Tableof Contents

 

 

 

**UNITED STATES**

**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 June 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 acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.
| Large accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |   | 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 August 14, 2008, theRegistrant had 14,910,808 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 June 30,2008**

 

**Table of Contents**

 
| **PART I. FINANCIAL INFORMATION** |
|----------------------------------------|
|                                   |   |   |
| Item 1.                                | Financial Statements |   |   |
|                                   |   |   |   |
| ·                                 | Consolidated  Balance Sheets as of June 30, 2008 (unaudited) and December 31,  2007 |   |   |
|                                   |   |   |   |
| ·                                 | Consolidated  Statements of Operations for the three and six months ended June 30,  2008 and 2007 (unaudited) |   |   |
|                                   |   |   |   |
| ·                                 | Consolidated  Statements of Comprehensive Operations for the three and six months ended  June 30, 2008 and 2007 (unaudited) |   |   |
|                                   |   |   |   |
| ·                                 | Consolidated  Statements of Cash Flows for the six months ended June 30, 2008 and 2007  (unaudited) |   |   |
|                                   |   |   |   |
| ·                                 | Condensed  Notes to Consolidated Financial Statements (unaudited) |   |   |
|                                   |   |   |   |
| Item 2.                                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |   |
|                                   |   |   |   |
| Item 3.                                | Quantitative and Qualitative Disclosures  About Market Risk |   |   |
|                                   |   |   |   |
| Item 4T.                               | Controls and Procedures |   |   |
| ** **                             | ** ** | ** ** | ** ** |
| **PART II. OTHER INFORMATION**    |
|                                   |   |   |   |
| Item 1.                                | Legal Proceedings |   |   |
|                                   |   |   |   |
| Item 1A.                               | Risk Factors |   |   |
|                                   |   |   |   |
| Item 2.                                | Unregistered Sales of Equity Securities and  Use of Proceeds |   |   |
|                                   |   |   |   |
| Item 3.                                | Defaults Upon Senior Securities |   |   |
|                                   |   |   |   |
| Item 4.                                | Submission of Matters to a Vote of Security  Holders |   |   |
|                                   |   |   |   |
| Item 5.                                | Other Information |   |   |
|                                   |   |   |   |
| Item 6.                                | Exhibits |   |   |

 

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**Part I.  FINANCIAL INFORMATION**

 

Item 1.  Financial Statements

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                          | ** ** | **June 30,  2008** | ** **     | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|----------------|-----------------------------|------------|
| ** **                                                                                                                                          | ** ** | **(unaudited)**         | ** **     | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                          | ** ** | ** **              | ** **     | ** **                  | ** ** |
| **Current assets:**                                                                                                                                 |       |                    |           |                        |       |
| Cash and cash equivalents                                                                                                                           |       | $                       | 15,823,781     |                        | $          | 20,652,154 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of $345,960 (unaudited) and $558,342                                             |       | 29,430,069              |           | 38,031,247                  |       |
| Inventory, net of reserves of $497,556  (unaudited) and $580,438                                                                                    |       | 15,755,245              |           | 13,479,861                  |       |
| Prepaid inventory                                                                                                                                   |       | 25,167                  |           | 461,990                     |       |
| Prepaid expenses                                                                                                                                    |       | 268,276                 |           | 87,753                      |       |
| Prepaid taxes                                                                                                                                       |       | 336,873                 |           | 334,990                     |       |
| Assets of discontinued operations                                                                                                                   |       | 5,113,626               |           | 14,114,074                  |       |
| Deferred tax asset – current                                                                                                                   |       | 1,270,757               |           | 1,203,417                   |       |
|                                                                                                                                                |       |                    |           |                        |       |
| Total current assets                                                                                                                                |       | 68,023,794              |           | 88,365,486                  |       |
|                                                                                                                                                |       |                    |           |                        |       |
| Property and equipment, net                                                                                                                         |       | 1,025,496               |           | 1,301,985                   |       |
| Intangible assets                                                                                                                                   |       | 504,000                 |           | 504,000                     |       |
| Deferred tax asset – non-current                                                                                                               |       | 1,423,726               |           | 1,401,671                   |       |
| Other assets                                                                                                                                        |       | 105,629                 |           | 110,660                     |       |
|                                                                                                                                                |       |                    |           |                        |       |
| **Total assets**                                                                                                                                    | ** ** | **$**                   | **71,082,645** | ** **                  | **$**      | **91,683,802** | ** ** |
|                                                                                                                                                |       |                    |           |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                      | ** ** | ** **              | ** **     | ** **                  | ** ** |
|                                                                                                                                                |       |                    |           |                        |       |
| **Current liabilities:**                                                                                                                            |       |                    |           |                        |       |
| Line of credit                                                                                                                                      |       | $                       | 18,115,265     |                        | $          | 26,755,100 |   |
| Accounts payable                                                                                                                                    |       | 13,598,144              |           | 20,821,601                  |       |
| Accrued expenses                                                                                                                                    |       | 2,814,948               |           | 1,105,972                   |       |
| Liabilities of discontinued operations                                                                                                              |       | 2,064,063               |           | 5,895,687                   |       |
| Income taxes payable                                                                                                                                |       | 41,000                  |           | 80,560                      |       |
|                                                                                                                                                |       |                    |           |                        |       |
| Total current liabilities                                                                                                                           |       | 36,633,420              |           | 54,658,920                  |       |
| ** **                                                                                                                                          | ** ** | ** **              | ** **     | ** **                  | ** ** |
| **Total liabilities**                                                                                                                               |       | 36,633,420              |           | 54,658,920                  |       |
|                                                                                                                                                |       |                    |           |                        |       |
| **Commitments and contingencies**                                                                                                                   |       |                    |           |                        |       |
|                                                                                                                                                |       |                    |           |                        |       |
| **Stockholders’ equity:**                                                                                                                      |       |                    |           |                        |       |
| Preferred stock, $0.001 par value  10,000,000 shares authorized (no shares issued and outstanding as of  applicable period end)                     |       | —                  |           | —                      |       |
| Common stock, $0.001 par value 40,000,000  shares authorized (14,910,808 and 14,647,067 shares issued and outstanding as  of applicable period end) |       | 14,911                  |           | 14,647                      |       |
| Additional paid-in capital                                                                                                                          |       | 31,580,366              |           | 31,505,990                  |       |
| Accumulated other comprehensive loss                                                                                                                |       | (35,092                 | )              | (31,190                     | )          |
| Retained earnings                                                                                                                                   |       | 2,889,040               |           | 5,535,435                   |       |
|                                                                                                                                                |       |                    |           |                        |       |
| Total stockholders’ equity                                                                                                                     |       | 34,449,225              |           | 37,024,882                  |       |
|                                                                                                                                                |       |                    |           |                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                 | ** ** | **$**                   | **71,082,645** | ** **                  | **$**      | **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 June 30,** | ** **     | **For the Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------|----------------|-----------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                                          | ** **     | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                  | ** ** | ** **                                                        | ** **     | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                                               |       | $                                                                 | 59,039,970     |                                                            | $          | 53,101,216 |   | $ | 126,973,238 |   | $ | 97,495,237 |   |
| **Cost of sales**                                                           |       | 55,814,413                                                        |           | 50,141,226                                                      |       | 120,158,895 |   | 92,132,203 |   |
|                                                                        |       |                                                              |           |                                                            |       |   |   |   |   |
| **Gross profit**                                                            |       | 3,225,557                                                         |           | 2,959,990                                                       |       | 6,814,343 |   | 5,363,034 |   |
| **Operating expenses**                                                      |       | 3,215,412                                                         |           | 2,736,958                                                       |       | 6,908,598 |   | 5,748,297 |   |
|                                                                        |       |                                                              |           |                                                            |       |   |   |   |   |
| **Operating income (loss) from continuing  operations**                     |       | 10,145                                                            |           | 223,032                                                         |       | (94,255 | ) | (385,263 | ) |
|                                                                        |       |                                                              |           |                                                            |       |   |   |   |   |
| **Other expense**                                                           |       |                                                              |           |                                                            |       |   |   |   |   |
| Interest expense                                                            |       | (325,142                                                          | )              | (223,998                                                        | )          | (514,201 | ) | (281,666 | ) |
|                                                                        |       |                                                              |           |                                                            |       |   |   |   |   |
| **Loss from continuing operations before  benefit for income taxes**        |       | (314,997                                                          | )              | (966                                                            | )          | (608,456 | ) | (666,929 | ) |
| **Benefit for income taxes**                                                |       | 159,527                                                           |           | 422                                                             |       | 127,356 |   | 275,534 |   |
|                                                                        |       |                                                              |           |                                                            |       |   |   |   |   |
| **Loss from continuing operations**                                         |       | (155,470                                                          | )              | (544                                                            | )          | (481,100 | ) | (391,395 | ) |
| **Loss from discontinued operations, net of  tax**                          |       | (2,077,743                                                        | )              | (446,699                                                        | )          | (2,165,293 | ) | (613,981 | ) |
| ** **                                                                  | ** ** | ** **                                                        | ** **     | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net loss**                                                                | ** ** | **$**                                                             | **(2,233,213** | **)**                                                           | **$**      | **(447,243** | **)** | **$** | **(2,646,393** | **)** | **$** | **(1,005,376** | **)** |
|                                                                        |       |                                                              |           |                                                            |       |   |   |   |   |
| **Basic and Diluted loss per share**                                        |       |                                                              |           |                                                            |       |   |   |   |   |
| From continuing operations                                                  | ** ** | **$**                                                             | **(0.01**      | **)**                                                           | **$**      | **(0.00** | **)** | **$** | **(0.03** | **)** | **$** | **(0.03** | **)** |
| From discontinued operations                                                | ** ** | **$**                                                             | **(0.14**      | **)**                                                           | **$**      | **(0.03** | **)** | **$** | **(0.15** | **)** | **$** | **(0.04** | **)** |
| Net loss                                                                    | ** ** | **$**                                                             | **(0.15**      | **)**                                                           | **$**      | **(0.03** | **)** | **$** | **(0.18** | **)** | **$** | **(0.07** | **)** |
|                                                                        |       |                                                              |           |                                                            |       |   |   |   |   |
| **Basic and Diluted weighted-average number  of common shares outstanding** | ** ** | **14,881,523**                                                    | ** **     | **14,453,992**                                                  | ** ** | **14,819,968** | ** ** | **14,386,825** | ** ** |

