**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10- Q**

 

| **x****  ****QUARTERLY REPORT UNDER  SECTION 13 OR 15(d)**        |
|----------------------------------------------------------------------------------|
| **OF THE SECURITIES EXCHANGE ACT  OF 1934.**                                     |
| ** **                                                                       |
| **For the quarterly period ended March 31,  2008**                          |
| ** **                                                                       |
| **OR**                                                                           |
| ** **                                                                       |
| **o****  ****TRANSITION REPORT PURSUANT TO  SECTION 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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large accelerated filer o                      |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

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 May 12, 2008, theRegistrant had 14,910,408 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 March 31,2008**

 

**Table of Contents**

 
| **PART I.FINANCIAL INFORMATION** |                                                                                        |                                                                                                                      |
|---------------------------------------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
|                                  |                                                                                        |                                                                                                                      |   |
| Item 1.                               | Financial Statements                                                                        |                                                                                                                      |   |
|                                  |                                                                                        |                                                                                                                      |   |
| ·                                |                                                                                        | Consolidated Balance Sheets as of  March 31, 2008 (unaudited) and December 31, 2007                             |   |   |
|                                  |                                                                                        |                                                                                                                      |   |   |
| ·                                |                                                                                        | Consolidated Statements of Operations for  the Three Months Ended March 31, 2008 and 2007 (unaudited)                |   |   |
|                                  |                                                                                        |                                                                                                                      |   |   |
| ·                                |                                                                                        | Consolidated Statements of Comprehensive  Operations for the Three Months Ended March 31, 2008 and 2007  (unaudited) |   |   |
|                                  |                                                                                        |                                                                                                                      |   |   |
| ·                                |                                                                                        | Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 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                                                                                    |                                                                                                                      |   |
|                                       |                                                                                             |                                                                                                                           |  |  |  |

 

2

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**Part I.  FINANCIAL INFORMATION**

 

Item1.  Financial Statements

 

**InfoSonics Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                          | ** ** | **March 31,  2008** | ** **     | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|----------------|-----------------------------|------------|
| ** **                                                                                                                                          | ** ** | **(unaudited)**          | ** **     | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                          | ** ** | ** **               | ** **     | ** **                  | ** ** |
| **Current assets:**                                                                                                                                 |       |                     |           |                        |       |
| Cash and cash equivalents                                                                                                                           |       | $                        | 2,874,488      |                        | $          | 20,750,800 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of $726,315 (unaudited) and $558,342                                             |       | 60,163,216               |           | 43,748,166                  |       |
| Inventory, net of reserves of $497,556  (unaudited) and $580,438                                                                                    |       | 16,171,474               |           | 20,547,273                  |       |
| Prepaid inventory                                                                                                                                   |       | 2,669,649                |           | 461,990                     |       |
| Prepaid expenses                                                                                                                                    |       | 130,038                  |           | 124,449                     |       |
| Prepaid taxes                                                                                                                                       |       | 1,234,993                |           | 1,227,449                   |       |
| Net assets of discontinued operations                                                                                                               |       | 4,209                    |           | 4,209                       |       |
| Deferred tax asset – current                                                                                                                   |       | 1,270,757                |           | 1,203,417                   |       |
|                                                                                                                                                |       |                     |           |                        |       |
| Total current assets                                                                                                                                |       | 84,518,824               |           | 88,067,753                  |       |
|                                                                                                                                                |       |                     |           |                        |       |
| Property and equipment, net                                                                                                                         |       | 1,362,977                |           | 1,544,550                   |       |
| Intangible assets                                                                                                                                   |       | 504,000                  |           | 504,000                     |       |
| Deferred tax asset – non-current                                                                                                               |       | 1,807,150                |           | 1,401,671                   |       |
| Other assets                                                                                                                                        |       | 118,547                  |           | 165,828                     |       |
|                                                                                                                                                |       |                     |           |                        |       |
| **Total assets**                                                                                                                                    | ** ** | **$**                    | **88,311,498** | ** **                  | **$**      | **91,683,802** | ** ** |
|                                                                                                                                                |       |                     |           |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                      | ** ** | ** **               | ** **     | ** **                  | ** ** |
|                                                                                                                                                |       |                     |           |                        |       |
| **Current liabilities:**                                                                                                                            |       |                     |           |                        |       |
| Line of credit                                                                                                                                      |       | $                        | 26,466,350     |                        | $          | 26,755,100 |   |
| Accounts payable                                                                                                                                    |       | 22,351,567               |           | 26,710,664                  |       |
| Accrued expenses                                                                                                                                    |       | 2,800,043                |           | 1,112,481                   |       |
| Income taxes payable                                                                                                                                |       | 41,201                   |           | 80,675                      |       |
|                                                                                                                                                |       |                     |           |                        |       |
| Total current liabilities                                                                                                                           |       | 51,659,161               |           | 54,658,920                  |       |
| ** **                                                                                                                                          | ** ** | ** **               | ** **     | ** **                  | ** ** |
| **Total liabilities**                                                                                                                               |       | 51,659,161               |           | 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, $0.001 par value 40,000,000  shares authorized (14,819,781 and 14,647,067 shares issued and outstanding as  of applicable period end) |       | 14,820                   |           | 14,647                      |       |
| Additional paid-in capital                                                                                                                          |       | 31,548,662               |           | 31,505,990                  |       |
| Accumulated other comprehensive loss                                                                                                                |       | (33,399                  | )              | (31,190                     | )          |
| Retained earnings                                                                                                                                   |       | 5,122,254                |           | 5,535,435                   |       |
|                                                                                                                                                |       |                     |           |                        |       |
| Total stockholders’ equity                                                                                                                     |       | 36,652,337               |           | 37,024,882                  |       |
|                                                                                                                                                |       |                     |           |                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                 | ** ** | **$**                    | **88,311,498** | ** **                  | **$**      | **91,683,802** | ** ** |

 

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

 

3

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** **

**InfoSonics Corporation and Subsidiaries**

**ConsolidatedStatements of Operations**

**(unaudited)**

 
| ** **                                                                  | ** ** | **For the Three Months  Ended March 31,** | ** **   |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|--------------|
| ** **                                                                  | ** ** | **2008**                                                           | ** **   | **2007** | ** ** |
| ** **                                                                  | ** ** | ** **                                                         | ** **   | ** ** | ** ** |
| **Net sales**                                                               |       | $                                                                  | 68,307,619   |   | $ | 58,403,610 |   |
| **Cost of sales**                                                           |       | 64,787,036                                                         |         | 55,254,746 |   |
|                                                                        |       |                                                               |         |   |   |
| **Gross profit**                                                            |       | 3,520,583                                                          |         | 3,148,864 |   |
| **Operating expenses**                                                      |       | 4,256,675                                                          |         | 4,031,293 |   |
|                                                                        |       |                                                               |         |   |   |
| **Operating loss**                                                          |       | (736,092                                                           | )            | (882,429 | ) |
|                                                                        |       |                                                               |         |   |   |
| **Other expense**                                                           |       |                                                               |         |   |   |
| Interest expense                                                            |       | (187,869                                                           | )            | (55,472 | ) |
|                                                                        |       |                                                               |         |   |   |
| **Operating loss before benefit from income  taxes**                        |       | (923,961                                                           | )            | (937,901 | ) |
| **Benefit from income taxes**                                               |       | (510,780                                                           | )            | (379,768 | ) |
| ** **                                                                  | ** ** | ** **                                                         | ** **   | ** ** | ** ** |
| **Net loss**                                                                | ** ** | **$**                                                              | **(413,181** | **)** | **$** | **(588,133** | **)** |
|                                                                        |       |                                                               |         |   |   |
| **Basic and diluted loss per share**                                        |       |                                                               |         |   |   |
| Net loss                                                                    | ** ** | **$**                                                              | **(0.03**    | **)** | **$** | **(0.04** | **)** |
|                                                                        |       |                                                               |         |   |   |
| **Basic and diluted weighted-average number  of common shares outstanding** | ** ** | **14,758,413**                                                     | ** **   | **14,318,912** | ** ** |

