Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10- Q**

 

**x********QUARTERLY REPORT UNDERSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934.**

** **

**For the quarterly period ended September 30,2008**

** **

**OR**

** **

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom           to           **

 

**Commission File Number - 001-32217**

 

**InfoSonicsCorporation**

(Exact name of registrant as specified inits charter)

 

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

 

**4350 Executive Drive Suite #100 San Diego, CA 92121**

(Address of principal executive officesincluding zip code)

 

**(858) 373-1600**

(Registrant’s telephonenumber, including area code)

 

**Not Applicable**

(Former Name or Former Address, if ChangedSince Last Report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe 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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x (Do not check if a smaller reporting  company) |   | Smaller reporting company o |
|--------------------------------|--------|--------------------------|--------|-----------------------------------------------------------------------------|--------|----------------------------------|

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

Yes  o   No  x

 

As of November 14, 2008, theRegistrant had 15,010,808 shares outstanding of its $.001 par value commonstock.

 

 

 

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**InfoSonics Corporation and Subsidiaries**

 

**Quarterly Report on Form 10-Q For The Period Ended September 30,2008**

 

**Table of Contents**

 
| **PART I.  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |   |
| Item 1.                                 | Financial Statements | 3 |
|                                    |   |   |
| ·                                  | Consolidated Balance Sheets as of  September 30, 2008 (unaudited) and December 31, 2007 | 3 |
|                                    |   |   |
| ·                                  | Consolidated Statements of Operations for  the three and nine months ended September 30, 2008 and 2007 (unaudited) | 4 |
|                                    |   |   |
| ·                                  | Consolidated Statements of Comprehensive  Operations for the three and nine months ended September 30, 2008 and  2007 (unaudited) | 5 |
|                                    |   |   |
| ·                                  | Consolidated Statements of Cash Flows for  the nine months ended September 30, 2008 and 2007 (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 | 24 |
|                                    |   |   |
| Item 4T.                                | Controls and Procedures | 25 |
|                                    |   |   |
| **PART II. OTHER INFORMATION**     |
|                                    |   |   |
| Item 1.                                 | Legal Proceedings | 25 |
|                                    |   |   |
| Item 1A.                                | Risk Factors | 26 |
|                                    |   |   |
| Item 2.                                 | Unregistered Sales of Equity Securities and  Use of Proceeds | 30 |
|                                    |   |   |
| Item 3.                                 | Defaults Upon Senior Securities | 30 |
|                                    |   |   |
| Item 4.                                 | Submission of Matters to a Vote of Security  Holders | 30 |
|                                    |   |   |
| Item 5.                                 | Other Information | 30 |
|                                    |   |   |
| Item 6.                                 | Exhibits | 30 |

 

2

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| **Part I.** | **FINANCIAL INFORMATION** |
|------------------|---------------------------|
|             |                      |
| Item 1.          | Financial  Statements     |

 

**InfoSonics Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                           | ** ** | **September 30,  2008** | ** **     | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|-----------------------------|------------|
| ** **                                                                                                                                           | ** ** | **(unaudited)**              | ** **     | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                           | ** ** | ** **                   | ** **     | ** **                  | ** ** |
| **Current assets:**                                                                                                                                  |       |                         |           |                        |       |
| Cash and cash equivalents                                                                                                                            |       | $                            | 10,189,774     |                        | $          | 20,652,154 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of $427,326 (unaudited) and $558,342                                              |       | 37,314,003                   |           | 38,027,013                  |       |
| Other receivables (Note #13)                                                                                                                         |       | 4,150,000                    |           | —                      |       |
| Inventory, net of reserves of $257,556  (unaudited) and $580,438                                                                                     |       | 8,304,763                    |           | 13,479,861                  |       |
| Prepaid inventory                                                                                                                                    |       | 94,986                       |           | 461,990                     |       |
| Prepaid expenses                                                                                                                                     |       | 137,520                      |           | 87,753                      |       |
| Prepaid taxes                                                                                                                                        |       | 338,679                      |           | 334,990                     |       |
| Assets of discontinued operations                                                                                                                    |       | 4,733,849                    |           | 14,118,308                  |       |
| Deferred tax asset – current                                                                                                                    |       | 1,270,757                    |           | 1,203,417                   |       |
|                                                                                                                                                 |       |                         |           |                        |       |
| Total current assets                                                                                                                                 |       | 66,534,331                   |           | 88,365,486                  |       |
|                                                                                                                                                 |       |                         |           |                        |       |
| Property and equipment, net                                                                                                                          |       | 691,289                      |           | 1,301,985                   |       |
| Intangible assets                                                                                                                                    |       | 504,000                      |           | 504,000                     |       |
| Deferred tax asset – non-current                                                                                                                |       | 1,454,789                    |           | 1,401,671                   |       |
| Other assets                                                                                                                                         |       | 118,072                      |           | 110,660                     |       |
|                                                                                                                                                 |       |                         |           |                        |       |
| **Total assets**                                                                                                                                     | ** ** | **$**                        | **69,302,481** | ** **                  | **$**      | **91,683,802** | ** ** |
|                                                                                                                                                 |       |                         |           |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                       | ** ** | ** **                   | ** **     | ** **                  | ** ** |
|                                                                                                                                                 |       |                         |           |                        |       |
| **Current liabilities:**                                                                                                                             |       |                         |           |                        |       |
| Line of credit                                                                                                                                       |       | $                            | 13,909,497     |                        | $          | 26,755,100 |   |
| Accounts payable                                                                                                                                     |       | 11,860,580                   |           | 20,821,601                  |       |
| Accrued expenses                                                                                                                                     |       | 7,551,536                    |           | 1,105,972                   |       |
| Liabilities of discontinued operations                                                                                                               |       | 1,365,623                    |           | 5,895,687                   |       |
| Income taxes payable                                                                                                                                 |       | 41,000                       |           | 80,560                      |       |
|                                                                                                                                                 |       |                         |           |                        |       |
| Total current liabilities                                                                                                                            |       | 34,728,236                   |           | 54,658,920                  |       |
| ** **                                                                                                                                           | ** ** | ** **                   | ** **     | ** **                  | ** ** |
| **Total liabilities**                                                                                                                                |       | 34,728,236                   |           | 54,658,920                  |       |
|                                                                                                                                                 |       |                         |           |                        |       |
| **Commitments and contingencies (Note #13)**                                                                                                         |       |                         |           |                        |       |
|                                                                                                                                                 |       |                         |           |                        |       |
| **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, $0.001 par value 40,000,000  shares authorized (14,910,808 and 14,647,067 shares issued and outstanding as  of applicable periods end) |       | 14,911                       |           | 14,647                      |       |
| Additional paid-in capital                                                                                                                           |       | 31,607,493                   |           | 31,505,990                  |       |
| Accumulated other comprehensive loss                                                                                                                 |       | (38,597                      | )              | (31,190                     | )          |
| Retained earnings                                                                                                                                    |       | 2,990,438                    |           | 5,535,435                   |       |
|                                                                                                                                                 |       |                         |           |                        |       |
| Total stockholders’ equity                                                                                                                      |       | 34,574,245                   |           | 37,024,882                  |       |
|                                                                                                                                                 |       |                         |           |                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                  | ** ** | **$**                        | **69,302,481** | ** **                  | **$**      | **91,683,802** | ** ** |

 

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

 

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**InfoSonics Corporation and Subsidiaries**

**ConsolidatedStatements of Operations**

**(unaudited)**

 
| ** **                                                                    | ** ** | **For the Three Months  Ended September 30,** | ** **  | **For the Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|-------------|-----------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                                               | ** **  | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | ** **                                                             | ** **  | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                                                 |       | $                                                                      | 52,883,848  |                                                                  | $          | 64,398,368 |   | $ | 179,857,086 |   | $ | 161,893,605 |   |
| **Cost of sales**                                                             |       | 49,982,339                                                             |        | 60,459,366                                                            |       | 170,141,235 |   | 152,591,568 |   |
|                                                                          |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Gross profit**                                                              |       | 2,901,509                                                              |        | 3,939,002                                                             |       | 9,715,851 |   | 9,302,037 |   |
| **Operating expenses**                                                        |       | 3,210,515                                                              |        | 3,622,188                                                             |       | 10,127,587 |   | 9,370,485 |   |
|                                                                          |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Operating income (loss) from continuing  operations**                       |       | (309,006                                                               | )           | 316,814                                                               |       | (411,736 | ) | (68,448 | ) |
|                                                                          |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Other income (expense)**                                                    |       |                                                                   |        |                                                                  |       |   |   |   |   |
| Other income                                                                  |       | 653,181                                                                |        | 2,094,918                                                             |       | 582,700 |   | 2,094,918 |   |
| Interest (expense)                                                            |       | (33,735                                                                | )           | (360,122                                                              | )          | (477,456 | ) | (641,789 | ) |
|                                                                          |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Income (loss) from continuing operations  before benefit for income taxes** |       | 310,440                                                                |        | 2,051,610                                                             |       | (306,492 | ) | 1,384,681 |   |
| **Benefit (provision) for income taxes**                                      |       | (128,410                                                               | )           | (134,408                                                              | )          | (1,054 | ) | 141,126 |   |
|                                                                          |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Income (loss) from continuing operations**                                  |       | 182,030                                                                |        | 1,917,202                                                             |       | (307,546 | ) | 1,525,807 |   |
| **Loss from discontinued operations, net of  tax  (Note #11)**                |       | (80,633                                                                | )           | (1,543,767                                                            | )          | (2,237,452 | ) | (2,157,749 | ) |
| ** **                                                                    | ** ** | ** **                                                             | ** **  | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss)**                                                         | ** ** | **$**                                                                  | **101,397** | ** **                                                            | **$**      | **373,435** | ** ** | **$** | **(2,544,998** | **)** | **$** | **(631,942** | **)** |
|                                                                          |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Basic earnings (loss) per share**                                           |       |                                                                   |        |                                                                  |       |   |   |   |   |
| From continuing operations                                                    | ** ** | **$**                                                                  | **0.01**    | ** **                                                            | **$**      | **0.13** | ** ** | **$** | **(0.02** | **)** | **$** | **0.11** | ** ** |
| From discontinued operations                                                  | ** ** | **$**                                                                  | **(0.01**   | **)**                                                                 | **$**      | **(0.11** | **)** | **$** | **(0.15** | **)** | **$** | **(0.15** | **)** |
| Net income (loss)                                                             | ** ** | **$**                                                                  | **0.01**    | ** **                                                            | **$**      | **0.02** | ** ** | **$** | **(0.17** | **)** | **$** | **(0.04** | **)** |
| **Diluted earnings (loss) per share**                                         |       |                                                                   |        |                                                                  |       |   |   |   |   |
| From continuing operations                                                    | ** ** | **$**                                                                  | **0.01**    | ** **                                                            | **$**      | **0.12** | ** ** | **$** | **(0.02** | **)** | **$** | **0.11** | ** ** |
| From discontinued operations                                                  | ** ** | **$**                                                                  | **(0.01**   | **)**                                                                 | **$**      | **(0.10** | **)** | **$** | **(0.15** | **)** | **$** | **(0.15** | **)** |
| Net income (loss)                                                             | ** ** | **$**                                                                  | **0.01**    | ** **                                                            | **$**      | **0.02** | ** ** | **$** | **(0.17** | **)** | **$** | **(0.04** | **)** |
|                                                                          |       |                                                                   |        |                                                                  |       |   |   |   |   |
| **Basic weighted-average number of common  shares outstanding**               | ** ** | **14,910,808**                                                         | ** **  | **14,474,353**                                                        | ** ** | **14,850,469** | ** ** | **14,416,322** | ** ** |
| ** **                                                                    | ** ** | ** **                                                             | ** **  | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted weighted-average number of common  shares outstanding**             | ** ** | **15,298,685**                                                         | ** **  | **15,722,324**                                                        | ** ** | **14,850,469** | ** ** | **14,416,322** | ** ** |

 

*Accompanying notes are an integral part of these financialstatements*.