 

*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** | ** ** | **For the  Six Months Ended** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                               | ** ** | **June 30, 2008**                    | ** ** | **June 30, 2007**                  | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
|                                     |       |                                           |       |                                         |       |   |   |   |   |
| Net loss                                 |       | $                                              | (2,233,213 | )                                            | $          | (447,243 | ) | $ | (2,646,393 | ) | $ | (1,005,376 | ) |
| Other comprehensive loss:                |       |                                           |       |                                         |       |   |   |   |   |
| Foreign currency translation adjustments |       | (1,694                                         | )          | (4,070                                       | )          | (3,903 | ) | (19,252 | ) |
| Comprehensive loss                       |       | $                                              | (2,234,907 | )                                            | $          | (451,313 | ) | $ | (2,650,296 | ) | $ | (1,024,628 | ) |

 

*Accompanyingnotes are an integral part of these financial statements*

 

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**InfoSonics Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

 
| ** **                                                                                | ** ** | **For the Six Months Ended  June 30,** | ** **     |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|----------------|
| ** **                                                                                | ** ** | **2008**                                                        | ** **     | **2007** | ** ** |
| **Cash flows from operating activities:**                                                 | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| Net loss                                                                                  |       | $                                                               | (2,646,393     | ) | $ | (1,005,376 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities |       |                                                            |           |   |   |
| Depreciation                                                                              |       | 337,057                                                         |           | 106,213 |   |
| Provision for bad debt                                                                    |       | (212,382                                                        | )              | (22,778 | ) |
| Loss on disposal of fixed assets                                                          |       | (9,125                                                          | )              | — |   |
| Provision for obsolete inventory                                                          |       | (82,882                                                         | )              | 296,405 |   |
| Stock option expense                                                                      |       | 40,398                                                          |           | 194,897 |   |
| (Increase) decrease in                                                                    |       |                                                            |           |   |   |
| Trade accounts receivable                                                                 |       | 8,813,560                                                       |           | 1,787,107 |   |
| Inventory                                                                                 |       | (2,192,503                                                      | )              | (3,819,013 | ) |
| Prepaid inventory                                                                         |       | 436,823                                                         |           | (769,701 | ) |
| Prepaid expenses                                                                          |       | (180,523                                                        | )              | (238,550 | ) |
| Prepaid taxes                                                                             |       | (1,883                                                          | )              | 2,280 |   |
| Other assets                                                                              |       | 5,031                                                           |           | (44,111 | ) |
| Deferred tax asset current                                                                |       | (67,340                                                         | )              | 15,414 |   |
| Deferred tax asset non current                                                            |       | (573,474                                                        | )              | (755,359 | ) |
| Increase (decrease) in                                                                    |       |                                                            |           |   |   |
| Accounts payable                                                                          |       | (7,223,457                                                      | )              | 3,072,650 |   |
| Accrued expenses                                                                          |       | 1,708,976                                                       |           | 269,585 |   |
| Income tax liabilities                                                                    |       | (39,560                                                         | )              | 3,940 |   |
|                                                                                      |       |                                                            |           |   |   |
| Cash used in continuing operations                                                        |       | (1,887,680                                                      | )              | (906,397 | ) |
| Cash provided by (used in) discontinued  operations                                       |       | 5,672,247                                                       |           | (9,231,582 | ) |
| Net cash provided by (used in) operating  activities                                      |       | 3,784,567                                                       |           | (10,137,979 | ) |
|                                                                                      |       |                                                            |           |   |   |
| **Cash flows from investing activities:**                                                 | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
|                                                                                      |       |                                                            |           |   |   |
| Purchase of property and equipment                                                        |       | (51,444                                                         | )              | (1,308,717 | ) |
| Cash provided by (used in) discontinued  operations                                       |       | 48,000                                                          |           | (5,779 | ) |
| Net cash used in investing activities                                                     |       | (3,444                                                          | )              | (1,314,496 | ) |
|                                                                                      |       |                                                            |           |   |   |
| **Cash flows from financing activities:**                                                 | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| Borrowings from line of credit                                                            |       | 131,467,733                                                     |           | 313,110,207 |   |
| Payments on line of credit                                                                |       | (140,107,568                                                    | )              | (319,322,821 | ) |
| Cash received for stock, options and  warrants                                            |       | 34,242                                                          |           | 263,037 |   |
|                                                                                      |       |                                                            |           |   |   |
| Net cash used in financing activities                                                     |       | (8,605,593                                                      | )              | (5,949,577 | ) |
|                                                                                      |       |                                                            |           |   |   |
| Effect of exchange rate changes on cash                                                   |       | (3,903                                                          | )              | (19,252 | ) |
|                                                                                      |       |                                                            |           |   |   |
| Net increase (decrease) in cash and cash  equivalents                                     |       | (4,828,373                                                      | )              | (17,421,304 | ) |
|                                                                                      |       |                                                            |           |   |   |
| **Cash and cash equivalents, beginning of  period**                                       |       | 20,652,154                                                      |           | 29,700,994 |   |
|                                                                                      |       |                                                            |           |   |   |
| **Cash and cash equivalents, end of period**                                              | ** ** | **$**                                                           | **15,823,781** | ** ** | **$** | **12,279,690** | ** ** |

 

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

 

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* *

**InfoSonicsCorporation**

**Condensed Notes to ConsolidatedFinancial 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 consolidatedfinancial statements reflect all adjustments considered, in the opinion of theCompany’s management, necessary to fairly present the results for the periodscovered herein and such adjustments are considered of a normal recurringnature.

 

The unaudited consolidatedbalance sheet at and statements of operations as of June 30, 2008 do notinclude 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 at or for the six months ended June 30, 2008and the unaudited consolidated statement of cash flows for the three and sixmonths ended June 30, 2008 are not necessarily indicative of the financialcondition, operating results or cash flows that may be expected for the fullfiscal 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 theplans has been approved by our stockholders. The 2006 Plan is the only planfrom which additional equity incentives will be granted. The 2006 Planauthorizes the grant of up to 1,000,000 shares for equity incentives. TheCompany is also a party to non-plan option agreements with several non-employeedirectors 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-basedpayments.  SAB 110 requires stock-basedcompensation to be classified in the same expense line items as cashcompensation.   Information aboutstock-based compensation included in the unaudited results of operations forthe three and six months ended June 30, 2008 and 2007 is as follows:

 
| ** **                                                       | ** ** | **For the  Three Months Ended** | ** ** | **For the  Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                       | ** ** | **June 30, 2008**                    | ** ** | **June 30, 2007**                  | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
|                                                             |       |                                           |       |                                         |       |   |   |   |   |
| Officer compensation                                             |       | $                                              | —     |                                         | $          | 46,018 |   | $ | — |   | $ | 92,036 |   |
| Non-employee directors                                           |       | 3,451                                          |       | 3,451                                        |       | 6,902 |   | 6,902 |   |
| Sales, general and administrative                                |       | 16,555                                         |       | 47,980                                       |       | 33,496 |   | 95,959 |   |
| Total stock option expense, included in total operating expenses |       | $                                              | 20,006     |                                         | $          | 97,449 |   | $ | 40,398 |   | $ | 194,897 |   |

 

Our stock options vest on an annual or a monthly basis.  TheCompany recognizes stock-based compensation costs on a straight-line basis overthe requisite service period of the award, which is generally the optionvesting term.   Such amounts maychange 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 thoseawards which will normally result in tax deductions under existing tax law.During the three and six months ended June 30, 2008, we recorded anexpense of $20,006 and $40,398, respectively related to options previouslygranted and granted during 

 

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the first six months of 2008. During each of the three and six monthsended June 30, 2007, we recorded an expense of $97,449 and $194,898,respectively related to options previously granted. Under current U.S. federaltax law, we would receive a compensation expense deduction related tonon-qualified stock options only when those options are exercised and vestedshares are received. Accordingly, the financial statement recognition ofcompensation cost for non-qualified stock options creates a deductibletemporary 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. Treasury yields in effect at the time of grant;expected dividend yields of 0 percent as the Company has not, and does notintend to, issue dividends; and expected lives of 3 to 6 years based upon thehistorical life of options. For grants in 2008 and 2007, the expectedvolatility used ranged from 88% to 89%, based on the Company’s historical stockprice fluctuations for a period matching the expected life of the options.  As of June 30, 2008, there was $195,000of total unrecognized compensation costs related to the non-vested stockoptions.  That cost is expected to berecognized over the next weighted-average period of 3.50 years.