 

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

 

4

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**Infosonics Corporation and Subsidiaries**

**ConsolidatedStatements of Comprehensive Operations**

**(unaudited)**

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                     |       |                                             |       |   |   |
| Net loss                                 |       | $                                                | (413,181   | ) | $ | (558,133 | ) |
| Other comprehensive loss:                |       |                                             |       |   |   |
| Foreign currency translation adjustments |       | (2,209                                           | )          | (15,181 | ) |
| Comprehensive loss                       |       | $                                                | (415,390   | ) | $ | (573,314 | ) |

 

*Accompanyingnotes are an integral part of these financial statements*

 

5

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**InfoSonics Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

 
| ** **                                                                                                           | ** ** | **For the Three Months  Ended March 31,** | ** **    |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|---------------|
| ** **                                                                                                           | ** ** | **2008**                                                           | ** **    | **2007** | ** ** |
| **Cash flows from operating activities:**                                                                            | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
| Net loss                                                                                                             |       | $                                                                  | (413,181      | ) | $ | (558,133 | ) |
| Adjustments to reconcile net loss from  continuing operations to net cash provided by (used in) operating activities |       |                                                               |          |   |   |
| Depreciation                                                                                                         |       | 169,388                                                            |          | 43,032 |   |
| Provision for bad debt                                                                                               |       | 167,973                                                            |          | 99,455 |   |
| Loss on disposal of fixed assets                                                                                     |       | 17,084                                                             |          | — |   |
| Provision for obsolete inventory                                                                                     |       | (82,882                                                            | )             | 182,565 |   |
| Stock option expense                                                                                                 |       | 20,392                                                             |          | 97,449 |   |
| (Increase) decrease in                                                                                               |       |                                                               |          |   |   |
| Trade accounts receivable                                                                                            |       | (16,583,023                                                        | )             | (7,186,599 | ) |
| Inventory                                                                                                            |       | 5,195,845                                                          |          | (7,403,373 | ) |
| Prepaid inventory                                                                                                    |       | (2,944,823                                                         | )             | (22,759 | ) |
| Prepaid expenses (including taxes)                                                                                   |       | (13,134                                                            | )             | (494,187 | ) |
| Other assets                                                                                                         |       | 47,283                                                             |          | (18,443 | ) |
| Deferred tax asset current                                                                                           |       | (67,340                                                            | )             | (74,000 | ) |
| Deferred tax asset non current                                                                                       |       | (405,479                                                           | )             | (322,298 | ) |
| Increase (decrease) in                                                                                               |       |                                                               |          |   |   |
| Accounts payable                                                                                                     |       | (4,359,097                                                         | )             | 148,535 |   |
| Accrued expenses                                                                                                     |       | 1,687,562                                                          |          | 1,155,423 |   |
| Income tax liabilities                                                                                               |       | (39,474                                                            | )             | 14,770 |   |
|                                                                                                                 |       |                                                               |          |   |   |
| Net cash provided by (used in) operating  activities                                                                 |       | (17,602,906                                                        | )             | (14,338,563 | ) |
|                                                                                                                 |       |                                                               |          |   |   |
| **Cash flows from investing activities:**                                                                            | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
|                                                                                                                 |       |                                                               |          |   |   |
| Purchase of property and equipment                                                                                   |       | (4,899                                                             | )             | (661,939 | ) |
|                                                                                                                 |       |                                                               |          |   |   |
| Net cash provided by (used in) investing  activities                                                                 |       | (4,899                                                             | )             | (661,939 | ) |
|                                                                                                                 |       |                                                               |          |   |   |
| **Cash flows from financing activities:**                                                                            | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
| Borrowings from line of credit                                                                                       |       | 36,322,720                                                         |          | 222,856,230 |   |
| Payments on line of credit                                                                                           |       | (36,611,471                                                        | )             | (226,135,774 | ) |
| Cash received for stock, options and  warrants                                                                       |       | 22,453                                                             |          | 253,380 |   |
|                                                                                                                 |       |                                                               |          |   |   |
| Net cash provided by (used in) financing  activities                                                                 |       | (266,298                                                           | )             | (3,026,164 | ) |
|                                                                                                                 |       |                                                               |          |   |   |
| Effect of exchange rate changes on cash                                                                              |       | (2,209                                                             | )             | (15,181 | ) |
|                                                                                                                 |       |                                                               |          |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                                |       | (17,876,312                                                        | )             | (18,041,847 | ) |
|                                                                                                                 |       |                                                               |          |   |   |
| **Cash and cash equivalents, beginning of  period**                                                                  |       | 20,750,800                                                         |          | 30,243,392 |   |
|                                                                                                                 |       |                                                               |          |   |   |
| **Cash and cash equivalents, end of period**                                                                         | ** ** | **$**                                                              | **2,874,488** | ** ** | **$** | **12,201,544** | ** ** |

 

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

 

6

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** **

**InfoSonics Corporation**

**Condensed Notes toConsolidated Financial Statements**

**(unaudited)**

 

**NOTE 1. Basisof Presentation**

 

Theaccompanying unaudited consolidated financial statements and these condensednotes have been prepared in accordance with accounting principles generallyaccepted in the United States (“GAAP”) for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-Xof the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Accordingly, they do not include all of the information and notes required byGAAP for complete financial statements. The preparation of financial statementsrequires management to make estimates and assumptions that affect amountsreported in the financial statements and accompanying notes. Actual results arelikely to differ from those estimates, but management does not believe suchdifferences will materially affect the financial position or results ofoperations of InfoSonics Corporation (the “Company”), although they may. Theseunaudited consolidated financial statements and condensed notes should be readin conjunction with the financial statements and notes as of and for the yearended December 31, 2007 included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007. These unaudited consolidated financial statements reflect alladjustments considered, in the opinion of the Company’s management, necessaryto fairly present the results for the periods covered herein and suchadjustments are considered of a normal recurring nature.

 

The unauditedconsolidated financial statements include the accounts of the Company and itssubsidiaries, Axcess Mobile LLC, InfoSonics Latin America, Inc.,InfoSonics de Mexico S.A. de C.V., InfoSonics de Guatemala S.A., InfoSonics ElSalvador S.A. de C.V., InfoSonics S.A., InfoSonics Corporation Chile y CompaniaLimitada and InfoSonics Colombia S.A., all of which are wholly owned.Significant intercompany accounts and transactions have been eliminated inconsolidation of these consolidated financial statements.

 

Theunaudited consolidated balance sheet at and statements of operations as of March 31,2008 do not include all of the information and notes required by GAAP forcomplete financial statements. The unaudited consolidated balance sheet, the unauditedconsolidated statements of operations and the unaudited consolidated statementsof comprehensive operations at or for the three months ended March 31,2008 and the unaudited consolidated statement of cash flows for the threemonths ended March 31, 2008 are not necessarily indicative of thefinancial condition, operating results or cash flows that may be expected forthe full fiscal year of 2008 or for any future period.