 

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**InfoSonics Corporation and Subsidiaries**

**ConsolidatedStatements of Comprehensive Operations**

**(unaudited)**

 
| ** **                               | ** ** | **For the Three Months********Ended September 30,** | ** ** | **For the Nine Months********Ended September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                                     | ** ** | **2007**                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Net profit (loss)                        |       | $                                                                            | 101,397    |                                                                        | $          | 373,435 |   | $ | (2,544,998 | ) | $ | (631,942 | ) |
| Other comprehensive loss:                |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Foreign currency translation adjustments |       | (3,504                                                                       | )          | 1,596                                                                       |       | (7,407 | ) | (17,655 | ) |
| Comprehensive income (loss)              |       | $                                                                            | 97,893     |                                                                        | $          | 375,031 |   | $ | (2,552,405 | ) | $ | (649,597 | ) |

 

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

 

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**InfoSonics Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

 
| ** **                                                                                | ** ** | **For the Nine Months Ended  September 30,** | ** **     |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|----------------|
| ** **                                                                                | ** ** | **2008**                                                              | ** **     | **2007** | ** ** |
| **Cash flows from operating activities:**                                                 | ** ** | ** **                                                            | ** **     | ** ** | ** ** |
| Net loss                                                                                  |       | $                                                                     | (2,544,998     | ) | $ | (631,942 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities |       |                                                                  |           |   |   |
| Depreciation                                                                              |       | 498,782                                                               |           | 207,185 |   |
| Provision for bad debt                                                                    |       | (131,016                                                              | )              | (12,177 | ) |
| Impairment on fixed assets                                                                |       | (13,126                                                               | )              | 57,785 |   |
| Provision for obsolete inventory                                                          |       | (322,882                                                              | )              | 553,857 |   |
| Stock option expense                                                                      |       | 67,481                                                                |           | 143,035 |   |
| (Increase) decrease in                                                                    |       |                                                                  |           |   |   |
| Trade accounts receivable                                                                 |       | (3,301,740                                                            | )              | (8,677,376 | ) |
| Inventory                                                                                 |       | 5,497,980                                                             |           | (14,316,154 | ) |
| Prepaid inventory                                                                         |       | 367,004                                                               |           | (610,821 | ) |
| Prepaid expenses                                                                          |       | (49,767                                                               | )              | (56,093 | ) |
| Prepaid taxes                                                                             |       | (3,689                                                                | )              | 14,919 |   |
| Other assets                                                                              |       | (7,412                                                                | )              | (101,322 | ) |
| Deferred tax asset current                                                                |       | (67,340                                                               | )              | (203,363 | ) |
| Deferred tax asset non current                                                            |       | (53,118                                                               | )              | (411,634 | ) |
| Increase (decrease) in                                                                    |       |                                                                  |           |   |   |
| Accounts payable                                                                          |       | (8,961,021                                                            | )              | 1,800,549 |   |
| Accrued expenses                                                                          |       | 6,445,564                                                             |           | 671,277 |   |
| Income tax liabilities                                                                    |       | (39,560                                                               | )              | 13,700 |   |
|                                                                                      |       |                                                                  |           |   |   |
| Cash used in continuing operations                                                        |       | (2,618,858                                                            | )              | (21,558,575 | ) |
| Cash provided by (used in) discontinued  operations                                       |       | 5,042,304                                                             |           | 868,192 |   |
| Net cash provided by (used in) operating  activities                                      |       | 2,423,446                                                             |           | (20,690,383 | ) |
|                                                                                      |       |                                                                  |           |   |   |
| **Cash flows from investing activities:**                                                 | ** ** | ** **                                                            | ** **     | ** ** | ** ** |
|                                                                                      |       |                                                                  |           |   |   |
| Purchase of property and equipment                                                        |       | 125,038                                                               |           | (1,357,573 | ) |
| Cash provided by (used in) discontinued  operations                                       |       | (192,142                                                              | )              | 14,618 |   |
| Net cash used in investing activities                                                     |       | (67,104                                                               | )              | (1,342,955 | ) |
|                                                                                      |       |                                                                  |           |   |   |
| **Cash flows from financing activities:**                                                 | ** ** | ** **                                                            | ** **     | ** ** | ** ** |
| Borrowings from line of credit                                                            |       | 186,370,107                                                           |           | 378,322,428 |   |
| Payments on line of credit                                                                |       | (199,215,710                                                          | )              | (376,300,542 | ) |
| Cash received for stock, options and  warrants                                            |       | 34,286                                                                |           | 263,037 |   |
|                                                                                      |       |                                                                  |           |   |   |
| Net cash provided by (used in) financing  activities                                      |       | (12,811,317                                                           | )              | 2,284,923 |   |
|                                                                                      |       |                                                                  |           |   |   |
| Effect of exchange rate changes on cash                                                   |       | (7,405                                                                | )              | (17,655 | ) |
|                                                                                      |       |                                                                  |           |   |   |
| Net decrease in cash and cash equivalents                                                 |       | (10,462,380                                                           | )              | (19,766,070 | ) |
|                                                                                      |       |                                                                  |           |   |   |
| **Cash and cash equivalents, beginning of  period**                                       |       | 20,652,154                                                            |           | 29,700,994 |   |
|                                                                                      |       |                                                                  |           |   |   |
| **Cash and cash equivalents, end of period**                                              | ** ** | **$**                                                                 | **10,189,774** | ** ** | **$** | **9,934,924** | ** ** |

 

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

 

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** **

**InfoSonics Corporation**

**Condensed Notes toConsolidated Financial Statements**

**(unaudited)**

 

**NOTE 1. Basisof Presentation**

 

The accompanying unauditedconsolidated financial statements and these condensed notes have been preparedin accordance with accounting principles generally accepted in the UnitedStates (“GAAP”) for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X of the Securities Exchange Act of 1934,as amended (the “Exchange Act”). Accordingly, they do not include all of theinformation and notes required by GAAP for complete financial statements. Thepreparation of financial statements requires management to make estimates andassumptions that affect amounts reported in the financial statements andaccompanying notes. Actual results are likely to differ from those estimates,but management does not believe such differences will materially affect thefinancial position or results of operations of InfoSonics Corporation (the “Company”),although they may. These unaudited consolidated financial statements andcondensed notes should be read in conjunction with the financial statements andnotes as of and for the year ended December 31, 2007 included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2007. These unaudited consolidated financial statements reflect all adjustmentsconsidered, in the opinion of the Company’s management, necessary to fairlypresent the results for the periods covered herein and such adjustments areconsidered of a normal recurring nature.

 

The unaudited consolidatedbalance sheet at and statements of operations as of September 30, 2008 donot include all of the information and notes required by GAAP for completefinancial statements. The unaudited consolidated balance sheet, the unauditedconsolidated statements of operations and the unaudited consolidated statementsof comprehensive operations as of or for the nine months ended September 30,2008 and the unaudited consolidated statement of cash flows for the three andnine months ended September 30, 2008 are not necessarily indicative of thefinancial condition, operating results or cash flows that may be expected forthe full fiscal year of 2008 or for any future period.

 

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

 

The Company has three equity incentive plans, the 2006 Equity IncentivePlan (“2006 Plan”), the 2003 Stock Option Plan (“2003 Plan”) and the 1998 StockOption Plan (“1998 Plan”). Each of the plans has been approved by ourstockholders. The 2006 Plan is the only plan from which additional equityincentives will be granted. The 2006 Plan authorizes the grant of up to1,000,000 shares for equity incentives. The Company is also a party to non-planoption agreements with several non-employee directors and several institutions.

 

On December 28,2007, the Securities and Exchange Commission (“SEC”) staff published StaffAccounting Bulletin No. 110 (SAB 110), which updates SAB 107 and providesthe SEC staff’s views on a variety of matters relating to stock-based payments.SAB 110 requires stock-based compensation to be classified in the same expenseline items as cash compensation. Information about stock-based compensationincluded in the unaudited results of operations for the three and nine monthsended September 30, 2008 and 2007 is as follows:

 
| ** **                                                        | ** ** | **For the Three Months Ended******** September 30,** | ** ** | **For the Nine Months Ended********September 30,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                                                           | ** ** | **2007**                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                              |       |                                                                               |       |                                                                        |       |   |   |   |   |
| Officer compensation                                              |       | $                                                                                  | —     |                                                                        | $          | — |   | $ | — |   | $ | 1,916 |   |
| Non-employee directors                                            |       | 3,451                                                                              |       | 3,451                                                                       |       | 10,353 |   | 10,353 |   |
| Sales, general and administrative                                 |       | 23,677                                                                             |       | 34,809                                                                      |       | 57,128 |   | 130,766 |   |
| Total stock option expense, included in  total operating expenses |       | $                                                                                  | 27,128     |                                                                        | $          | 38,260 |   | $ | 67,481 |   | $ | 143,035 |   |

 

Our stock options vest on an annual or a monthly basis. The Company recognizes stock-basedcompensation costs on a straight-line basis over the requisite service periodof the award, which is generally the option vesting term. Such amountsmay change as a result of additional grants, forfeitures, modifications inassumptions and other factors. SFAS 123R provides that income tax effects ofshare-based payments are recognized in the financial statements for those awardswhich will normally result in tax deductions under existing tax law. During thethree and nine months ended September 30, 2008, we recorded an expense of$27,128 and $67,481, respectively, related to options previously granted andgranted during the first

 

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nine months of 2008. During each of the three and nine months ended September 30,2007, we recorded an expense of $38,260 and $143,035, respectively, related tooptions previously granted and granted during the first nine months of 2007.Under current U.S. federal tax law, we receive a compensation expense deductionrelated to non-qualified stock options only when those options are exercisedand vested shares are received. Accordingly, the financial statementrecognition of compensation cost for non-qualified stock options creates adeductible temporary difference which results in a deferred tax asset and a correspondingdeferred tax benefit in our consolidated statements of operations.

 

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option pricing model with the followingweighted-average assumptions used for grants in 2008 and 2007: risk-freeinterest rate of 1.47% in 2008 and 4.66% in 2007, based on the U.S. Treasuryyields in effect at the time of grant; expected dividend yields of 0 percent asthe Company has not, and does not intend to, issue dividends; and expectedlives of 3 to 6 years based upon the historical life of options. For grants in2008 and 2007, the expected volatility used ranged from 88% to 89%, based onthe Company’s historical stock price fluctuations for a period matching theexpected life of the options. As of September 30, 2008, there was $167,000of total unrecognized compensation costs related to the non-vested stockoptions. That cost is expected to be recognized over the next weighted-averageperiod of 3.25 years.

 

Asummary of option activity under all of the above plans as of September 30,2008 and changes during the nine months then ended is presented in the tablebelow:

 
| ** **                             | ** ** | **Shares** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** | **Wtd. Avg.  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December 31, 2007  |       | 2,606,936  |       | $                                       | 2.66       |                                             | 1.88       |                            | —     |   |
| Granted                                |       | 183,000    |       | $                                       | 1.04       |                                             | 5.44       |                            | —     |   |
| Exercised                              |       | 263,740    |       | $                                       | 0.13       |                                             |       |                            | —     |   |
| Forfeited                              |       | 357,752    |       | $                                       | 2.47       |                                             |       |                            | —     |   |
| Outstanding at September 30, 2008 |       | 2,168,444  |       | $                                       | 2.87       |                                             | 2.54       |                            | —     |   |
| Vested and expected to vest            |       | 2,168,444  |       | $                                       | 2.87       |                                             | 2.54       |                            | —     |   |
| Exercisable at September 30, 2008 |       | 2,015,513  |       | $                                       | 2.98       |                                             | 2.33       |                            | —     |   |

 

A summary of the status of the Company’s non-vested options at September 30,2008 and changes during the nine months ended September 30, 2008 ispresented below:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|---------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Non-vested at December 31, 2007  |       | 23,333     |       | $                                                     | 5.32       |   |
| Granted                               |       | 183,000    |       | $                                                     | 1.04       |   |
| Vested                                |       | 10,903     |       | $                                                     | 4.64       |   |
| Forfeited                             |       | 42,500     |       | $                                                     | 1.04       |   |
| Non-vested at September 30, 2008 |       | 152,930    |       | $                                                     | 1.31       |   |

 

The weighted-average grant-date fair value of options granted duringthe nine months ended September 30, 2008 was $1.04. The total intrinsicvalue of options granted during the nine months ended September 30, 2008and 2007 was $0 and $0, respectively. There was $34,000 and $263,000 of cashreceived from options exercised for the nine months ended September 30,2008 and 2007, respectively.

 

**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.

 

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 monthsended September 30, 2008 and 2007, the number of shares excluded was2,957,628 and 2,522,267, respectively. Since their effect would have beenanti-dilutive, for the nine months ended September 30, 2008 and 2007,the number of shares excluded was 3,150,644 and 3,770,238, respectively, fromthe computation of net loss per share.

 

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**NOTE 4. IncomeTaxes**

 

The Company adopted the FinancialAccounting Standards Board’s Interpretation No. 48, “Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109”(“FIN 48”) effective January 1, 2007. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in financial statements and requires theimpact of a tax position to be recognized in the financial statements if thatposition is more likely than not of being sustained by the taxing authority. Atthe date of adoption, and as of December 31, 2007 and September 30,2008, the Company does not have a liability for unrecognized tax benefits. TheCompany concluded that at this time there are no uncertain tax positions. As aresult of applying the provisions of FIN 48, there was no cumulative effect onretained earnings.

 

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 is subject to USfederal income tax as well as income tax in multiple states and foreignjurisdictions. For all major taxing jurisdictions, the tax years 2002 through2007 remain open to examination. As of September 30, 2008, the Companydoes not expect any material changes to unrecognized tax positions within thenext 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**

 

Inventoryis stated at the lower of cost (first-in, first-out) or market and consistsprimarily of cellular phones and cellular phone accessories. The Companyprovides for the possible inability to sell its inventory by recording areserve. As of September 30, 2008 and December 31, 2007, theinventory reserve was $258,000 and $580,000, respectively. As of September 30,2008, we had inventory in-transit of $232,000, which is under the control of acommon freight carrier until it arrives at one of our customer facilities. Thisinventory is owned by the Company while it is in-transit. From time to time,the Company has prepaid inventory as a result of payments for products whichhave not been received by the balance sheet date. As of September 30, 2008and December 31, 2007, the prepaid inventory balances were $95,000 and$462,000, respectively. Included in Assests for discontinued operations as of September 30,2008 and December 31, 2007 is inventory balances of $2,030,000 and$7,067,000, respectively. Inventory consists of the following:

 
| ** **            | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **(unaudited)**              | ** ** | **(audited)**               | ** ** |
| Finished goods        |       | $                            | 8,330,700  |                        | $          | 14,060,213 |   |
| Inventory  in-transit |       | 231,619                      |       | 86                          |       |
| Inventory reserve     |       | (257,556                     | )          | (580,438                    | )          |
| Net inventory         |       | $                            | 8,304,763  |                        | $          | 13,479,861 |   |

 

**NOTE 6.Property and Equipment**

 

Property and equipmentare primarily located in the United States and Mexico, with the exception of$7,000 located in Asia, and consisted of the following as of the datespresented:

 

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| ** **                    | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **(unaudited)**              | ** ** | **(audited)**               | ** ** |
| Machinery and equipment       |       | $                            | 462,180    |                        | $          | 437,954 |   |
| Furniture and fixtures        |       | 106,314                      |       | 117,491                     |       |
| Tooling and molds             |       | 1,088,378                    |       | 1,257,636                   |       |
| Subtotal                      |       | 1,656,872                    |       | 1,813,081                   |       |
| Less accumulated depreciation |       | 965,583                      |       | 511,096                     |       |
| Total                         |       | $                            | 691,289    |                        | $          | 1,301,985 |   |

 

Depreciation expense was $161,725 and $55,926 for the threemonths ended September 30, 2008 and 2007, respectively. Depreciationexpense was $498,782 and $207,185 for the nine months ended September 30,2008 and 2007, respectively.