 

Asummary of option activity under all of the above plans as of June 30,2008 and changes during the six 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       |                                             |       |                            | —     |   |
| Granted                               |       | 183,000    |       | $                                       | 1.04       |                                             | 5.69       |                            | —     |   |
| Exercised                             |       | 263,740    |       | $                                       | 0.13       |                                             |       |                            | —     |   |
| Forfeited                             |       | 90,000     |       | $                                       | 4.83       |                                             |       |                            | —     |   |
| Outstanding at June 30, 2008     |       | 2,436,196  |       | $                                       | 2.73       |                                             | 2.59       |                            | —     |   |
| Vested and expected to vest           |       | 2,436,196  |       | $                                       | 2.73       |                                             | 2.59       |                            | —     |   |
| Exercisable at June 30, 2008     |       | 2,248,995  |       | $                                       | 2.85       |                                             | 2.34       |                            | —     |   |

 

A summary of the status of the Company’s non-vested options at June 30,2008 and changes during the six months ended June 30, 2008 is presentedbelow:

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Non-vested at December 31, 2007 |       | 23,333     |       | $                                                     | 5.32       |   |
| Granted                              |       | 183,000    |       | $                                                     | 1.04       |   |
| Vested                               |       | 9,132      |       | $                                                     | 4.61       |   |
| Forfeited                            |       | 10,000     |       | $                                                     | 1.04       |   |
| Non-vested at June 30, 2008     |       | 187,201    |       | $                                                     | 1.29       |   |

 

The weighted-average grant-date fair value of options granted duringthe six months ended June 30, 2008 was $1.04. The total intrinsic value ofoptions granted during the six months ended June 30, 2008 and 2007 was $0and $0, respectively. There was $34,000 and $263,000 of cash received fromoptions exercised for the six months ended June 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.

 

Since their effect wouldhave been anti-dilutive, 2,991,616 and 2,903,611, stock options and warrants topurchase shares of common stock have been excluded from the computation of netloss per share for the three and six months ended June 30, 2008,respectively.  Since their effect wouldhave been anti-dilutive, 2,371,252 and 2,247,871, stock options and warrantsto purchase shares of common stock have been excluded from the computation ofnet loss per share for the three and six months ended June 30, 2007,respectively.

 

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**NOTE 4. IncomeTaxes**

 

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

 

The Company is subject to 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 June 30, 2008, the Company does notexpect any material changes to unrecognized tax positions within the nexttwelve 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 Company provides for the possibleinability to sell its inventory by recording a reserve.  As of June 30, 2008 and December 31,2007, the inventory reserve was $498,000 and $580,000, respectively.  At June 30, 2008, we had inventoryin-transit of $441,000, which is under the control of a common freight carrieruntil it arrives at one of our customer facilities.  This inventory is owned by the Company whileit is in-transit. From time to time, the Company has prepaid inventory as aresult of payments for products which have not been received by the balancesheet date.  As of June 30, 2008 andDecember 31, 2007, the prepaid inventory balances were $25,000 and$462,000, respectively.    Inventoryconsists of the following:

 
| ** **           | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **           | ** ** | **(unaudited)**         | ** ** | **(audited)**               | ** ** |
| Finished goods       |       | $                       | 15,811,849 |                        | $          | 14,060,213 |   |
| Inventory in-transit |       | 440,952                 |       | 86                          |       |
| Inventory reserve    |       | (497,556                | )          | (580,438                    | )          |
| Net inventory        |       | $                       | 15,755,245 |                        | $          | 13,479,861 |   |

 

**NOTE 6.Property and Equipment**

 

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

 
| ** **                    | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **(unaudited)**         | ** ** | **(audited)**               | ** ** |
| Machinery and equipment       |       | $                       | 451,521    |                        | $          | 437,954 |   |
| Furniture and fixtures        |       | 106,314                 |       | 117,491                     |       |
| Tooling and molds             |       | 1,296,490               |       | 1,257,636                   |       |
| Subtotal                      |       | 1,854,325               |       | 1,813,081                   |       |
| Less accumulated depreciation |       | 828,829                 |       | 511,096                     |       |
| Total                         |       | $                       | 1,025,496  |                        | $          | 1,301.985 |   |

 

Depreciation expense was $160,435 and $79,204 for the threemonths ended June 30, 2008 and 2007, respectively.  

 

Depreciation expense was $337,057 and $106,213 for the sixmonths ended June 30, 2008 and 2007, respectively.

 

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**NOTE 7. Accrued Expenses**

 

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

 
| ** **                 | ** ** | **June 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|----------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                 | ** ** | **(unaudited)**         | ** **  | **(audited)**               | ** ** |
| Accrued product costs      |       | $                       | 2,723,234   |                        | $          | 1,031,147 |   |
| Other accruals (Inc Taxes) |       | 91,714                  |        | 74,825                      |       |
| Total                      |       | $                       | 2,  814,948 |                        | $          | 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. At June 30, 2008, the majority of our debt was based onforeign accounts receivable.

 

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% (5.00% at June 30,2008) or (ii) at the one-month LIBOR plus 1.50% (2.46% at June 30,2008). The interest rate floated at Wells Fargo’s prime rate or was at LIBORplus 1.5% if the debt was a fixed amount drawn upon.  The line of credit was collateralized bysubstantially all of the assets of the Company, and was to expire October 1,2008. In addition to reporting and other non-financial covenants, the line ofcredit contained certain financial covenants which required the Company tomaintain a tangible net worth of not less than $30,000,000 plus 50% of netprofit after tax from January 1, 2007, a pre-tax profit of not less than$1 on a rolling four quarter basis, a quick ratio of not less than one-to-one,a debt-to-net worth ratio of not greater than two-to-one, and an annual netincome after taxes of at least $1. At June 30, 2008 and December 31,2007, the amounts drawn against this the line of credit were zero and$26,755,100, respectively.

 

On April 30, 2008, the Company entered into a Loan, Security and Bulk Purchase Agreement and a Letterof Credit and Security Agreement (collectively, the “***Agreement***”)with Wells Fargo Century, Inc. (“***Lender***”), replacing itsexisting asset-based secured credit facility withWells Fargo HSBC Trade Bank, N.A. Pursuant to the Agreement, the Lender may advance up to $45,000,000 tothe Company based on the expected collections of eligible receivables as wellas value of the Company’s eligible inventory determined in accordance with theAgreement.  The outstanding advances maynot exceed the lesser of $45,000,000 or the sum of the value of the eligiblereceivables and eligible inventory (times their respective advance rates as setforth in the Agreement).  The creditfacility has a two-year term ending April 2010 and is secured by all ofthe assets of the Company. The interest rate for each borrowing under thecredit facility is, at the option of the Company, either the Wells Fargo BankN.A. prime rate minus 0.50%(5.00% at June 30,2008)  or the LIBOR rate plus 2.00%(2.46%at June 30, 2008).  AtJune 30, 2008, the amounts drawn against the line of credit was$18,115,265.

 

TheCompany has no other notes payable.

 

**NOTE 9.Stockholders’ Equity**

 

StockOptions

 

Effective March 18, 2008, the Company granted options to purchasean aggregate of 180,500 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 have exercise prices of $1.04per share, which was the closing price per share of the Company’s common stockon March 18, 2008, and expire six years from the date of grant. SeeNote 2 for Stock-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 previously enteredagreement with an unrelated partner.  Theshares will be issued during the third quarter of 2008.  The amendment modifies a profit sharingagreement to increase the portion of profit sharing the Company earns.  The increase in the portion of the profit sharingto the Company is retroactive to January 1, 2008.

 

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**NOTE 10.Recent Accounting Pronouncements**

 

Recently adopted:

 

In September 2006, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“SFAS 157”), which defines the fair value, establishes aframework for 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.  Early adoption is encouraged, provided thatthe registrant has not yet issued financial statements for that fiscal year,including any financial statements for an interim period within that fiscalyear. The adoption of SFAS 157 did not have a material impact on the Company’sresults of operations and financial position.

 

In February 2007, the FASB issued Statement No. 159, “*The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115*” (“SFAS 159”).  This standard amendsFASB Statement No. 115, “*Accounting for Certain Investment in Debt and Equity Securities*,”with respect to accounting for a transfer to the trading category for allentities with available-for-sale and trading securities electing the fair valueoption.  This standard allows companies to elect fair value accounting formany financial instruments and other items that currently are not required tobe accounted as such, allows different applications for electing the option fora single item or groups of items, and requires disclosures to facilitatecomparisons of similar assets and liabilities that are accounted fordifferently in relation to the fair value option.  SFAS 159 is effectivefor fiscal years beginning after November 15, 2007. The adoption of SFAS159 did not have a material impact on the Company’s results of operations andfinancial position.

 

Recentlyissued:

 

The Financial AccountingStandards Board (FASB) has issued FASB Statements No. 141 (revised 2007), *Business Combinations,* and No. 160, *Noncontrolling Interests in Consolidated FinancialStatements.*  These newstandards represent the completion of the FASB’s first major joint project withthe International Accounting Standards Board (IASB)*.*  The FASB and theIASB first initiated the joint project that resulted in the new standardsbecause U.S. generally accepted accounting principles and InternationalFinancial Reporting Standards (IFRS) differed widely in their approach toaccounting for business combinations. The IASB plans to issue its counterpart standards IFRS 3 (revised), *Business Combinations,* and InternationalAccounting Standard 27 (as revised in 2007), *Consolidatedand Separate Financial Statements,* early next year.  The new standards to be issued by the IASBare expected to contain the same fundamental principles as those of the FASB,but will diverge with respect to certain issues.

 

In Statement No. 141(revised 2007), the FASB retained the fundamental requirements of Statement No. 141to account for all business combinations using the acquisition method (formerlythe purchase method) and for an acquiring entity to be identified in allbusiness combinations.  However, the fairvalue principles in the revised Statement are a major change from Statement No. 141’scost allocation process, together with other revisions from past practice.  Among numerous changes, Statement No. 141(R) requiresthe acquiring entity in a business combination to:

 

·                  Recognize theassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree at the acquisition date, measured at their fair values as of thatdate, with limited exceptions

·                  Recognize andmeasure the goodwill acquired in the business combination or a gain from abargain purchase

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

·                  Recognize anyrestructuring costs that the acquiring entity expects to incur with respect tothe acquired business as an expense, rather than capitalize as part of theacquisition

·                  Disclose toinvestors and other users all of the information they need to evaluate andunderstand the nature and financial effect of the business combination.

 

FASB Statement No. 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 parent shareholders’equity. Statement No. 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 a parent recognize a gain or lossin net income when a subsidiary is deconsolidated.