 

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

 

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

 

On December 28,2007, the Securities and Exchange Commission (“SEC”) staff published StaffAccounting Bulletin No. 110 (SAB 110), which updates SAB 107, provides theSEC 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 results of operations for the threemonths ended March 31, 2008 and 2007 is as follows:

 
| ** **                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                              |       |                                             |       |   |   |
| Officer compensation                                              |       | $                                                | —     |   | $ | 46,018 |   |
| Non-employee directors                                            |       | 3,451                                            |       | 3,451 |   |
| Sales, general and administrative                                 |       | 16,941                                           |       | 47,980 |   |
| Total stock option expense, included in  total operating expenses |       | $                                                | 20,392     |   | $ | 97,449 |   |

 

Our stock options vest on an annual or a monthlybasis. As of March 31, 2008, there was $220,000 of total unrecognizedcompensation costs related to the non-vested stock options.  TheCompany recognizes stock-based compensation costs on a straight-line basis overthe requisite service period of the award, which is generally the optionvesting term.  That cost is 

 

7

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expected to be recognized over the next weighted-average period of 3.75years.  Such amounts may change as aresult of additional grants, forfeitures, modifications in assumptions andother factors. SFAS 123R provides that income tax effects of share-basedpayments are recognized in the financial statements for those awards which willnormally result in tax deductions under existing tax law. During the firstquarter of 2008, we recorded an expense of $20,392 related to optionspreviously granted and granted during the first quarter of 2008. Under currentU.S. federal tax law, we would receive a compensation expense deduction relatedto non-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 onthe date of grant using the Black-Scholes option pricing model with thefollowing weighted-average assumptions used for grants in 2008 and 2007:risk-free interest 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 0percent as the Company has not, and does not intend to, issue dividends; andexpected lives of 3 to 6 years based upon the historical life of options. Forgrants in 2008 and 2007, the expected volatility used ranged from 88% to 89%,based on the Company’s historical stock price fluctuations for a periodmatching the expected life of the options.

 

A summary ofoption activity under all of the above plans as of March 31, 2008 andchanges during the three months then ended is presented in the table below:

 
| ** **                            | ** ** | **Shares** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** | **Wtd. Avg.  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December 31, 2007 |       | 2,606,936  |       | $                                       | 2.66       |                                             |       |                            | —     |   |
| Granted                               |       | 180,500    |       | $                                       | 1.04       |                                             | 5.94       |                            | —     |   |
| Exercised                             |       | 172,713    |       | $                                       | 0.13       |                                             |       |                            | —     |   |
| Forfeited                             |       | 8,000      |       | $                                       | 6.84       |                                             |       |                            | —     |   |
| Outstanding at March 31, 2008    |       | 2,606,723  |       | $                                       | 2.70       |                                             | 2.78       |                            | —     |   |
| Vested and expected to vest           |       | 2,606,723  |       | $                                       | 2.70       |                                             | 2.78       |                            | —     |   |
| Exercisable at March 31, 2008    |       | 2,409,556  |       | $                                       | 2.82       |                                             | 2.52       |                            | —     |   |

 

A summary of the status of the Company’s non-vestedoptions at March 31, 2008 and changes during the three months ended March 31,2008 is presented below:

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Non-vested at December 31, 2007 |       | 23,333     |       | $                                                     | 5.32       |   |
| Granted                              |       | 180,500    |       | $                                                     | 1.04       |   |
| Vested                               |       | 6,667      |       | $                                                     | 4.50       |   |
| Forfeited                            |       | —     |       | $                                                     | —     |   |
| Non-vested at March 31, 2008    |       | 197,167    |       | $                                                     | 1.33       |   |

 

The weighted-average grant-date fair value of optionsgranted during the three months ended March 31, 2008 was $1.04. The totalintrinsic value of options granted during the three months ended March 31,2008 and 2007 was $0 and $0, respectively. There was $22,453 and $253,380 cashreceived from options exercised for the three months ended March 31, 2008and 2007, respectively.

 

**NOTE 3. Earnings Per Share**

 

The Companyutilizes SFAS No. 128, ‘‘*Earnings per Share*.’’ Basic earnings per share is computedby dividing income available to common stockholders by the weighted-averagenumber of common shares outstanding. Diluted earnings per share is computedsimilarly to basic earnings per share, except that the denominator is increasedto include the number of additional common shares that would have beenoutstanding if the potential additional common shares that were dilutive hadbeen issued. Common share equivalents are excluded from the computation iftheir effect is anti-dilutive. The Company’s common share equivalents consistof stock options and warrants.

 

8

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Since their effect wouldhave been anti-dilutive, 3,588,922 and 3,945,524, stock options and warrants topurchase shares of common stock have been excluded from the computation of netloss per share for the three months ended March 31, 2008 and 2007,respectively.

 

**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 Companyis subject to US federal income tax as well as income tax in multiple statesand foreign jurisdictions. For all major taxing jurisdictions, the tax years2002 through 2007 remain open to examination. As of March 31, 2008, theCompany does not expect any material changes to unrecognized tax positionswithin the next twelve months.

 

SFAS No. 109,“*Accounting forIncome Taxes,*” establishes financial accounting and reportingstandards for the effect of income taxes. The objectives of accounting forincome taxes are to recognize the amount of taxes payable or refundable for thecurrent year and deferred tax liabilities and assets for the future taxconsequences of events that have been recognized in an entity’s financialstatements or tax returns. Judgment is required in assessing the future taxconsequences of events that have been recognized in our financial statements ortax returns. Fluctuations in the actual outcome of these future tax consequencescould materially impact our financial position or our results of operations.

 

**NOTE 5.Inventory**

 

Inventory is stated at the lower ofcost (first-in, first-out) or market and consists primarily of cellular phonesand cellular phone accessories.  TheCompany provides for the possible inability to sell its inventory by recordinga reserve.  As of March 31, 2008 andDecember 31, 2007, the inventory reserve was $498,000 and $580,000respectively.  At March 31, 2008, wehad inventory in-transit of $737,000, which is under the control of a commonfreight carrier until 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 March 31, 2008and December 31, 2007, the prepaid inventory balances were $2.7 millionand $462,000, respectively.  Inventoryconsists of the following:

 
| ** **            | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Finished goods        |       | $                        | 15,931,780 |                        | $          | 21,127,625 |   |
| Inventory  in-transit |       | 737,250                  |       | 86                          |       |
| Inventory reserve     |       | (497,556                 | )          | (580,438                    | )          |
| Net inventory         |       | $                        | 16,171,474 |                        | $          | 20,547,273 |   |

 

**NOTE 6.Property and Equipment**

 

Property and equipment are primarily located in theUnited States, with the exception of $283,000 of machinery and equipmentlocated in Mexico and $10,000 located in Korea, and consisted of the followingas of the dates presented:

 
| ** **                    | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Machinery and equipment       |       | $                        | 704,312    |                        | $          | 711,578 |   |
| Furniture and fixtures        |       | 117,495                  |       | 126,421                     |       |
| Tooling and molds             |       | 1,257,636                |       | 1,257,636                   |       |
| Subtotal                      |       | 2,079,443                |       | 2,095,635                   |       |
| Less accumulated depreciation |       | 716,466                  |       | 551,085                     |       |
| Total                         |       | $                        | 1,362,977  |                        | $          | 1,544,550 |   |

 

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Depreciationexpense was $169,388 and $43,032 for the three months ended March 31, 2008and 2007, respectively.

 

**NOTE 7. Accrued Expenses**

 

As of March 31, 2008 and December 31,2007, Accrued expenses consisted of the following:

 
| ** **                      | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Accrued product costs |       | $                        | 2,713,684  |                        | $          | 1,031,147 |   |
| Other accrueds                  |       | 86,359                   |       | 81,334                      |       |
| Total                           |       | $                        | 2,800,043  |                        | $          | 1,112,481 |   |

 

**NOTE 8.Borrowings**

 

Until April 30, 3008, theCompany had a line of credit from Wells Fargo HSBC Trade Bank N.A., whichprovided for advances not to exceed 80% of eligible domestic accountsreceivable and up to 85% of foreign-insured accounts receivable (depending onthe country of the debtor), up to a maximum of $30,000,000. At March 31,2008, the majority of our debt was based on foreign accounts receivable.