 

**NOTE 7. Accrued Expenses**

 

As of September 30, 2008 and December 31, 2007,accrued expenses consisted of the following:

 
| ** **                       | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(unaudited)**              | ** ** | **(audited)**               | ** ** |
| Accrued product costs            |       | $                            | 2,538,529  |                        | $          | 1,031,147 |   |
| Accrued legal settlement         |       | 4,150,000                    |       | —                      |       |
| Other accruals (including taxes) |       | 863,007                      |       | 74,825                      |       |
| Total                            |       | $                            | 7,551,536  |                        | $          | 1,105,972 |   |

 

**NOTE 8.Borrowings**

 

UntilApril 30, 2008, the Company had a line of credit from Wells Fargo HSBCTrade Bank N.A., which provided 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.

 

Underthe Wells Fargo HSBC Trade Bank line of credit, interest was payable on amonthly basis (i) at Wells Fargo’s prime rate minus 0.25% or (ii) atthe one-month LIBOR plus 1.50%. The interest rate floated at Wells Fargo’sprime rate minus 0.25% or was at LIBOR plus 1.5% if the debt was a fixed amountdrawn upon. The line of credit was collateralized by substantially all of theassets of the Company, and was to expire October 1, 2008. At December 31,2007, the amount drawn against this the line of credit was $26,755,100.

 

On April 30, 2008, theCompany entered into a Loan,Security and Bulk Purchase Agreement and a Letter of Credit and SecurityAgreement (collectively, the “Agreement”) with Wells Fargo Century, Inc. (“Lender”),replacing the then existing asset-based secured credit facility with Wells Fargo HSBC Trade Bank, N.A. Pursuantto the Agreement, the Lender may advance up to $45,000,000 to the Company basedon the expected collections of eligible receivables as well as value of theCompany’s eligible inventory determined in accordance with the Agreement. Theoutstanding advances may not exceed the lesser of (i) $45,000,000 or (ii) thesum of the value of the eligible receivables and eligible inventory multipliedby their respective advance rates as set forth in the Agreement ($32.2 millionas of September 30, 2008). At September 30, 2008, themajority of our debt was based on foreign accounts receivable. TheLender credit facility has a two-year term ending April 2010 and issecured by all of the assets of the Company. The interest rate for eachborrowing under the credit facility is, at the option of the Company, eitherthe Wells Fargo Bank N.A. prime rate minus 0.50% (5.00% at September 30,2008) or the LIBOR rate plus 2.00% (2.93% at September 30, 2008).AtSeptember 30, 2008, the amounts drawn against the line of credit was$13,909,497. As of September 30, 2008, the Company was in compliance withthe covenants of the new credit facility. If any adverse events occur or we areunable to renew our new credit facility or enter into an adequate creditrelationship as needed, our business’ financial condition or operating resultscould be negatively affected.

 

TheCompany has no other notes payable.

 

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**NOTE 9.Stockholders’ Equity**

 

StockOptions

 

Effective March 18, 2008 and May 13, 2008, the Companygranted options to purchase an aggregate of 180,500 and 2,500 shares,respectively, of its common stock to certain non-executive employees (the “Employee Options”).One-fourth of the total options subject to these option grants becomeexercisable one year from the date of grant, and 1/48th of the total optionsbecome exercisable each month thereafter until fully vested. These options haveexercise prices of $1.04 per share, which was the closing price per share ofthe Company’s common stock on each of March 18, 2008 and May 13,2008, and expire six years from the date of grant. See Note 2 forStock-Based Compensation discussion.

 

Common Stock

 

On May 15, 2008, the Company agreed to issue 100,000 unregisteredshares of common stock in connection with an amendment to a then existingagreement with an unrelated partner. The shares were issued October 20,2008. The amendment modifies a profit sharing agreement to increase the portionof profit sharing the Company earns. The increase in the portion of the profitsharing to the Company is retroactive to January 1, 2008 and continues to December 31,2008.

 

**NOTE 10.Recent Accounting Pronouncements**

 

Recentlyadopted:

 

In September 2006, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“SFAS 157”), which defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about fair valuemeasurements.  This statement is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years.  The adoptionof SFAS 157 did not have a material impact on the Company’s results ofoperations and financial position.

 
| In February 2007, the FASB issued Statement  No. 159, “*The  Fair Value Option for Financial Assets and Financial Liabilities — Including  an amendment of FASB Statement No. 115* “ (“SFAS 159”).   This standard 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 all entities with  available-for-sale and trading securities electing the fair value option.   This standard allows companies to elect fair value accounting for many  financial instruments and other items that currently are not required to be  accounted as such, allows different applications for electing the option for  a single item or groups of items, and requires disclosures to facilitate  comparisons of similar assets and liabilities that are accounted for  differently in relation to the fair value option.  SFAS 159 is effective  for fiscal years beginning after November 15, 2007. The adoption of SFAS  159 did not have a material impact on the Company’s results of operations and  financial position. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Recentlyissued:

 

The FinancialAccounting Standards Board (FASB) has issued FASB Statements No. 141(revised 2007) (“SFAS 141R”), *BusinessCombinations,* and No. 160 (“SFAS 160”), *Noncontrolling Interests in Consolidated FinancialStatements.* These new standards represent the completion of the FASB’sfirst major joint project with the International Accounting Standards Board(IASB)*.* The FASB and the IASB firstinitiated the joint project that resulted in the new standards because U.S.generally accepted accounting principles and International Financial ReportingStandards (IFRS) differed widely in their approach to accounting for businesscombinations. The IASB plans to issue its counterpart standards IFRS 3(revised), *Business Combinations,*and International Accounting Standard 27 (as revised in 2007), *Consolidated and Separate Financial Statements,*early next year. The new standards to be issued by the IASB are expected tocontain the same fundamental principles as those of the FASB, but will divergewith respect to certain issues.

 

In SFAS141(R), the FASB retained the fundamental requirements of SFAS 141 to accountfor all business combinations using the acquisition method (formerly thepurchase method) and for an acquiring entity to be identified in all businesscombinations. However, the fair value principles in the revised Statement are amajor change from SFAS 141’s cost allocation process, together with otherrevisions from past practice. Among numerous changes, SFAS 141(R) requiresthe acquiring entity in a business combination to:

 

·                 Recognize the assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree at theacquisition date, measured at their fair values as of that date, with limitedexceptions

·                 Recognize and measure the goodwillacquired in the business combination or a gain from a bargain purchase

·                 Expense acquisition-related costs,such as legal and due diligence costs, when incurred

 

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·                 Recognize any restructuring costs thatthe acquiring entity expects to incur with respect to the acquired business asan expense, rather than capitalize as part of the acquisition

·                 Disclose to investors and other usersall of the information they need to evaluate and understand the nature andfinancial effect of the business combination.

 

SFAS 160amends Accounting Research Bulletin No. 51, *Consolidated Financial Statements,* and requires all entitiesto report noncontrolling (minority) interests in subsidiaries within equity inthe consolidated financial statements, but separate from the parentshareholders’ equity. SFAS 160 also requires any acquisitions or dispositionsof noncontrolling interests that do not result in a change of control to beaccounted for as equity transactions. Further, the Statement requires that aparent recognize a gain or loss in net income when a subsidiary isdeconsolidated.

 

The final business combinations and noncontrolling interest statementsare effective for annual periods beginning on or after December 15, 2008. TheStatements should be applied on a prospective basis, except for thepresentation and disclosure requirements of SFAS 160, which must be appliedretrospectively. Entities are prohibitedfrom adopting the Statements before their effective dates The Company does notbelieve adoption of SFAS 141(R) and SFAS 160 will have a material effecton the Company’s financial statements.

 

In March 2008, the FASB issued Statement of FinancialAccounting Standards No. 161 (SFAS 161) “Disclosures about DerivativeInstruments and Hedging Activities—an amendment of FASB Statement No. 133”. SFAS 161 amends and expands the disclosure requirements for derivativeinstruments and hedging activities. Entities are required to provide enhanceddisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations, and (c) how derivative instrumentsand related hedged items affect an entity’s financial position, financialperformance, and cash flows. SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. This statement encourages, but doesnot require, comparative disclosures for earlier periods at initial adoption.The Company does not believe adoption of SFAS 161 will have a material effecton the Company’s financial statements.

 

In May 2008,the FASB issued Statement of Financial Accounting Standards SFAS No. 162 (“SFAS162”) “The Hierarchy of Generally Accepted Accounting Principles,” whichidentifies the sources of accounting principles and the framework for selectingthe principles to be used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with GAAP (the GAAPhierarchy). SFAS 162 is effective 60 days following the SEC’s approval of thePublic Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples. Management does not expect adoption of SFAS 162 to have a materialimpact on the Company’s financial statements.

 

In May 2008, the FASB issued Statementof Financial Accounting Standards No. 163 (“SFAS 163”), “Accounting forFinancial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60,”which requires that an insurance enterprise recognize a claim liability priorto an event of default (insured event) when there is evidence that creditdeterioration has occurred in an insured financial obligation, and clarifieshow FASB Statement 60 applies to financial guarantee insurance contracts,including the recognition and measurement to be used to account for premiumrevenue and claim liabilities, and requires expanded disclosures about financialguarantee insurance contracts. SFAS 163 is effective for financial statementsissued for fiscal years beginning after December 15, 2008, and all interimperiods within those fiscal years.  Management is currently assessing theeffect of SFAS 163 on the Company’s financial statements.

 

**NOTE 11.  Discontinued Operations**

 

Duringthe quarter ended June 30, 2008, the Company assessed opportunities in theUnited States and Mexico, and the Company began to implement actions necessaryto close sales operations in both of those countries, which actions continuedin the third quarter of 2008. These two areas accounted for less than 1% of ournet sales in the first nine months of 2008, as compared to 13% of our net salesfor the first nine months of 2007.Due to the changing environment and consolidation in the United Statesof the regional cellular carriers, along with the challenges of opening salesrelations with the cellular carriers in Mexico, management determined that itwas necessary to take decisive actions to mitigate further losses. The results of the unaudited discontinuedoperations are as follows:

 

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| ** **                    | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net Sales                     |       | $                                                                      | 113,876    |                                                                  | $          | 4,962,047 |   | $ | 847,312 |   | $ | 24,131,121 |   |
| Gross profit                  |       | (4,568                                                                 | )          | (1,284,330                                                            | )          | (1,328,603 | ) | (301,749 | ) |
| Operating income (loss)       |       | $                                                                      | (257,571   | )                                                                     | $          | (1,552,024 | ) | $ | (3,569,356 | ) | $ | (2,635,157 | ) |
| Identifiable assets           |       | $                                                                      | 4,733,849  |                                                                  | $          | 13,129,919 |   | $ | 4,733,849 |   | $ | 13,129,919 |   |
| Capital expenditures          |       | $                                                                      | —     |                                                                  | $          | 3,740 |   | $ | — |   | $ | 9,519 |   |
| Depreciation and amortization |       | $                                                                      | 5,420      |                                                                  | $          | 8,297 |   | $ | 20,787 |   | $ | 24,775 |   |

 

Liabilitiesof discontinued operations consist primarily of accounts payable. Assets ofdiscontinued operations are as follows:

 

| ** **          | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **          | ** ** | **(unaudited)**              | ** ** | **(audited)**               | ** ** |
| Accounts Receivable |       | $                            | 1,083,057  |                        | $          | 5,721,128 |   |
| Inventory           |       | 2,030,157                    |       | 7,067,413                   |       |
| Prepaid Taxes       |       | 900,496                      |       | 892,458                     |       |
| Deferred Tax Assets |       | 551,421                      |       | —                      |       |
| Other Assets        |       | 168,718                      |       | 437,309                     |       |
| Total               |       | $                            | 4,733,849  |                        | $          | 14,118,308 |   |

 

Asof September 30, 2008, the plans for the discontinued operations were substantiallycomplete; however, the Company expects to continue to record adjustments andexpenses through discontinued operations as necessary.

