Table of Contents

UNITED STATES

SECURITIES AND 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 June 30, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

Commission File Number - 001-32217

InfoSonics Corporation

(Exact name of registrant as specified in its charter)

4350 Executive Drive Suite #100 San Diego, CA 92121

(Address of principal executive offices including zip code)

(858) 373-1600

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Yes  x   No  o

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

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

Yes  o   No  x

As of August 14, 2008, the Registrant had 14,910,808 shares outstanding of its $.001 par value common stock.

Table of Contents

InfoSonics Corporation and Subsidiaries

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

Table of Contents

2

Table of Contents

Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

InfoSonics Corporation and Subsidiaries

Consolidated Balance Sheets

Accompanying notes are an integral part of these financial statements.

3

Table of Contents

InfoSonics Corporation and Subsidiaries

Consolidated Statements of Operations

(unaudited)

Accompanying notes are an integral part of these financial statements.

4

Table of Contents

Infosonics Corporation and Subsidiaries

Consolidated Statements of Comprehensive Operations

(unaudited)

Accompanying notes are an integral part of these financial statements

5

Table of Contents

InfoSonics Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

Accompanying notes are an integral part of these financial statements.

6

Table of Contents

InfoSonics Corporation

Condensed Notes to Consolidated Financial Statements

(unaudited)

NOTE 1. Basis of Presentation

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

The unaudited consolidated balance sheet at and statements of operations as of June 30, 2008 do not include all of the information and notes required by GAAP for complete financial statements. The unaudited consolidated balance sheet, the unaudited consolidated statements of operations and the unaudited consolidated statements of comprehensive operations at or for the six months ended June 30, 2008 and the unaudited consolidated statement of cash flows for the three and six months ended June 30, 2008 are not necessarily indicative of the financial condition, operating results or cash flows that may be expected for the full fiscal year of 2008 or for any future period.

NOTE 2. Stock-Based Compensation

The Company has three equity incentive plans, the 2006 Equity 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 Plan is the only plan from which additional equity incentives will be granted. The 2006 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 several non-employee directors and several institutions.

On December 28, 2007, the Securities and Exchange Commission (“SEC”) staff published Staff Accounting Bulletin No. 110 (SAB 110), which updates SAB 107 and provides the SEC staff’s views on a variety of matters relating to stock-based payments.  SAB 110 requires stock-based compensation to be classified in the same expense line items as cash compensation.   Information about stock-based compensation included in the unaudited results of operations for the three and six months ended June 30, 2008 and 2007 is as follows:

Our stock options vest on an annual or a monthly basis.  The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term.   Such amounts may change as a result of additional grants, forfeitures, modifications in assumptions and other factors. SFAS 123R provides that income tax effects of share-based payments are recognized in the financial statements for those awards which will normally result in tax deductions under existing tax law. During the three and six months ended June 30, 2008, we recorded an expense of $20,006 and $40,398, respectively related to options previously granted and granted during

7

Table of Contents

the first six months of 2008. During each of the three and six months ended June 30, 2007, we recorded an expense of $97,449 and $194,898, respectively related to options previously granted. Under current U.S. federal tax law, we would receive a compensation expense deduction related to non-qualified stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation cost for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in our consolidated statements of operations.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following 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 0 percent as the Company has not, and does not intend to, issue dividends; and expected lives of 3 to 6 years based upon the historical life of options. For grants in 2008 and 2007, the expected volatility used ranged from 88% to 89%, based on the Company’s historical stock price fluctuations for a period matching the expected life of the options.  As of June 30, 2008, there was $195,000 of total unrecognized compensation costs related to the non-vested stock options.  That cost is expected to be recognized over the next weighted-average period of 3.50 years.

A summary of option activity under all of the above plans as of June 30, 2008 and changes during the six months then ended is presented in the table below:

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

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

NOTE 3. Earnings Per Share

The Company utilizes SFAS No. 128, ‘‘Earnings per Share.’’ Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common share equivalents are excluded from the computation if their effect is anti-dilutive. The Company’s common share equivalents consist of stock options and warrants.

