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We may not be able to adequately respond to rapid technological changes in the wireless handset industry, which could cause us to lose customers.

The technology relating to wireless handsets changes rapidly, resulting in product obsolescence or short product life cycles. We are required to anticipate future technological changes in our industry and to continually identify, obtain and market new products that will satisfy evolving industry and customer requirements. While our top vendors have historically kept their products competitive, andAlthough we aimare now making significant investments in R&D to keep our proprietaryverykool^® products competitive in terms of technological changes,technology and features, there is no guarantee they or we will continue to do so,have success with this, which could materially affect our business. Competitors or manufacturers of wireless handsets may market products which have perceived or actual advantages over products that we market or which otherwise render those products obsolete or less marketable. We have made and continue to make significant capital investments in accordance with evolving industry and customer requirements, including maintaining levels of inventories of currently popular products that we believe are necessary based on current market conditions. This utilization of capital for product development and inventory buildup of this nature increases our risk of loss due to possible product obsolescence. Furthermore, if we do not adequately anticipate future technological changes, we may not have established adequateestablish appropriate supplier relationships with suppliers or performedperform appropriate product development. These factors all pose significant risks ofto loss of customers and decreased sales and impairment of inventory assets.profitability.

Substantial defaults by our customers on accounts receivables could have a significant negative impact on our cash flow and financial condition.

We offer open account terms to certain of our customers, both large and small, which may subject us to credit risks, particularly to the extent that our receivables represent sales to a limited number of customers or are concentrated in particular geographic markets. Although we have an accounts receivable insurance policy, this policy carries a substantial deductibledoes not cover all accounts and may not cover our liability in all instances. We also rely on our accounts receivable-based100% of the credit facility to reduce our working capital requirements. The extent of our ability to use our accounts receivable-based credit facility is dependent on the amount of and collection cycle of our accounts receivable. Adverse changes in our ability to use accounts receivable financingwe extend. A substantial default by a major customer could have a material adverse effect on our financial position, cash flowsflow and results of operations.

We rely on our suppliers to provide favorable terms, including payment terms, in order for us to make appropriate product purchases, and without such terms, our ability to procure products could be impacted.

        Much of our business is dependent on our ability to obtain adequate supplies of currently popular products on favorable pricing and other terms. Our ability to fund our product purchases is dependent on our principal suppliers providing favorable payment terms that allow us to maximize the efficiency of our capital usage. The payment terms we receive from our suppliers are dependent on several factors, including, but not limited to, our payment history with the supplier, the suppliers' credit granting policies, contractual provisions, our overall credit rating as determined by various credit rating agencies, industry conditions, our recent operating results, financial position and cash flows, and each supplier's ability to obtain credit insurance on amounts that we owe them. Adverse changes in any of these factors, certain of which may not be wholly in our control, could have a material adverse effect on our business and operations.

We rely on our information technology systems to function efficiently, without interruptions, and if it doesthey do not, customer relationships could be harmed.

We have focused on the application ofare dependent upon our information technology systems to provide customized servicesmanage our business and to wireless handset manufacturers and carriers. Our abilitybe responsive to meet our customers' technical and performance requirements is highly dependent on the effective functioning of our information

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technologycustomers needs. These systems which may experience interruptions, including interruptions of related services from third-party providers which may be beyond our control. TheseSuch business interruptions could cause us to fail to meet customer requirements and could result in the loss of business relationships. Some of our information technology systems are managed and operated by third-party providers. All information technology systems, both internal and external, are potentially vulnerable to damage or interruption from a variety of sources, including, without limitation, computer viruses, security breaches, energy blackouts, natural disasters, terrorism, war and telecommunication failures, as well as third-party provider failures. We have implemented various measures to manage our risks related to system and network disruptions, but a systems failure or security breach or other problem with our information technology systems could negatively impact our operations and financial results.

We face risks related to our dependence on third parties to manufacture the products we distribute, including our proprietary verykool® verykool^®products.

        ProductOur third party manufacturers typically provide limited or no warranties on their products, whether directly to us or to the end consumer.products. We generally pass through any warranties received from our manufacturers to our customers, and in absence of such warranties, we are solely responsible for the products. If a product we distributesource from a manufacturer has delivery, quality or performance problems, our ability to provide satisfactory products to our customers could be disrupted (including, for example, during and after Chinese New Year) and our reputation could be impaired. We also may not be able to sell these products before payment is due our manufacturesmanufacturers or at prices above our cost. These risks are magnified for ourverykool® products, which are manufactured exclusively for us, and for which we carry greater financial risk of the inventory. Any of these risks could have a negative impact on our business and operations.

The wireless handset industry is intensely competitive and we may not be able to continue to compete against well-established competitors with greater resources.

We compete for sales of wireless handsets and accessories with numerous well-established manufacturers, carriers and distributors, and manufacturers,sometimes including our own suppliers.suppliers and customers. Many of our competitors possess greater financial and other resources than we do and may market similar products or services directly to our customers or potential customers. Distribution of wireless handsets and accessories has generally had low barriers to entry. As a result, additional competitors may choose to enter our industry in the future. The markets for wireless handsets and accessories are characterized by intense price competition and significant price erosion over the life of a product. Many of our competitors have the financial resources to withstand substantial price competition and to implement extensive advertising and promotional programs, both generally and in response to efforts by additional competitors to enter into new markets or introduce new products. Our ability to continue to compete successfully will depend largely on our ability to maintain our current industry relationships, with both manufacturers and carrier customers.customers, as well as differentiate our verykool^® branded products from the competition. We may not be successful in anticipating and responding to competitive factors affecting our industry or these relationships, including introduction of new products, changes in consumer preferences, demographic trends, new or changing outsourcing requirements, the entry of additional well-capitalized competitors, introduction of new products, changes in consumer preferences, demographic trends, international, national, regional and local economic conditions, and competitors'competitors’ discount pricing

and promotion strategies. As wireless telecommunications markets mature, and as we seek to enter into new markets in the CentralAsia Pacific and South American regionLatin America and offer new products, the competition that we face may change and grow more intense.