 

**NOTE 12. Geographic Information**

 

TheCompany currently operates in one business segment. All fixed assets are locatedin Company or third party facilities in the United States, Asia and Mexico. Theunaudited net sales by geographical area for the three and nine months ended September 30,2008 and 2007 were:

 
|            |   | **For the********Three Months Ended** |       | **For the********Nine Months Ended** |   |
|-----------------|--------|------------------------------------------------------|------------|-----------------------------------------------------|--------|
|            |   | **September 30, 2008**                     |       | **September 30, 2007**                    |   | **September 30, 2008** |   | **September 30, 2007** |   |
| Central America |   | $                                                    | 8,826,072  |                                                | $      | 23,331,592 |   | $ | 43,519,895 |   | $ | 52,941,013 |   |
| South America   |   | 44,057,777                                           |       | 41,066,777                                          |   | 136,337,191 |   | 108,952,592 |   |
| Total           |   | $                                                    | 52,883,849 |                                                | $      | 64,398,369 |   | $ | 179,857,086 |   | $ | 161,893,605 |   |

 

**NOTE 13. Commitmentsand Contingencies**

 

*Securities Class Actions*

 

In the securities class action, captioned *In Re: InfoSonicsCorporation Securities Litigation*, Lead Case No. 06 CV 1231,now pending before Judge Sammartino in the United States District Court for theSouthern District of California, Plaintiffs filed a third amended consolidatedcomplaint on May 23, 2008 against the Company and certain of its officersand directors. The two prior complaints (including claims therein based ondefendants’ restatement of first quarter 2006 earnings) were dismissed in partby the Court, with leave to amend. The third amended consolidated complaintalleges violations of Section 10(b) of the Exchange Act andassociated Rule 10b-5, Section 20(a) and Section 20A inconnection with the announcement of the Company’s restatement of first quarter2006 earnings and in connection with allegedly false and/or misleadingstatements related to the Company’s distribution of the VK Mobile phone. Plaintiffsseek a declaration that their action is a proper class action pursuant to Rule 23(a) and(b)(3), unspecified damages, prejudgment and post-judgment interest, attorneys’fees, expert witness fees, other costs, and other unspecified relief. Theplaintiffs purport to represent a class of purchasers of the Company’s stockduring the period February 6, 2006 to August 9, 2006. On August 8,2008, prior to defendants filing a motion to dismiss or other responsivepleading to the third amended consolidated complaint, the parties

 

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entered into a Memorandum of Understanding to resolve the case. On October 17,2008, the parties entered a Stipulation and Agreement of Settlement (the “SecuritiesSettlement”) of the case, which provides the securities class action settlementis contingent on preliminary and final Court approval (after appropriatenotice), as well as settlement of the derivative action noted below, amongother contingencies**,** and providesfor, among other things, a dismissal with prejudice of the lawsuit, releases ofthe defendants, and a payment by the Company or its insurer of $3.8 million toplaintiffs (inclusive of any plaintiffs’ attorneys fees, to be determined bythe Court). It is anticipated that the settlement payment will be fundedentirely by the Company’s insurer. The Securities Settlement further providesthat defendants deny any liability or responsibility for the claims made andmake no admission of any wrongdoing. On October 30, 2008, the Court tookunder submission without oral argument the request for an order preliminarilyapproving the Securities Settlement.

 

*Derivative Action*

 

In thederivative action, captioned *In ReInfoSonics Corporation Derivative Litigation*, Lead Case No. 06CV 1336, now pending before Judge Sammartino in the United States DistrictCourt for the Southern District of California, plaintiffs filed a consolidatedcomplaint on November 6, 2006, purportedly on behalf of the Companyagainst certain of its officers and directors, and the Company as a nominaldefendant. The consolidated complaint alleges claims for violations of Section 14(a) ofthe Exchange Act, Sections 25402 and 25403 of the California Corporations Code,disgorgement under the Sarbanes-Oxley Act of 2002, breach of fiduciary duty,abuse of control, gross mismanagement, waste of corporate assets, unjustenrichment, rescission, a constructive trust, and an accounting, in connectionwith the Company’s restatement of first quarter 2006 earnings and in connectionwith allegations of wrongdoing with respect to granting, exercising, accountingand reporting of the stock options that the Company granted in December 2005.Plaintiffs seek unspecified damages, declaratory relief regarding theSarbanes-Oxley Act of 2002, Section 14(a) of the Exchange Act, andthe legality of stock options, a constructive trust, restitution, disgorgement,modification of certain corporate governance and internal procedures,extraordinary equitable and/or injunctive relief, costs, and such other reliefas is just and proper.

 

Defendantsfiled a motion to dismiss the consolidated complaint on the grounds, amongothers, that the plaintiffs had failed to make a demand on the Company’s boardof directors and to adequately allege their other purported claims. On September 4,2007, the Court granted defendants’ motion to dismiss for failure to make ademand on the board, and also granted with prejudice the motion to dismiss theSarbanes-Oxley claim. On August 6, 2008 the parties entered into aMemorandum of Understanding to resolve the derivative case. On October 17,2008, the parties entered into a Stipulation and Agreement of Settlement (the “DerivativeSettlement”), which provides the Derivative Settlement is contingent onpreliminary and final Court approval (after appropriate notice) of thissettlement and the Securities Settlement noted above, among othercontingencies, and provides for, among other things, a dismissal with prejudiceof the lawsuit, releases of the defendants, corporate governances changes and apayment by the Company or its insurer of plaintiffs’ attorneys fees to beordered by the Court up to a maximum of $350,000. It is anticipated that thesettlement payment will be funded entirely by the Company’s insurer. TheDerivative Settlement further provides that defendants deny any liability orresponsibility for the claims made and make no admission of any wrongdoing. On October 30,2008, the Court took under submission without oral argument the request for anorder preliminarily approving the Derivative Settlement.

 

As of September 30,2008, the Company has accrued for the accrued legal settlement in accruedexpenses on the accompanying balance sheet (see Note 7).  As of September 30,2008, the Company has recorded a receivable for the insurance proceeds inother receivables on the accompanying balance sheet, as the Company fullyexpects the insurance company to pay the plaintiffs’ directly.

 

We maybecome involved in certain other legal proceedings and claims which arise inthe normal course of business. Other than as described above, as of September 30,2008, we did not have any significant litigation outstanding.

 

**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-LookingStatements and Other General Information**

 

This discussion and analysisof financial condition and results of operations should be read in conjunctionwith the accompanying unaudited consolidated financial statements and condensednotes thereto and other information included in this report and our AnnualReport on Form 10-K for the year ended December 31, 2007 (includingour 2007 audited consolidated financial statements and related notes theretoand other information). InfoSonics Corporation’s (“InfoSonics” or the “Company”)discussion and analysis of financial condition and results of operations arebased upon, among other things, our unaudited consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States (“GAAP”). The preparation of financialstatements in conformity with GAAP

 

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requires usto make estimates and assumptions that affect the reported amounts of assetsand liabilities, the disclosures of contingent liabilities as of and at thefinancial statement date, and the reported amounts of revenues and expensesduring the reporting periods. On an ongoing basis, we review our estimates andassumptions. Our estimates are based on our historical experience and otherassumptions that we believe to be reasonable under the circumstances. Actualresults are likely to differ from these estimates under different assumptionsor conditions, but we do not believe such differences will materially affectour financial position or results of operations, although they may. Ourcritical accounting policies, the policies we believe are most important to thepresentation of our financial statements and require the most difficult,subjective and complex judgments, are outlined below in “Critical Accounting Policies.”All references to results of operations in this discussion generally are toresults from continuing operations, unless otherwise noted.

 

The decision during thesecond quarter of 2008 to discontinue our operations in Mexico and the U.S.,which we continued to implement in the third quarter of 2008, and theadjustments required to the financial statements related to that decision haveaffected certain amounts of our results of operations and the classificationson the balance sheet, statement of operations and statement of cash flows forprior periods, and as of prior dates, as well as, our disclosure in thisreport, including management’s discussion and analysis.

 

**Safe HarborStatement**

 

The matters inthis report that are forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995, including, withoutlimitation, statements about future revenues, sales levels, operating incomeand margins, wireless handset sales, stock-based compensation expense, gainloss in value of derivatives, cost synergies, operating efficiencies,profitability, market share, and rates of return, are based on currentmanagement expectations that involve certain risks and uncertainties. Theserisks and uncertainties, in whole or in part, could cause such expectations tofail to be achieved and have a material adverse effect on InfoSonics’ business,financial condition and results of operations, and include, without limitation:(1) intense competition internationally, including competition fromalternative business models, such as manufacturer-to-carrier sales, which maylead to reduced prices, lower sales or reduced sales growth, lower grossmargins, extended payment terms with customers, increased capital investmentand interest costs, bad debt risks and product supply shortages; (2) dependencyon Latin American sales; (3) extended general economic downturn; (4) inabilityto secure adequate supply of competitive products on a timely basis and oncommercially reasonable terms; (5) foreign exchange rate fluctuations,devaluation of a foreign currency, adverse governmental controls or actions,political or economic instability, or disruption of a foreign market, and otherrelated risks of our international operations; (6) the ability to attractnew sources of profitable business from expansion of products or services orrisks associated with entry into new markets, including geographies, productsand services; (7) an interruption or failure of our information systems orsubversion of access or other system controls may result in a significant lossof business, assets, or competitive information; (8) significant changesin supplier terms and relationships; (9) termination of a supply orservices agreement with a major supplier or product supply shortages; (10) continuedconsolidation in the wireless handset carrier market; (11) loss of businessfrom one or more significant customers; (12) customer and geographical accountsreceivable concentration risk; (13) rapid product improvement and technologicalchange resulting in inventory obsolescence; (14) future terrorist or militaryactions; (15) the loss of a key executive officer or other key employees; (16)changes in consumer demand for multimedia wireless handset products andfeatures; (17) our failure to adequately adapt to industry changes and tomanage potential growth and/or contractions; (18) seasonal buying patterns;(19) uncertain political and economic conditions internationally; (20) theresolution of any litigation against the Company; (21) the ability of theCompany to successfully introduce and sell its *verykool*®products and the related inventory risk of such products; and (22) the abilityof the Company to generate taxable income in future periods in order to utilizeand realize any quarterly tax benefits recorded. Our actual results andcondition could differ materially from those anticipated in our forward lookingstatements.

 

InfoSonics hasinstituted in the past and continues to institute changes to our strategies,operations and processes to address risks and uncertainties and to mitigateimpact on InfoSonics’ results of operations and financial condition. However,no assurances can be given that InfoSonics will be successful in these efforts.For a further discussion of significant factors to consider concerningInfoSonics, see “Risk Factors” below in this report and “Item 1A. Risk Factors”of InfoSonics’ Annual Report on Form 10-K for the year ended December 31,2007. In addition, other risks or uncertainties may be detailed from time totime in InfoSonics’ future SEC filings.

 

**Overview**

 

We are one of the premier distributors and providers of wirelesshandsets and accessories in Latin America. We provide end-to-end handset andwireless terminal solutions for carriers in Latin America. We distributeproducts of several key original equipment manufacturers (OEMs), includingSamsung, LG, and others. We are also involved in the designing, sourcing anddistribution of a proprietary line of products under our own *verykool®*brand, which includes entry level, mid-tier and high-end products.

 

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As an integral part of our customers’ supply chain, we perform valueadded services and solutions, including product approval and certification,light assembly, warehousing, logistics services (packing, shipping anddelivery), marketing campaigns, warranty services and end-user support. Weprovide these services for OEMs and for our own *verykool*®products in order to facilitate sales to carriers, agents, resellers,distributors, independent dealers and retailers in Latin America. During thefirst quarter of 2007, we initially introduced a proprietary line of handsetsand accessories under the*verykool®* brand, for which we are involved in severalaspects, including the design and feature sets determination, and contract withvarious design and contract manufacturers in Asia to develop exclusive orsemi-exclusive products for us.

 

Due to seasonal and other factors,our interim financial condition or operating results may not be indicative offiscal year 2008 or other future financial condition or operating results. Ourfinancial condition and operating results are influenced by several seasonal,general economic and other factors, which may cause our financial condition andoperating results to fluctuate on a quarterly basis, including, but not limitedto, the timing and introduction of new products by our suppliers and competitors,promotions and subsidies by network operators, technical and certificationdelays by industry bodies as well as operators, purchasing patterns ofcustomers, the timing of holidays, the success of our proprietary *verykool®* products line and other events affectingconsumer demand.

 

**Areas ofManagement Focus and Performance Indicators**

 

We focus on the needs of our customers, developing and maintainingclose relationships with manufacturers, expanding in current and entering newmarkets and exiting markets, as determined appropriate, and sourcing anddeveloping new and innovative products, while maintaining close attention tooperational efficiencies and costs. We intend to increase shipping volumes andimprove efficiencies to the extent possible based on market conditions inefforts to attain profitability and earnings growth. We provide distributionand other services for OEMs, such as Samsung and LG and our own proprietaryline of *verykool®*handsets. Performance indicators that are key for the monitoring and managementof our business include operating and net income, cost of sales and grossmargin percentage, operating expenses as a percent of revenues, and overall netsales growth, as well as balances of accounts receivable and inventory. We makeextensive use of our customized information system to closely monitor allaspects of our business, including customer relationship management,intelligent purchasing, inventory control, inventory flow, line item margincontrol for every order, and weighted-average cost and statistical data for ourproducts, customers and suppliers, as appropriate. We believe a strong focus onproviding better service to customers leads to increased customer satisfactionand retention and potential increases in sales.

 

Management spends a significant amount of timetraveling to Latin America and Asia with the purpose of spending time with keycustomers, suppliers and employees. We believe that these relationships arevital to our success, and we will continue to dedicate a significant amount oftime to this area.