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

8

Table of Contents

NOTE 4. Income Taxes

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

The Company is subject to US federal income tax as well as income tax in multiple states and foreign jurisdictions. For all major taxing jurisdictions, the tax years 2002 through 2007 remain open to examination. As of June 30, 2008, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.

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

NOTE 5. Inventory

Inventory is stated at the lower of cost (first-in, first-out) or market and consists primarily of cellular phones and cellular phone accessories.  The Company provides for the possible inability to sell its inventory by recording a reserve.  As of June 30, 2008 and December 31, 2007, the inventory reserve was $498,000 and $580,000, respectively.  At June 30, 2008, we had inventory in-transit of $441,000, which is under the control of a common freight carrier until it arrives at one of our customer facilities.  This inventory is owned by the Company while it is in-transit. From time to time, the Company has prepaid inventory as a result of payments for products which have not been received by the balance sheet date.  As of June 30, 2008 and December 31, 2007, the prepaid inventory balances were $25,000 and $462,000, respectively.    Inventory consists of the following:

NOTE 6. Property and Equipment

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

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

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

9

Table of Contents

NOTE 7. Accrued Expenses

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

NOTE 8. Borrowings

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

Under the Wells Fargo HSBC Trade Bank line of credit, interest was payable on a monthly basis (i) at Wells Fargo’s prime rate minus 0.25% (5.00% at June 30, 2008) or (ii) at the one-month LIBOR plus 1.50% (2.46% at June 30, 2008). The interest rate floated at Wells Fargo’s prime rate or was at LIBOR plus 1.5% if the debt was a fixed amount drawn upon.  The line of credit was collateralized by substantially all of the assets of the Company, and was to expire October 1, 2008. In addition to reporting and other non-financial covenants, the line of credit contained certain financial covenants which required the Company to maintain a tangible net worth of not less than $30,000,000 plus 50% of net profit after tax from January 1, 2007, a pre-tax profit of not less than $1 on a rolling four quarter basis, a quick ratio of not less than one-to-one, a debt-to-net worth ratio of not greater than two-to-one, and an annual net income after taxes of at least $1. At June 30, 2008 and December 31, 2007, the amounts drawn against this the line of credit were zero and $26,755,100, respectively.

On April 30, 2008, the Company entered into a Loan, Security and Bulk Purchase Agreement and a Letter of Credit and Security Agreement (collectively, the “Agreement”) with Wells Fargo Century, Inc. (“Lender”), replacing its 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 to the Company based on the expected collections of eligible receivables as well as value of the Company’s eligible inventory determined in accordance with the Agreement.  The outstanding advances may not exceed the lesser of $45,000,000 or the sum of the value of the eligible receivables and eligible inventory (times their respective advance rates as set forth in the Agreement).  The credit facility has a two-year term ending April 2010 and is secured by all of the assets of the Company. The interest rate for each borrowing under the credit facility is, at the option of the Company, either the Wells Fargo Bank N.A. prime rate minus 0.50%(5.00% at June 30, 2008)  or the LIBOR rate plus 2.00%(2.46% at June 30, 2008).  At June 30, 2008, the amounts drawn against the line of credit was $18,115,265.

The Company has no other notes payable.

NOTE 9. Stockholders’ Equity

Stock Options

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

Common Stock

On May 15, 2008, the Company agreed to issue 100,000 unregistered shares of common stock in connection with an amendment to a previously entered agreement with an unrelated partner.  The shares will be issued during the third quarter of 2008.  The amendment modifies a profit sharing agreement to increase the portion of profit sharing the Company earns.  The increase in the portion of the profit sharing to the Company is retroactive to January 1, 2008.

10

Table of Contents

NOTE 10. Recent Accounting Pronouncements

Recently adopted:

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

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

Recently issued:

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

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

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

·                  Recognize and measure the goodwill acquired 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 costs that the acquiring entity expects to incur with respect to the acquired business as an expense, rather than capitalize as part of the acquisition

·                  Disclose to investors and other users all of the information they need to evaluate and understand the nature and financial 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 in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders’ equity. Statement No. 160 also requires any acquisitions or dispositions of noncontrolling interests that do not result in a change of control to be accounted for as equity transactions.  Further, the Statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated.