We rely on trade secret laws and agreements with our key employees and other third parties to protect our proprietary rights, which may not afford adequate protection.

We rely on trade secret laws to protect our proprietary knowledge, particularly, our database of customers and suppliers, business terms such as pricing, and the information and technology related to our verykool^®verykool® brand. brand, our database of customers and suppliers and business terms such as pricing. In general, we also have non-disclosure agreements with our key employees and

limit disclosure of our trade secrets and other proprietary information. These measures may prove difficult to enforce and may not prove adequate to prevent misappropriation of our proprietary information.

We are dependent on a small number of personnel.

Our success depends in large part on the abilities and continued service of our executive officers, particularly Joseph Ram, our CEO and largest stockholder upon whom we maintain a key-man life insurance policy, and other key employees.employees, including ourverykool^® design team members in China. In 2009 we experienced the departure of two executive officers, and replaced our Chief Financial Officer in July 2010. If we are currently seeking to hire a permanent Chief Financial Officer. We may be unable to replace senior management with qualified individuals or retain the services of other key employees. The loss ofour executive officers or other key personnel, it could impede our ability to fully and timely implement our business plan and future growth strategy. In addition, in order to support our continued growth, we will be required to effectively recruit, develop and retain additional qualified management. Competition for such personnel is intense, and there can be no assurance that we will be able to successfully attract, assimilate or retain sufficiently qualified personnel. The failure to retain and attract necessary personnel could also delay or prevent us from executing our planned growth strategy.

We may become subject to lawsuits alleging medical risks associated with our wireless handsets, the cost of which could be substantial.

Lawsuits or claims have been filed or made against manufacturers of wireless handsets alleging possible medical risks, including brain cancer, associated with the electromagnetic fields emitted by wireless handsets. There has been only limited relevant research in this area, and this research has not been conclusive as to what effects, if any, exposure to electromagnetic fields emitted by wireless handsets has on human cells. Substantially all of our revenues are derived, either directly or indirectly, from sales of wireless handsets. We may become subject to lawsuits filed by plaintiffs alleging various health risks from our products. If any future studies find possible health risks associated with the use of wireless handsets, or if any damages claimclaimed against us or a business partner is successful, it could have a material adverse effect on our business. Even an unsubstantiated perception that health risks exist could adversely affect our ability or the ability of our customers to market wireless handsets.

Risks Related To Our Common Stock

The market for our common stock is volatile and our stock price could decline.

An active trading market for our common stock may not be sustained, which could affect the ability of our stockholders to sell their shares and could depress the market price of their shares. The stock market in general, including the market for telecommunications-related stocks in particular, has been highly volatile. For example, the closing price of our common stock has fluctuated between $2.51$1.60 and $0.10$0.50 from January 1, 20092010 through March 19, 2010.30, 2011.

The market price of our common stock has been and is likely to remain volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects, resulting in a substantial loss on their investment.

We may be delisted from The NASDAQ Stock Market if we do not satisfy continued listing requirements.

        In 2008 and 2009,At various times over the last several years we faced potential delisting from The NASDAQ Global Market for failure to maintain the minimum $1.00 bid price per share requirement for continued listing. If in the future we failBecause of our failure to comply with the continued listing standards ofthis requirement, on May 4, 2010 we were afforded a 180-day compliance period by The NASDAQ GlobalStock Market includingto regain compliance. We later elected to transfer our listing to The NASDAQ Capital Market, which transfer was effective on November 4, 2010. This afforded us an additional 180-day compliance period until May 2, 2011 to demonstrate compliance. In January 2011, after the closing bid price of our stock had been at $1.00 per share or greater for 10 consecutive business days, we were notified by The NASDAQ Stock Market on February 1, 2011 that we had regained compliance.

However, since the February NASDAQ notification, the closing bid price of our stock has been below $1.00 per share at various times. If the closing bid price of our stock does not rise to $1.00 or above by April 4, 2011, we would once again be notified by The NASDAQ Stock Market of our non-compliance and be afforded a 180-day period to demonstrate compliance. There is no assurance that we could regain compliance with the minimum bid price requirement, and our common stock would be delisted from that market.

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        If we are delisted from The NASDAQ Global Market, we may apply to transfer our common stock to The NASDAQ Capital Market. However, our application may not be granted if we do not satisfy the applicable listing requirements for The NASDAQ Capital Market at the time of the application. Even if we successfully transfer our common stock to The NASDAQ Capital Market, but are unable to satisfy the minimum bid price requirement or any of the other continued listing standards of The NASDAQ Capital Market, our common stock wouldcould be delisted from The NASDAQ Capital Market.

If our common stock were delisted from The NASDAQ Stock Market, you may find it difficult to dispose of your shares and our share price may be adversely affected.

If our common stock were to be delisted from The NASDAQ Global Market and we could not satisfy the listing standards of The NASDAQ Capital Market, trading of our common stock most likely would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities such as theOTC Pink, SheetsOTCQX, OTCQB or the OTC Bulletin Board. Such trading would reduce the market liquidity of our common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock, thereby negatively impacting the share price of our common stock.