 

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Thefinal business combinations and noncontrolling interest statements areeffective for annual periods beginning on or after December 15, 2008.  The Statements should be applied on aprospective basis, except for the presentation and disclosure requirements ofStatement No. 160, which must be applied retrospectively. Entities are prohibited from adopting theStatements before their effective dates The Company does not believe adoptionof SFAS 160 will have a material effect on the Company’s financial statements.

 

InMarch 2008, the FASB issued Statement of Financial AccountingStandards 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.

 

**NOTE11.  Discontinued Operations**

 

During the quarter ended June 30,2008, the Company assessed opportunities in the United States and Mexico, andthe Company began to implement actions necessary to close sales operations inboth of those countries. These two areas accounted for less than 1% of our netsales in the first six months of 2008, as compared to 20% of our net sales forthe first six months of 2007.  Due to the changing environment andconsolidation in the United States of the regional cellular carriers, alongwith the challenges of opening sales relations with the cellular carriers inMexico, management determined that it was necessary to take decisive actions tomitigate further losses.  The results of the unaudited discontinuedoperations are as follows:

 
| ** **                    | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** **                    | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net Sales                     |       | $                                                  | 359,084    |                                             | $          | 5,159,485 |   | $ | 733,436 |   | $ | 19,169,074 |   |
| Gross profit                  |       | (1,264,968                                         | )          | 236,760                                          |       | (1,333,170 | ) | 982,581 |   |
| Operating income (loss)       |       | $                                                  | (2,688,568 | )                                                | $          | (808,998 | ) | $ | (3,320,259 | ) | $ | (1,083,132 | ) |
| Identifiable assets           |       | $                                                  | 5,113,626  |                                             | $          | 23,076,937 |   | $ | 5,113,626 |   | $ | 23,076,937 |   |
| Capital expenditures          |       | $                                                  | —     |                                             | $          | 2,522 |   | $ | — |   | $ | 5,776 |   |
| Depreciation and amortization |       | $                                                  | 7,235      |                                             | $          | 9,217 |   | $ | 15,367 |   | $ | 16,023 |   |

 

As of June 30, 2008,the plans for the discontinued operations were substantially complete; howeverthe Company expects to continue to record adjustments and expenses throughdiscontinued operations as necessary.

 

**NOTE 12. Geographic Information**

 

TheCompany currently operates in one business segment.  All fixed assets are located in Company orthird party facilities in the United States, Asia and Mexico. The unaudited netsales by geographical area for the three and six months ended June 30,2008 and 2007 were:

 
| ** **      | ** ** | **For the  Three Months Ended** | ** ** | **For the  Six Months Ended** | ** ** |
|-----------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **      | ** ** | **June 30, 2008**                    | ** ** | **June 30, 2007**                  | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| Central America |       | $                                              | 13,527,600 |                                         | $          | 20,600,421 |   | $ | 34,693,825 |   | $ | 29,609,421 |   |
| South America   |       | 45,512,370                                     |       | 32,500,795                                   |       | 92,279,413 |   | 67,885,816 |   |
| Total           |       | $                                              | 59,039,970 |                                         | $          | 53,101,216 |   | $ | 126,973,238 |   | $ | 97,495,237 |   |

 

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**NOTE 13.  Commitments and Contingencies**

 

*Securities Class Actions*

 

In the securities class action, captioned *In Re: InfoSonics Corporation SecuritiesLitigation*, Lead Case No. 06 CV 1231, now pending before JudgeSammartino in the United States District Court for the Southern District ofCalifornia, Plaintiffs filed a third amended consolidated complaint on May 23,2008 against the Company and certain of its officers and directors.  The two prior complaints (including claimstherein based on defendants’ restatement of first quarter 2006 earnings) weredismissed 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 (“MOU”), which will be followed by a Stipulationof Settlement, to resolve the case.  TheMOU, which is contingent on preliminary and final Court approval (afterappropriate notice) of this settlement as well as settlement of the derivativeaction noted below, among other contingencies**,**provides for, among other things, a dismissal with prejudice of the lawsuit,releases of the defendants, and a payment by the Company or its insurer of $3.8million to plaintiffs (inclusive of any plaintiffs’ attorneys fees, to bedetermined by the Court).  It isanticipated that the settlement payment will be funded entirely by the Company’sinsurer.  The MOU further provides thatdefendants deny any liability or responsibility for the claims made and make noadmission of any wrongdoing.

 

*Derivative Action*

 

In the derivative action, captioned *In Re InfoSonics Corporation DerivativeLitigation*, Lead Case No. 06 CV 1336, now pending before JudgeSammartino in the United States District Court for the Southern District ofCalifornia, plaintiffs filed a consolidated complaint on November 6, 2006purportedly on behalf of the Company against certain of its officers anddirectors, and the Company as a nominal defendant.  The consolidated complaint alleges claims forviolations of Section 14(a) of the Exchange Act, Sections 25402 and25403 of the California Corporations Code, disgorgement under theSarbanes-Oxley Act of 2002, breach of fiduciary duty, abuse of control, grossmismanagement, waste of corporate assets, unjust enrichment, rescission, aconstructive trust, and an accounting, in connection with the Company’srestatement of first quarter 2006 earnings and in connection with allegationsof wrongdoing with respect to granting, exercising, accounting and reporting ofthe stock options that the Company granted in December 2005.  Plaintiffs seek unspecified damages,declaratory relief regarding the Sarbanes-Oxley Act of 2002, Section 14(a) ofthe Exchange Act, and the legality of stock options, a constructive trust,restitution, disgorgement, modification of certain corporate governance andinternal procedures, extraordinary equitable and/or injunctive relief, costs,and such other relief as is just and proper.

 

Defendants filed a 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, prior to the deadline for plaintiffs to file an amended complaint, theparties entered into an MOU, which will be followed by a Stipulation ofSettlement, to resolve the case.  TheMOU, which is contingent on preliminary and final Court approval (afterappropriate notice) of this settlement and the securities settlement notedabove, among other contingencies, provides for, among other things, a dismissalwith 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 MOU further provides that defendants denyany liability or responsibility for the claims made and make no admission ofany wrongdoing.

 

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

 

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**NOTE 14.  Subsequent events**

 

Subsequent to June 30,2008, the Company settled an outstanding claim against a former service providerin which the Company is to receive $655,000. Such amount is expected to be received and reflected in the statement ofoperations for the quarter ended September 30, 2008.

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**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 requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosures of contingent liabilities as of and at the financial statementdate, and the reported amounts of revenues and expenses during the reportingperiods. On an ongoing basis, we review our estimates and assumptions. Ourestimates are based on our historical experience and other assumptions that webelieve to be reasonable under the circumstances. Actual results are likely todiffer from these estimates under different assumptions or conditions, but wedo not believe such differences will materially affect our financial positionor results of operations, although they may. Our critical accounting policies,the policies we believe are most important to the presentation of our financialstatements and require the most difficult, subjective and complex judgments, areoutlined below in “Critical Accounting Policies.”  All references to results of operations inthis discussion generally are to results from continuing operations, unlessotherwise noted.

 

The decision during thesecond quarter of 2008 to discontinue our operations in Mexico and the U.S. andthe adjustments required to the financial statements related to that decisionhave affected certain amounts of our results of operations and theclassifications on the balance sheet, statement of operations and statement ofcash flows for prior periods, and as of prior dates, as well as, our disclosurein this report, 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.  These risks and uncertainties, in whole or inpart, could cause such expectations to fail to be achieved and have a materialadverse effect on InfoSonics’ business, financial condition and results ofoperations, and include, without limitation: (1) intense competitioninternationally, including competition from alternative business models, suchas manufacturer-to-carrier sales, which may lead to reduced prices, lower salesor reduced sales growth, lower gross margins, extended payment terms withcustomers, increased capital investment and interest costs, bad debt risks andproduct supply shortages; (2) dependency on Latin American sales; (3) inabilityto secure adequate supply of competitive products on a timely basis and oncommercially reasonable terms; (4) 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; (5) 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; (6) 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; (7) significant changesin supplier terms and relationships; (8) termination of a supply orservices agreement with a major supplier or product supply shortages; (9) continuedconsolidation in the wireless handset carrier market; (10) extendedgeneral economic downturn; (11) loss of business from one or more significantcustomers; (12) customer and geographical accounts receivable concentrationrisk; (13) rapid product improvement and technological change resulting ininventory obsolescence; (14) future terrorist or military actions; (15) theloss of a key executive officer or other key employees; (16) changes inconsumer demand for multimedia wireless handset products and features; (17) ourfailure to adequately adapt to industry changes and to manage potential growthand/or contractions; (18) seasonal buying patterns; (19) uncertain politicaland economic conditions internationally; (20) the resolution of any litigationagainst the Company; (21) the ability of the Company to successfully introduceand sell its *verykool*® products and therelated inventory risk of such products; and (22) the ability of the Company togenerate taxable income in future periods in order to utilize and realize anyquarterly tax benefits recorded.  Ouractual results could differ materially from those anticipated in our forwardlooking statements.

 

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InfoSonics has institutedin the past and continues to institute changes to our strategies, operationsand processes to address risks and uncertainties and to mitigate impact onInfoSonics’ results of operations and financial condition. However, no assurancescan be given that InfoSonics will be successful in these efforts. For a furtherdiscussion of significant factors to consider concerning InfoSonics, see “RiskFactors” below in this report and “Item 1A. Risk Factors” of InfoSonics’ AnnualReport on Form 10-K for the year ended December 31, 2007. Inaddition, other risks or uncertainties may be detailed from time to time inInfoSonics’ 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 distribute products of several keyoriginal equipment manufacturers (OEMs), including Samsung, LG, andothers.  We are also involved in thedesigning, sourcing and distribution of a proprietary line of products underour own *verykool®*brand, which includes entry level, mid-tier and high-end products.