 

**IndustryTrends and Risks**

 

  According to an October 2008 report by Cowen andCompany, 2007 overall worldwide wireless handset sales increased byapproximately 16% over 2006, and are forecasted to increase 10% in 2008 and 5%in 2009. The two largest areas of growth are the Africa and Asia Pacificregions in which we do not currently operate. A rapid decline in wirelesshandset sales in the Latin American markets we serve has and could continue tonegatively impact our net sales. Excess supply conditions and the currenteconomic downturn has and may continue to reduce the demand for our productsand market prices of the products we sell and therefore affect our ability togenerate net sales and gross profit at expected levels and could continue toaffect the value of our inventory. Conversely, should manufacturers be unableto respond to an unanticipated increase in demand on a timely basis, we, alongwith others in our industry, could experience supply constraints that wouldaffect our ability to deliver products. We are unable to quantify theseeffects, as it is difficult to predict future supply conditions and demandpatterns which affect our ability to meet customer demand or sell handsets atan acceptable gross profit.

 

During the second and third quarters of 2008 in particular, ourindustry was impacted by the economic slowdown impacting the United States andthe rest of the world. We believe that some of the countries in the regions weoperate, particularly in Central America, have close economic relations withthe United States, and have been impacted by the economic situation during thesecond and third quarters of 2008 in the United States in particular, as wellas, generally globally. We believe this impacted consumer demand for wirelesshandsets in some of the countries we operate, and therefore our overalloperations, including net sales, during the second and third quarters of 2008were adversely impacted.

 

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**CompanySpecific Trends and Risks**

 

Our long-term strategy incorporates overall marketgrowth elements for our business, which we hope will result in future growth aseconomic conditions recover. Certain of our manufacturers entered into thelow-tier handset market during 2007 and continue to market them in 2008, whichhas had a positive impact on our volumes of handsets sold, but a negativeimpact on gross profit margin. Our *verykool®*proprietary line of products, for which we have six models selling as of September 30,2008, continued to show orders and sales during the first nine months of 2008and is expected to become an increasing part of our overall business in thefuture.

 

The addition of *verykool®* andLG products during 2007 and the first nine months of 2008 continues to assistwith manufacturer and product diversification for Central and South America,which should be beneficial as we move forward and work towards profitabilityagain. We have complete control over the *verykool®* lineof products, whereas for LG products we perform distribution and other servicesto the extent needed by LG. On a sequential quarterly basis, we were able tomaintain our gross margins at 5.5% for the quarter ended September 30,2008, compared to the quarter ended June 30, 2008, and increased ascompared to 5.3% for the quarter ended March 31, 2008 and 4.3% for thequarter ended December 31, 2007. These results were primarily due to thevolume and product mix of our *verykool*®products and continued focus on higher margin products.

 

In the United States, we have halted substantially allsales. Much of our significant United States customer base completed thetransitional stage as regional carriers, including some of our customers beingacquired in 2007 by AT&T, TMobile USA and Verizon Wireless. With ourpotential United States customer base significantly reduced, we decided duringthe second quarter of 2008 to discontinue this portion of our operations,together with a discontinuation of our operations in Mexico, which we continuedto implement in the third quarter of 2008. These two areas accounted for lessthan 1% of our net sales in the first nine months of 2008, as compared to 13%of our net sales for the first nine months of 2007.

 

**Recent Events**

 

On July 10, 2008, InfoSonics Corporation, (the “Company”)received a Nasdaq Staff Deficiency letter indicating that for the last thirtyconsecutive business days the bid price for the Company’s common stock hadclosed below the minimum $1.00 per share requirement for continued listing onThe Nasdaq Stock Market under Nasdaq Marketplace Rule 4450(a)(5). Inaccordance with Nasdaq Marketplace Rule 4450(e)(2), the Company wasprovided an initial period of 180 calendar days, or until January 6, 2009,to regain compliance. The letter stated that the Nasdaq staff would providewritten notification that the Company had achieved compliance with Rule 4450(a)(5) ifat any time before January 6, 2009, the bid price of the Company’s commonstock closed at $1.00 per share or more for a minimum of ten consecutivebusiness days, although the letter also stated that the Nasdaq staff haddiscretion to require compliance for a period in excess of ten consecutive businessdays, but generally no more than twenty consecutive business days, undercertain circumstances.  On October 16, 2008, Nasdaq implemented atemporary suspension of enforcement of Nasdaq Marketplace Rule 4450(a)(5) untilFriday, January 16, 2009, due to the volatility of then current marketconditions. As a result of the temporary suspension, Nasdaq informed theCompany that its deadline for compliance with Nasdaq Marketplace Rule 4450(a)(5) wasextended from January 6, 2009 to April 13, 2009.

** **

During this period before April 13, 2009, absentthe occurrence of any unexpected events, the Company’s common stock is expectedto continue to trade on The Nasdaq Global Market. If compliance with NasdaqMarketplace Rule 4450(a)(5) cannot be demonstrated by April 13,2009, the staff of The Nasdaq Stock Market Listing Qualifications department isexpected to deliver a written notification to the Company that its securitieswill be delisted from The Nasdaq Global Market. If the Company receives adelisting notice, the Company may appeal the Nasdaq staff’s determination to aListing Qualifications Panel. Alternatively, the Company may apply to transferits securities to The Nasdaq Capital Market or another exchange or tradingmarket.  The Company intends to monitor the bid price of its common stockand consider available options if its common stock does not trade at a levellikely to result in the Company regaining compliance with Nasdaq’s minimum bidprice rule.

 

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**Results ofOperations**

 

***Three Months ended September 30,2008 Compared with Three Months ended September 30, 2007***

 

**Net Sales**

 

For the three months ended September 30,2008, our net sales from continuing operations of $52.9 million decreased 18%compared to our net sales from continuing operations of $64.4 million for thesame period of 2007. Average selling price of wireless handsets sold in thethird quarter of 2008 increased 2%, as compared to the third quarter of 2007,due primarily to increased volume of higher-priced handsets, including some ofour *verykool®* and OEM products. However,this increase was more than offset by a 22% decrease in overall wirelesshandset sales volume, due to the impact of the worsening economic slowdown inthe markets we serve during the third quarter 2008. The geographic mix of netsales shifted in the third quarter of 2008 as sales in South America increasedto more than 83% of net sales, as compared to 65% of net sales for the thirdquarter of 2007. Sales in Central America decreased to 17% of total net salesin the quarter ended September 30, 2008, as compared to 36% in the quarterended September 30, 2007. These regional shifts in net sales were theresult of the factors discussed below.

 

In South and Central America, we have continued towork to expand our customer base as well as our geographic presence by seekingadditional customers and further business with existing customers. In addition,we continued efforts to market and sell our proprietary *verykool*®line of products in South and Central America. In South America, net sales were$44.1 million for the quarter ended September 30, 2008, a 7% increase fromthe same quarter in 2007. This increase was primarily due to increased sales inexisting countries and the addition during the first half of 2008 of a newcarrier relationship in Colombia. In Central America, net sales decreased 62%to $8.8 million for the quarter ended September 30, 2008, which wasprimarily due to the continuing unusually low demand during the quarter, whichwe believe was related to the worsening worldwide economic downturn.

 

**Net Salesby Geographic Region**

 
| ** **      | ** ** | **For the Three Months  Ended September 30,** | ** ** | **Increase** | ** ** |
|-----------------|------------|------------------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2008**                                                               | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)**          | ** ** | ** **   | ** ** |
| Central America |       | 8,826                                                                  |       | 23,331       |       | (62 | )% |
| South America   |       | 44,058                                                                 |       | 41,067       |       | 7 | % |
| Total           |       | 52,884                                                                 |       | 64,398       |       | (18 | )% |

 

**Cost of Sales, Gross Profit and Gross Margin**

 

For the quarter ended September 30, 2008, cost ofsales was $49.9 million, or 94.5% of net sales, and gross margin was 5.5%, ascompared with $60.5 million, or 93.9% of net sales, and 6.1% for gross marginfor the quarter ended September 30, 2007. The increase in our cost of salesas a percentage of net sales and decrease in gross margin were due to the lowerlevels of sales and product mix shift, including increased sales of low-marginproducts. Some of our OEM partners previously entered into the low-tier handsetrange, which has had less margin opportunity than mid-tier and high-endhandsets sales. This was partially offset by sales of our *verykool*®proprietary products, which generally have gross margins higher than OEMproduct sales. Our gross margin continues to be impacted by the change ofproduct and regional mix of our sales, as different products and differentregions have varying margins, as well as the worsening economic downturn.

 

For the quarter ended September 30, 2008, ourgross profit decreased to $2.9 million from $3.9 million, as compared with thesame quarter last year, a decrease of 26%. This decrease in gross profit wasprimarily the result of the decreased net sales which was further impacted bythe decrease in gross margin due to product mix shift.

 
| ** **    | ** ** | **For the Three Months  Ended September 30,** | ** ** | **Increase** | ** ** |
|---------------|------------|------------------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2008**                                                               | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)**          | ** ** | ** **   | ** ** |
| Net sales     |       | $                                                                      | 52,884     |         | $          | 64,398 |   | (18 | )% |
| Cost of sales |       | 49,982                                                                 |       | 60,459       |       | (17 | )% |
| Gross profit  |       | $                                                                      | 2,902      |         | $          | 3,939 |   | (26 | )% |
| Gross margin  |       | 5.5                                                                    | %          | 6.1          | %          | (10 | )% |

 

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**Operating Expense and Operating Income (Loss) fromContinuing Operations**

** **

For the quarter ended September 30, 2008,operating expense decreased 11%, as compared with the same quarter lastyear.  As a percentage of net sales fromcontinuing operations, operating expense increased to 6.1% in the quarter endedSeptember 30, 2008, as compared with 5.6% for the same quarter lastyear.  The increase in operating expense asa percentage of net sales was primarily due to the decrease in total net sales;however, the decrease in operating expense was due to management efforts toreduce overall operational costs to match current market conditions.  Management believes that pursuant to itsefforts, and assuming economic conditions improve, future sales and marginscould provide gross profits to better cover operational costs.  In addition, management continues to reviewexpenses in an effort to better match the operational costs with the futurebusiness opportunities.   We believe suchmeasures will assist us as we strive to return to continued profitability.

 

For the quarter ended September 30, 2008, ouroperating loss from continuing operations was $309,000, as compared with operatingincome from continuing operations of $317,000 for the quarter ended September 30,2007. As a percentage of net sales, operating loss from continuing operationswas 0.5% for the quarter ended September 30, 2008, compared to income of0.5% for the quarter ended September 30, 2007. The decrease in operatingincome from continuing operations was a result of the decrease in gross marginsand gross profits due to the factors discussed above.

 

**OperatingExpense**

 
| ** **              | ** ** | **For the Three Months  Ended September 30,** | ** ** | **Increase** | ** ** |
|-------------------------|------------|------------------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2008**                                                               | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)**          | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                                      | 52,884     |         | $          | 64,398 |   | (18 | )% |
| Operating expense       |       | $                                                                      | 3,211      |         | $          | 3,622 |   | (11 | )% |
| Percentage of net sales |       | 6.1                                                                    | %          | 5.6          | %          | (9 | )% |

 

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

 
| ** **                                          | ** ** | **For the Three Months****Ended September 30,** | ** ** | **Increase** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                          | ** ** | **2008**                                                                 | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **                                          | ** ** | **(Dollar amounts in thousands)  (unaudited)**            | ** ** | ** **   | ** ** |
| Net sales                                           |       | $                                                                        | 52,884     |         | $          | 64,398 |   | (18 | )% |
| Operating income (loss) from continuing  operations |       | $                                                                        | (309       | )            | $          | 317 |   | (197 | )% |
| Percentage of net sales                             |       | (0.6                                                                     | )%         | 0.5          | %          | (200 | )% |

 

**OtherIncome**

** **

Duringthe third quarter of 2008, the Company settled an outstanding claim against aformer service provider in which the Company received a gross amount of$655,000, of which $87,000 represented reimbursement for legal fees and alsohad a gain of $85,000 related to revenue sharing negotiations and an insurancesettlement.   During the same period inthe prior year, we received $2.1 million in compensation due to our agreementto an early termination and relocation for our corporate headquarters. Duringthe third quarter of 2008, we also incurred $34,000 of interest expense,compared to $360,000 for the same period last year, primarily due to a loweraverage outstanding balance on our line of credit, as compared to the sameperiod in the prior year.  We expect toregularly utilize amounts on our revolving line of credit, which will impactour interest expense in future periods depending on applicable interest rates,among other things.

 
| ** **                | ** ** | **For the Three Months  Ended September 30,**       | ** ** | **Increase** | ** ** |
|---------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **                | ** ** | **2008**                                                      | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **                | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Other Income              |       | $                                                             | 653        |         | $          | 2,095 |   | (69 | )% |
| Interest income (expense) |       | (34                                                           | )          | (360         | )          | (91 | )% |
| Total                     |       | $                                                             | 619        |         | $          | 1,735 |   | (64 | )% |

 

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**NetIncome from Continuing Operations**

 

Duringthe quarter ended September 30, 2008, our net income from continuingoperations was $182,000, as compared to $1.9 million for the quarter ended September 30,2007.  This net income from continuingoperations was primarily due to the settlement discussed above, partiallyoffset by our operating loss from continuing operations.