If our common stock is delisted from The NASDAQ Global Market and we could not satisfy the listing standards of The NASDAQ Capital Market and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a "penny stock"“penny stock” (generally, any equity security not listed on a national securities exchange or quoted on The NASDAQ Stock Market that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of shareholdersstockholders to borrow against or "margin"“margin” low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers'brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual shareholderstockholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade our common stock, thereby negatively impacting the share price of our common stock.

The ability of our stockholders to control our policies or effect a change in control of our company is limited, which may not be in our stockholders'stockholders’ best interests.

Some provisions of our charter and bylaws and the General Corporation Law of Maryland, under which we are incorporated, may delay or prevent a change in control of our company or other transactions that could provide our common stockholders with a premium over the then-prevailing market price of our common stock or that might otherwise be in the best interests of our stockholders. These include the ability of our Board of Directors to authorize the issuance of preferred stock without stockholder approval, which preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a

premium price or otherwise be in the best interests of our stockholders. Maryland law imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions can occur. These provisions of Maryland law may have the effect of discouraging offers to acquire us even if the acquisition would be advantageous to our stockholders.

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Stockholders have been and may be diluted as a result of past or future offerings or other financings or equity grants.

We have raised and may in the future raise additional capital through one or more public offerings, private placements or other financings involving our securities and have made or may make stock option and other equity incentive grants. As a result of these financings or grants, ownership interests in us may be diluted, potentially substantially.

Our largest stockholder may have strategic interests that differ from those of our other stockholders, and can significantly influence important corporate matters.

As of March 19,31, 2010, our Chief Executive Officer Joseph Ram, beneficially owned approximately 30% of our outstanding common stock. As a result, Mr. Ram may be able to significantly influence corporate actions relating to:

•

controlling the composition of our board of directors;



•

controlling our management and policies;



•

determining the outcome of significant corporate transactions, including changes in control that may not be beneficial to other stockholders; and



•

acting in his own interest, which may conflict with, or be different from, the interests of other stockholders.

Item 1B.    Unresolved Staff Comments—None.

Not Applicable.

Item 2.    Properties.

Our corporate headquarters office is located in San Diego, California. We provide ourhave provided certain distribution and other value-added services from our sales and operations center in Miami, Florida, but expect to eliminate that distribution center after the end of the lease term which also serves asis March 31, 2011. Ourverykool^® R&D facility is located in Beijing, China and we have a small quality control office located in Shenzhen, China, close to our sales and executive office for Central and South America. Thesecontract manufacturers. All of these facilities are occupied pursuant to operating leases. The table below summarizes information about our sales and operations centers:

augment the efforts of handsets and accessories under our ownverykool® brandChina development team. All of our manufacturing continues to be done by contract manufacturers in 2006.China.

Areas of Management Focus and Performance Indicators

We focus on the needs of our customers, developing and maintainingsourcing new and innovative products, fostering close relationships with manufacturers, and expanding our business in our current markets and entering into new geographic markets, and sourcing and developing new and innovative products,all while maintaining close attention to operational efficiencies and costs. We are particularly focused on increasing shippingsales volumes and improving efficienciesof higher margin products in a cost effective manner to achieve higher levels ofenable us to return to profitability, and earnings growth, as well as monitoring and managing levels of accounts receivable and inventory. We provide distribution and other services for OEMs, such as Samsung, and our own proprietary line ofverykool® handsets.inventory to minimize risk. Performance indicators that are important for the monitoring and management of our business include operating and net income,top line sales growth, cost of sales and gross margin percentage, operating expenses in absolute dollars and as a percent of revenues and overalloperating and net sales growth.income (loss). We make extensive use ofrely upon our customized informationin-house software management system to closely monitor all aspectsexercise real-time control over many elements of our business including customer relationship management, intelligent purchasing, inventory management and control, inventory flow, line-item marginsales order control for every order, and weighted-average cost and statistical data for products, customers and suppliers, as deemed appropriate. We believe a strong focus on providing better service to customers leads to increased customer satisfaction and retention and potential increases in sales.pricing management.

Management and employees spend a significant amount of time traveling to Latin America and Asia Pacific with the purpose of spending time with our Beijing design team, 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.

Industry Trends and, Risks

        Since 2008, a rapid decline in wireless handset sales in the Central and South American markets we serve has negatively impacted and could continue to negatively impact our net sales. Excess supply conditions and the extended global economic downturn have reduced and may continue to reduce demand for our products and the market prices of the products we sell. These reductions affect our ability to generate net sales, margins and gross profit at expected levels and could continue to affect the value of our inventory, as well as customer payment trends. For example, the second half of 2008 and the first quarter of 2009 generally saw a decrease in handset demand globally, including our sales regions, and an increase in carrier inventory, which both had a negative impact on our financial results during 2008 and 2009 and created a more difficult sales environment, requiring additional operating expenses to help maintain and increase our sales. We saw these trends begin to ease in the second quarter of 2009 in the regions we serve. Conversely, should manufacturers be unable to respond to an unanticipated increase in demand as the global economy recovers 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 that affect our ability to meet customer demand or sell handsets at an acceptable gross profit.

        During the second half of 2008, and continuing through the period of this report, our industry has been impacted by the worldwide economic slowdown. We believe that some of the countries in the regions where we operate, particularly in Central America, have close economic relations with, and therefore have been impacted by weak economic conditions in the United States. We believe this adversely impacted consumer demand for the wireless handsets we sell, and as a result our overall operations, including net sales, during the first half of 2009. We began to experience a small increase in the demand for handsets in the third quarter of 2009, which positively affected our net sales for the

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third and fourth quarters. We have also begun to observe a decrease in some subsidies offered by operators in the region, which increases the handset price to the consumer, and this has reduced overall handset volumes. We are also beginning to see more low-cost manufacturers gaining traction with entry-level products, which is negatively affecting both our OEM andverykool™ sales in the entry-level segment.