 

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. We previouslyintroduced a proprietary line of handsets and accessories under the*verykool®*brand, for which we are involved in several aspects, including the design andfeature sets determination, and contract with various design and contractmanufacturers in Asia to develop exclusive or semi-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 andcompetitors, promotions and subsidies by network operators, technical andcertification delays by industry bodies as well as the operators, purchasingpatterns of customers, 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 enable higher levels of profitability and earningsgrowth.  We provide distribution andother services for OEMs, such as Samsung and LG and our own proprietary line of*verykool®*handsets.  Performance indicators thatare key for the monitoring and management of our business include operating andnet income, cost of sales and gross margin percentage, operating expenses as apercent of revenues, and overall net sales growth, as well as balances ofaccounts receivable and inventory. We make extensive use of our customizedinformation system to closely monitor all aspects of our business, includingcustomer relationship management, intelligent purchasing, inventory control,inventory flow, line item margin control for every order, and weighted-averagecost and statistical data for our products, customers and suppliers, asappropriate. We believe a strong focus on providing better service to customersleads to increased customer satisfaction and retention and potential increasesin sales.

 

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

 

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**IndustryTrends and Risks**

 

According to a January 2008report by Cowen and Company, 2007 overall worldwide wireless handset salesincreased by approximately 16% over 2006, and are forecasted to increase 12% in2008 and 5% in 2009. The two largest areas of growth are Africa and AsiaPacific, regions in which we do not currently operate. A rapid decline inwireless handset sales growth in the markets we serve could negatively impactour net sales. Excess supply conditions and the current economic downturn canreduce the market prices of the products we sell and therefore affect ourability to generate net sales and gross profit at expected levels and couldaffect 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 quarter of 2008, our industry, as well as the regionswe operate in, was impacted by the economic slowdown impacting the UnitedStates and the rest of the world.  Webelieve that some of the countries in the regions we operate, particularly inCentral America, have close economic relations with the United States and wereimpacted by the economic situation during the second quarter of 2008 in theUnited States.  We believe this impactedconsumer demand for wireless handsets in some of the countries we operate, andthus our overall operations, including net sales, during the second quarter of2008 are adversely impacted.

 

**CompanySpecific Trends and Risks**

 

Our strategy incorporates overall market growthelements for our business, which we hope will result in future growth. Certainof our manufacturers entered into the low-tier handset market during 2007 andcontinue to market them in 2008, which has had a positive impact on our volumesof handsets sold, but a negative impact on gross profit margin. Our *verykool®* proprietary line of products,for which we have six models selling as of June 30, 2008 continued to showa steady stream of orders and sales during the first six months of 2008 and isexpected to become an increasingly important part of our overall business inthe future.

 

The addition of *verykool®* andLG products during 2007 and the first half of 2008 continues to assist withmanufacturer and product diversification for Central and South America, whichshould be beneficial as we move forward and work towards profitability again.On a sequential basis, we were able to increase our gross margins to 5.5% forthe quarter ended June 30, 2008, as compared to 5.3% for the quarter endedMarch 31, 2008 and 4.3% for the quarter ended December 31, 2007.  These increases were primarily due to theincreased volume and product mix of our *verykool*®products and continued focus on higher margin products.

 

In the United States, we continued to experiencesignificantly decreased net sales.  Muchof our significant United States customer base completed the transitional stageas regional carriers, including some of our customers being acquired in 2007 byAT&T, T-Mobile USA and Verizon Wireless. With our potential United States customer base significantly reduced, wedecided during the second quarter of 2008 to discontinue this portion of ouroperations, together with a discontinuation of our operations in Mexico.  These two areas accounted for less than 1% ofour net sales in the first six months of 2008, as compared to 20% of our netsales for the first six months of 2007.

 

**Results of Operations**

** **

***Discontinued Operations***

 

During the quarter ended June 30, 2008, theCompany assessed opportunities in the United States and Mexico and decided toimplement actions necessary to close sales operations in both of thosecountries.  Due to the changing environment and consolidation in theUnited States of the regional cellular carriers, along with the challenges ofopening sales relations with the cellular carriers in Mexico, management determinedthat it was necessary to take decisive actions to mitigate furtherlosses.   The loss relating to these discontinued operations duringthe three and six months ended June 30, 2008 was $2,077,743 and$2,165,293, respectively, and included non-cash charges of $1.8 million towrite-down inventory and accounts receivable.  As of June 30, 2008,our plans for the discontinued operations were substantially complete; howeverwe expect to continue to record adjustments and expenses related to thosediscontinued operations as necessary.

 

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***ThreeMonths ended June 30, 2008 Compared with Three Months ended June 30,2007***

*** ***

**Net Sales**

 

For the three months ended June 30, 2008, our netsales from continuing operations of $59.0 million increased 11% compared to ournet sales from continuing operations of $53.1 million for the same period of2007.  Average selling price of wirelesshandsets sold in the second quarter of 2008 increased 6%, as compared to the secondquarter of 2007, due primarily to increased volume of higher priced handsets,including our *verykool®* and OEM products.  However, this increase was offset by a 7%decrease in wireless handset sales volume, due to the impact of the economicslowdown in the markets we serve during the second quarter 2008.  The geographic mix of net sales shifted inthe second quarter of 2008 as sales in South America significantly increased tomore than 77% of net sales, as compared to 62% of net sales for the second quarterof 2007.  Sales in Central Americadecreased to 23% of total net sales in the quarter ended June 30, 2008, ascompared to 38% in the quarter ended June 30, 2007.  These regional shifts in net sales were theresult of the factors discussed below.

 

In South and Central America, we have expanded ourcustomer base as well as our geographic presence by adding additional customersas well as expanding our 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 $45.5 million for the quarter ended June 30,2008, a 40% increase from the same quarter in 2007.  This increase was primarily due to increasedsales in existing countries and the opening of a new country relationship,specifically Colombia.  In CentralAmerica, net sales decreased 34% to $13.5 million for the quarter ended June 30,2008, which was primarily due to an unusually low demand during the latter partof the quarter, which we believe was related to the economic downturnworldwide.

 

**Net Salesby Geographic Region**

 
| ** **      | ** ** | **For the Three Months  Ended June 30,** | ** ** | **Increase** | ** ** |
|-----------------|------------|-------------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2008**                                                          | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)**     | ** ** | ** **   | ** ** |
| Central America |       | 13,528                                                            |       | 20,600       |       | (34 | )% |
| South America   |       | 45,512                                                            |       | 32,501       |       | 40 | % |
| Total           |       | $                                                                 | 59,040     |         | $          | 53,101 |   | 11 | % |
|                 |            |                                                                   |            |              |            |  |  |  |  |

 

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

 

For the quarter ended June 30, 2008, cost ofsales was $55.8 million, or 94.5% of net sales, and gross margin was 5.5%, ascompared with $50.1 million, or 94.4% of net sales, and 5.6% for gross marginfor the quarter ended June 30, 2007. The increase in our total cost ofsales as a percentage of net sales and slight decrease in gross margin were dueto higher levels of sales and product mix shift, including sales of low-marginproducts.   Some of our OEM partnerspreviously entered into the low-tier handset range, which had less margin opportunitythan mid-tier and high-end handsets. This was partially offset by our *verykool*® proprietary products, which generally have grossmargins higher than OEM product sales. Our gross margin continues to be impacted by the change of product andregional mix of our sales, as different products and different regions havevarying margins.

 

For the quarter ended June 30, 2008, our grossprofit increased to $3.2 million from $3.0 million, as compared with the samequarter last year, an increase of 9%. This increase in gross profit wasprimarily the result of the increased net sales which was partially offset bythe decrease in gross margin due to product mix.

 
| ** **    | ** ** | **For theThree Months  Ended June 30,**   | ** ** | **Increase** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2008**                                                      | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales     |       | $                                                             | 59,040     |         | $          | 53,101 |   | 11 | % |
| Cost of sales |       | 55,814                                                        |       | 50,141       |       | 11 | % |
| Gross profit  |       | $                                                             | 3,226      |         | $          | 2,960 |   | 9 | % |
| Gross margin  |       | 5.5                                                           | %          | 5.6          | %          | (2 | )% |

 

**Operating Expenses and Operating Income fromContinuing Operations**

 

For the quarter ended June 30, 2008, operatingexpense from continuing operations increased 17%, as compared with the samequarter last year.  As a percentage ofnet sales from continuing operations, operating expense from continuingoperations increased to 5.4% for the quarter ended June 30, 2008, comparedwith 5.2% in the same quarter last year. The increase in operating expense from continuing operations as apercentage of net sales from continuing operations was due to the effortsrelated to the *verykool®* products and newcountry expansion, including marketing, engineering, depreciation and overallregional support 

 

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related expenses. Such expenses are necessary for geographical expansion as well as fornew product introduction.  Managementbelieves that future sales and margins will provide gross profits to bettercover the operational costs.  Inaddition, management continues to review expenses in an effort to better matchthe operational costs with the future opportunities.   We believe such measures will assist us aswe strive to return to profitability.

 

For the quarter ended June 30, 2008, ouroperating income from continuing operations was $10,000 compared with operatingincome from continuing operations of $223,000 for the quarter ended June 30,2007. As a percentage of net sales, operating income from continuing operationswas 0.1% for the quarter ended June 30, 2008, compared to income of 0.4%for the quarter ended June 30, 2007. The decrease in operating income fromcontinuing operations was a result of the increase in operating expenses asdiscussed above.

