quarter of 2006. Sales in Central America represented 35% of our total quarterly netsales in the quarter ended June 30, 2007 as compared to 41% in the quarterended June 30, 2006.  However, CentralAmerica net sales of $20.3 million for the quarter ended June 30, 2007, arecloser to the 2006 quarterly average of $20 million for this region.  Our South America region continued torepresent the majority of our business, accounting for 56% of our net sales inthe second quarter of 2007 as compared to 53% of our net sales for the secondquarter of 2006.  This regional shift innet sales was the result of two primary factors.  The Central America region, which wasimpacted during the first quarter of 2007 due to excess inventory in thechannel, has seen this excess reduced, thereby opening sales channels, enablingan 87% sequential increase in sales to $20.3 million for the second quarter of2007.  The United States region, whichexperienced a year-over-year increase to 9% of net sales for the second quarterof 2007, suffered a sequential decrease from the first quarter of 2007.  Our customer base in the United States wasnegatively impacted by a pending acquisition of one of our customers by alarger carrier announced at the end of the second quarter of 2007, which webelieve negatively impacted that customer’s buying patterns during thequarter.  We continued our sales andmarketing efforts in Central and South America, and in Central America, wherethe channel inventory returned to more normalized levels, we were able toachieve incremental sales to existing customers.  In South America, our continued effortsenabled sales to new customers and additional sales to existing customers.  This region continues to experience anoverall increase in handset sales.
|                                                           | ** ** | **Three Months ended June 30,**                                                          | ** ** | **Increase/** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                | ** ** | **2007**                                                                                                | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** |
| ** **                                                | ** ** | **(Dollar amounts in thousands,  except per share amounts)  (unaudited)** | ** ** | ** **    | ** ** |
| Net sales                                                 |       | $                                                                                                       | 58,261     |          | $          | 58,280 |   | 0 | % |   |
| Gross profit                                              |       | 3,197                                                                                                   |       | 4,332         |       | (26 | )% |   |
| Net income  (loss)                                        |       | (447                                                                                                    | )          | 126           |       | (451 | )% |   |
|                                                      |       |                                                                                                    |       |          |       |   |   |   |
| Diluted earnings (loss)  per share from net income (loss) |       | $                                                                                                       | (0.03      | )             | $          | 0.01 |   | (400 | )% |   |

 

**Net sales by geographic region**
|                 | ** ** | **Three Months ended June 30,**                | ** ** | **Increase** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| United States   |       | $                                                             | 5,436      |         | $          | 3,242 |   | 68 | % |   |
| Central America |       | 20,324                                                        |       | 23,985       |       | (15 | )% |   |
| South America   |       | 32,501                                                        |       | 31,053       |       | 5 | % |   |
| Total           |       | $                                                             | 58,261     |         | $          | 58,280 |   | 0 | % |   |

 

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

For the quarter ended June 30, 2007, cost of sales was$55.1 million, or 94.5% of net sales, compared with $53.9 million, or 92.6% ofnet sales, for the quarter ended June 30, 2006. The increase in our total costof sales was primarily the result of product mix, as during the second quarterof 2007 the mix was more weighted towards lower margin products.  One of our manufacturing partners enteredinto the low-tier handset range and those products had less margin opportunitythan mid-tier and high-end handsets. Low-tier handset business impacted the margin opportunity primarily inCentral America.  Our gross margincontinues to be impacted by the change of product and regional mix of oursales, as different products and different regions can have varying margins.

For the quarter ended June 30, 2007, our gross profitdecreased to $3.2 million from $4.3 million, compared with the same quarterlast year, a decrease of 26%. This decrease in gross profit was primarily theresult of product mix and the lower margin products introduced to the market byone of our manufacturing partners, impacting gross margin potential.