 

**NetLoss from Discontinued Operations**

*** ***

Duringthe quarter ended June 30, 2008, the Company assessed opportunities in theUnited States and Mexico and decided to implement actions necessary to closesales operations in both of those countries, which we continued to implement inthe third quarter of 2008.  For the quarter ended September 30, 2008,we incurred a loss of approximately $81,000 from discontinued operations, ascompared to a loss of $1.5 million for the quarter ended September 30,2007.  The loss was a result of very low sales in the U.S. and Mexicoduring the third quarter of 2008, as we continued to wind down our business inthese areas. As of September 30, 2008, our plans for the discontinuedoperations were substantially complete; however, the Company expects tocontinue to record adjustments and expenses through the discontinued operationsas necessary.

 

***Nine Months ended September 30,2008 Compared with Nine Months ended September 30, 2007***

 

**Net Sales**

** **

For the nine months ended September 30,2008, our net sales from continuing operations of $179.9 million increased 11%compared to our net sales from continuing operations of $161.9 million for thesame period of 2007.  Wireless handsetssold in the first nine months of 2008 increased 12%, as compared to the firstnine months of 2007, due primarily to volume increases in South America withexisting and new customers.  However, thevolume increase was offset by a 3% decrease in the average selling price ofhandsets, due to a higher mix of low-tier products sold.  Net sales in Central America decreased 18%for the nine months ended September 30, 2008, as compared to the sameperiod a year earlier, and accounted for 24% of net sales for the nine monthsended September 30, 2008.  Our SouthAmerica sales continued to represent the majority of our business, accountingfor 76% of our net sales in the first nine months of 2008, as compared to 67%of our net sales for the first nine months of 2007.  These regional shifts in net sales were theresult of a number of factors discussed above and below.

 

In South and Central America, we have continued towork to expand our customer base as well as our geographic presence by seekingadditional customers and further business with existing customers, which has resultedin generally increased net sales over the past several years.  In addition, we continued efforts to marketand sell our proprietary *verykool*® lineof products in Central and South America. In South America, net sales were $136.3 million for the nine monthsended September 30, 2008, a 25% increase from the same period of2007.  This increase was primarily due toincreased sales in existing countries and the opening of a new carrierrelationship during the first half of 2008 in Colombia.  In Central America, net sales decreased 18%to $43.5 million for the nine months ended September 30, 2008, which wasprimarily due to an unusually low demand during the second and third quartersof 2008, which we believe was related to the worldwide economic downturn.

 

**Net Salesby Geographic Region**

 
| ** **      | ** ** | **For the Nine months****Ended September 30,** | ** ** | **Increase** | ** ** |
|-----------------|------------|-------------------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2008**                                                                | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)**           | ** ** | ** **   | ** ** |
| Central America |       | $                                                                       | 43,520     |         | $          | 52,941 |   | (18 | )% |
| South America   |       | 136,337                                                                 |       | 108,953      |       | 25 | % |
| Total           |       | $                                                                       | 179,857    |         | $          | 161,894 |   | 11 | % |

 

**Cost of Sales, Gross Profit and Gross Margin**

** **

For the nine months ended September 30, 2008,cost of sales was $170.1 million, or 94.6% of net sales from continuingoperations, and gross margin was 5.4%, as compared with $152.6 million, or94.3% of net sales from continuing operations, and 5.7% for gross margin forthe nine months ended September 30, 2007. The increase in our total costof sales as a percentage of net sales was due to higher levels of sales oflower margin products.   Our gross margincontinues to be impacted by the change of product and regional mix of oursales, as different products and different regions have varying margins, aswell as the economic downturn.

 

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For the nine months ended September 30, 2008, ourgross profit increased to $9.7 million from $9.3 million for the same period in2007, an increase of 4%. This increase in gross profit was primarily the resultof overall increased sales levels, which was offset by a decrease in our grossmargin due to the shift in the product mix of our sales.

 
| ** **    | ** ** | **For the Nine Months  Ended September 30,** | ** ** | **Increase** | ** ** |
|---------------|------------|-----------------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2008**                                                              | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)**         | ** ** | ** **   | ** ** |
| Net sales     |       | $                                                                     | 179,857    |         | $          | 161,894 |   | 11 | % |
| Cost of sales |       | 170,141                                                               |       | 152,592      |       | 12 | % |
| Gross profit  |       | $                                                                     | 9,716      |         | $          | 9,302 |   | 4 | % |
| Gross margin  |       | 5.4                                                                   | %          | 5.7          | %          | (5 | )% |

 

**Operating Expense and Operating Loss fromContinuing Operations**

** **

As a percentage of net sales from continuingoperations, operating expense decreased to 5.6% in the nine months ended September 30,2008, compared with 5.8% in the same period last year.  The decrease in operating expense as a percentageof net sales was due to the increased overall net sales volume without aproportionate increase in related expenses. For the nine months ended September 30, 2008, operating expensesincreased to $10.1 million as compared to $9.4 million for the same period lastyear.  The increase of expenses of 8% isprimarily due to increased sales levels of 11% as discussed above.

 

For the nine months ended September 30, 2008, ouroperating loss from continuing operations was $412,000, as compared withoperating loss from continuing operations of $68,000 for the nine months ended September 30,2007. As a percentage of net sales, our operating loss was 0.2% for the ninemonths ended September 30, 2008, compared to an operating loss of 0.1% forthe same period in 2007. The increase in operating loss was primarily a resultof the decrease in gross margin due to the factors discussed above.

 

**OperatingExpense**

 
| ** **              | ** ** | **For the Nine Months****Ended September 30,** | ** ** | **Increase** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2008**                                                                | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)**           | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                                       | 179,857    |         | $          | 161,894 |   | 11 | % |
| Operating expense       |       | $                                                                       | 10,128     |         | $          | 9,370 |   | 8 | % |
| Percentage of net sales |       | 5.6                                                                     | %          | 5.8          | %          | (3 | )% |

 

**Operating Loss from Continuing Operations**

 
| ** **              | ** ** | **For the Nine Months****Ended September 30,** | ** ** | **Increase** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2008**                                                                | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)**           | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                                       | 179,857    |         | $          | 161,894 |   | 11 | % |
| Operating loss          |       | $                                                                       | (412       | )            | $          | (68 | ) | (506 | )% |
| Percentage of net sales |       | (0.2                                                                    | )%         | (0.0         | )%         | (100 | )% |

 

**OtherIncome**

 

Duringthe third quarter of 2008, the Company settled an outstanding claim against aformer service provider in which the Company received a gross amount of$655,000, of which $87,000 represented reimbursement for legal fees.   During the same period in the prior year, wereceived $2.1 million in compensation due to our agreement to an earlytermination and relocation for our corporate headquarters. In addition, duringthe nine months ended September 30, 2008, we incurred $477,000 of interestexpense, compared to $642,000 for the nine months ended September 30,2007, with the decrease primarily due to higher average outstanding balance andinterest rate on our line of credit during the nine months ended September 30,2007, as compared to the same period in the current year.  We expect to regularly utilize amounts on ourrevolving line of credit, which will impact our interest expense in futureperiods depending on applicable interest rates, among other things.

 

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| ** **                | ** ** | **For the Nine Months****Ended September 30,** | ** ** | **Increase** | ** ** |
|---------------------------|------------|-------------------------------------------------------------------------|------------|--------------|------------|
| ** **                | ** ** | **2008**                                                                | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **                | ** ** | **(Dollar amounts in thousands)****(unaudited)**         | ** ** | ** **   | ** ** |
| Other Income              |       | $                                                                       | 583        |         | $          | 2,095 |   | (72 | )% |
| Interest income (expense) |       | (477                                                                    | )          | (642         | )          | (26 | )% |
| Total                     |       | $                                                                       | 106        |         | $          | 1,453 |   | (93 | )% |

 

**NetIncome (Loss) from Continuing Operations**

 

Duringthe nine months ended September 30, 2008, our net loss from continuingoperations was $308,000, as compared to net income from continuing operationsof $1.5 million in the same period last year. This net loss was primarily related to increased operational expensesand investments relating primarily to the establishment and increased sales ofour proprietary line of *verykool**®* products during the first nine months of 2008,partially offset by our increased net sales, including those of our *verykool**®* products, gross profits, and the settlementdiscussed above during the first nine months of 2008.

 

**NetLoss from Discontinued Operations**

 

Forthe nine months ended September 30, 2008, we incurred a loss of $2.2million from discontinued operations, similar to the loss of $2.2 million forthe nine months ended September 30, 2007.  The loss in the currentperiod was primarily a result of decreased sales in the U.S. and Mexico and ourdecision to close sales operations in those regions during 2008, and we had towrite-down accounts receivable and inventory associated with those operations.See “Discontinued Operations under Three Months Ended September 30, 2008 comparedwith the Three Months ended September 30, 2007”, above.

 

**FinancialCondition, Liquidity and Capital Resources**

** **

Wegenerally use cash from our sales of products, lines of credit (bank andvendor) and sale and exercise of securities (from time to time), to providecapital needed to support our business.

 

**Cash Used inOperating Activities**

** **

At September 30, 2008, we had $10.2 million incash, a decrease of $10.5 million from December 31, 2007.  During the nine months ended September 30, 2008, weused cash and continued to leverage our bank and vendor lines of credit to fundour operations and growth.  The decreasein our use of the bank line of credit was directly related to the cashcollected as seen in the decrease accounts receivable and the decrease ininventory levels during the nine months ended September 30, 2008.   The net cash provided by operatingactivities was $2.4 million for the nine months ended September 30, 2008,which resulted primarily from decreased inventory and increased accrued expensespartially offset by increased accounts receivable and decreased accountspayable.  The increase in receivables wasprimarily due to the amounts due from our insurance carrier related to ourpending settlement of our class action and derivative lawsuits.  Inventory decreased by $5.5 million andprepaid inventory decreased by $0.4 million, resulting in a total decrease of$5.9 million in inventory levels.  Thisdecrease was partially attributable to the increased sales levels of the *verykool*® products as we continued to expand the geographiccountries and sales of these products, in addition to our efforts to reduceoverall inventory levels due to the recent change in economic worldwideconditions. Accounts payable at September 30, 2008 decreased $9.0 million,compared to December 31, 2007, primarily due to payments to vendors andpartners in the ordinary course during the nine months ended September 30,2008.  In addition, accrued expensesincreased $6.4 million, primarily due to the pending settlement payable toplantiffs of our class action and derivative lawsuits, in addition to timing ofexpenses and payments during the nine months ended September 30, 2008.

 

**Days of SalesOutstanding**

** **

Days of sales outstanding (the average number of days ittakes to collect revenue after a sale is made) at September 30, 2008 were68 days, compared with 67 days at December 31, 2007.  This increase was due to a few customersmaking 

 

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paymentsshortly after the close of the third quarter of 2008, as more than 53% of ouraccounts receivable at September 30, 2008 were collected during the firstfive weeks of the fourth quarter.  Normalpayment terms require our customers to pay on a net 30-day or net 60-day basisdepending on the region. We are constantly working with our customers to reduceour days of sales outstanding. The extension of net 60-day terms was requiredto remain competitive in the regions we primarily operate, Central and SouthAmerica. In an effort to obtain new customers and penetrate new markets, wesometimes offer terms beyond our normal terms.

 

**Cash Used inInvesting Activities**

** **

The net cash used in investing activities was $67,000 forthe nine months ended September 30, 2008, compared to net cash used of$1.3 million for the nine months ended September 30, 2007. This use ofcash was primarily the result of our investment related to geographicexpansion, tooling and molds for our proprietary *verykool®*products.

 

**Cash Used inFinancing Activities**

** **

The net cash used in financing activities for the ninemonths ended September 30, 2008 of $12.8 million was primarily the resultof payments on our bank line of credit, partially offset by approximately$34,000 from the exercise of employee stock options.

 

**WorkingCapital**

** **

Our net working capital at September 30, 2008 was$31.8 million, as compared with $33.7 million at December 31, 2007. Thisdecrease was primarily due to decreases in accounts payable and amounts drawnon our line of credit in addition to decreased inventory levels, for the ninemonths ended September 30, 2008.

 

**Borrowings**

** **

Until April 30, 2008, we had a line of credit from WellsFargo HSBC Trade Bank N.A., which provided for advances not to exceed 80% ofeligible domestic accounts receivable and up to 85% of foreign-insured accountsreceivable (depending on the country of the debtor), up to a maximum of $30million.

 

On April 30, 2008, theCompany entered into a Loan,Security and Bulk Purchase Agreement and a Letter of Credit and SecurityAgreement (collectively, the “Agreement”) with Wells Fargo Century, Inc. (the“Lender”), replacing the then existing asset-based secured creditfacility with Wells Fargo HSBC TradeBank, N.A.  Pursuant to the Agreement,Lender may advance up to $45,000,000 to the Company based on the expectedcollections of eligible receivables as well as value of the Company’s eligibleinventory determined in accordance with the Agreement.  The outstanding advances may not exceed thelesser of (i) $45,000,000 or (ii) the sum of the value of theeligible receivables and eligible inventory multiplied by their respectiveadvance rates as set forth in the agreement ($32.2 million as of September 30,2008).  The credit facility has atwo-year term ending April 2010 and is secured by all assets of theCompany. The interest rate for each borrowing under the credit facility is, atthe option of the Company, either the Wells Fargo Bank N.A. prime rate minus0.50% (5.00%at September 30, 2008)  orthe LIBOR rate plus 2.00% (2.93% at September 30, 2008).As of September 30, 2008, the majority of our debt was based onforeign-insured accounts receivable.