 

**OperatingExpenses from Continuing Operation**

 
| ** **              | ** ** | **For the Three Months  Ended June 30,** | ** ** | **Increase** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2008**                                                          | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)**     | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                                 | 59,040     |         | $          | 53,101 |   | 11 | % |
| Operating expenses      |       | $                                                                 | 3,215      |         | $          | 2,737 |   | 17 | % |
| Percentage of net sales |       | 5.4                                                               | %          | 5.2          | %          | 4 | % |

 

**Operating Income from Continuing Operations**

 
| ** **                                  | ** ** | **For the Three Months  Ended June 30,** | ** ** | **Increase** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------|------------|
| ** **                                  | ** ** | **2008**                                                          | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **                                  | ** ** | **(Dollar amounts in thousands)  (unaudited)**     | ** ** | ** **   | ** ** |
| Net sales                                   |       | $                                                                 | 59,040     |         | $          | 53,101 |   | 11 | % |
| Operating income from continuing operations |       | $                                                                 | 10         |         | $          | 223 |   | (95 | )% |
| Percentage of net sales                     |       | 0.1                                                               | %          | 0.4          | %          | (75 | )% |

 

**OtherExpense**

 

Duringthe quarter ended June 30, 2008, we incurred $325,000 of interest expense,compared to $224,000 for the same period last year, primarily due to a higheraverage outstanding balance on our line of credit during the quarter ended June 30,2008 as compared to the same period in the prior year.  We expect to regularly utilize larger amountson our revolving line of credit, which will increase our interest expense infuture periods.

 

**NetLoss from Continuing Operations**

 

Duringthe quarter ended June 30, 2008, our net loss from continuing operations was$155,000, as compared to a net loss from continuing operations of $1,000 forthe quarter ended June 30, 2007. This increase in our net loss was primarily related to the factorsdiscussed above, including our increased operational expenses, such as ourinvestments relating primarily to our geographical expansion and our *verykool®* products.

 

**DiscontinuedOperations**

 

For the quarter ended June 30,2008 we incurred a loss of $2.1 million from discontinued operations, ascompared to a loss of $447,000 for the quarter ended June 30, 2007. The loss was primarily a result of decreased sales in the U.S. and Mexicoduring 2008, as our more significant U.S. customers were acquired in the laterpart of 2007, and we wrote-down accounts receivable and inventory associatedwith those operations. As of June 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.

 

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***SixMonths ended June 30, 2008 Compared with Six Months ended June 30,2007***

*** ***

**Net Sales**

 

For the six months ended June 30, 2008, our netsales from continuing operations of $126.9 million increased 30% compared toour net sales from continuing operations of $97.5 million for the same periodof 2007.  Wireless handsets sold in thefirst six months of 2008 increased 20%, as compared to the first six months of2007, due primarily to volume increases in Central and South America withexisting and new customers.  However,this increase was offset by an 8% decrease in the average selling price ofhandsets, due to a larger mix of low-tier products sold.  Net sales in Central America increased 21%for the six months ended June 30, 2008, as compared to the same period a yearearlier, and accounted for 27% of net sales for the six months ended June 30,2008.  Our South America region salescontinued to represent the majority of our business, accounting for 73% of ournet sales in the first six months of 2008 as compared to 70% of our net salesfor the first six months of 2007.  Theseregional shifts in net sales were the result of a number of factors asdiscussed above and below.

 

In South and Central America, we have expanded ourcustomer base as well as our geographic presence by adding additional customersas well as expanding our business with existing customers, which has resultedin generally increased net sales over the past several years.  In addition, we continued to progress withour marketing and sales efforts of our proprietary *verykool*®line of products in Central and South America, resulting in sales of *verykool*® products accounting for nearly 8% of our net salesfor the six months ended June 30, 2008. In Central America, we increased sales 17% to $34.7 million for the sixmonths ended June 30, 2008, compared to $29.6 million in the same periodfor 2007, which was primarily due to an unusually low sales level in the firstquarter of 2007.  In South America, saleswere $92.3 million for the six months ended June 30, 2008, a 36% increase,compared to $67.9 million for the same period in 2007.  This increase was primarily due to increasedsales levels in existing countries and the opening of a new country in SouthAmerica, specifically Colombia.

 

**Net Salesby Geographic Region**

 
| ** **      | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Increase** | ** ** |
|-----------------|------------|-----------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2008**                                                        | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)**   | ** ** | ** **   | ** ** |
| Central America |       | $                                                               | 34,694     |         | $          | 29,609 |   | 17 | % |
| South America   |       | 92,279                                                          |       | 67,886       |       | 36 | % |
| Total           |       | $                                                               | 126,973    |         | $          | 97,495 |   | 30 | % |

 

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

 

For the six months ended June 30, 2008, cost ofsales was $120.2 million, or 94.6% of net sales from continuing operations, andgross margin was 5.4%, as compared with $92.1 million, or 94.5% of net sales fromcontinuing operations, and 5.5% for gross margin for the six months ended June 30,2007. The slight increase in our total cost of sales as a percentage of netsales was due to higher levels of sales of lower margin products.   Our gross margin continues to be impacted bythe change of product and regional mix of our sales, as different products anddifferent regions have varying margins.

 

For the six months ended June 30, 2008, our grossprofit increased to $6.8 million from $5.4 million, as compared with the sameperiod in 2007, an increase of 27%. This increase in gross profit was primarilythe result of overall increased sales levels, including the increase of *verykool*® products in our product mix, as those highermargin products continue to become a larger part of our net sales mix.

 
| ** **    | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Increase** | ** ** |
|---------------|------------|-----------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2008**                                                        | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)**   | ** ** | ** **   | ** ** |
| Net sales     |       | $                                                               | 126,973    |         | $          | 97,495 |   | 30 | % |
| Cost of sales |       | 120,159                                                         |       | 92,132       |       | 30 | % |
| Gross profit  |       | $                                                               | 6,814      |         | $          | 5,363 |   | 27 | % |
| Gross margin  |       | 5.4                                                             | %          | 5.5          | %          | (2 | )% |

 

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**Operating Expense and Operating Loss fromContinuing Operations**

 

As a percentage of net sales from continuingoperations, operating expense from continuing operations decreased to 5.4% inthe six months ended June 30, 2008, compared with 5.9% in the same periodlast year.  The decrease in operatingexpense from continuing operations as a percentage of net sales from continuingoperations was due to the increased overall net sales volume without aproportionate increase in related expenses. For the six months ended June 30, 2008, operating expenses fromcontinuing operations increased to $6.9 million as compared to $5.7 million forthe same period last year.  The increaseof expenses of 20% is primarily due to increased sales levels of 30% asdiscussed above.

 

For the six months ended June 30, 2008, ouroperating loss from continuing operations was $94,000, compared withoperating loss from continuing operations of $385,000 for the six months ended June 30,2007, an improvement of 76%. As a percentage of net sales, operating loss was0.1% for the six months ended June 30, 2008, compared to a loss of 0.4%for the period ended June 30, 2007. The decrease in operating loss was aresult of the increase in net sales and gross profits in excess of the increaseof operating expenses, as discussed above.

 

**OperatingExpenses**

 
| ** **              | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Increase** | ** ** |
|-------------------------|------------|-----------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2008**                                                        | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)**   | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                               | 126,973    |         | $          | 97,495 |   | 30 | % |
| Operating expenses      |       | $                                                               | 6,909      |         | $          | 5,748 |   | 20 | % |
| Percentage of net sales |       | 5.4                                                             | %          | 5.9          | %          | (8 | )% |

 

**Operating Loss from Continuing Operations**

 
| ** **              | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Increase** | ** ** |
|-------------------------|------------|-----------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2008**                                                        | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)**   | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                               | 126,973    |         | $          | 97,495 |   | 30 | % |
| Operating loss          |       | $                                                               | (94        | )            | $          | (385 | ) | (76 | )% |
| Percentage of net sales |       | (0.1                                                            | )%         | (0.4         | )%         | (75 | )% |

 

**OtherExpense**

 

Duringthe six months ended June 30, 2008, we incurred $514,000 of interestexpense, compared to $282,000 for the six months ended June 30, 2007,primarily due to a higher average outstanding balance on our line of creditduring the six months ended June 30, 2008 as compared to the same periodin the prior year.  We expect toregularly utilize larger amounts on our revolving line of credit, which willincrease our interest expense in future periods.

 

**NetLoss from Continuing Operations**

 

Duringthe six months ended June 30, 2008, our net loss from continuingoperations was $481,000, as compared to a net loss from continuing operations of$391,000 in the same period last year. This increase in our net loss was primarily related to increasedoperational expenses and investments relating primarily to the establishmentand increased sales of our proprietary line of *verykool®*products offset by our increased net sales, including those of our *verykool®* products, and increased gross profits, offset by.

 

**NetLoss from Discontinued Operations**

 

Forthe six months ended June 30, 2008, we incurred a loss of $2.2 millionfrom discontinued operations, as compared to a loss of $600,000 for the sixmonths ended June 30, 2007.  The increased loss was primarily aresult of decreased sales in the U.S. and Mexico during 2008, as our moresignificant U.S. customers were acquired in the later part of 2007, and we hadto write-down accounts receivable and inventory associated with theseoperations. As of June 30, 2008, our plans for the discontinued operationswere substantially complete; however, the Company expects to continue to recordadjustments and expenses through the discontinued operations as necessary.

 

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**FinancialCondition, Liquidity and Capital Resources**

 

Wegenerally use cash from our sales of products, lines of credit (bank andvendor) and sale of securities to provide capital needed to support ourbusiness.

 

**Cash Used inOperating Activities**

 

At June 30, 2008, we had $15.8 million in cash, adecrease of $4.8 million from December 31, 2007.  During the six months ended June 30, 2008, we usedcash and continued to leverage our bank and vendor lines of credit to fund ourgrowth.  The decrease in our use of thebank line of credit, was directly related to the decrease in accountsreceivable during the six months ended June 30, 2008.   The net cash provided by operatingactivities was $3.8 million for the six months ended June 30, 2008, whichresulted primarily from decreased accounts receivable partially offset bydecreased accounts payable, and a decrease in our inventory levels.  The $8.8 million decrease in accountsreceivable was primarily due to the timing of sales and the overall economicslowdown during the later part of the second quarter of 2008.  Inventory increased by $2.2 million andprepaid inventory decreased by $0.4 million, resulting in a total decrease of$1.8 million in inventory levels.  Thisnet decrease was partially attributable to the increased sales levels of the *verykool*® products as we continued to expand the geographiccountries and sales of these products. Accounts payable at June 30, 2008decreased $7.2 million, compared to December 31, 2007, primarily due topayments to vendors and partners in the ordinary course during the six monthsended June 30, 2008.  In addition,accrued expenses increased $1.7 million, due to timing of payments during thesix months ended June 30, 2008.