Company Specific Trends and Risks

        Our long-term strategy incorporates overall market growth elements for our business, which we hope will result in future growth as global economic conditions recover. Ourverykool® proprietary line of products, for which we had several models selling as of December 31 2009, continued to show increased orders and sales during 2009 and is expected to become an increasing part of our overall business in the future.

        Ourverykool® products continue to increase product diversification in Central and South America, which we believe should contribute to profitability. We have more control over the production and supply of ourverykool® line of products than the OEM products we distribute. We were able to increase our gross margins to 6.6% for the twelve months ended December 31, 2009, compared to 4.7% for the twelve months ended December 31, 2008. These results were primarily due to a product mix shift, including increased sales of higher-margin products (including ourverykool® products), better product sourcing for ourverykool® line of products and beneficial purchasing opportunities.

        Argentina, one of the countries where we currently sell a significant amount of OEM products and where we generated 87% of our net sales in 2009, passed a new tariff in November 2009 impacting certain imported electronics, including wireless handsets. From the information we have obtained, this new tariff could impact the pricing at the point of sale in excess of 30%, and we expect that it will reduce significantly our overall OEM sales volume in Argentina. We believe that this tariff will have a material adverse impact on our sales, results of operations and prospects for our OEM products in Argentina.

        During 2009, we provided products and services to approximately 70 customers. Our three largest customers in fiscal 2009 represented 28%, 28% and 18% of our net sales, respectively. All three of these customers are carriers in South America. In 2010, a customer accounting for 28%, has begun significantly reducing its purchases from us as a result of the newly enacted Argentina tariff on wireless handsets, among other electronic devices. Additional Argentina customers are expected to decrease or eliminate their purchases of imported wireless handsets in the coming fiscal quarters

Results of Operations:

Year Ended December 31, 2009 Compared With Year Ended December 31, 2008

Net Sales

        For the year ended December 31, 2009, our net sales from continuing operations of $231.3 million was 8% higher than our net sales from continuing operations of $213.2 million for 2008. The average selling price of wireless handsets sold in 2009 increased 13.4% relative to 2008, due primarily to increased volume of higher-priced handsets, including some of ourverykool® and OEM products. The increase in average selling price was partially offset by a 1.2% decrease in overall wireless handset sales volume. The geographic mix of net sales shifted slightly in the twelve months ended December 31, 2009 as sales in South America were more than 91% of net sales, compared to 76% of net sales for 2008.

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Sales in Central America decreased to 9% of total net sales in the twelve months ended December 31, 2009, as compared to 24% for 2008. These regional shifts in net sales resulted from the factors discussed below.

        In South and Central America, we have continued to expand our customer base and geographic presence by seeking new customers and additional business with existing customers for both our OEM andverykool® line of products. In South America, net sales were $210.7 million for the twelve months ended December 31, 2009, a 30% increase from 2008. This increase was primarily due to increased sales in existing countries where we sell products, primarily Argentina. In Central America, net sales decreased 59% to $20.6 million for the twelve months ended December 31, 2009, which was primarily due to the continuing low demand during the year, which we believe was related to the worldwide and regional economic downturn. Despite the year-over-year decline, we have seen sequential quarterly improvement in Central America in the second and third quarters of 2009. The second quarter of 2009 increased 81% over the first quarter of 2009 and the third quarter of 2009 increased 124% over the first quarter of 2009. A seasonal decrease in sales resulted in a smaller increase in the fourth quarter of 2009 of 58% over the first quarter of 2009.

        Our sales in Argentina, where we generated 87% of our net sales in 2009, will be materially adversely affected by the new tariff and loss of a customer described above. While we have not yet experienced a significant decrease in sales to Argentina at the date of this report, we believe that in the coming quarters, the full impact of the tariff will necessitate significant steps by us in response. Such steps may include, without limitation, establishing relationships in Argentina that are tariff-compliant and consequently eliminate the tariff on our OEM and proprietary products, focusing on increasing sales in other countries and aligning our cost structure with the level of sales.

        We do not believe that inflation had a significant impact on our results of operations for the periods reported in our Consolidated Audited Financial Statements.

Net Sales by Geographic Region

Cost of Sales, Gross Profit and Gross Margin

        For the year ended December 31, 2009, cost of sales was $216.0 million, or 93.4% of net sales, and gross margin was 6.6%, as compared with $203.2 million, or 95.3% of net sales, and 4.7% for gross margin for the year ended December 31, 2008. The increase in gross margin was due to a product mix

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shift, including increased sales of higher-margin products (including ourverykool® products), improved product sourcing for ourverykool® line of products and beneficial purchasing opportunities.

        For the twelve months ended December 31, 2009, our gross profit increased 53% to $15.3 million from $10.0 million for 2008. This increase in gross profit was primarily the result of the increased net sales and of the factors which increased our gross margin as described above.

Operating Expense and Operating Income (Loss) from Continuing Operations

        For the year ended December 31, 2009, operating expense increased 4%, to $14.5 million, from 2008. As a percentage of net sales from continuing operations, operating expense decreased to 6.2% in the year ended December 31, 2009, compared with 6.5% for 2008. The total increase in operating expense was related to the opening of a new market in South America and other support required in additional markets due to the global and regional economic downturn. It also included the write-off of intangible assets related to our Argentina business described in Item 8, Note 5 to the Consolidated Audited Financial Statements. Operating expense decreased as a percentage of net sales as we took action to reduce fixed operational costs to match current market conditions. Our management continues to review expenses in an effort to better match operational costs with the future business opportunities, by shifting expenses from fixed to variable components when possible, among other approaches. We believe such measures will assist us as we strive to achieve profitability in the current volatile market. Operating expense for the year ended December 31, 2009 included non-cash expense related to stock options of $61,000, compared to $127,000 in the year ended December 31, 2008.