 

Under the Wells Fargo HSBC TradeBank line of credit, interest was payable on a monthly basis (i) at WellsFargo’s prime rate minus 0.25% (5.25% at March 31, 2008) or (ii) atthe one-month LIBOR plus 1.50% (2.70% at March 31, 2008). The interestrate floated at Wells Fargo’s prime rate or was at LIBOR plus 1.5% if the debtwas a fixed amount drawn upon.  The lineof credit was collateralized by substantially all of the assets of the Company,and was to expire October 1, 2008. In addition to reporting and othernon-financial covenants, the line of credit contained certain financialcovenants which required the Company to maintain a tangible net worth of notless than $30,000,000 plus 50% of net profit after tax from January 1,2007, a pre-tax profit of not less than $1 on a rolling four quarter basis, aquick ratio of not less than one-to-one, a debt-to-net worth ratio of notgreater than two-to-one, and an annual net income after taxes of at least $1.The Company did not meet all of these financial covenants at March 31,2008.  The Company received a waiver fromWells Fargo relating to default rights Wells Fargo may have had due to theCompany failing to meet certain of these financial covenants at March 31,2008. At March 31, 2008 and December 31, 2007, the amounts drawnagainst the line of credit were $26,466,350 and $26,755,100, respectively.

 

On April 30, 2008, theCompany entered into a Loan,Security and Bulk Purchase Agreement and a Letter of Credit and SecurityAgreement (collectively, the “***Agreement***”)with Wells Fargo Century, Inc. (“***Lender***”), replacingits existing asset-based secured credit facility with Wells 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).  Thecredit facility has a two-year term ending April 2010 and is secured byall of the assets of the Company. The interest rate for each borrowing underthe credit facility is at the option of the Company, either the Wells FargoBank N.A. prime rate minus 0.50% or the LIBOR rate plus 2.00%.

 

The Company has no other notespayable.

 

**NOTE 9.Stockholders’ Equity**

 

StockOptions

 

Effective March 18, 2008, the Company grantedoptions to purchase an aggregate of 180,500 of its common stock to certainnon-executive employees(the “Employee Options”). One-fourth of the total options subject to theseoption grants become exercisable one year from the date of grant, and 1/48th ofthe total options become exercisable each month thereafter until fullyvested.  These options have exerciseprices of $1.04 per share, which was the closing price per share of the Company’scommon stock on March 18, 2008, and expire six years from the dateof grant. See Note 2 for Stock Based Compensation discussion.

 

10

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**NOTE 10.Recent Accounting Pronouncements**

 

In September 2006, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards No. 157,“Fair Value Measurements” (“SFAS 157”), which defines the fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements.  This statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years.  Early adoption is encouraged,provided that the registrant has not yet issued financial statements for thatfiscal year, including any financial statements for an interim period withinthat fiscal year. The adoption of SFAS 157 did not have a material impact onthe Company’s results of operations and financial position.

 

In February 2007, the FASB issued Statement No. 159,“*The Fair ValueOption for Financial Assets and Financial Liabilities – Including an amendmentof FASB Statement No. 115* “ (“SFAS 159”).  This standardamends FASB Statement No. 115, “*Accounting for Certain Investment in Debtand Equity Securities*,” with respect to accounting for a transfer tothe trading category for all entities with available-for-sale and tradingsecurities electing the fair value option.  This standard allows companiesto elect fair value accounting for many financial instruments and other itemsthat currently are not required to be accounted as such, allows differentapplications for electing the option for a single item or groups of items, andrequires disclosures to facilitate comparisons of similar assets andliabilities that are accounted for differently in relation to the fair valueoption.  SFAS 159 is effective for fiscal years beginning after November 15,2007. If elected, the implementation of FAS 159 is not expected to have amaterial impact on the Company’s consolidated financial statements.  The adoption of SFAS 159 did not have amaterial impact on the Company’s results of operations and financial position.

 

The Financial Accounting Standards Board (FASB) has issued FASBStatements No. 141 (revised 2007), *BusinessCombinations,* and No. 160, *NoncontrollingInterests in Consolidated Financial Statements.*  These new standards represent the completionof the FASB’s first major joint project with the International AccountingStandards Board (IASB)*.*  The FASB and the IASB first initiated thejoint project that resulted in the new standards because U.S. generallyaccepted accounting principles and International Financial Reporting Standards(IFRS) differed widely in their approach to accounting for businesscombinations.  The IASB plans to issueits counterpart standards IFRS 3 (revised), *BusinessCombinations,* and International Accounting Standard 27 (as revisedin 2007), *Consolidated and Separate FinancialStatements,* early next year. The new standards to be issued by the IASB are expected to contain thesame fundamental principles as those of the FASB, but will diverge with respectto certain issues.

 

In Statement No. 141 (revised 2007), the FASB retained thefundamental requirements of Statement No. 141 to account for all businesscombinations using the acquisition method (formerly the purchase method) andfor an acquiring entity to be identified in all business combinations.  However, the fair value principles in therevised Statement are a major change from Statement No. 141’s costallocation process, together with other revisions from past practice.  Among numerous changes, Statement No. 141(R) requiresthe acquiring entity in a business combination to:

 

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

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

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

·                  Recognize any restructuring coststhat the acquiring entity expects to incur with respect to the acquiredbusiness as an expense, rather than capitalize as part of the acquisition

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

 

FASB Statement No. 160 amends Accounting Research Bulletin No. 51,*Consolidated Financial Statements,*and requires all entities to report noncontrolling (minority) interests insubsidiaries within equity in the consolidated financial statements, butseparate from the parent shareholders’ equity. Statement No. 160 alsorequires any acquisitions or dispositions of noncontrolling interests that donot result in a change of control to be accounted for as equitytransactions.  Further, the Statementrequires that a parent recognize a gain or loss in net income when a subsidiaryis deconsolidated.

 

The final business combinations and noncontrolling interests Statementsare effective for annual periods beginning on or after December 15,2008.  The Statements should be appliedon a prospective basis, except for the presentation and disclosure requirementsof Statement No. 160, which must be applied retrospectively. Entities are **prohibited** from adopting the Statementsbefore their effective dates.

 

In March 2008, the FASB issued Statement of FinancialAccounting Standards No. 161 (SFAS 161), “Disclosures aboutDerivative Instruments 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 

 

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hedged items are accounted for under SFAS 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS 161 is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008, with earlyapplication encouraged. This statement encourages, but does not require,comparative disclosures for earlier periods at initial adoption. The Companydoes not believe adoption of SFAS 161 will have a material effect on theCompany’s financial statements.

 

**NOTE 11. Geographic Information**

 

The Company currently operates inone business segment.  All fixed assetsare located in Company or third party facilities in the United States, Koreaand Mexico. Net sales by geographical area for the three months ended March 31,2008 and 2007 were:

 
| ** **      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------|------------|--------------------------------------------------|------------|
| ** **      | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| United States   |       | $                                                | 141,300    |   | $ | 12,158,256 |   |
| Central America |       | 21,399,277                                       |       | 10,860,333 |   |
| South America   |       | 46,767,042                                       |       | 35,385,021 |   |
| Total           |       | $                                                | 68,307,619 |   | $ | 58,403,610 |   |

 

**NOTE 12.  Commitments and Contingencies**

 

*Securities Class Actions*

 

In the securities class action, captioned *In Re: InfoSonicsCorporation Securities Litigation*, Lead Case No. 06 CV 1231,now pending before Judge Sammartino in the United States District Court for theSouthern District of California, Plaintiffs filed a second amended consolidatedcomplaint on September 10, 2007 against the Company and certain of itsofficers and directors.  The secondamended consolidated complaint alleges violations of Section 10(b) ofthe Exchange Act and associated Rule 10b-5, Section 20(a) and Section 20Ain connection with the announcement of the Company’s restatement of firstquarter 2006 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 October 1, 2007, the defendants filed a motionto dismiss the second amended consolidated complaint.  On April 28, 2008, the Court issued anorder granting in part and denying in part defendants’ motion to dismiss thesecond consolidated amended class action complaint.  Specifically, the Court dismissed withoutprejudice plaintiffs’ claims based on defendants’ restatement of first quarter2006 earnings and dismissed without prejudice all claims against defendantAlthoff.  The Court denied the motion todismiss claims against defendant Klausner based on the February 6, 2006press release.  Plaintiffs may file athird amended class action complaint on or before May 26, 2008.  Defendants’ responsive pleading is due June 16,2008. At this time, discovery has not begun and no trial date has been set bythe Court.