 

**Days of SalesOutstanding**

 

Days of sales outstanding (the average number of days ittakes to collect revenue after a sale is made) at June 30, 2008 were 71days, compared with 67 days at December 31, 2007.  This increase was due to a few customersmaking payments shortly after the close of the second quarter of 2008, as morethan 53% of our accounts receivable at June 30, 2008 were collected duringthe month of July.  Normal payment termsrequire our customers to pay on a net 30-day or net 60-day basis depending onthe region. We are constantly working with our customers to reduce our days ofsales outstanding. The extension of net 60-day terms was required to remaincompetitive in the regions we primarily operate, Central and South America. Inan effort to obtain new customers and penetrate new markets, we sometimes offerterms beyond our normal terms.

 

**Cash Used inInvesting Activities**

 

The net cash used in investing activities was $3,000 forthe six months ended June 30, 2008, compared to net cash used of $1.3million for the six months ended June 30, 2007. This use of cash isprimarily the result of our investment related to geographic expansion, toolingand molds for our proprietary *verykool®*products.

 

**Cash Used inFinancing Activities**

 

The net cash used in financing activities for the sixmonths ended June 30, 2008 of $8.6 million was primarily the result ofpayments on our bank line of credit, partially offset by approximately $34,000from the exercise of employee stock options.

 

**WorkingCapital**

 

Our net working capital at June 30, 2008 was $31.4million, compared with $33.7 million at December 31, 2007. This decreasewas primarily due to decreases in accounts payable and amounts drawn on ourline of credit, for the six months ended June 30, 2008.

 

**Borrowings**

 

During the first quarter of 2008 we had a line of creditfrom Wells Fargo HSBC Trade Bank N.A., which provided for advances not toexceed 80% of eligible domestic accounts receivable and up to 85% offoreign-insured accounts receivable (depending on the country of the debtor),up to a maximum of $30 million.

 

On April 30, 2008, the Company entered into a Loan, Security and Bulk Purchase Agreement and a Letterof Credit and Security Agreement (collectively, the “***Agreement***”)with Wells Fargo Century, Inc. (“***Lender***”), replacing itsexisting asset-based secured credit facility withWells Fargo HSBC Trade Bank, N.A. Pursuant to the Agreement, Lender may advance up to $45,000,000 to theCompany based on the expected collections of eligible receivables as well asvalue of the 

 

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Company’s eligible inventory determined inaccordance with the Agreement.  Theoutstanding advances may not exceed the lesser of $45,000,000 or the sum of thevalue of the eligible receivables and eligible inventory (times their respectiveadvance rates as set forth in the agreement).  The credit facility has a two-year termending April 2010 and is secured by all assets of the Company. Theinterest rate for each borrowing under the credit facility will be, at theoption of the Company, either the Wells Fargo Bank N.A. prime rate minus 0.50%or the LIBOR rate plus 2.00%. As of June 30, 2008,the majority of our debt was based on foreign-insured accounts receivable.

 

We have no other notes payable.

 

At June 30,2008 and December 31, 2007, the amounts drawn against the line of creditwere $18.1 million and $26.8 million, respectively.  Credit lines have been an importantpart of growing our business, and market changes affecting accounts receivablecould diminish the borrowing base of available funds under our credit line. At June 30,2008 and December 31, 2007, advances were at 67% and 96% of the availableborrowing base.

 

**Subsequentevents**

 

Subsequent to June 30,2008, the Company settled an outstanding claim against a former serviceprovider in which the Company is to receive $655,000.  Such amount is expected to be received andreflected in the statement of operations for the quarter ended September 30,2008.

 

***Critical Accounting Policies***

*** ***

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

 

*RevenueRecognition and Allowance for Returns*

 

Revenues for wirelesshandset and accessory sales are recognized when (i) shipment of theproducts 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 added servicesare related to services prior to the shipment of the products, and no valueadded services are provided after delivery of the products. We recognize areserve against the related receivables estimates for product returns based onhistorical experience and other judgmental factors. We evaluate these estimateson an on-going basis and adjust the estimates each period based on actualproduct return activity. We recognize freight costs billed to our customers inrevenue and actual freight costs incurred as a component of cost of sale.

 

*Allowance for Doubtful Accounts*

* *

Credit evaluations are undertaken for all major salestransactions before shipment is authorized. Normal payment terms requirepayment on a net 30 or 60-day basis depending on the customer. On an ongoingbasis, we analyze the payment history of customer accounts, including recentcustomer purchases. We evaluate aged items in accounts receivable and providereserves for doubtful accounts. Customer creditworthiness and economicconditions may change, including increasing the risk of collectibility andsales returns, and may require additional provisions, which could negativelyimpact our operating results.

 

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*Inventory Write-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 estimate productdemand, we sometimes build inventories in excess of demand for the applicablefuture periods. If this occurs, we provide a reserve, which may have a negativeimpact on our reported results of operations and financial condition.

 

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

 

The primary objective of 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.

 

**InterestRate**

 

We are exposed to market risk from changes in interest rates on ouroutstanding revolving line of credit. At June 30, 2008, we had $18.1million outstanding under our line of credit, which could be affected bychanges in short-term interest rates. Under our new borrowing facility weentered into in April 2008, the interest rate for funds borrowed is (i) WellsFargo’s prime rate minus 0.50% (5.00% at June 30, 2008) or LIBOR plus2.00% (2.46% at June 30, 2008). For every 1% increase in Wells Fargo’sprime rate or one-month LIBOR, our interest expense increases by $181,000annually assuming $18.1 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 effectinterest-rate movement may have on other variables relating to our business,including changes in sales volumes that could be indirectly attributed tochanges in interest rates. The actions that we would take in response to such achange are also not considered. If it were possible to quantify this impact,the results could differ from the sensitivity effects shown above.

 

**MarketRisk**

 

Substantial 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 both our domestic and foreignsales.  However, there can be noassurance that our insurance policy will substantially offset the impact offluctuations in currency exchange rates, political, economic or regulatoryconditions on its results of operations and financial position. Foreigncurrency fluctuations did not have a material impact on our financial resultsduring the three and six months ended June 30, 2008.  Please see “Consolidated Statement of Comprehensive Operations”.

 

**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 our disclosure controls and procedures as of theend of the period covered by this Quarterly Report pursuant to Rule 13a-15(b) underthe Securities Exchange Act, as amended (the “Exchange Act”). Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of the period covered by this Quarterly Report,our disclosure controls and procedures were effective to ensure that (i) informationrequired to be disclosed by us is accumulated and communicated to ourmanagement as appropriate to allow timely decisions regarding requireddisclosure and (ii) information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

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**Changes in Internal Control over FinancialReporting**

 

The Chief Executive Officer and President and theChief Financial Officer conducted an evaluation of our internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) (“Internal Control”) to determine whether any changes in InternalControl occurred during the quarter ended June 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 and associatedRule 10b-5, Section 20(a) and Section 20A in connectionwith the announcement of the Company’s restatement of first quarter 2006earnings and in connection with allegedly false and/or misleading statementsrelated 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 (“MOU”), which will be followed by a Stipulationof Settlement, to resolve the case.  TheMOU, which is contingent on preliminary and final Court approval (after appropriatenotice) of this settlement as well as settlement of the derivative action notedbelow, among other contingencies**,** provides for,among other things, a dismissal with prejudice of the lawsuit, releases of thedefendants, 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 MOU further provides that defendants denyany liability or responsibility for the claims made and make no admission ofany wrongdoing.

 

*Derivative Action*

 

In the derivative action, captioned *In Re InfoSonicsCorporation Derivative Litigation*, Lead Case No. 06 CV 1336,now pending before Judge Sammartino in the United States District Court for theSouthern District of California, plaintiffs filed a consolidated complaint on November 6,2006 purportedly on behalf of the Company against certain of its officers anddirectors, and the Company as a nominal defendant.  The consolidated complaint alleges claims forviolations of Section 14(a) of the Exchange Act, Sections 25402 and25403 of the California Corporations Code, disgorgement under theSarbanes-Oxley Act of 2002, breach of fiduciary duty, abuse of control, grossmismanagement, waste of corporate assets, unjust enrichment, rescission, aconstructive trust, and an accounting, in connection with the Company’srestatement of first quarter 2006 earnings and in connection with allegationsof wrongdoing with respect to granting, exercising, accounting and reporting ofthe stock options that the Company granted in December 2005.  Plaintiffs seek unspecified damages,declaratory relief regarding the Sarbanes-Oxley Act of 2002, Section 14(a) ofthe Exchange Act, and the legality of stock options, a constructive trust,restitution, disgorgement, modification of certain corporate governance andinternal procedures, extraordinary equitable and/or injunctive relief, costs,and such other relief as is just and proper.

 

Defendants filed a 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, prior to the deadline for plaintiffs to file an amended complaint, theparties entered into an MOU, which will be followed by a Stipulation ofSettlement, to resolve the case.  TheMOU, which is contingent on preliminary and final Court approval (afterappropriate notice) of this settlement and the securities settlement notedabove, among other contingencies, provides for, among other things, a dismissalwith 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 MOU further provides that defendants denyany liability or responsibility for the claims made and make no admission ofany wrongdoing.