17

----

** **
|               | ** ** | **Three Months Ended June 30,**                | ** ** | **Increase** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales     |       | $                                                             | 58,261     |         | $          | 58,280 |   | 0 | % |   |
| Cost of sales |       | $                                                             | 55,064     |         | $          | 53,948 |   | 2 | % |   |
| Gross profit  |       | $                                                             | 3,197      |         | $          | 4,332 |   | (26 | )% |   |
| Gross margin  |       | 5.5                                                           | %          | 7.4          | %          | (26 | )% |   |

 

**OperatingExpenses and Operating Income (Loss) from Continuing Operations**

For the quarter ended June 30, 2007, operatingexpenses decreased 6%, compared with the same quarter last year. As apercentage of net sales, operating expenses were 6.5% in the quarter ended June30, 2007, compared with 6.9% in the same quarter last year.  During the quarter ended June 30, 2007, weincurred $97,000, or 0.2% of net sales, of non-cash expense relating to stock options,compared to $1.2 million, or 2.0% of net sales, for the quarter ended June 30,2006.  The increase, excluding non-cashexpense, was primarily the result of investments in facilities, marketing,engineering and product and market development, predominantly attributable toour proprietary *verykoolTM* product line.    We believe such investments are necessaryto help build a solid foundation for our business including our *verykoolTM*products for potential future growth.

For the quarter ended June 30, 2007, our operatingloss from continuing operations was $586,000, including the non-cash expense of$97,000 relatingto stock options, compared with operating income from continuingoperations of $312,000, including the non-cash expense of $1.2 million relatingto stock options, for the quarter ended June 30, 2006, a decrease of 288%. As apercentage of net sales, operating loss from continuing operations was 1.0% forthe quarter ended June 30, 2007, compared to income of 0.5% for the quarterended June 30, 2006. The decrease in operating income from continuingoperations was a result of the increase in operating expenses discussed above,in addition to the decrease in gross margin.

**Operating Expenses**
|                          | ** ** | **Three Months Ended June 30,**                | ** ** | **Increase** | ** ** |
|--------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **               | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **               | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales                |       | $                                                             | 58,261     |         | $          | 58,280 |   | 0 | % |   |
| Operating  expenses      |       | $                                                             | 3,783      |         | $          | 4,020 |   | (6 | )% |   |
| Percentage of  net sales |       | 6.5                                                           | %          | 6.9          | %          | (6 | )% |   |

 

**OperatingIncome (Loss) from Continuing Operations**
|                                                     | ** ** | **Three Months Ended June 30,**                | ** ** | **Increase** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **                                          | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **                                          | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales                                           |       | $                                                             | 58,261     |         | $          | 58,280 |   | 0 | % |   |
| Operating income  (loss) from continuing operations |       | $                                                             | (586       | )            | $          | 312 |   | (288 | )% |   |
| Percentage of net sales                             |       | (1.0                                                          | )%         | 0.5          | %          | (300 | )% |   |

 

18

----

**Other Income (Expense)**

During the quarter ended June 30, 2007,we incurred  $216,000 of interestexpense, compared to interest expense of $119,000 for the same period lastyear.  We expect to regularly utilizelarger amounts on our revolving line of credit, which will increase ourinterest expense in future periods.

**OtherIncome**
|                                | ** ** | **Three Months Ended June 30,**         | ** ** | **Increase** | ** ** |
|--------------------------------|------------|--------------------------------------------------------|------------|--------------|------------|
| ** **                     | ** ** | **2007**                                               | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **                     | ** ** | **(Dollar amounts in thousands) ** | ** ** | ** **   | ** ** |
| ** **                     | ** ** | **(unaudited)**                                        | ** ** | ** **   | ** ** |
| Other Income (Expense),  total |       | $                                                      | (216       | )            | $          | (119 | ) | 81 | % |   |
|                                |            |                                                        |            |              |            |  |  |  |  |  |

 

**NetIncome (Loss)**

During the quarter ended June 30, 2007,our net loss was $447,000, compared to net income of $127,000 in the sameperiod last year.  This loss wasprimarily related to the factors discussed above, including our reduced grossmargin opportunities on low-tier products and increased operational expensesand investments relating to primarily our proprietary line of *verykoolTM* products. The second quarter of 2006 included non-cash expense related to stockoptions of $1.2 million, as compared to $97,000 in the second quarter of 2007.