 

*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.

 

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Defendants filed a motion to dismiss the consolidated complaint on thegrounds, among others, that the plaintiffs had failed to make a demand on theCompany’s board of directors and to adequately allege their other purportedclaims.  On September 4, 2007, theCourt granted defendants’ motion to dismiss for failure to make a demand on theboard, and also granted with prejudice the motion to dismiss the Sarbanes-Oxleyclaim.  The Court denied the othergrounds for dismissal.  On March 4,2008, the Court entered an order continuing the deadline for plaintiffs to filean amended complaint to June 3, 2008. At this time, discovery on the merits has not begun and no trial datehas been set by the Court.

 

We may become involved incertain other legal proceedings and claims which arise in the normal course ofbusiness. Other than as described above, as of March 31, 2008, we did nothave any significant litigation outstanding.

 

**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,are outlined below in “Critical Accounting Policies.”  All references to results of operations inthis discussion generally are to results from continuing operations, unlessotherwise noted.

 

**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, gain lossin value of derivatives, cost synergies, operating efficiencies, profitability,market share, and rates of return, are based on current management expectationsthat involve certain risks and uncertainties. These risks and uncertainties, in whole or in part, could cause suchexpectations to fail to be achieved and have a material adverse effect onInfoSonics’ business, financial condition and results of operations, including,without limitation: (1) intense competition, regionally andinternationally, 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) inability to secure adequate supply ofcompetitive products on a timely basis and on commercially reasonable terms; (3) foreignexchange rate fluctuations, devaluation of a foreign currency, adversegovernmental controls or actions, political or economic instability, ordisruption of a foreign market, and other related risks of our internationaloperations; (4) the ability to attract new sources of profitable businessfrom expansion of products or services or risks associated with entry into newmarkets, including geographies, products and services; (5) an interruptionor failure of our information systems or subversion of access or other systemcontrols may result in a significant loss of business, assets, or competitiveinformation; (6) significant changes in supplier terms and relationships; (7) terminationof a supply or services agreement with a major supplier or product supplyshortages; (8) continued consolidation in the wireless handset carriermarket; (9) extended general economic downturn; (10) loss of businessfrom one or more significant customers; (11) customer and geographical accountsreceivable concentration risk; (12) rapid product improvement and technologicalchange resulting in inventory obsolescence; (13) future terrorist or militaryactions; (14) the loss of a key executive officer or other key employees; (15)changes in consumer demand for multimedia wireless handset products andfeatures; (16) our failure to adequately adapt to industry changes and tomanage potential growth and/or contractions; (17) seasonal buying patterns;(18) dependency on Latin American sales; (19) uncertain political and economicconditions 

 

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internationally; (20) the impact, if any, of changesin EITF 00-19 or SFAS 133 guidance as it relates to warrants and registrationrights and SFAS 123R as it relates to stock options; (21) the resolution of anylitigation against the company; (22) the ability of the Company to successfullyintroduce and sell its *verykool*®products and the related inventory risk of such products; and (23) the abilityof the Company to generate taxable income in future periods in order to utilizeand realize any quarterly tax benefits recorded.  Our actual results could differ materiallyfrom those anticipated in our forward looking statements.

 

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, noassurances can be given that InfoSonics will be successful in these efforts.For a further discussion of significant factors to consider concerningInfoSonics, see “Risk Factors” below in this report and “Item 1A. Risk Factors”of InfoSonics’ Annual Report on Form 10-K for the year ended December 31,2007. In addition, other risks or uncertainties may be detailed from time totime in InfoSonics’ future SEC filings.

 

**Overview**

 

We are one of the premier distributors and providers of wirelesshandsets and accessories in Latin America. We provide end-to-end handset andwireless terminal solutions for carriers in Latin America.   We distribute products of several keyoriginal equipment manufacturers (OEMs), including Samsung, LG, Novatel 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 and delivery),marketing campaigns, warranty services and end-user support. We provide theseservices 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, and contract with various design and contract manufacturers inAsia to develop exclusive or semi-exclusive products for us.

 

In October 2007,we relocated our corporate headquarters from one location to another in SanDiego, California.  In addition we have afacility in Miami, Florida, where we have our Latin America sales and executiveoffices, and operate our main warehouse and distribution center. This warehouseand distribution center services our customers in Latin America.  We have wholly-owned subsidiaries in LatinAmerica, which conduct some of our business activities in their respectiveregions of Latin America.

 

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 seasonaland other factors, which may cause our financial condition and operatingresults to fluctuate on a quarterly basis, including, but not limited to, thetiming and introduction of new products by our suppliers and competitors,promotions and subsidies by network operators, technical and certificationdelays by industry bodies as well as the operators, purchasing patterns ofcustomers, the timing of holidays, the introduction 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 and entering new markets,and sourcing and developing new and innovative products, while maintainingclose attention to operational efficiencies and costs. We intend to increaseshipping volumes and improve efficiencies to enable higher levels ofprofitability and earnings growth.  Weprovide distribution and other services for OEMs, such as Samsung and LG andour own proprietary line of *verykool®* handsets. Performance indicators that are key for the monitoring and management ofour business include operating and net income, cost of sales and gross marginpercentage, operating expenses as a percent of revenues, and overall net salesgrowth, as well as balances of accounts receivable and inventory. We makeextensive use of our customized information system to closely monitor allaspects of our business, including customer relationship management,intelligent purchasing, inventory control, inventory flow, line item margincontrol for every order, and weighted-average cost and statistical data for ourproducts, customers and suppliers, as appropriate. We believe a strong focus onproviding better service to customers leads to increased customer satisfactionand retention and potential increases in sales.

 

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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.

 

**IndustryTrends and Risks**

 

  According to a January 2008 report by Cowen andCompany, 2007 overall worldwide wireless handset sales increased byapproximately 16%, and are forecasted to increase 12% in 2008 and 5% in 2009.The two largest areas of growth are Africa and Asia Pacific, regions in whichwe do not currently operate. A rapid decline in wireless handset sales growthcould negatively impact our net sales. Excess supply conditions can reduce themarket prices of the products we sell and therefore affect our ability togenerate net sales and gross profit at expected levels and could affect thevalue of our inventory. For example, United States rural service area carrierconsolidation resulted in a decrease in the value of some of our inventory carriedfor that region, which inventory was sold below our cost during 2007.Conversely, should manufacturers be unable to respond to an unanticipatedincrease in demand on a timely basis, we, along with others in our industry,could experience supply constraints that would affect our ability to deliverproducts. We are unable to quantify these effects, as it is difficult topredict future supply conditions and demand patterns which affect our abilityto meet customer demand or sell handsets at an acceptable gross profit.

 

**CompanySpecific Trends and Risks**

 

Our strategy incorporates overall market growthelements for each aspect of our business, which we hope will result in growth.Certain of our manufacturers entered into the low-tier handset market during 2007and continue to market them in 2008, which has had a positive impact on ourvolumes of handsets sold, but a negative impact on gross profit margin. Duringthe first quarter of 2008, we decreased our inventory levels as we worked moretowards a “just-in-time” inventory model. Our *verykool®*proprietary line of products, for which we have six models selling as of March 31,2008, showed continued ramp-up of sales in the first quarter of 2008 and couldbe an important part of our overall business in the future.

 

The addition of the *verykool®*and LG products during 2007 continues to assist with manufacturer and productdiversification for Central and South America, which should be beneficial as wemove forward and work towards profitability again. On a sequential basis, wewere able to increase our gross margins to 5.2% for the quarter ended March 31,2008, as compared to 4.3% for the quarter ended December 31, 2007.  This increase was primarily due to theincreased volume and product mix of our *verykool*® products.