11

Table of Contents

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

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

NOTE 11.  Discontinued Operations

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

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

NOTE 12. Geographic Information

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

12

Table of Contents

NOTE 13.  Commitments and Contingencies

Securities Class Actions

In the securities class action, captioned In Re: InfoSonics Corporation Securities Litigation, Lead Case No. 06 CV 1231, now pending before Judge Sammartino in the United States District Court for the Southern District of California, Plaintiffs filed a third amended consolidated complaint on May 23, 2008 against the Company and certain of its officers and directors.  The two prior complaints (including claims therein based on defendants’ restatement of first quarter 2006 earnings) were dismissed in part by the Court, with leave to amend.  The third amended consolidated complaint alleges violations of Section 10(b) of the Exchange Act and associated Rule 10b-5, Section 20(a) and Section 20A in connection with the announcement of the Company’s restatement of first quarter 2006 earnings and in connection with allegedly false and/or misleading statements related to the Company’s distribution of the VK Mobile phone.  Plaintiffs seek a declaration that their action is a proper class action pursuant to Rule 23(a) and (b)(3), unspecified damages, prejudgment and post-judgment interest, attorneys’ fees, expert witness fees, other costs, and other unspecified relief.  The plaintiffs purport to represent a class of purchasers of the Company’s stock during the period February 6, 2006 to August 9, 2006.  On August 8, 2008, prior to defendants filing a motion to dismiss or other responsive pleading to the third amended consolidated complaint, the parties entered into a Memorandum of Understanding (“MOU”), which will be followed by a Stipulation of Settlement, to resolve the case.  The MOU, which is contingent on preliminary and final Court approval (after appropriate notice) of this settlement as well as settlement of the derivative action noted below, among other contingencies, provides for, among other things, a dismissal with prejudice of the lawsuit, releases of the defendants, and a payment by the Company or its insurer of $3.8 million to plaintiffs (inclusive of any plaintiffs’ attorneys fees, to be determined by the Court).  It is anticipated that the settlement payment will be funded entirely by the Company’s insurer.  The MOU further provides that defendants deny any liability or responsibility for the claims made and make no admission of any wrongdoing.

Derivative Action

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

Defendants filed a motion to dismiss the consolidated complaint on the grounds, among others, that the plaintiffs had failed to make a demand on the Company’s board of directors and to adequately allege their other purported claims.  On September 4, 2007, the Court granted defendants’ motion to dismiss for failure to make a demand on the board, and also granted with prejudice the motion to dismiss the Sarbanes-Oxley claim.  On August 6, 2008, prior to the deadline for plaintiffs to file an amended complaint, the parties entered into an MOU, which will be followed by a Stipulation of Settlement, to resolve the case.  The MOU, which is contingent on preliminary and final Court approval (after appropriate notice) of this settlement and the securities settlement noted above, among other contingencies, provides for, among other things, a dismissal with prejudice of the lawsuit, releases of the defendants, corporate governances changes and a payment by the Company or its insurer of plaintiffs’ attorneys fees to be ordered by the Court up to a maximum of $350,000.  It is anticipated that the settlement payment will be funded entirely by the Company’s insurer.  The MOU further provides that defendants deny any liability or responsibility for the claims made and make no admission of any wrongdoing.

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

13

Table of Contents

NOTE 14.  Subsequent events

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

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

Forward-Looking Statements and Other General Information

This discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and condensed notes thereto and other information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2007 (including our 2007 audited consolidated financial statements and related notes thereto and other information). InfoSonics Corporation’s (“InfoSonics” or the “Company”) discussion and analysis of financial condition and results of operations are based upon, among other things, our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent liabilities as of and at the financial statement date, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we review our estimates and assumptions. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from these estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations, although they may. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in “Critical Accounting Policies.”  All references to results of operations in this discussion generally are to results from continuing operations, unless otherwise noted.