        For the year ended December 31, 2009, our operating income from continuing operations was $0.9 million, as compared with an operating loss of $3.9 million for the year ended December 31, 2008. As a percentage of net sales, operating income from continuing operations was 0.4% for the year ended December 31, 2009, compared to an operating loss of 1.8% for the year ended December 31, 2008.

Operating Expense

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Operating Income (Loss) from Continuing Operations

Other Income

        During 2009 we incurred $342,000 of interest expense compared to $545,000 for 2008, due to lower interest rates. During 2008, we settled an outstanding claim against a former service provider in which we received a gross amount of $655,000, of which $87,000 represented reimbursement for legal fees, and also had a gain from an insurance settlement. We expect to regularly utilize our credit facility, which will impact our interest expense in future periods, depending on applicable interest rates and amounts drawn from the line.

Income (Loss) from Continuing Operations

        During the year ended December 31, 2009, our income from continuing operations was $484,000, compared to loss from continuing operations of $6.3 million for the year ended December 31, 2008. The net income from continuing operations was primarily due to the increased gross margin and gross profit discussed above. Included in the loss for 2008 is a non-cash valuation allowance of $3.2 million related to our deferred tax assets (see Note 10- Income Taxes to our Consolidated Audited Financial Statements), in addition to the $2.5 million of inventory write-downs taken during the year, which enabled us to significantly reduce inventory levels and the associated carrying costs.

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Loss from Discontinued Operations

        During the second quarter of 2008, we assessed opportunities in the United States and Mexico and decided to implement actions necessary to close sales operations in both of those countries, which we substantially completed in the second half of the year. For the year ended December 31, 2009, we incurred a loss of $2.0 million from discontinued operations, as compared to a loss of $4.1 million for the year ended December 31, 2008. The loss was a result of very low sales in the U.S. and Mexico during 2009 and 2008, as we wound down our business in these areas, as well as the other matters discussed in Item 8, Note 2 to the Consolidated Audited Financial Statements. As of December 31, 2009, our plans for the discontinued operations were substantially completed; however, we will continue to record adjustments and expenses through the discontinued operations as necessary.

Net Loss

        During the year ended December 31, 2009, our net loss was $1.5 million, compared to net loss of $10.4 million in 2008. The loss was attributable to our loss from discontinued operations as we continued to wind down business in the United States and Mexico. The loss in the twelve months ended December 31, 2008 was related to the general economic downturn and other factors such as inventory write-downs, marketing, engineering and tolling expenses, as well as the non-cash valuation allowance for deferred tax assets described above.

Year Ended December 31, 2008 Compared With Year Ended December 31, 2007

Net Sales

        For the year ended December 31, 2008, our net sales from continuing operations of $213.2 million were generally consistent with our net sales from continuing operations of $214.5 million for 2007. Average selling price of wireless handsets sold in 2008 remained relatively constant compared to 2007. However, we experienced a 2% decrease in overall wireless handset sales volume, due primarily to the impact of the worsening economic slowdown in the markets we serve, most notably in Central America, during the second half of 2008. The geographic mix of net sales shifted in 2008 as sales in South America increased to more than 76% of net sales, compared to 66% of net sales in 2007. Sales in Central America decreased to 24% of total net sales in 2008, compared to 34% in 2007. These regional shifts in net sales were the result of the factors discussed below. Further, we discontinued our operations in the United States and Mexico in 2008.

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        In South America, net sales were $162.6 million for 2008, a 15% increase from 2007. This increase was primarily due to increased sales in existing countries, most notably Argentina, and the addition during the first half of 2008 of a new carrier relationship in Colombia. In Central America, net sales decreased 31% to $50.6 million for 2008, which was primarily due to the continuing unusually low demand during the third and fourth quarters of 2008. We believe the worldwide economic downturn impacted that region also, especially during the second half of 2008.

Net Sales by Geographic Region

Cost of Sales, Gross Profit and Gross Margin

        For the year ended December 31, 2008, cost of sales was $203.2 million, or 95.3% of net sales, and gross margin was 4.7%, compared with $202.8 million, or 94.6% of net sales, and 5.4% for gross margin for the year ended December 31, 2007. The increase in both our total cost of sales and as a percentage of net sales and decrease in gross margin were primarily due to inventory write-downs, sales of some products at or below cost and a product mix shift, including increased sales of low-margin products. Inventory write-downs during 2008 were approximately $2.5 million, or 1.2% of cost of sales, and in addition, we sold product below our cost in order to reduce inventory levels and incurred costs of $3.0 million on these products. These actions primarily resulted from of the abrupt shift in market conditions and resulted in decreased demand, particularly in Central America, in the second half of 2008. We had immaterial inventory write-downs in 2007. Some of our OEM partners that had previously entered into the low-tier handset range continued to sell a higher amount of low-tier handsets, which had less margin opportunity than mid-tier and high-end handsets sales. Our gross margin was impacted by the change of product and regional mix of our sales. The economic downturn also reduced consumer demand for higher-priced and higher-margin products.

        For the year ended December 31, 2008, our gross profit decreased to $10.0 million from $11.7 million, a decrease of 14% compared with the year ended December 31, 2007. This decrease in gross profit was primarily the result of the $2.5 million inventory write-down during 2008, as well as sales of certain products below cost in efforts to reduce inventory levels and carrying costs. In addition, a decrease in gross margin due to a product mix shift, as well as other factors resulting from the general economic downturn, negatively impacted gross profit.