 

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

 

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**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, which factors and information could materially affect our business,financial condition or operating results. The risk factors and uncertaintiesdescribed in our Annual Report on Form 10-K and this report  are not the only risks and uncertaintiesfacing us. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial also may materially affect our business,financial condition or operating results. Except as set forth below, there have been no material changes to therisk factors included in our 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 and second quarters of 2008. As of June 30, 2008, we had working capital of approximately $30.1million.  While we remain optimistic forfuture prospects, given the economic slowdown and consolidation in the U.S. andthe economic slowdown in the Latin American markets that we serve, we cannotadequately evaluate the financial viability of our business and our long-termprospects.

 

To achieve profitability we must, among other things:

 

·              Continue to increasegross profits while controlling operational expenses;

·              Continue to workwith our OEM vendors for increased margin opportunities; and

·              Generate sales andconsumer demand for 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 outstandingindebtedness, which is secured by substantially all our assets and couldprevent us from borrowing additional funds, if needed.***

 

Asof June 30, 2008, we had outstanding debt in the amount of $18.1 millionunder a bank credit facility.  In April 2008, we entered into a Loan,Security and Bulk Purchase Agreement and a Letter of Credit and SecurityAgreement with Wells Fargo Century, Inc., replacing our existingasset-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 June 30, 2008, the Companywas 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.

 

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***W******e buy a significant amount of our products from alimited number of suppliers, who may not provide us with competitive productsat reasonable prices when we need them in 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 June 30, 2008, three suppliers accounted for 74%, 10%and 10%, 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 three 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.

 

***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 June 30, 2008 represented25%, 22% and 17% of our net sales.  Thesecustomers are carriers in Latin America. The markets we serve are subject to significantprice competition. Additionally, our customers are not contractually obligatedto purchase products from us. For these and other reasons, such as competitivepricing and competitive pressures, customers may seek to obtain products orservices from us at lower prices than we have been able to obtain from thesecustomers in the past. This could occur, for example, in the case of a customerpurchasing large quantities of a product from us, who then terminates thisrelationship because the customer can obtain a lower price by buying directlyfrom the manufacturer or other supplier. The loss of any of our principalcustomers, a reduction in the amount of product or services our principalcustomers order from us or the inability to maintain current terms, includingprice, with these or other customers could have an adverse effect on ourfinancial condition, results of operations and liquidity. In addition, we haveexperienced losses of certain customer bases through industry consolidation andin the ordinary course of business. Recent losses include our U.S. and Mexico customer bases where wedecided in second quarter 2008 to discontinue operations, thereby restrictingpotential customer geography. Overall, there can be no assurance that any ofour customers will continue to purchase products or services from us or thattheir purchases will be at the same or greater levels than in prior periods,with any such customer decisions having the potential to adversely affect ourbusiness 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, particularly Latin American countries,as we discontinued operations in the United States (as well as Mexico) in thesecond quarter 2008.  All our salestransactions are completed in U.S. dollars and therefore may be impacted bychanges 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 additionalfinancial risks, including expenses and losses.

 

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***We may not be ableto continue to support the realization of our deferred 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 carrybacks, (c) taxplanning strategies and (d) future taxable income. At June 30, 2008,our deferred tax asset was $2.7 million, for which we have not established avaluation allowance. We recognized the deferred tax asset because managementbelieves, based on detailed financial projections, that it is more likely thannot, we will have sufficient future earnings to utilize this asset to offset futureincome tax liabilities. Realization of a deferred tax asset requires us toapply significant judgment and is inherently speculative because it requiresthe future occurrence of circumstances that cannot be predicted with certainty.We cannot assure you that we will achieve sufficient future taxable income asthe basis for the ultimate realization of our deferred tax asset and thereforewe may have to establish a full or partial valuation allowance at some point inthe future. If we determine that a valuation allowance is necessary, this wouldrequire us to incur a charge to earnings that would adversely affect ourcapital position.  At June 30, 2008,we had $2.7 million of allowable deferred tax assets for regulatory capitalpurposes, which is the amount that is expected to be recovered based on atwo-year net operating loss carryback calculation. There is no assurance thatwe will be able to continue to recognize any or the entire deferred tax assetfor regulatory capital purposes.

 

***Our ability to attain future profitability depends on our ability toincrease existing margins, including through increased net sales, which we maynot 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 half of 2008, although we had highersales, we were unprofitable due to lower gross margins, as well as, among otherthings, higher operating expenses. We cannot guarantee that we will be able toimprove gross margins, including increasing sales, or do so in a profitablemanner in the future.

 

***Ifthe trading price of our common stock remains below $1.00 for an extendedperiod of time, our common stock may, among other things, be delisted from TheNasdaq Global Market or Nasdaq markets altogether adversely affecting the valueof our common stock.***

 

BetweenJanuary 1, 2006 and August 8, 2008, our common stock share pricefluctuated between $0.58 and $16.52 per share, and on August 8, 2008closed at $0.69 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, we received a Nasdaq Staff Deficiency letter indicatingthat, for the last thirty consecutive business days, the bid price for theCompany’s common stock closed below the minimum $1.00 per share requirement forcontinued listing on The Nasdaq Stock Market under Nasdaq Market Rules.  In accordance with such rules, the Companyhas been provided an initial period of 180 calendar days, or until January 6,2009, to regain compliance. The letter states that the Nasdaq staff willprovide written notification that the Company has achieved compliance if at anytime before January 6, 2009, the bid price of the Company’s common stockcloses at $1.00 per share or more for a minimum of ten consecutive businessdays, although the letter also states that the Nasdaq staff has discretion torequire compliance for a period in excess of ten consecutive business days, butgenerally no more than twenty consecutive business days, under certaincircumstances.

 

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.

 

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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.

 

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

 

None.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

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

 

On June 9, 2008, we held our 2008 Annual Meeting of Stockholders.  At that meeting, our stockholders took thefollowing actions on the following proposals by the vote of shares indicated:

 

(a)           The election of thefollowing directors to serve on our Board of Directors, each director to serveuntil the next annual meeting of stockholders or until their respectivesuccessor is elected and qualified:

 
| **Name**          | ** ** | **Votes Cast For** | ** ** | **Votes Against** | ** ** | **Votes Withheld** | ** ** |
|-------------------|------------|------------------------------|------------|------------------------|------------|-------------------------|------------|
| Joseph Ram        |       | 11,929,412                   |       | —                 |       | 1,792,004               |       |
| Abraham G. Rosler |       | 11,807,892                   |       | —                 |       | 1,913,524               |       |
| Randall P. Marx   |       | 11,933,692                   |       | —                 |       | 1,787,724               |       |
| Robert S. Picow   |       | 11,933,992                   |       | —                 |       | 1,787,424               |       |
| Kirk A. Waldron   |       | 11,933,692                   |       | —                 |       | 1,787,724               |       |

 

(b)           The ratification ofthe employment of Singer Lewak Greenbaum & Goldstein LLP as ourindependent registered public accounting firm for the fiscal year ending December 31,2008:

 
| For: 13,458,303 | Against: 96,139 | Abstain: 166,974 | Not Voted: 0 |
|-----------------|-----------------|------------------|--------------|

 

**Item 5.    Other Information**

 

None.

 

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

 
| Exhibit  Number | ** ** | **Description of Exhibit**                                                                                                                                                               |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Distribution Agreement by and between InfoSonics  Corporation and Samsung Electronics Argentina S.A. effective as of  April 8, 2008 (1).                                            |
| 10.2            | *          | Employment Agreement dated April 8, 2008, by  and between InfoSonics Corporation and Joseph Ram (1).                                                                                |
| 10.3            | *          | Employment Agreement dated April 8, 2008, by  and between InfoSonics Corporation and Jeffrey Klausner (1).                                                                          |
| 10.4            | *          | Employment Agreement dated April 8, 2008, by  and between InfoSonics Corporation and Abraham Rosler (1).                                                                            |
| 10.5            |       | Seventh Amendment to Credit Agreement by and between  InfoSonics Corporation and Wells Fargo HSBC Trade Bank, N.A. entered into on  April 21, 2008 (2).                             |
| 10.6            |       | Loan Security and Bulk Purchase Agreement dated  April 30, 2008, by and between InfoSonics Corporation and Wells Fargo  Century Inc. (3)                                            |
| 10.7            |       | Letter of Credit and Security Agreement dated  April 30, 2008, by and between InfoSonics Corporation and Wells Fargo  Century Inc. (3)                                              |
| 10.8            |       | Stock Purchase and Sale Agreement dated  January 19, 2005, by and between InfoSonics Corporation and Fanrock  Investments Limited (4)                                               |
| 10.9            |       | Amendment No.1 to Stock Purchase and Sale Agreement  dated May 15, 2008, by and between InfoSonics Corporation and Fanrock  Investments Limited (4)                                 |
| 10.10           |       | Common Stock Purchase Agreement dated May 15,  2008, by and between InfoSonics Corporation and Fanrock Investments Limited  (4)                                                     |
| 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)  Incorporatedby reference from the Company’s Current Report on Form 8-K, filed on April 14,2008.

(2)  Incorporatedby reference from the Company’s Current Report on Form 8-K, filed on April 23,2008.

(3)  Incorporatedby reference from the Company’s Current Report on Form 8-K, filed on May 6,2008.

(4)  Incorporatedby reference from the Company’s Current Report on Form 8-K, filed on May 19,2008.

(+)  Filed herewith.

(*)  Indicatesa management contract or compensatory plan or arrangement.

 

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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:   August 14,  2008 | By:                         | /s/  Joseph  Ram |
|                                         |                        | Joseph  Ram |
|                                         |                        | Chief  Executive Officer and President |
|                                         |                        |
|                                         |                        |
| Date:   August 14,  2008 | By:                         | /s/  Jeffrey  Klausner |
|                                         |                        | Jeffrey  Klausner |
|                                         |                        | Chief  Financial Officer |

 

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