 

We have no other notes payable.

 

At September 30,2008 and December 31, 2007, the amounts drawn against the applicable lineof credit were $13.9 million and $26.8 million, respectively.  Credit lines have been an importantpart of operating and growing our business, and market changes affectingaccounts receivable have, and will in the future, diminish or increase theborrowing base of available funds under our current credit line. At September 30,2008 and December 31, 2007, advances were at 43% and 96% of the availableborrowing 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.

 

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*RevenueRecognition and Allowance for Returns*

* *

Revenuesfor wireless handset and accessory sales are recognized when (i) shipmentof the products to customers has occurred and title has passed, (ii) whencollection of the outstanding receivables is probable and (iii) the finalprice of the products is determined. Sales are recorded net of discounts,rebates, cooperative arrangements (marketing, training and promotional funds),returns, and allowances. Consideration is given on select sales for cooperativearrangements related to market development, training and special promotions,usually agreed upon in advance. The amount given is generally in the form of acredit memo, which is applied as a reduction of the sale price and such amountis recorded as a current liability. Expenditures made pursuant to the agreedupon activity reduce this liability. To the extent that we incur costs inexcess of the established cooperative fund, we recognize that amount as aselling or marketing expense. As part of the sales process, we may performcertain value added services such as programming, software loading and qualityassurance testing. These value added services are considered an ancillarycomponent of the sales process and amounts attributable to these processes areincluded in the unit cost to the customer. Furthermore, these value addedservices are related to services prior to the shipment of the products, and novalue added services are provided after delivery of the products. We recognizea reserve against the related receivables estimates for product returns basedon historical experience and other judgmental factors. We evaluate theseestimates on an on-going basis and adjust the estimates each period based onactual product return activity. We recognize freight costs billed to ourcustomers in revenue and actual freight costs incurred as a component of costof sale.

 

*Allowancefor Doubtful Accounts*

 

The Company recognizes allowances for doubtfulaccounts based on the length of time the receivables are past due, the currentbusiness environment and the Company’s historical experience.  Credit evaluations are undertaken for allmajor sales transactions before shipment is authorized. Normal payment termsrequire payment on a net 30 or 60-day basis depending on the customer. On anongoing basis, we analyze the payment history of customer accounts, includingrecent customer purchases. We evaluate aged items in accounts receivable andprovide reserves for doubtful accounts. Customer creditworthiness and economicconditions may change, including increasing the risk of collectability 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 willgenerally provide a full reserve for the costs of our inventories in excess ofour relevant demand forecast for the applicable period. We attempt to controlour inventory 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 financial condition.

 

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

** **

The primary objective of the following information is to provideforward-looking quantitative and qualitative information about our potentialexposure to market risks. The term “market risk” for us refers to the risk ofloss 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 interest rates on ouroutstanding revolving line of credit. At September 30, 2008, we had $13.9million outstanding under our line of credit, which could be affected bychanges in short-term interest rates. Under our credit facility that we enteredinto in April 2008, the interest rate for funds borrowed is (i) WellsFargo’s prime rate minus 0.50% (5.00% at September 30, 2008) or LIBOR plus2.00% (2.93% at September 30, 2008). For every 1% increase in Wells Fargo’sprime rate or one-month LIBOR, our interest expense increases by $139,000annually assuming $13.9 million remained outstanding for the entire year.

 

The above sensitivity analysis for interest-rate risk excludes accountsreceivable, accounts payable and accrued liabilities because of the short-termmaturity of such instruments. The analysis does not consider the effect interest-ratemovement may have on other variables relating to our business, includingchanges in sales volumes that could be indirectly attributed to changes ininterest rates. The actions that we would take in response to such a change arealso not considered. If it were possible to quantify this impact, the resultscould differ from the sensitivity effects shown above.

 

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**Market Risk**

** **

Virtually all portions of our revenue and expenses are transacted inmarkets outside the United States; however, all sales transactions and accountsreceivable are denominated in U.S. dollars. As a result of our internationalsales, our future operating results could be adversely affected by a variety offactors, including changes in specific countries’ political, economic orregulatory conditions, and trade protection measures.  Our market risk management includes anaccounts receivable insurance policy for our sales.  However, there can be no assurance that ourinsurance policy will substantially offset the impact of fluctuations incurrency exchange rates, political, economic or regulatory conditions on ourresults of operations and financial position. Foreign currency fluctuations didnot have a material impact on our financial results during the three and ninemonths ended September 30, 2008.   See “Consolidated Statement ofComprehensive Operations” in our financial statements included in this report.

 

**Item 4T.Controls and Procedures**

** **

**Disclosure Controls**

 

Our management has evaluated, under the supervisionand with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the design and operation of our disclosurecontrols and procedures as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of theperiod covered by this Quarterly Report pursuant to Rule 13a-15(b) underthe Exchange Act. Based on that evaluation, our Chief Executive Officer andChief Financial Officer have concluded that, as of the end of the periodcovered by this Quarterly Report, our disclosure controls and procedures wereeffective to ensure that (i) information required to be disclosed by us isaccumulated and communicated to our management as appropriate to allow timelydecisions regarding required disclosure and (ii) information required tobe disclosed by us in the reports that we file or submit under the Exchange Actis recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

**Changes in Internal Control over FinancialReporting**

 

The Chief Executive Officer and President and the ChiefFinancial Officer conducted an evaluation of our internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) (“Internal Control”) to determine whether any changes in InternalControl occurred during the quarter ended September 30, 2008, that havematerially affected or which are reasonably likely to materially affectInternal Control. Based on that evaluation, no such change occurred during suchperiod.

 

**PART II.OTHER INFORMATION**

** **

**Item 1. LegalProceedings**

** **

*Securities Class Actions*

* *

In the securities class action, captioned *In Re: InfoSonicsCorporation Securities Litigation*, Lead Case No. 06 CV 1231,now pending before Judge Sammartino in the United States District Court for theSouthern District of California, Plaintiffs filed a third amended consolidatedcomplaint on May 23, 2008 against the Company and certain of its officersand directors.  The two prior complaints(including claims therein based on defendants’ restatement of first quarter2006 earnings) were dismissed in part by the Court, with leave to amend.  The third amended consolidated complaintalleges violations of Section 10(b) of the Exchange Act andassociated Rule 10b-5, Section 20(a) and Section 20A inconnection with the announcement of the Company’s restatement of first quarter2006 earnings and in connection with allegedly false and/or misleadingstatements related to the Company’s distribution of the VK Mobile phone.  Plaintiffs seek a declaration that theiraction is a proper class action pursuant to Rule 23(a) and (b)(3),unspecified damages, prejudgment and post-judgment interest, attorneys’ fees,expert witness fees, other costs, and other unspecified relief.  The plaintiffs purport to represent a classof purchasers of the Company’s stock during the period February 6, 2006 toAugust 9, 2006.  On August 8,2008, prior to defendants filing a motion to dismiss or other responsivepleading to the third amended consolidated complaint, the parties entered intoa Memorandum of Understanding to resolve the case.  On October 17, 2008, the parties entereda Stipulation and Agreement of Settlement (the “Securities Settlement”) of thecase, which provides the securities class action settlement is 

 

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contingent on preliminary and final Court approval (after appropriatenotice), as well as settlement of the derivative action noted below, amongother contingencies**,** and providesfor, among other things, a dismissal with prejudice of the lawsuit, releases ofthe defendants, and a payment by the Company or its insurer of $3.8 million toplaintiffs (inclusive of any plaintiffs’ attorneys fees, to be determined bythe Court).  It is anticipated that thesettlement payment will be funded entirely by the Company’s insurer.  The Securities Settlement further providesthat defendants deny any liability or responsibility for the claims made andmake no admission of any wrongdoing.  On October 30,2008, the Court took under submission without oral argument the request for anorder preliminarily approving the Securities Settlement.

 

*Derivative Action*

* *

In the derivative action, captioned *In Re InfoSonics Corporation Derivative Litigation*,Lead Case No. 06 CV 1336, now pending before Judge Sammartino in theUnited States District Court for the Southern District of California,plaintiffs filed a consolidated complaint on November 6, 2006 purportedlyon behalf of the Company against certain of its officers and directors, and theCompany as a nominal defendant.  Theconsolidated complaint alleges claims for violations of Section 14(a) ofthe Exchange Act, Sections 25402 and 25403 of the California Corporations Code,disgorgement under the Sarbanes-Oxley Act of 2002, breach of fiduciary duty,abuse of control, gross mismanagement, waste of corporate assets, unjustenrichment, rescission, a constructive trust, and an accounting, in connectionwith the Company’s restatement of first quarter 2006 earnings and in connectionwith allegations of wrongdoing with respect to granting, exercising, accountingand reporting of the 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 motion to dismiss the consolidatedcomplaint on the grounds, among others, that the plaintiffs had failed to makea demand on the Company’s board of directors and to adequately allege theirother purported claims.  On September 4,2007, the Court granted defendants’ motion to dismiss for failure to make ademand on the board, and also granted with prejudice the motion to dismiss theSarbanes-Oxley claim.  On August 6,2008 the parties entered into a Memorandum of Understanding to resolve thederivative case.  On October 17,2008, the parties entered into a Stipulation and Agreement of Settlement (the “DerivativeSettlement”), which provides the Derivative Settlement is contingent onpreliminary and final Court approval (after appropriate notice) of this  settlement and the securities settlementnoted above, among other contingencies, and provides for, among other things, adismissal with prejudice of the lawsuit, releases of the defendants, corporategovernances changes and a payment by the Company or its insurer of plaintiffs’attorneys fees to be ordered by the Court up to a maximum of $350,000.  It is anticipated that the settlement paymentwill be funded entirely by the Company’s insurer.  The Derivative Settlement further providesthat defendants deny any liability or responsibility for the claims made andmake no admission of any wrongdoing.  On October 30,2008, the Court took under submission without oral argument the request for anorder preliminarily approving the Derivative Settlement.

 

We may become involved in certain other legal proceedingsand claims which arise in the normal course of business. Other than asdescribed above, as of September 30, 2008, we did not have any significantlitigation outstanding.

 

**Item 1A.  Risk Factors**

** **

In addition to the riskfactors included below and other information set forth in this report, youshould carefully consider the factors discussed in “Part I. Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2007 and the “Risk Factors” sections of our first and second quarter 2008Quarterly Reports on Form 10-Q, which factors and information couldmaterially affect our business, financial condition or operating results. Therisk factors and uncertainties described in our last Annual Report on Form 10-Kand, our previous 2008 Quarterly Reports on Form 10-Q and this report arenot the only risks and uncertainties facing us. Additional risks and uncertaintiesnot currently known to us or that we currently deem to be immaterial also maymaterially affect our business, financial condition or operating results.  Except as set forth below, there have been nomaterial changes to the risk factors included in our last Annual Report on Form 10-K.

 

***We have been recently experiencing net losses andexpect net losses may continue for the near future. If we continue to operateat a loss, our business may not be financially viable.***

*** ***

We have experienced losses and negative cash flows for the year ended2007 and the first nine months of 2008. As of September 30, 2008, we had working capital of $31.8million.  Given the economic slowdown andcontraction in the wider 

 

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markets,including the U.S. and the Latin American markets that we serve and generallyglobally, we cannot adequately evaluate the financial viability of our businessand our long-term prospects.

 

To achieve profitability we must, among other things:

 

·              Continue to increase gross profitswhile controlling operational expenses;

·              Continue to work with our OEMvendors for increased margin opportunities; and

·              Generate sales and consumer demandfor our *verykool®* products.

 

If we do not succeed in these objectives, our business might continueexperiencing losses and may not be sustainable in the future.

 
| ***We have outstanding  indebtedness, which is secured by substantially all our assets and could  prevent us from borrowing additional funds, if needed.*** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*** ***

Asof September 30, 2008, we had outstanding debt in the amount of $13.9million under a bank credit facility.  In April 2008, we entered intoa Loan, Security and Bulk Purchase Agreement and a Letter of Credit andSecurity Agreement with Wells Fargo Century, Inc., which replaced our thenexisting asset-based, secured credit facility with Wells Fargo HSBC Trade Bank,N.A.  Under the new two-year credit facility, Wells Fargo Century, Inc.may advance us up to $45,000,000 based on the expected collections of eligiblereceivables as well as the value of our eligible inventory as determined inaccordance with the terms of the facility. Any significant decrease in ourlevel of eligible accounts receivable or inventory will reduce our ability toborrow additional funds under the new credit facility and may affect ourability to adequately finance our operations and expansion strategies. Further,if we violate our loan covenants, default on our obligations or become subjectto a change of control, our indebtedness would become immediately due andpayable. In addition, the terms of our new credit facility restrict us fromincurring certain additional indebtedness, which could limit our ability toexpand our operations. Some of our loan covenants subject us to, among otherthings, limits on our ability to sell certain assets and make certain payments,including, but not limited to, dividends, repurchases of common stock and otherpayments outside the normal course of business, as well as prohibitions onmerging or consolidating with another corporation or selling all orsubstantially all of our assets.  As of September 30, 2008, theCompany was in compliance with the covenants of the new credit facility.  If any of these adverse events occur or we areunable to renew our new credit facility or enter into an adequate creditrelationship as needed, our business’ financial condition or operating resultscould be negatively affected.