***Six Months Ended June 30, 2007 and 2006***

**Net Sales**

For the six monthsended June 30, 2007, our net sales of $116.7 million was comparable to our netsales of $112.4 million for the six months ended June 30, 2006.  Handsets sold during the six months endedJune 30, 2007 increased 14% as compared to the same period in 2006; however,this increase was offset by a decrease in the average selling price of 7%. Thegeographic mix of net sales shifted for the six months ended June 30, 2007, ascompared to the same period of 2006. Sales in the United States increased to 15% of net sales for the firstsix months in 2007, as compared to 4% of net sales for the same period in2006.  In contrast, our net sales inCentral America decreased to 26% of our net sales for the first six months of2007, as compared to 39% of net sales for the same period 2006.  Our South America region continued torepresent the majority of our business, accounting for 59% of our net sales for2007, as compared to 57% for 2006.  Thisregional shift in net sales was the result of two primary factors.  Product availability in the United Statesincreased during 2007, enabling us to sell more products to our customers.  However, in contrast, the Central Americaregion had excess inventory in the channel during the first quarter of 2007,reducing sales and gross margin.  Thechannel inventory began to return to normalized levels during the secondquarter of 2007.  In South America, ourefforts enabled sales to new customers and additional sales to existingcustomers.  This region continues toexperience a general increase in handset sales, and we have opened accounts in newSouth American countries.  For the sixmonths ended June 30, 2007, we incurred a net loss of $1.0 million, or $0.07per diluted share, as compared to net income of $1.3 million, or $0.08 perdiluted share, in the six months ended June 30, 2006.
|                                                          | ** ** | **Six Months ended June 30,**                                                       | ** ** | **Increase** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                               | ** ** | **2007**                                                                                                | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **                                               | ** ** | **(Dollar amounts in thousands,  except per share amounts)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales                                                |       | $                                                                                                       | 116,664    |         | $          | 112,407 |   | 4 | % |   |
| Gross profit                                             |       | 6,346                                                                                                   |       | 8,512        |       | (25 | )% |   |
| Net income (loss)                                        |       | (1,005                                                                                                  | )          | 1,301        |       | (177 | )% |   |
|                                                     |       |                                                                                                    |       |         |       |   |   |   |
| Diluted earnings (loss) per share from net income (loss) |       | $                                                                                                       | (0.07      | )            | $          | 0.08 |   | (188 | )% |   |

**Net sales by geographic region**
|                 | ** ** | **Six Months ended June 30,**             | ** ** | **Increase** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| United States   |       | $                                                             | 17,594     |         | $          | 4,963 |   | 255 | % |   |
| Central America |       | 31,184                                                        |       | 43,360       |       | (28 | )% |   |
| South America   |       | 67,886                                                        |       | 64,084       |       | 6 | % |   |
| Total           |       | $                                                             | 116,664    |         | $          | 112,407 |   | 4 | % |   |

 

19

----

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

For the six months ended June 30, 2007, cost of saleswas $110.3 million, or 94.6% of net sales, compared with $103.9 million, or92.4% of net sales, for the six months ended June 30, 2006. The increase in ourtotal cost of sales was a direct result of many factors including our increasedsales levels on a consolidated basis, as well as increased product mix ofhigher cost products.  In the CentralAmerica region, during the first quarter of 2007, a significant decrease inhandset demand as a result of industry-wide excess inventory in the channel forthat particular region, also impacted our ability to sell higher-marginproducts.  During the second quarter of2007, we began to see channel inventory returning to normalized levels in CentralAmerica.  Our gross margin continues tobe impacted by the change of product and regional mix of our sales, asdifferent products and different regions can have varying margins, and in thesecond quarter of 2007 gross margins was negatively impacted as one of ourmanufacturers entered into the low-tier handset range.

For the six months ended June 30, 2007, our grossprofit decreased to $6.3 million from $8.5 million, compared with the sameperiod last year, a decrease of 25%. The decrease in gross profit was primarilythe result of increased sales of low-tier products having lower margins and inventorylevels in Central America during the period. These factors impacted gross marginpotential in addition to decreasing the opportunity for sales of higher marginproducts.
|               | ** ** | **Six Months Ended June 30,**             | ** ** | **Increase** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales     |       | $                                                             | 116,664    |         | $          | 112,407 |   | 4 | % |   |
| Cost of sales |       | $                                                             | 110,319    |         | $          | 103,895 |   | 6 | % |   |
| Gross margin  |       | 5.4                                                           | %          | 7.6          | %          | (29 | )% |   |
| Gross profit  |       | $                                                             | 6,346      |         | $          | 8,512 |   | (25 | )% |   |

 

**OperatingExpenses and Operating Income (Loss) from Continuing Operations**

For the six months ended June 30, 2007, operatingexpenses increased 10%, compared to the six months ended June 30, 2006. As apercentage of net sales, operating expenses were 6.7% for the six months endedJune 30, 2007, as compared to 6.3% for the six months ended June 30, 2006.  During the six months ended June 30, 2007, weincurred non-cash expense relating to stock options of $195,000, or 0.2% ofnet sales, compared to $1.2 million, or 1.1% of net sales for the six monthsended June 30, 2006.  This increase wasprimarily the result of investments in facilities, marketing, engineering andproduct and market development, predominantly attributable to our proprietary *verykoolTM* product line.   We believe such investments are necessary to help build a solidfoundation for our business including the *verykoolTM*productsfor potential future growth.