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Operating Expense and Operating Loss from Continuing Operations

        For the year ended December 31, 2008, operating expense increased almost 5%, to $13.9 million compared with 2007. As a percentage of net sales from continuing operations, operating expense increased to 6.5% in the year ended December 31, 2008, compared with 6.2% for 2007. The increase in operating expense as a percentage of net sales was primarily related to the increase in marketing activities related to sales of our products, as we continued to create brand awareness at the point of sale. Marketing expenses increased approximately $0.7 million in 2008 compared to 2007. In addition, we had product tooling and engineering expenses related to theverykool® products during 2008 increase $1.1 million in 2008 compared to 2007. Marketing, tooling and engineering increases were primarily related to the increased penetration and sales of ourverykool®-branded products. Operating expense for the year ended December 31, 2008 included non-cash expense related to stock options of $127,000, compared to $143,000 in the year ended December 31, 2007.

        For the year ended December 31, 2008, our operating loss from continuing operations was $3.9 million, compared with a loss of $1.6 million for the year ended December 31, 2007. As a percentage of net sales, operating loss from continuing operations was 2% for the year ended December 31, 2008, compared to a loss of 1% for the year ended December 31, 2007. The increase in operating loss from continuing operations was a result of the decrease in gross margin and gross profit (related primarily to inventory write-downs and product sales below cost) and the increase in operational expenses (most notably relating to marketing, product tooling and engineering) as discussed above.

Operating Expense

Operating Loss from Continuing Operations

Other Income

        During 2008, we settled an outstanding claim against a former service provider in which we received a gross amount of $655,000, of which $87,000 represented reimbursement for legal fees, and also had a gain from an insurance settlement. During 2007, we received $2.1 million in compensation from our early lease termination and relocation of our corporate headquarters. During 2008, we

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incurred $545,000 of interest expense, compared to $901,000 for 2007, primarily due to a lower average outstanding balance on our line of credit as well as generally lower borrowing rates.

Loss from Continuing Operations

        During the year ended December 31, 2008, our loss from continuing operations was $6.3 million, compared to income from continuing operations of $0.7 million for the year ended December 31, 2007. Included in this loss was the non-cash valuation allowance of $3.2 million related to our deferred tax assets described above, in addition to the $2.5 million of inventory write-downs taken during the year, which enabled us to significantly reduce inventory levels and the associated carrying costs. This loss from continuing operations was also impacted by the decreases in gross margin and gross profit, sales at or below cost on certain products, increased operational expenses (marketing, product tooling and engineering), and the general economic downturn that affected our sales regions. Income from continuing operations of $0.7 million in 2007 primarily resulted from the compensation we received from our early lease termination of our former corporate headquarters.

Loss from Discontinued Operations

        For the year ended December 31, 2008, we incurred a loss of $4.1 million from discontinued operations, compared to a loss of $2.3 million for the year ended December 31, 2007. The loss was a result of very low sales in the U.S. and Mexico during 2008, as we wound down our business in these areas.

Net loss

        During the year ended December 31, 2008, our net loss was $10.4 million, compared to net loss of $1.6 million in the same period in 2007. This loss was primarily related to the factors discussed above,

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including the inventory write-down, marketing, engineering and tolling expense, as well as the non-cash valuation allowance for the deferred tax assets.

Financial Condition, Liquidity and Capital Resources

        We generally use cash from our sale of products, lines of credit (bank and vendor) and the sale of securities and exercise of stock options (from time to time) to provide the capital needed to support our business. As of December 31, 2009, we did not have any material commitments for capital expenditures. We believe that we have sufficient liquidity (cash and available borrowings) to continue our operations for the next 12 months.

Year ended December 31, 2009

Cash Provided by (Used In) Operating Activities

        At December 31, 2009, we had $18.4 million in cash, a decrease of $6.3 million from December 31, 2008, and we had $25.5 million outstanding under our bank credit facility, an increase of $11.2 million from December 31, 2008. During the twelve months ended December 31, 2009, we used cash and continued to leverage our credit facility to fund our operations. The increase in our use of the credit facility was directly related to the significantly increased levels of accounts receivable and our taking advantage of purchase discounts during the twelve months ended December 31, 2009. The net cash used in operating activities was $16.9 million for the twelve months ended December 31, 2009 compared to net cash provided from operating activities of $16.8 million for 2008. The change resulted primarily from significantly increased accounts receivable and decreased accrued expenses, but was offset by a smaller decrease in accounts payable compared to the change in 2008. Trade accounts receivable increased by $19.3 million and accounts payable and accrued expenses decreased by $3.0 million from December 31, 2008. The increase in accounts receivable was primarily due to the sales activity towards the later part of 2009 and the standard payment terms of sales we provide our customers. The decrease in accounts payable and accrued expenses at December 31, 2009 compared to December 31, 2008 was primarily due to our taking advantage of beneficial purchasing terms offered by other vendors and partners in the ordinary course in 2009. Accounts receivable other decreased by $3.2 million and inventory decreased by $1.0 million from December 31, 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 December 31, 2009 was 66 days, compared with 56 days at December 31, 2008. This increase was due to several customers making payments shortly after the year end, as more than 80% of our accounts receivable at December 31, 2009 were still within current terms provided to our customers. Normal payment terms require our customers to pay on a net 30-day or net 60-day basis, depending on the customer. The extension of net 60-day terms was required to remain competitive in the regions in which we currently operate, Central and South America. In an effort to penetrate new markets and reach new customers, we may offer terms beyond our normal terms.