 

***Wehave and could lose customers or orders as well as potential customers andorders as a result of consolidation in the wireless telecommunications carrierindustry.***

*** ***

In recent years, there has been significantconsolidation in the wireless industry, particularly in the United States ruralservice area market, which has caused extreme price competition and reduced ournumber of customers and potential customers. For example, in 2007, consolidation in regional United States carriersgreatly reduced our existing and potential customer base, which negativelyimpacted our business and led to our decision to discontinue our operations inthe United States leading to a substantial loss relating to discontinuedoperations.   Additional consolidationscould further erode our current and potential markets, which could lead to,among other things, reduced sales volume and margins and greater fluctuationsin our periodic results as well as carrying value of our inventory.

 

***We buy asignificant amount of our products from a limited number of suppliers, who maynot provide us with competitive products at reasonable prices when we need themin the future.***

*** ***

Wepurchase wireless handsets and accessories principally from wirelesscommunications equipment manufacturers and distributors. We depend on thesesuppliers to provide us with adequate inventories of currently popular brandname products on a timely basis and on favorable pricing and other terms, aswell as on our suppliers’ quantity and financial stability. Forthe quarter ended September 30, 2008, two suppliers accounted for 77% and14%, respectively, of our total cost of sales.  Wecurrently have one exclusive and several non-exclusive agreements with ourprincipal suppliers, which can be terminated on short notice and provide forcertain territorial restrictions. Our suppliers may not offer us competitiveproducts on favorable terms or with timely delivery. In addition new productsfrom other manufacturers could impact the demand for products frommanufacturers we represent. From time to time, we have been unable to obtainsufficient product supplies. Any failure or delay by our suppliers,particularly our two primary vendors, in supplying us with products onfavorable 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.

 

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***The loss or reduction inorders from principal customers or a reduction in prices we are able to chargethese customers will have a negative impact upon our revenues and could causeour stock price to decline.***

*** ***

Ourthree largest customers in the quarter ended September 30, 2008represented 28%, 18% and 17% of our net sales. These customers are carriers in Latin America. The markets we serve aresubject to significant price competition. Additionally, our customers are notcontractually obligated to purchase products from us. For these and otherreasons, such as competitive pricing and competitive pressures, customers mayseek to obtain products or services from us at lower prices than we have beenable to obtain from these customers in the past. This could occur, for example,in the case of a customer purchasing large quantities of a product from us, whothen terminates this relationship because the customer can obtain a lower priceby buying directly from the manufacturer or other supplier. The loss of any ofour principal customers, a reduction in the amount of product or services ourprincipal customers order from us or the inability to maintain current terms,including price, with these or other customers could have an adverse effect onour financial condition, results of operations and liquidity. In addition, wehave experienced losses of certain customer bases through industryconsolidation and in the ordinary course of business.  Recent losses include our U.S. and Mexicocustomer bases where we decided in second quarter 2008 to discontinueoperations, thereby restricting potential customer geography. Overall, therecan be no assurance that any of our customers will continue to purchaseproducts or services from us or that their purchases will be at the same orgreater levels than in prior periods, with any such customer decisions havingthe potential to adversely affect our business operations and profitability.

 

***Almost all of our revenues will be generated outsideof the United States in countries that may have volatile currencies or otherrisks in the foreseeable future.***

*** ***

Wenow engage in all of our significant sales activities in territories andcountries outside of the United States, specifically in Latin Americancountries, as we discontinued operations in the United States as well as Mexicoin the second quarter of 2008.  All oursales transactions are completed in U.S. dollars and therefore may be impactedby changes in the strength of the U.S. dollar. Further, the fact that wedistribute a substantial amount of our products into a number of territoriesand countries other than the United States exposes us to, among other things,increased credit risks, customs duties, import quotas and other traderestrictions, potentially greater and more unpredictable inflationary andcurrency 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. Also, although we purchase and sell products and services in U.S.dollars and do not engage in exchange swaps, futures or options contracts orother hedging techniques, fluctuations in currency exchange rates could reducedemand for products sold in U.S. dollars. We cannot predict the effect thatfuture exchange rate fluctuations will have on our operating results orfinancial position. We may in the future engage in currency hedgingtransactions, which could result in our incurring significant additional financialrisks, including expenses and losses.

 

***We may not be able to continue to support the realization of ourdeferred tax asset.***

*** ***

Wecalculate income taxes in accordance with SFAS 109, Accounting for Income Taxes(“SFAS 109”), which requires the use of the asset and liability method. Inaccordance with SFAS 109, we regularly assess available positive and negativeevidence to determine whether it is more likely than not that our deferred taxasset balances will be recovered from (a) reversals of deferred taxliabilities, (b) potential utilization of net operating loss carry backs, (c) taxplanning strategies and (d) future taxable income. At September 30,2008, our deferred tax asset was $2.7 million, for which we have notestablished a valuation allowance. We recognized the deferred tax asset becausemanagement believes, based on detailed financial projections, that it is morelikely than not, we will have sufficient future earnings to utilize this assetto offset future income tax liabilities. Realization of a deferred tax assetrequires us to apply significant judgment and is inherently speculative becauseit requires the future occurrence of circumstances that cannot be predictedwith certainty. We cannot assure you that we will achieve sufficient futuretaxable income as the basis for the ultimate realization of our deferred taxasset and therefore we may have to establish a full or partial valuationallowance at some point in the future. If we determine that a valuationallowance is necessary, this would require us to incur a charge to earningsthat would adversely affect our capital position.  At September 30, 2008, we had $2.7million of allowable deferred tax assets for regulatory capital purposes, whichis the amount that is expected to be recovered based on a two-year netoperating loss carry back calculation. There is no assurance that we will beable to continue to recognize any or the entire deferred tax asset forregulatory capital purposes.

 

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***Our ability to attain future profitabilitydepends on our ability to increase existing margins, including throughincreased net sales, which we may not be able to do.***

*** ***

Thegross margins that we realize on sales of wireless handsets may not increase orcould be reduced due to, among other things, increased competition and agrowing industry and customer emphasis on cost containment, thereby negativelyaffecting our ability to become profitable again.  Our ability to obtain future profitabilitywill continue to depend on our ability to increase our margins throughincreased sales (either through a higher volume of sales of wireless handsetproducts or a higher average price per wireless handset product) or lower ourcost of sales. However, we may not be able to increase existing margins forproducts or services we offer. Our ability to generate sales is based on demandfor wireless handset products that we can deliver and our having an adequatesupply of these products to cover demand. Even if our sales rates increase, thegross margins that we receive from our sales may not be sufficient to make ourfuture operations profitable as our cost of sales may increase at higher rates.For example, in 2007 and during the first nine months of 2008, although we hadhigher sales, we did not have operating income from continuing operations dueto lower gross margins, as well as, among other things, higher operatingexpenses. We cannot guarantee that we will be able to improve gross margins,including increasing sales, or do so in a profitable manner in the future.

 

***If the trading price of our common stock remains below $1.00 for anextended period of time, our common stock may, among other things, be delistedfrom The Nasdaq Global Market or Nasdaq markets altogether adversely affectingthe value of our common stock.***

*** ***

BetweenJanuary 1, 2006 and November 11, 2008, our common stock share pricefluctuated between $0.28 and $16.52 per share, and on November 10, 2008closed at $0.43 per share. Under Nasdaq Market Rules, among other things, ifour share price is under $1.00 per share for an extended period of time, ourstock could be delisted from The Nasdaq Global Market, be transferred to alisting on The Nasdaq Capital Market, or be delisted from the Nasdaq marketsaltogether.

 

OnJuly 10, 2008, InfoSonics Corporation, (the “Company”) received a NasdaqStaff Deficiency letter indicating that for the last thirty consecutivebusiness days the bid price for the Company’s common stock had closed below theminimum $1.00 per share requirement for continued listing on The Nasdaq StockMarket under Nasdaq Marketplace Rule 4450(a)(5). In accordance with NasdaqMarketplace Rule 4450(e)(2), the Company was provided an initial period of180 calendar days, or until January 6, 2009, to regain compliance. Theletter stated that the Nasdaq staff would provide written notification that theCompany had achieved compliance with Rule 4450(a)(5) if at any timebefore January 6, 2009, the bid price of the Company’s common stock closedat $1.00 per share or more for a minimum of ten consecutive business days,although the letter also stated that the Nasdaq staff had discretion to requirecompliance for a period in excess of ten consecutive business days, butgenerally no more than twenty consecutive business days, under certaincircumstances.  On October 16, 2008, Nasdaq implemented a temporarysuspension of enforcement of Nasdaq Marketplace Rule 4450(a) (5) untilFriday, January 16, 2009, due to the volatility of then current marketconditions. As a result of the temporary suspension, Nasdaq informed theCompany that its deadline for compliance with Nasdaq Marketplace Rule 4450(a) (5) hadbeen extended from January 6, 2009 to April 13, 2009.

 

Duringthis period before April 13, 2009, the Company’s common stock is expectedto continue to trade on The Nasdaq Global Market. If compliance with NasdaqMarketplace Rule 4450(a)(5) cannot be demonstrated by April 13,2009, the staff of The Nasdaq Stock Market Listing Qualifications department isexpected to deliver a written notification to the Company that its securitieswill be delisted from The Nasdaq Global Market. If the Company receives adelisting notice, the Company may appeal the Nasdaq staff’s determination to aListing Qualifications Panel. Alternatively, the Company may apply to transferits securities to The Nasdaq Capital Market or another exchange or tradingmarket.  The Company intends to monitor the bid price of its common stockand consider available options if its common stock does not trade at a levellikely to result in the Company regaining compliance with Nasdaq’s minimum bidprice rule.

 

Ifour common stock were to be delisted from The Nasdaq Global Market or theNasdaq markets altogether, we may seek quotation on a regional stock exchangeor other exchange or market, if available. Such listing could reduce the marketliquidity for our common stock. If our common stock is not eligible forquotation on another exchange or market, trading of our common stock could beconducted in the over-the-counter market or on an electronic bulletin boardestablished for unlisted securities, such as the Pink Sheets or the OTCBulletin Board. As a result, an investor would find it more difficult todispose of, or obtain accurate quotations for the price of, our common stock,which would likely cause a decrease in the value of our common stock.

 

Further,if our common stock were to be delisted from the Nasdaq markets, and ourtrading price remained below $5.00 per share, trading in our common stock mightalso become subject to the requirements of certain rules promulgated underthe Securities Exchange Act of 1934, as amended, or the Exchange Act, whichrequire additional disclosure by broker-dealers in connection with any tradeinvolving a “penny stock.” In addition, many brokerage firms are reluctant torecommend low-priced stocks to their clients. Further, various regulations andpolicies may restrict the ability of shareholders to borrow against or “margin”low-priced stocks, and declines in our stock price below certain levels maytrigger unexpected margin calls. Additionally, because brokers’ commissions onlow-priced stocks generally represent a higher percentage of the stock pricethan commissions on higher-priced stocks, the price of our common stock couldresult in an individual shareholder paying transaction costs that represent ahigher percentage of total share value than would be the case if our shareprice were higher. This factor may also limit the willingness of institutionsto purchase our common stock. Finally, the additional burdens imposed uponbroker-dealers by these requirements could discourage broker-dealers fromfacilitating trades in our common stock. All of these risks could severelylimit the market liquidity of our common stock and the ability of investors totrade our common stock, thereby negatively impacting share price.

 

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**Item 2.    Unregistered Salesof Equity Securities and Use Of Proceeds**

** **

None.

 

**Item 3.    Defaults UponSenior Securities**

 

None.

 

**Item 4.    Submission ofMatters to a Vote of Security Holders**

** **

None.

 

**Item 5.    Other Information**

 

None.

 

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

 
| Exhibit  Number | ** ** | **Description of Exhibit**                                                                                                                                                               |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Memorandum of Understanding among plaintiffs and  defendants in *In Re: InfoSonics Corporation Securities  Litigation*, Lead Case No. 06 CV 1231 dated August 8,  2008 (1)     |
| 10.2            |       | Memorandum of Understanding among plaintiffs and  defendants in *In Re: InfoSonics Corporation Derivative  Litigation*, Lead Case No. 06 CV 1336 dated August 6,  2008 (1)     |
| 10.3            |       | Escrow Agreement *In Re: InfoSonics Corporation  Securities Litigation*, dated October 16, 2008 (+)                                                                                 |
| 31.1            |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing  Section 302 of Sarbanes-Oxley Act of 2002 (+). |
| 31.2            |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing  Section 302 of Sarbanes-Oxley Act of 2002 (+). |
| 32.1            |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (+).                           |
| 32.2            |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (+).                           |

 

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(1)     Incorporated by reference from the Company’sCurrent Report on Form 8-K, filed on August 12, 2008.

(+)    Filed herewith.

 

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**SIGNATURE**

** **

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

 
|        |                    | ** ** | **InfoSonics  Corporation** |
|--------|-------------------------|------------|-----------------------------|
|   |                    |       |                        |
|   |                    |       |                        |
| Date:  | November 14,  2008 |       | By:                         | /s/  Joseph  Ram |
|   |                    |       |                        | Joseph  Ram |
|   |                    |       |                        | Chief  Executive Officer and President |
|   |                    |       |                        |   |
|   |                    |       |                        |   |
| Date:  | November 14,  2008 |       | By:                         | /s/  Jeffrey  Klausner |
|   |                    |       |                        | Jeffrey  Klausner |
|   |                    |       |                        | Chief  Financial Officer |

 

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