 

In the United States, we experienced a significantsequential decrease in net sales to $0.1 million, accounting for less than 1%of our total net sales in the quarter ended March 31, 2008, as compared to$5.7 million, or 10%, for the quarter ended December 31, 2007.  We have seen some of our significant UnitedStates customer base complete the transitional stage as regional carriers,including some of our customers being acquired in 2007 by AT&T, T-MobileUSA and Verizon Wireless.  With thepotential United States customer base reduced, we are currently evaluating theimpact of these acquisitions and other developments for our futureopportunities in the United States.

 

**Results of Operations**

 

***ThreeMonths Ended March 31, 2008 Compared With Three Months Ended March 31,2007***

 

**Net Sales**

 

For the three months ended March 31,2008, our net sales of $68.3 million increased 17% compared to our sales of$58.4 million for the same period of 2007. Wireless handsets sold in the first quarter of 2008 increased 53%, ascompared to the first quarter of 2007, due primarily to increases in Centraland South America with existing and new customers.  However, this increase was offset by a 20%decrease in the average selling price, due to a larger mix of low-tier productsold. The geographic mix of net sales shifted in the first quarter of 2008 assales in the United States significantly decreased to less than 1% of netsales, as compared to 20% of net sales for the first quarter of 2007.  Sales in Central America increased to 31% oftotal net sales in the quarter ended March 31, 2008, as compared to 19% inthe quarter ended March 31, 2007. Our South America region sales continued to represent the majority ofour business, accounting for 69% of our net sales in the first quarter of 2008as compared to 61% of our net sales for the first quarter of 2007.  These regional shifts in net sales were theresult of a number of factors as discussed above and below.

 

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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 increased net sales.  Conversely, ourcustomer base in the United States has been negatively impacted by theacquisition of our two most significant United States customers, DobsonCellular Systems Inc. and Suncom Wireless, by larger carriers.  In addition, we continued progress with ourproprietary *verykool*® line of products with salesand marketing efforts in Central and South America, resulting in sales of *verykool*® products accounting for nearly 10% of our netsales for the quarter ended March 31, 2008.  In Central America, we increased sales 97% to$21.4 million for the quarter ended March 31, 2008, compared to $10.9million in the same quarter for 2007, which was primarily due to an unusuallylow sales level in the first quarter of 2007 due to customers having unusuallylarge levels of inventory on hand during the first quarter of 2007.  In South America, sales were $46.8 millionfor the quarter ended March 31, 2008, a 32% increase from the same quarterin 2007.  This increase was primarily dueto the opening of a new country in additional to increased sales levels inexisting countries in South America.

 

**Net Salesby Geographic Region**

 
| ** **      | ** ** | **Three Months ended  March 31,**              | ** ** | **Increase** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2008**                                                      | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| United States   |       | $                                                             | 141        |         | $          | 12,158 |   | (99 | )% |
| Central America |       | 21,399                                                        |       | 10,861       |       | 97 | % |
| South America   |       | 46,768                                                        |       | 35,385       |       | 32 | % |
| Total           |       | $                                                             | 68,308     |         | $          | 58,404 |   | 17 | % |

 

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

 

For the quarter ended March 31, 2008, cost ofsales was $64.8 million, or 94.8% of net sales, and gross margin was 5.2%, ascompared with $55.3 million, or 94.6% of net sales, and 5.4% for gross marginfor the quarter ended March 31, 2007. The increase in our total cost ofsales and decrease in gross margin are due to higher levels of sales andproduct mix shift, including sales of more low-tier and low-marginproducts.   Some of our OEM partnerspreviously entered into the low-tier handset range, which had less marginopportunity than mid-tier and high-end handsets. This was partially offset byour *verykool*® proprietary products, whichhave gross margins significantly higher than OEM product sales and *verykool*® products were a larger percentage of our productmix in the first quarter of 2008, compared to the same period in 2007.  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 quarter ended March 31, 2008, our grossprofit increased to $3.5 million from $3.1 million, as compared with the samequarter last year, an increase of 12%. This increase in gross profit wasprimarily the result of the increased *verykool*®products in our mix, as those higher margin products continue to become alarger part of our net sales mix.

 
| ** **    | ** ** | **Three Months Ended  March 31,**              | ** ** | **Increase** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2008**                                                      | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales     |       | $                                                             | 68,308     |         | $          | 58,404 |   | 17 | % |
| Cost of sales |       | 64,787                                                        |       | 55,255       |       | 17 | % |
| Gross profit  |       | $                                                             | 3,521      |         | $          | 3,149 |   | 12 | % |
| Gross margin  |       | 5.2                                                           | %          | 5.4          | %          | (4 | )% |

 

**Operating Expenses and Operating Income Loss**

 

As a percentage of net sales, operating expensesdecreased to 6.2% in the quarter ended March 31, 2008, compared with 6.9%in the same quarter last year.  Thedecrease in operating expenses as a percentage of sales was due to theincreased overall net sales volume without a similar increase in relatedexpenses.  For the quarter ended March 31,2008, operating expenses increased 6%, as compared with the same quarter lastyear. The dollar increase in operating expenses is primarily due to theincreased activity and operational expenses related to our increased sales ofour proprietary *verykool®* products in ourmarkets, as we continued our investments in facilities, marketing, engineeringand product and market development.  We believesuch investments are necessary to help build a solid foundation for ourbusiness, including our *verykool®*productsand for potential future growth.

 

16

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For the quarter ended March 31, 2008, our operatingloss was $736,000,compared with operating loss of $882,000 for the quarter ended March 31,2007, a decrease of 17%. As a percentage of net sales, operating loss was 1.1%for the quarter ended March 31, 2008, compared to a loss of 1.5% for thequarter ended March 31, 2007. The decrease in operating loss was a resultof the increase in net sales and gross profits, partially offset by theincrease in operating expenses as discussed above.

 

**OperatingExpenses**

 
| ** **              | ** ** | **Three Months Ended  March 31,**              | ** ** | **Increase** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2008**                                                      | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                             | 68,308     |         | $          | 58,404 |   | 17 | % |
| Operating expenses      |       | $                                                             | 4,257      |         | $          | 4,031 |   | 6 | % |
| Percentage of net sales |       | 6.2                                                           | %          | 6.9          | %          | (10 | )% |

 

**Operating Loss**

 
| ** **              | ** ** | **Three Months Ended  March 31,**              | ** ** | **Increase** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2008**                                                      | ** ** | **2007**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                             | 68,308     |         | $          | 58,404 |   | 17 | % |
| Operating loss          |       | $                                                             | (736       | )            | $          | (882 | ) | (17 | )% |
| Percentage of net sales |       | (1.1                                                          | )%         | (1.5         | )%         | (27 | )% |

 

**OtherExpense**

 

Duringthe quarter ended March 31, 2008, we incurred $188,000 of interestexpense, compared to $55,000 for the same period last year.  We expect to regularly utilize larger amountson our revolving line of credit, which will increase our interest expense infuture periods.

 

**NetLoss**

 

Duringthe quarter ended March 31, 2008, our net loss was $413,000, as comparedto a net loss of $588,000 in the same quarter last year.  This decrease in our net loss was primarilyrelated to the factors discussed above, including our increased net sales, increasedgross profits, offset by increased operational expenses and investmentsrelating primarily to the establishment and increased sales of our proprietaryline of *verykool®* products.