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Net Cash Used in Investing Activities

        The net cash used in investing activities was $154,000 for the year ended December 31, 2009, compared to cash used of $312,000 for the year ended December 31, 2008. The use of cash during 2009 and 2008 was primarily the result of our investment in tooling and molds for our proprietaryverykool® products.

Net Cash Provided by (Used in) Financing Activities

        The net cash provided by financing activities for the year ended December 31, 2009 of $10.7 million as a result of $11.2 million funding from our credit facility. This source of funding was offset by the net repurchase of $483,000 shares of our common stock. The net cash used in financing activities for the year ended December 31, 2008 of $12.5 million was primarily the result of payments on our credit facility due to less financing needs for our decreased levels of inventory and accounts receivable.

Working Capital

        Our net working capital at December 31, 2009 was $24.4 million, compared with $25.6 million at December 31, 2008. This slight decrease was primarily due to an increase in amounts drawn on our bank credit facility and a decrease in cash and cash equivalents, offset by a significant increase in accounts receivable and a decrease in accounts payable and accrued expenses for the year ended December 31, 2009.

Borrowings

        On April 30, 2008, we 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. (the "Lender"), replacing the then 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 us based on the expected collections of eligible receivables as well as value of our eligible inventory determined in accordance with the Agreement. The outstanding advances may not exceed the lesser of (i) $45,000,000 or (ii) the sum of the value of the eligible receivables and eligible inventory multiplied by their respective advance rates as set forth in the Agreement ($29.1 million at December 31, 2009). At December 31, 2009, the majority of our debt was based on foreign accounts receivable, a majority of which is insured. This credit facility has a two-year term ending April 2010 and is secured by all of our assets. The terms automatically roll over annually; however, the terms and conditions of such credit facility (including, without limitations, rates, eligibility, borrowing base and maximum line) may change. The interest rate for each borrowing under the credit facility is, at our option, either the Wells Fargo Bank N.A. prime rate minus 0.50% (3.25% less 0.50% at December 31, 2009) or the LIBOR rate plus 2.00% (0.25% plus 2.00% at December 31, 2009). As of December 31, 2009, we were in compliance with the covenants of the credit facility.

        At December 31, 2009 and December 31, 2008, amounts drawn against the credit facility were $25.5 million and $14.3 million, respectively. Credit lines have been an important part of operating and growing our business, and market changes affecting accounts receivable have, and will in the future, diminish or increase the borrowing base of available funds under our current credit line. At December 31, 2009 and December 31, 2008, advances were at 88% and 66% of the available borrowing base. At February 28, 2010, we had no balance against our line of credit.

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Year ended December 31, 2008

Cash Provided by Operating Activities

        At December 31, 2008, we had $24.7 million in cash, an increase of $4.1 million from December 31, 2007. During the year ended December 31, 2008, we continued to leverage our bank and vendor credit facilities to fund our operations, in addition to reducing our accounts receivable and inventory levels. The net cash provided by operating activities from continuing operations was $10.6 million for the year ended December 31, 2008, which resulted primarily from substantially decreased inventory and accounts receivable levels. The $9.5 million decrease in inventory at December 31, 2008 in addition to a $0.5 million decrease in prepaid inventory were primarily attributable to our efforts to reduce inventory levels as a result of worldwide economic conditions. Accounts receivable decreased $14.9 million primarily due to decreased sales in the second half of 2008, which we believe was substantially the result of the worldwide economic downturn. Accounts payable at December 31, 2008 decreased $9.8 million. The decrease was related to our decreased use of our vendors' credit facilities during the year ended December 31, 2008, as we decreased our inventory levels as noted above.

Days of Sales Outstanding

        Days of sales outstanding at December 31, 2008 was 56 days, compared with 61 days at December 31, 2007. This decrease was due to continuous efforts to keep our customers to the payment terms we provide.

Cash Used in Investing Activities

        The net cash used in investing activities was $312,000 for the year ended December 31, 2008, compared to cash used of $1.4 million for the year ended December 31, 2007. The use of cash during 2008 and 2007 was primarily the result of our investment in tooling and molds for our proprietaryverykool® products.

Net Cash Used in (Provided by) Financing Activities

        The net cash used in financing activities for the year ended December 31, 2008 of $12.5 million was primarily the result of payments on our bank credit facilities due to less financing needs for our decreased levels of inventory and accounts receivable, compared to 2007, when we had cash provided from financing activities of $1.6 million as a result of funding from our bank credit facilities.

Working Capital

        Our net working capital at December 31, 2008 was $25.6 million, compared with $33.4 million at December 31, 2007. The decrease was primarily due to decreases in inventory and accounts receivable, partially offset by the increase in our cash balance, for the year ended December 31, 2008. In addition, the loss from discontinued operations of $4.1 million also reduced our overall working capital.

Critical Accounting Policies and Estimates

        We believe the following criticalCritical accounting policies are those policies that, in management’s view, are most important toin the presentationportrayal of our financial condition and results of operations. The notes to our consolidated Financial Statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the condition and results that we report in our financial statements. These critical accounting policies require management'sus to make difficult and subjective judgments, often as a result of the need to make estimates about the effects ofand assumptions regarding matters that are inherently uncertain. Our critical accounting policies and estimates and assumptions that require the most significant judgment are discussed further below.