The decision during the second quarter of 2008 to discontinue our operations in Mexico and the U.S. and the adjustments required to the financial statements related to that decision have affected certain amounts of our results of operations and the classifications on the balance sheet, statement of operations and statement of cash flows for prior periods, and as of prior dates, as well as, our disclosure in this report, including management’s discussion and analysis.

Safe Harbor Statement

The matters in this report that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements about future revenues, sales levels, operating income and margins, wireless handset sales, stock-based compensation expense, gain loss in value of derivatives, cost synergies, operating efficiencies, profitability, market share, and rates of return, are based on current management expectations that involve certain risks and uncertainties.  These risks and uncertainties, in whole or in part, could cause such expectations to fail to be achieved and have a material adverse effect on InfoSonics’ business, financial condition and results of operations, and include, without limitation: (1) intense competition internationally, including competition from alternative business models, such as manufacturer-to-carrier sales, which may lead to reduced prices, lower sales or reduced sales growth, lower gross margins, extended payment terms with customers, increased capital investment and interest costs, bad debt risks and product supply shortages; (2) dependency on Latin American sales; (3) inability to secure adequate supply of competitive products on a timely basis and on commercially reasonable terms; (4) foreign exchange rate fluctuations, devaluation of a foreign currency, adverse governmental controls or actions, political or economic instability, or disruption of a foreign market, and other related risks of our international operations; (5) the ability to attract new sources of profitable business from expansion of products or services or risks associated with entry into new markets, including geographies, products and services; (6) an interruption or failure of our information systems or subversion of access or other system controls may result in a significant loss of business, assets, or competitive information; (7) significant changes in supplier terms and relationships; (8) termination of a supply or services agreement with a major supplier or product supply shortages; (9) continued consolidation in the wireless handset carrier market; (10) extended general economic downturn; (11) loss of business from one or more significant customers; (12) customer and geographical accounts receivable concentration risk; (13) rapid product improvement and technological change resulting in inventory obsolescence; (14) future terrorist or military actions; (15) the loss of a key executive officer or other key employees; (16) changes in consumer demand for multimedia wireless handset products and features; (17) our failure to adequately adapt to industry changes and to manage potential growth and/or contractions; (18) seasonal buying patterns; (19) uncertain political and economic conditions internationally; (20) the resolution of any litigation against the Company; (21) the ability of the Company to successfully introduce and sell its verykool® products and the related inventory risk of such products; and (22) the ability of the Company to generate taxable income in future periods in order to utilize and realize any quarterly tax benefits recorded.  Our actual results could differ materially from those anticipated in our forward looking statements.

14

Table of Contents

InfoSonics has instituted in the past and continues to institute changes to our strategies, operations and processes to address risks and uncertainties and to mitigate impact on InfoSonics’ results of operations and financial condition. However, no assurances can be given that InfoSonics will be successful in these efforts. For a further discussion of significant factors to consider concerning InfoSonics, 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 to time in InfoSonics’ future SEC filings.

Overview

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

As an integral part of our customers’ supply chain, we perform value added 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 these services for OEMs and for our own verykool® products in order to facilitate sales to carriers, agents, resellers, distributors, independent dealers and retailers in Latin America. We previously introduced a proprietary line of handsets and accessories under the verykool® brand, for which we are involved in several aspects, including the design and feature sets determination, and contract with various design and contract manufacturers in Asia to develop exclusive or semi-exclusive products for us.

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

Areas of Management Focus and Performance Indicators

We focus on the needs of our customers, developing and maintaining close relationships with manufacturers, expanding in current and entering new markets and exiting markets, as determined appropriate, and sourcing and developing new and innovative products, while maintaining close attention to operational efficiencies and costs. We intend to increase shipping volumes and improve efficiencies to enable higher levels of profitability and earnings growth.  We provide distribution and other services for OEMs, such as Samsung and LG and our own proprietary line of verykool® handsets.  Performance indicators that are key for the monitoring and management of our business include operating and net income, cost of sales and gross margin percentage, operating expenses as a percent of revenues, and overall net sales growth, as well as balances of accounts receivable and inventory. We make extensive use of our customized information system to closely monitor all aspects of our business, including customer relationship management, intelligent purchasing, inventory control, inventory flow, line item margin control for every order, and weighted-average cost and statistical data for our products, customers and suppliers, as appropriate. We believe a strong focus on providing better service to customers leads to increased customer satisfaction and retention and potential increases in sales.