For the six months ended June 30, 2007, our operatingloss from continuing operations was $1.5 million, including the non-cashexpense of $195,000 relatingto stock options, compared with income of $1.4 million for the sixmonths ended June 30, 2006, a decrease of 205%. As a percentage of net sales,operating loss from continuing operations was 1.3% for the six months endedJune 30, 2007, compared to income of 1.2% for the six months ended June 30,2006. The decrease in operating income from continuing operations was a resultof the increase in operating expenses discussed above, in addition to thedecrease in gross margin.

**Operating Expenses**
|                         | ** ** | **Six Months Ended June 30,**             | ** ** | **Increase** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                             | 116,664    |         | $          | 112,407 |   | 4 | % |   |
| Operating expenses      |       | $                                                             | 7,814      |         | $          | 7,116 |   | 10 | % |   |
| Percentage of net sales |       | 6.7                                                           | %          | 6.3          | %          | 6 | % |   |

 

20

----

**OperatingIncome from Continuing Operations**
|                                                     | ** ** | **Six Months Ended June 30,**             | ** ** | **Increase** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **                                          | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **                                          | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales                                           |       | $                                                             | 116,664    |         | $          | 112,407 |   | 4 | % |   |
| Operating income  (loss) from continuing operations |       | $                                                             | (1,468     | )            | $          | 1,395 |   | (205 | )% |   |
| Percentage of net sales                             |       | (1.3                                                          | )%         | 1.2          | %          | (208 | )% |   |

 

**Other Income (Expense)**

During the six months ended June 30,2007, we incurred $271,000 of interest expense, compared to interest expense of$200,000 for the same period last year. We expect to regularly utilize larger amounts on our revolving line ofcredit, which will increase our interest expense in future periods.  During the six months ended June 30, 2006, wehad income from a non-cash change in fair value of derivative liabilityrelating to January 2006 financing-related warrants of $399,000. Thisderivative liability was classified as equity in February 2006 in accordancewith SFAS 133, when our registration statement registering the common stockunderlying the warrants was declared effective by the SEC.
|                                               | ** ** | **Six Months Ended June 30,**             | ** ** | **Increase** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **                                    | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** |
| ** **                                    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Change in fair value of  derivative liability |       | $                                                             | —     |         | $          | 399 |   | (100 | )% |   |
| Interest expense                              |       | (271                                                          | )          | (200         | )          | 35 | % |   |
| Other Income (expense) total                  |       | $                                                             | (271       | )            | $          | 199 |   | 236 | % |   |

 

**NetIncome (Loss)**

During the sixmonths ended June 30, 2007, our net loss was $1.0 million, compared to netincome of $1.3 million in the same period last year.  This loss was primarily related to thefactors discussed above, including our decreased sales in the Central Americaregion in the first quarter in addition to our reduced gross margin andincreased operational expenses and investments relating to the potential futureof our proprietary line of *verykoolTM*products. The six months ended June 30, 2006 included non-cash expense relatedto stock options of $1.2 million, as compared to $195,000 in the first half of2007.  In addition, the six months endedJune 30, 2006 included non-cash income from a derivative liability of $399,000as compared to no such income in 2007. This non-cash income was related to warrants issued in conjunction witha fund raising completed during the six months ended June 30, 2006.