 

**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 our business.

 

**Cash Used inOperating Activities**

 

At March 31, 2008, we had $2.9 million in cash, adecrease of $17.9 million from December 31, 2007.  During the three months ended March 31, 2008, we usedcash and continued to leverage our bank and vendor lines of credit to fund ourgrowth.  The net cash used by operatingactivities was $17.6 million for the three months ended March 31, 2008,which resulted primarily from increased accounts receivable and decreasedaccounts payable, which were partially offset by a decrease in our inventorylevels.  The $16.6 million increase inaccounts receivable was primarily due to the timing of significant amounts ofsales prior to the close of the first quarter of 2008.  Inventory decreased by $5.2 million andprepaid inventory increased by $2.9 million, resulting in a net decrease of$2.3 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 March 31, 2008decreased $4.4 million, compared to December 31, 2007, primarily due topurchases from vendors in excess of the usual credit terms we have beenprovided.  In addition, accrued expensesincreased $1.7 million, due to timing of payments during the three months endedMarch 31, 2008.

 

17

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**Days of SalesOutstanding**

 

Days of sales outstanding (the average number of days ittakes to collect revenue after a sale is made) at March 31, 2008 were 69days, compared with 61 days at December 31, 2007.  This increase was due to a few customersmaking payments shortly after the close of the first quarter of 2008, as morethan 53% of our accounts receivable at March 31, 2008 were collectedduring the month of April.  Normalpayment terms require our customers to pay on a net 30-day or net 60-day basisdepending on the region. We are constantly working with our customers to reduceour days of sales outstanding. The extension of net 60-day terms was requiredto remain competitive in the regions we primarily operate, Central and SouthAmerica. In an effort to obtain new customers and penetrate new markets, wesometimes offer terms beyond our normal terms.

 

**Cash Used inInvesting Activities**

 

The net cash used in investing activities was $5,000 forthe three months ended March 31, 2008, compared to net cash used of$662,000 for the three months ended March 31, 2007. This use of cash isprimarily the result of our investment in equipment related to geographicexpansion, tooling and molds for our proprietary *verykool®*products.

 

**Net CashProvided from Financing Activities**

 

The net cash used in financing activities for the threemonths ended March 31, 2008 of $266,000 was primarily the result ofpayments on our bank line of credit, partially offset by approximately $22,000from the exercise of employee stock options.

 

**WorkingCapital**

 

Our net working capital at March 31, 2008 was $32.9million, compared with $33.4 million at December 31, 2007. This decreasewas primarily due to decreases in accounts payable and amounts drawn on ourline of credit, for the three months ended March 31, 2008.

 

**Borrowings**

 

During the first quarter of 2008 we had a line of creditfrom Wells Fargo HSBC Trade Bank N.A., which provides for advances not toexceed 80% of eligible domestic accounts receivable and up to 85% of foreign-insuredaccounts receivable (depending on the country of the debtor), up to a maximumof $30 million. ** **Asof March 31, 2008, the majority of our debt was based on foreign-insuredaccounts receivable.

 

Interest was payable on a monthlybasis (i) at Wells Fargo’s prime rate minus 0.25% (5.25% at March 31,2008) or (ii) at the one-month LIBOR plus 1.50% (3.25% at March 31,2008). The interest rate was floating at Wells Fargo’s prime rate or was atLIBOR plus 1.5% if the debt was a fixed amount drawn upon.  The line of credit was collateralized bysubstantially all of our assets, and was to expire October 1, 2008. Inaddition to reporting and other non-financial covenants, the line of creditcontains certain financial covenants which required us to maintain a tangiblenet worth of not less than $30 million plus 50% of net profit after tax from January 1,2007, a pre-tax profit of not less than $1 on a rolling four quarter basis, aquick ratio of not less than one-to-one, a debt-to-net worth ratio of not greaterthan two-to-one, and an annual net income after taxes of at least $1. At March 31,2008, the Company did not meet all of these financial covenants.  The Company received a waiver from WellsFargo relating to default rights Wells Fargo may have due to the Companyfailing to meet certain of these financial covenants at March 31,2008.  This line of credit was terminatedin April and replaced as described below.

 

On April 30, 2008, theCompany entered into a Loan,Security and Bulk Purchase Agreement and a Letter of Credit and SecurityAgreement (collectively, the “***Agreement***”)with Wells Fargo Century, Inc. (“***Lender***”), replacingits existing asset-based secured credit facility with Wells 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 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).  Thecredit facility has a two-year term ending April 2010 and is secured byall assets of the Company. The interest rate for each borrowing under thecredit facility will be, at the option of the Company, either the Wells FargoBank N.A. prime rate minus 0.50% or the LIBOR rate plus 2.00%.

 

18

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We have no other notes payable.

 

At March 31,2008 and December 31, 2007, the amounts drawn against the line of creditwere $26.5 million and $26.8 million, respectively.  Credit lines have been important partsof growing our business, and market changes affecting accounts receivable coulddiminish the borrowing base of available funds. At March 31, 2008 and December 31,2007, advances were at 88% and 96% of the available borrowing base.

 

***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 wireless handset and accessory sales arerecognized when (i) shipment of the products to customers has occurred andtitle has passed, (ii) when collection of the outstanding receivables isprobable and (iii) the final price of the products is determined. Salesare recorded net of discounts, rebates, cooperative arrangements (marketing,training and promotional funds), returns, and allowances. Consideration isgiven on select sales for cooperative arrangements related to marketdevelopment, training and special promotions, usually agreed upon in advance.The amount given is generally in the form of a credit memo, which is applied asa reduction of the sale price and such amount is recorded as a currentliability. Expenditures made pursuant to the agreed upon activity reduce thisliability. To the extent that we incur costs in excess of the establishedcooperative fund, we recognize that amount as a selling or marketing expense.As part of the sales process, we may perform certain value added services suchas programming, software loading and quality assurance testing. These valueadded services are considered an ancillary component of the sales process andamounts attributable to these processes are included in the unit cost to thecustomer. Furthermore, these value added services are related to services priorto the shipment of the products, and no value added services are provided afterdelivery of the products. We recognize a reserve against the relatedreceivables estimates for product returns based on historical experience andother judgmental factors. We evaluate these estimates on an on-going basis andadjust the estimates each period based on actual product return activity. Werecognize freight costs billed to our customers in revenue and actual freightcosts 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.

 

*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 estimateproduct demand, we sometimes build inventories in excess of demand for theapplicable future periods. If this occurs, we provide a reserve, which may havea negative impact on our reported results of operations and financialcondition.

 

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

 

The primary objective of the following information 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.

 

19

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**InterestRate**

 

We are exposed to market risk from changes in interest rates on ouroutstanding revolving line of credit. At March 31, 2008, we had $26.5million outstanding, which could be affected by changes in short-term interestrates. Under our new borrowing facility we entered into in April 2008, theinterest rate for funds borrowed is (i) Wells Fargo’s prime rate minus0.50% (5.25% at March 31, 2008) or LIBOR plus 2.00% (2.70% at March 31,2008). For every 1% increase in Wells Fargo’s prime rate or one-month LIBOR,our interest expense increases by $265,000 annually assuming $26.5 millionremained 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 months ended March 31, 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.

 

**Changes in Internal Control Over FinancialReporting**

 

The Chief Executive Officer and President and theChief Financial Officer conducted an evaluation of our internal control overfinancial reporting (as defined in Exchange Act Rule 13a-15(f)) (“InternalControl”) to determine whether any changes in Internal Control occurred duringthe quarter ended March 31, 2008, that have materially affected or whichare reasonably likely to materially affect Internal Control. Based on thatevaluation, no such change occurred during such period.

 

20

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**PART II.OTHER INFORMATION**

 

**Item 1. LegalProceedings**

 

*Securities Class Actions*

 

In the securities class action, captioned *In Re: InfoSonics CorporationSecurities Litigation*, Lead Case No. 06 CV 1231, now pendingbefore Judge Sammartino in the United States District Court for the SouthernDistrict of California, Plaintiffs filed a second amended consolidatedcomplaint on September 10, 2007 against the Company and certain of itsofficers and directors.  The secondamended consolidated complaint alleges violations of Section 10(b) ofthe Exchange Act and associated Rule 10b-5, Section 20(a) and Section 20Ain connection with the announcement of the Company’s restatement of firstquarter 2006 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 October 1, 2007, the defendants filed a motionto dismiss the second amended consolidated complaint.  On April 28, 2008, the Court issued anorder granting in part and denying in part defendants’ motion to dismiss thesecond consolidated amended class action complaint.  Specifically, the Court dismissed withoutprejudice plaintiffs’ claims based on defendants’ restatement of first quarter2006 earnings and dismissed without prejudice all claims against defendantAlthoff.  The Court denied the motion todismiss claims against defendant Klausner based on the February 6, 2006press release.  Plaintiffs may file athird amended class action complaint on or before May 26, 2008.  Defendants’ responsive pleading is due June 16,2008. At this time, discovery has not begun and no trial date has been set bythe Court.