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

15

Table of Contents

Industry Trends and Risks

According to a January 2008 report by Cowen and Company, 2007 overall worldwide wireless handset sales increased by approximately 16% over 2006, 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 which we do not currently operate. A rapid decline in wireless handset sales growth in the markets we serve could negatively impact our net sales. Excess supply conditions and the current economic downturn can reduce the market prices of the products we sell and therefore affect our ability to generate net sales and gross profit at expected levels and could affect the value of our inventory. Conversely, should manufacturers be unable to respond to an unanticipated increase in demand on a timely basis, we, along with others in our industry, could experience supply constraints that would affect our ability to deliver products. We are unable to quantify these effects, as it is difficult to predict future supply conditions and demand patterns which affect our ability to meet customer demand or sell handsets at an acceptable gross profit.

During the second quarter of 2008, our industry, as well as the regions we operate in, was impacted by the economic slowdown impacting the United States and the rest of the world.  We believe that some of the countries in the regions we operate, particularly in Central America, have close economic relations with the United States and were impacted by the economic situation during the second quarter of 2008 in the United States.  We believe this impacted consumer demand for wireless handsets in some of the countries we operate, and thus our overall operations, including net sales, during the second quarter of 2008 are adversely impacted.

Company Specific Trends and Risks

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

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

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

Results of Operations

Discontinued Operations

During the quarter ended June 30, 2008, the Company assessed opportunities in the United States and Mexico and decided to implement actions necessary to close sales operations in both of those countries.  Due to the changing environment and consolidation in the United States of the regional cellular carriers, along with the challenges of opening sales relations with the cellular carriers in Mexico, management determined that it was necessary to take decisive actions to mitigate further losses.   The loss relating to these discontinued operations during the three and six months ended June 30, 2008 was $2,077,743 and $2,165,293, respectively, and included non-cash charges of $1.8 million to write-down inventory and accounts receivable.  As of June 30, 2008, our plans for the discontinued operations were substantially complete; however we expect to continue to record adjustments and expenses related to those discontinued operations as necessary.

16

Table of Contents

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

Net Sales

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

In South and Central America, we have expanded our customer base as well as our geographic presence by adding additional customers as well as expanding our business with existing customers, which has resulted in generally increased net sales over the past several years.  In addition, we continued efforts to market and sell our proprietary verykool® line of products in Central and South America.  In South America, net sales were $45.5 million for the quarter ended June 30, 2008, a 40% increase from the same quarter in 2007.  This increase was primarily due to increased sales in existing countries and the opening of a new country relationship, specifically Colombia.  In Central America, net sales decreased 34% to $13.5 million for the quarter ended June 30, 2008, which was primarily due to an unusually low demand during the latter part of the quarter, which we believe was related to the economic downturn worldwide.

Net Sales by Geographic Region

Cost of Sales, Gross Profit and Gross Margin

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

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

Operating Expenses and Operating Income from Continuing Operations

For the quarter ended June 30, 2008, operating expense from continuing operations increased 17%, as compared with the same quarter last year.  As a percentage of net sales from continuing operations, operating expense from continuing operations increased to 5.4% for the quarter ended June 30, 2008, compared with 5.2% in the same quarter last year.  The increase in operating expense from continuing operations as a percentage of net sales from continuing operations was due to the efforts related to the verykool® products and new country expansion, including marketing, engineering, depreciation and overall regional support

17

Table of Contents

related expenses.  Such expenses are necessary for geographical expansion as well as for new product introduction.  Management believes that future sales and margins will provide gross profits to better cover the operational costs.  In addition, management continues to review expenses in an effort to better match the operational costs with the future opportunities.   We believe such measures will assist us as we strive to return to profitability.