**Financial Condition, Liquidity and CapitalResources**

**Cash Used in Operating Activities**

At June 30, 2007, we had $13.0 million in cash. During the six months endedJune 30, 2007, we continued to leverage our bank and vendor lines of credit tofund our growth. The net cash used by operating activities was $10.0 millionfor the six months ended June 30, 2007, which resulted primarily from increasedinventory levels. The $10.9 million increase in inventory was increased by a$0.8 million increase in prepaid inventory, which was part of a net increase ofinventory during the six months ended June 30, 2007.  This increase was partially attributable to thebuild-up of *verykoolTM* inventory in anticipation ofsales for the second half of 2007. Accounts payable at June 30, 2007 increased$3.8 million, compared to December 31, 2006. In addition, this increase****was related to our ability to negotiateand utilize our vendors lines of credit during the six months ended June 30,2007, which was used for increased inventory levels generally.

21

----

**Days of Sales Outstanding**

Days of sales outstanding (theaverage number of days it takes to collect revenue after a sale is made) atJune 30, 2007 were 65 days, compared with 62 days at December 31, 2006.  This increase was due to customers takingslightly longer than their provided terms to make payments.  Normal payment terms require our customers topay on a net 30-day or net 60-day basis depending on the region. We areconstantly working with our customers to reduce our days of sales outstanding.The extension of net 60-day terms was required to remain competitive in severalof the regions we currently operate, most notably in Central and South America.In an effort to penetrate new customers and or new markets, we may offer termsbeyond our normal terms.

**Cash Used in Investing Activities**

The net cash used in investingactivities was $1.3 million for the six months ended June 30, 2007, comparedwith $295,000 for the six months ended June 30, 2006. This use of cash isprimarily the result of our investment in tooling and molds for our proprietary*verykoolTM* products.

**Net Cash used in Financing Activities**

The net cash used in financingactivities for the six months ended June 30, 2007 of $6.0 million was primarilythe result of borrowings on our bank line of credit and offset by approximately$263,000 from the exercise of employee stock options.

**Working Capital**

Our net working capital at June 30,2007 was $34.1 million, compared with $36.7 million at December 31, 2006. Thisdecrease was primarily due to our increase in accounts payable and inventoryfor the six months ended June 30, 2007, partially offset by the decrease in ourcash balance and decreased borrowings from our line of credit.

**Borrowings**

The Company has a line of creditfrom Wells Fargo HSBC Trade Bank N.A., which provides for advances not toexceed 80% of eligible domestic accounts receivable and up to 85% offoreign-insured accounts receivable (depending on the country of the debtor),up to a maximum of $30,000,000. As of June 30, 2007, the majority of our debtwas based on foreign-insured accounts receivable.

Interest is payable on a monthlybasis (i) at Wells Fargo’s prime rate minus 0.25% (8.25% at June 30, 2007) or(ii) at the one-month LIBOR plus 1.50% (5.32% at June 30, 2007). The interestrate is floating at Wells Fargo’s prime rate or is at LIBOR plus 1.5% if thedebt is a fixed amount drawn upon.  Theline of credit is collateralized by substantially all of the assets of theCompany, and expires October 1, 2008. In addition to reporting and othernon-financial covenants, the line of credit contains certain financial covenantswhich require the Company to maintain a tangible net worth of not less than$30,000,000 plus 50% of net profit after tax from January 1, 2007, a pre-taxprofit of not less than $1 on a rolling four quarter basis, a quick ratio ofnot less than one-to-one, a debt-to-net worth ratio of not greater thantwo-to-one, and an annual net income after taxes of at least $1. Managementbelieves the Company was in compliance with these covenants at June 30, 2007.

We have no other notes payable.

At June 30,2007 and December 31, 2006, the amounts drawn against the line of credit were$19,436,000 and $25,648,614, respectively. Credit lines have been important parts of growing our business,and market changes affecting accounts receivable could diminish the borrowingbase of available funds. At June 30, 2007 and December 31, 2006, advances wereat 67% and 84% of the available borrowing base.