 

 *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.  The Court deniedthe other grounds for dismissal.  On March 4,2008, the Court entered an order continuing the deadline for plaintiffs to filean amended complaint to June 3, 2008. At this time, discovery on the merits has not begun and no trial datehas been set by the Court.

 

We may become involved in certain other legal proceedingsand claims which arise in the normal course of business. Other than asdescribed above, as of March 31, 2008, we did not have any significantlitigation outstanding.

 

**Item 1A.  Risk Factors**

 

In addition to the riskfactors included below and other information set forth in this report, youshould carefully consider the factors discussed in “Part I. Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2007, 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 theonly risks and uncertainties facing us. Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially affect our business, financial condition or operating results.  Except as set forth below, there have been nomaterial changes to the risk factors included in our Annual Report on Form 10-K.

 

21

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***We have and could lose customersor orders as a result of consolidation in the wireless telecommunicationscarrier industry.***

 

There has beensignificant consolidation in the wireless industry, particularly in the UnitedStates rural service area market, which has caused extreme price competitionand reduced our number of customers and potential customers.  Future consolidations have and could furthererode our current and potential markets. This could also lead to fluctuations in our quarterly results andcarrying value of our inventory.  Theseconsolidated entities may also order fewer products from us or elect to nolonger do business with us or demand pricing changes in order to compete.  For example, in 2007, consolidation in theregional United States carriers had an adverse impact on our existing andpotential customer base, which has negatively impacted current and future salesin the United States.

 

***We buy a significant amountof our products from a limited number of suppliers, who may not provide us withcompetitive products at 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 March 31, 2008, two suppliers accounted for 66% and 20%,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 from manufacturerswe represent. From time to time, we have been unable to obtain sufficientproduct supplies. Any failure or delay by our suppliers, particularly our threeprimary vendors, in supplying us with products on favorable terms may severelydiminish our ability to obtain and deliver products to our customers on atimely and competitive basis. If we lose any of our principal suppliers, or ifthese suppliers are unable to fulfill our product needs, or if any principalsupplier imposes substantial price increases and alternative sources of supplyare not readily available, it would have a material adverse effect on ourresults 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.***

 

Ourfour largest customers in the quarter ended March 31, 2008 represented28%, 17%, 13% and 11% of our net sales. These customers are carriers in Latin America. The markets we serve aresubject to significant price competition. Additionally, our customers are notcontractually obligated to purchase products from us. For these and otherreasons, such as competitive pricing and competitive pressures, customers mayseek to obtain products or services from us at lower prices than we have beenable to obtain from these customers in the past. This could occur, for example,in the case of a customer purchasing large quantities of a product from us, whothen terminates this relationship because the customer can obtain a lower priceby buying directly from the manufacturer or other supplier. The loss of any ofour principal customers, a reduction in the amount of product or services ourprincipal customers order from us or the inability to maintain current terms,including price, with these or other customers could have an adverse effect onour financial condition, results of operations and liquidity. In addition, wehave experienced losses of certain customers through industry consolidation andin the ordinary course of business. There can be no assurance that any of ourcustomers will continue to purchase products or services from us or that theirpurchases will be at the same or greater levels than in prior periods.

 

***Approximately 99% of our revenues during the three monthsended March 31, 2008, were generated outside of the United Statesin countries that may have volatile currencies or other risks.***

 

Weengage in significant sales activities in territories and countries outside ofthe United States, particularly Latin American countries, includingArgentina.  All our sales transactionsare completed in U.S. dollars. The fact that we distribute a substantial amountof our products into a number of territories and countries other than theUnited States exposes us to, among other things, increased credit risks,customs duties, import quotas and other trade restrictions, potentially greaterand more unpredictable inflationary and currency pressures, and shippingdelays. Changes may occur in social, political, regulatory and economicconditions or in laws and policies governing foreign trade and investment inthe territories and countries where we currently distribute products. UnitedStates laws and regulations relating to investment and trade in foreigncountries could also change to our detriment. Any of these factors could havematerial adverse effects on our business and operations. Although we purchaseand sell products and services in U.S. dollars and do not engage in exchangeswaps, futures or options contracts or other hedging techniques, fluctuationsin currency exchange rates could reduce demand for products sold in U.S.dollars. We cannot predict the effect that future exchange rate fluctuationswill have on our operating results or financial position. We may in the futureengage in currency hedging transactions, which could result in our incurringsignificant additional financial risks, including expenses and losses.

 

22

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***We have outstandingindebtedness, which is secured by substantially all our assets and couldprevent us from borrowing additional funds, if needed.***

 

As of April 30, 2008, we hadoutstanding debt in the amount of $24.8 million under a bank creditfacility.  In April 2008, we entered intoa Loan, Security and Bulk Purchase Agreement and a Letter of Credit andSecurity Agreement with Wells Fargo Century, Inc. ("Lender"),replacing our existing asset-based secured credit facility with Wells FargoHSBC Trade Bank, N.A.  Under the newcredit facility, Wells Fargo Century, Inc. may advance us up to $45,000,000based on the expected collections of eligible receivables as well as the valueof our eligible inventory as determined in accordance with the terms of thefacility. Any significant decrease in our level of eligible accounts receivableor inventory will reduce our ability to borrow additional funds under the newcredit facility and may affect our ability to adequately finance our operationsand expansion strategies. Further, if we violate our loan covenants, default onour obligations or become subject to a change of control, our indebtednesswould become immediately due and payable. In addition, the terms of our newcredit facility restrict us from incurring additional indebtedness, which couldlimit our ability to expand our operations. Some of our loan covenants subjectus to, among other things and limits on our ability to sell certain assets andmake certain payments, including, but not limited to, dividends, repurchases ofcommon stock and other payments outside the normal course of business, as wellas prohibitions on merging or consolidating with another corporation or sellingall or substantially all of our assets. As of April 30, 2008, the Company was in compliance with the covenantsof the new credit facility.  If any ofthese adverse events occur, our business’ financial condition or operatingresults could be negatively affected.

 

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

 

None.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

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

 

None

 

**Item 5.    Other Information**

 

None.

 

23

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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).                             |
| 31.1            |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing  Section 302 of Sarbanes-Oxley Act of 2002 (*). |
| 31.2            |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing  Section 302 of Sarbanes-Oxley Act of 2002 (*). |
| 32.1            |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (*).                           |
| 32.2            |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (*).                           |

 

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(1)  Incorporated byreference from the Company’s Current Report on Form 8-K, filed on April 14,2008.

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

(*)  Filed herewith.

 

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** **

**SIGNATURE**

 

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

 
|        |               |   | **InfoSonics  Corporation** |
|--------|--------------------|--------|-----------------------------|
|   |               |   |                        |
|   |               |   |                        |
| Date:  | May 15,  2008 |   | By:                         | /s/  Joseph  Ram |
|   |               |   |                        | Joseph  Ram |
|   |               |   |                        | Chief  Executive Officer and President |
|   |               |   |                        |   |
|   |               |   |                        |   |
| Date:  | May 15,  2008 |   | By:                         | /s/  Jeffrey  Klausner |
|   |               |   |                        | Jeffrey  Klausner |
|   |               |   |                        | Chief  Financial Officer |

 

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