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

Operating Expenses from Continuing Operation

Operating Income from Continuing Operations

Other Expense

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

Net Loss from Continuing Operations

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

Discontinued Operations

For the quarter ended June 30, 2008 we incurred a loss of $2.1 million from discontinued operations, as compared to a loss of $447,000 for the quarter ended June 30, 2007.  The loss was primarily a result of decreased sales in the U.S. and Mexico during 2008, as our more significant U.S. customers were acquired in the later part of 2007, and we wrote-down accounts receivable and inventory associated with those operations. As of June 30, 2008, our plans for the discontinued operations were substantially complete; however, the Company expects to continue to record adjustments and expenses through the discontinued operations as necessary.

18

Table of Contents

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

Net Sales

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

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

Net Sales by Geographic Region

Cost of Sales, Gross Profit and Gross Margin

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

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

19

Table of Contents

Operating Expense and Operating Loss from Continuing Operations

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

For the six months ended June 30, 2008, our operating loss from continuing operations was $94,000, compared with operating loss from continuing operations of $385,000 for the six months ended June 30, 2007, an improvement of 76%. As a percentage of net sales, operating loss was 0.1% for the six months ended June 30, 2008, compared to a loss of 0.4% for the period ended June 30, 2007. The decrease in operating loss was a result of the increase in net sales and gross profits in excess of the increase of operating expenses, as discussed above.

Operating Expenses

Operating Loss from Continuing Operations

Other Expense

During the six months ended June 30, 2008, we incurred $514,000 of interest expense, compared to $282,000 for the six months ended June 30, 2007, primarily due to a higher average outstanding balance on our line of credit during the six months ended June 30, 2008 as compared to the same period in the prior year.  We expect to regularly utilize larger amounts on our revolving line of credit, which will increase our interest expense in future periods.

Net Loss from Continuing Operations

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

Net Loss from Discontinued Operations

For the six months ended June 30, 2008, we incurred a loss of $2.2 million from discontinued operations, as compared to a loss of $600,000 for the six months ended June 30, 2007.  The increased loss was primarily a result of decreased sales in the U.S. and Mexico during 2008, as our more significant U.S. customers were acquired in the later part of 2007, and we had to write-down accounts receivable and inventory associated with these operations. As of June 30, 2008, our plans for the discontinued operations were substantially complete; however, the Company expects to continue to record adjustments and expenses through the discontinued operations as necessary.

20

Table of Contents

Financial Condition, Liquidity and Capital Resources

We generally use cash from our sales of products, lines of credit (bank and vendor) and sale of securities to provide capital needed to support our business.

Cash Used in Operating Activities

At June 30, 2008, we had $15.8 million in cash, a decrease of $4.8 million from December 31, 2007.  During the six months ended June 30, 2008, we used cash and continued to leverage our bank and vendor lines of credit to fund our growth.  The decrease in our use of the bank line of credit, was directly related to the decrease in accounts receivable during the six months ended June 30, 2008.   The net cash provided by operating activities was $3.8 million for the six months ended June 30, 2008, which resulted primarily from decreased accounts receivable partially offset by decreased accounts payable, and a decrease in our inventory levels.  The $8.8 million decrease in accounts receivable was primarily due to the timing of sales and the overall economic slowdown during the later part of the second quarter of 2008.  Inventory increased by $2.2 million and prepaid inventory decreased by $0.4 million, resulting in a total decrease of $1.8 million in inventory levels.  This net decrease was partially attributable to the increased sales levels of the verykool® products as we continued to expand the geographic countries and sales of these products. Accounts payable at June 30, 2008 decreased $7.2 million, compared to December 31, 2007, primarily due to payments to vendors and partners in the ordinary course during the six months ended June 30, 2008.  In addition, accrued expenses increased $1.7 million, due to timing of payments during the six months ended June 30, 2008.

Days of Sales Outstanding

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

Cash Used in Investing Activities

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