***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.

22

----

*RevenueRecognition and Allowance for Returns*

Revenues for wirelesshandset and accessory sales are recognized when (i) shipment of theproducts to customers has occurred, (ii) when collection of theoutstanding receivables is probable and (iii) the final price of theproducts are determined. Sales are recorded net of discounts, rebates, cooperativearrangements (marketing, training and promotional funds), returns, andallowances.  Consideration is given onselect sales for cooperative arrangements related to market development,training and special promotions, usually agreed upon in advance. The amountgiven is generally in the form of a credit memo, which is applied as areduction of the sale price and same amount is recorded as a current liability.Expenditures made pursuant to the agreed upon activity reduce this liability.To the extent that the Company incurs costs in excess of the establishedcooperative fund, the Company recognizes the amount as a selling or marketingexpense. As part of the sales process, the Company may perform certain valueadded services such as programming, software loading and quality assurancetesting. These value added services are considered an ancillary component ofthe sales process and amounts attributable to these processes are included inthe unit cost to the customer. Furthermore, these value added services arerelated to services prior to the shipment of the products, and no value addedservices are provided after delivery of the products.  The Company recognizes a reserve against therelated receivables estimates for product returns based on historicalexperience and other judgmental factors, evaluates these estimates on anon-going basis and adjusts its estimates each period based on actual productreturn activity. The Company recognizes freight costs billed to its customersin revenue and actual freight costs incurred as a component of cost of revenue.

*Allowance forDoubtful Accounts*

Credit evaluations are undertaken for all major salestransactions 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. Customer creditworthiness and economicconditions may change, including increasing the risk of collectibility andsales returns, and may require additional provisions, which could negativelyimpact 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 three 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 three months. However, because we need to place non-cancelableorders with significant lead time and because it is difficult to estimateproduct demand, we sometimes build inventories in excess of demand for theapplicable future periods. If this occurs, we provide a reserve, which may havea negative impact on our reported results of operations and financialcondition.

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

The primary objective of the following information isto provide forward-looking quantitative and qualitative information about ourpotential exposure to market risks. The term “market risk” for us refers to therisk of loss arising from adverse changes in interest rates and various foreigncurrencies. The disclosures are not meant to be precise indicators of expectedfuture losses, but rather indicators of reasonably possible losses. Thisforward-looking information provides indicators of how we view and manage ourongoing market risk exposures.

**Interest Rate**

We are exposed to market risk from changes in interestrates on our outstanding revolving line of credit. At June 30, 2007, we had$19.4 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 June 30, 2007) or LIBOR plus 1.50%(5.32% at June 30, 2007). For every 1% increase in Wells Fargo’s prime rate orone-month LIBOR, our interest expense increases by $194,000 annually assuming$19.4 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.

23

----

**Market Risk**

Substantial portions of our revenue and expenses aretransacted in markets outside the United States; however, all sales transactionsand accounts receivable are denominated in U.S. dollars. As a result of ourinternational sales, our future operating results could be adversely affectedby a variety of factors, including changes in specific countries’ political,economic or regulatory conditions, and trade protection measures.  Our market risk management includes anaccounts receivable insurance policy for both our domestic and foreignsales.  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 six months ended June 30, 2007.   Please see ConsolidatedStatement of Comprehensive Operations

**Item 4. Controls and Procedures**

**Disclosure Controls**

Pursuant to Rule13a-15(e) and 15d-15(e) under the Exchange Act, an evaluation was performedunder the supervision and with the participation of the Company’s management,including the Chief Executive Officer and President and the Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport.  Based on the evaluation, theChief Executive Officer and President and the Chief Financial Officer,concluded that the Company’s disclosure controls and procedures were effectiveas of the end of the 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 June 30, 2007, that have materially affected or which arereasonably 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 at June 30, 2007 is less than $75 million) for thefiscal year 2006; accordingly, the internal controls certification andattestation requirements of Section 404 of the Sarbanes-Oxley act will not beapplicable to the Company until the fiscal year ended December 31, 2007.  Notwithstanding the fact that these internalcontrol requirements are not applicable to the Company at this time, the Companyhas been reviewing its internal control procedures and it has retained anoutside firm to assist in this process.

**PART II. OTHERINFORMATION**

**Item 1. Legal Proceedings**

*Securities Class Actions*

In the securities classaction, captioned *In Re: InfoSonics Corporation SecuritiesLitigation*, Lead Case No. 06 CV 1231, pending before Judge Moskowitzin the United States District Court for the Southern District of California,Plaintiffs filed a consolidated complaint on February 14, 2007 against theCompany and certain of its officers and directors.  The consolidated complaint alleges violationsof Section 10(b) of the Exchange Act and associated Rule 10b-5, Section 20(a)and Section 20A in connection with the Company’s restatement announced on June12, 2006 and allegedly false and/or misleading statements related to theCompany’s distribution of the VK Mobile phone. Plaintiffs seek a declaration that their action is a proper class actionpursuant to Rule 23(a) and (b)(3), unspecified damages, prejudgment andpost-judgment interest, attorneys’ fees, expert witness fees, other costs, andother unspecified relief.  The plaintiffspurport to represent a class of purchasers of the Company’s stock during theperiod February 6, 2006 to August 9, 2006.

The defendants filed amotion to dismiss the consolidated complaint on the grounds, among others, thatthe plaintiffs had failed to adequately plead violations of the securitieslaws.  After a hearing, the Court issuedan order on August 7, 2007 granting in part and denying in part defendants’motion.  To the extent plaintiffs’ claimsare based on an alleged delay in 

24

----

issuing a restatement forthe first quarter 2006, the Court’s order dismissed them withoutprejudice.  To the extent that plaintiffs’claims are based on various statements related to the VK Mobile phone, theCourt’s order dismissed selected portions of the claims (one with and theothers without prejudice), and allowed other portions of the claims tostand.  The Court ordered plaintiffs tofile any amended complaint by September 10, 2007, and ordered defendants tofile any motion to dismiss such amended complaint by October 1, 2007.  At this time, discovery has not begun and notrial date has been set by the Court.

*Derivative Action*

In the derivative action,captioned *In Re InfoSonics Corporation Derivative Litigation*,Lead Case No. 06 CV 1336, pending before Judge Moskowitz in the United StatesDistrict Court for the Southern District of California, plaintiffs filed aconsolidated complaint on November 6, 2006 purportedly on behalf of the Companyagainst certain of its officers and directors, and the Company as a nominaldefendant.  The consolidated complaintalleges claims for violations of Section 14(a) of the Exchange Act, Sections25402 and 25403 of the California Corporations Code, disgorgement under theSarbanes-Oxley Act of 2002, breach of fiduciary duty, abuse of control, grossmismanagement, waste of corporate assets, unjust enrichment, rescission, aconstructive trust, and an accounting, in connection with the Company’srestatement of first quarter 2006 earnings and in connection with allegationsof wrongdoing with respect to granting, exercising, accounting and reporting ofthe stock 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.

Defendants filed a motionto dismiss the consolidated complaint on the grounds, among others, that theplaintiffs had failed to make a demand on the Company’s board of directors andto adequately allege their other purported claims.  The Court took this motion to dismiss undersubmission on April 27, 2007.  The twonon-resident director defendants also filed motions to dismiss based upon alack of personal jurisdiction in California. The Court took the non-resident director defendants’ motion to dismissunder submission on June 22, 2007.  Atthis time, the Court has not set a date for completion of discovery or trial.

We may become involved in certainother legal proceedings and claims which arise in the normal course ofbusiness. Other than as described above, as of June 30, 2007, we did not haveany 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, 2006 and in ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2007, which couldmaterially affect our business, financial condition or operating results. Therisk factors and uncertainties described in our Annual Report on Form 10-K,this report and First Quarter report on Form 10-Q are not the only risks anduncertainties facing us. Additional risks and uncertainties not currently knownto us or that we currently deem to be immaterial also may materially affect ourbusiness, financial condition or operating results.  Except as set forth below, there have been nomaterial changes to the risk factors included in our Annual Report on Form10-K, as updated by the disclosures in our First Quarter Report on Form 10-Qduring the period covered by this report.

***Wemay not succeed in our introduction of proprietary products.***

Theintroduction of new products such as our proprietary *verykool*TM line may depress sales of existing productsand may not be well received by our carrier customers and consumers.  Failure to adequately carry out our productmarketing, sales and delivery strategy may result in significant inventoryobsolescence.

***Wecould lose customers or orders as a result of consolidation in the wirelesstelecommunications carrier industry.***

Therehas been significant consolidation in the wireless industry, particularly inthe U.S. Rural Service Area market, which has caused extreme price competitionand reduced our number of potential customers. Future consolidations could further erode our potential markets.  This could also lead to fluctuations in ourquarterly results and carrying value of our inventory.  These consolidated entities may also orderfewer products from us or elect to no longer do business with us or demandpricing changes in order to compete.

***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 anddistributors. We depend on these suppliers to provide us with adequateinventories of currently popular brand name products on a timely basis and onfavorable pricing and other terms, as well as on our suppliers’ quantity andfinancial stability. For the quarter ended June 30,2007, three suppliers accounted for 56%, 23% and 11%, respectively, of ourtotal cost of sales.  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 with productson favorable terms may severely diminish our ability to obtain and deliverproducts to our customers on a timely and competitive basis. If we lose any ofour 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 and financial conditions.

25

----

***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 four largest customers in the quarter endedJune 30, 2007 represented 25%, 14%, 12% and 12% of our net sales.  These customers are carriers in Latin 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.

***Approximately 91% and 85% of our revenuesduring the three and six months ended June 30, 2007, respectively, were generatedoutside of the United States in countries that may have volatile currencies orother 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 $19.4 million at June 30, 2007 and $25.6million at December 31, 2006 in the form of a bank line of credit of up to $30million based on a borrowing base, which is based on a percentage of eligibleaccounts receivable.Any significant decrease in our level of eligible accounts receivable willreduce our ability to borrow additional funds to adequately finance ouroperations and expansion strategies. If we violate our loan covenants, defaulton our obligations or become subject to a change of control, our indebtednesswould become immediately due and payable. The terms of our credit facility restrictus from incurring additional indebtedness, which could limit our ability toexpand our operations. We are also subject to negative covenants that, amongother things, limit our ability to sell certain assets and make certainpayments, including, but not limited to, dividends, repurchases of common stockand other payments outside the normal course of business, as well asprohibiting us from merging or consolidating with another corporation orselling all or substantially all of our assets.

***We depend onthird parties to manufacture our proprietary verykoolTM products that wedistribute and, accordingly, rely on their quality control procedures, whileassuming the inventory risk associated with those products.***

Product manufacturerstypically provide no warranties on the proprietary products directly to the endconsumer or to us, therefore we are solely responsible for such warranty to theend consumer. If a product we distribute for a manufacturer has quality orperformance problems, our ability to provide satisfactory products to ourcustomers could be disrupted and our reputation could be impaired.  In addition as the *verykoolTM*products are manufactured exclusively for us, we are burdened with carrying theinventory and there can be no assurance that we will be able to sell thesedevices before payment is due and at prices above our cost. Either of theserisks could have a negative effect on our operations, condition and futureliquidity.

26

----

**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**

On June 4, 2007, weheld our 2007 Annual Meeting of Stockholders. At that meeting, our stockholders took the following actions on thefollowing proposals by the vote of shares indicated:

(a)           The election of the followingdirectors to serve on our Board of Directors, each director to serve until thenext annual meeting of stockholders or until their respective successor iselected and qualified:
| **Name**          | ** ** | **Votes Cast For** | ** ** | **Votes Against** | ** ** | **Votes Withheld** | ** ** |
|-------------------|------------|------------------------------|------------|------------------------|------------|-------------------------|------------|
| Joseph Ram        |       | 11,665,816                   |       | —                 |       | 425,215                 |       |
| Abraham G. Rosler |       | 11,664,627                   |       | —                 |       | 426,404                 |       |
| Randall P. Marx   |       | 11,665,307                   |       | —                 |       | 425,724                 |       |
| Robert S. Picow   |       | 11,665,407                   |       | —                 |       | 425,624                 |       |
| Kirk A. Waldron   |       | 11,301,092                   |       | —                 |       | 789,939                 |       |

 

(b)           The ratification of the employment ofSinger Lewak Greenbaum & Goldstein LLP as our independent registeredpublic accounting firm for the fiscal year ending December 31, 2007:
| For: 11,901,092 |   | Against: 154,320 |   | Abstain: 35,619 |   | Not Voted: 0 |
|-----------------|--------|------------------|--------|-----------------|--------|--------------|

** **

**Item 5.    Other Information**

None.

**Item 6.****   ****Exhibits**
| Exhibit Number | ** ** | **Description of Exhibit**                                                                                                                                                    |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 (*)                      |

 

 

----

(*)  Filed herewith.

27

----

**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:  | August  14, 2007 |       | By:                         | /s/  Joseph  Ram |   |
|   |             |       |                        | Joseph  Ram |
|   |             |       |                        | Chief  Executive Officer and President |
|   |             |       |                        |   |
|   |             |       |                        |   |
| Date:  | August  14, 2007 |       | By:                         | /s/  Jeffrey  Klausner |   |
|   |             |       |                        | Jeffrey  Klausner |
|   |             |       |                        | Chief  Financial Officer |
|        |                  |            |                             |  |  |  |

 

28

----