Revenue Recognition and Allowance for Returns

Revenues for wireless handset and accessory sales are recognized when (i) shipment of the products to customers has occurred and title has passed, (ii) when collection of the outstanding receivables is probable and (iii) the final price of the products is determined, which occurs at the time

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of shipment. Sales are recorded net of discounts, rebates, cooperative marketing arrangements, (marketing, training and promotional funds), returns and allowances. Consideration is given onOn select sales, forwe may agree to cooperative arrangements wherein we agree to fund future marketing programs related to market development, training and special promotions,the products purchased by the customer. Such arrangements are usually agreed uponto in advance. The amount givenof the co-op allowance is generally in the form of a credit memo, which is appliedrecorded as a reduction of the sale price and recordedadded to accrued expenses as a current liability. ExpendituresSubsequent expenditures made pursuant to the agreed-upon activityarrangements reduce this liability. To the extent we incur costs in excess of the established cooperative fund, we recognize thatthe amount as a selling or marketing expense. As part of the sales process, we may perform certain value-added services such as programming, software loading and quality assurance testing. These value-added services are considered an ancillary component of the sales process and amounts attributable to these processes are included in the unit cost to the customer. Furthermore, these value-added services are related to services prior to the shipment of the products, and no value-added services are provided after delivery of the products. We recognize as a reserve against the related receivables estimates for product returns based on historical experience and other judgmental factors. Wefactors, evaluate these estimates on an ongoing basis and adjust theour estimates each period based on actual product return activity. We recognize freight costs billed to our customers in revenuesales and actual freight costs incurred as a component of cost of sale.sales.

Allowance for Doubtful Accounts

We provide for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. We evaluate the collectability of our accounts receivable on an ongoing basis. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, we record a specific allowance against amounts due in order to reduce the net recognized receivable to the amount we reasonably believe will be collected, after consideration for accounts receivable insurance coverage we may have. For all other customers, we recognize allowanceallowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience. Credit evaluations are undertaken for all major sales transactions before shipment is authorized. Normal payment terms require payment on a net 30-day or net 60-day basis depending on the customer. On an ongoing basis, we analyze the payment history of customer accounts, including recent customer purchases. We evaluate aged items in accounts receivable and provide reserves for doubtful accounts. Customer creditworthiness and economic conditions may change, including increasing the risk of collectability and sales returns, and may require additional provisions, which could negatively impact our operating results.

Inventory Write-Off and Effect on Gross MarginReserves

We regularly monitor inventory quantities on hand and record a provision for excess, slow moving and obsolete inventories based primarily on historical usage rates and our estimated forecast of product demand for a period of time, generally three months. Because of obsolescence, we will generally provide a full reserve for the costs of our inventories in excess of our relevant demand forecast for the applicable period.and expected pricing. We attempt to tightly control our inventory levels so that we limit inventoriesand in excess of demand for the succeeding several months.recent past have moved more to a build-to-order model. However, because we need to place non-cancelable orders with significantour contract manufacturers with a lead time of 30 to 60 days, and because it is difficultwe may not have a confirmed customer purchase order in hand as quickly as we would like to, estimate product demand, we sometimes build inventoriestake an inventory risk. As our products get closer to end-of-life status, we are more strict about our build-to-order policy in excessorder to limit our inventory exposure on older product.

Results of demandOperations:

The following table sets forth certain items from our consolidated statements of operations and comprehensive loss as a percentage of net sales for the applicable future periods. If this occurs, we provideperiods indicated (percentages may not add due to rounding):

We do not believe that inflation had a reserve, which may havesignificant impact on our results of operations for the periods reported in our Consolidated Audited Financial Statements.

Year Ended December 31, 2010 Compared With Year Ended December 31, 2009

Net Sales

For the year ended December 31, 2010, our net sales of $72.5 million decreased by $158.8 million, or 68.6%, compared to net sales of $231.3 million in 2009. The significant decline was primarily the effect of a stiff import tariff on certain electronic devices, including wireless handsets, that was enacted in Argentina in November 2009. The tariff began to affect our sales beginning in the first quarter of 2010 and had a negative impact throughout the year. In 2010, our Samsung distribution sales in Argentina declined by $147.5 million to $59.7 million from $207.2 million in 2009. Distribution sales in the remainder of Latin America during 2010 fell by an additional $14.1 million, as Samsung began to shift its business to other locally-based distributors or distributed directly. Offsetting these declines was an increase in sales of our brandedverykool^® products of $2.9 million, which represented a 34.1% increase in sales of those products over 2009.

In February 2011, Argentina enacted a further import regulation effective March 6, 2011 which essentially resulted in the conclusion of our distribution business. Going forward, we expect our business to be centered on ourverykool^® product line. Our goal is to replace the lost gross profit from distribution revenues with higher marginverykool^® sales through expansion of our product portfolio and entry into new geographic markets in Asia Pacific and Latin America.

Cost of Sales, Gross Profit and Gross Margin

For the year ended December 31, 2010, cost of sales was $67.7 million, 93.4% of net sales, and gross margin was 6.6%, compared to cost of sales of $216.0 million, 93.4% of net sales, and a 6.6% gross margin for the year ended December 31, 2009. In 2010, our gross profit amounted to $4.8 million, a decrease of 68.6% from $15.3 million in 2009 as a result of the decrease in sales. Sales of ourverykool^® branded products typically result in higher gross margins than our distribution sales. However,verykool^® margins were reduced in 2010 by approximately $356,000 charged to cost of sales for reserves for slow moving and obsolete inventories.

Operating Expenses and Operating Income (Loss) from Continuing Operations

For the year ended December 31, 2010, operating expenses of $8.8 million decreased by $5.6 million, or 39.1%, from $14.5 million in 2009. Selling, general and administrative (“SG&A”) expenses declined by $6.5 million, but this reduction was partially offset by an increase in R&D spending of $0.9 million related to our new development team in Beijing that was established in April 2010 to focus on ourverykool^® products. The majority of the SG&A decrease was related to reduction of expenses that were variable with sales, which decreased 69% in 2010 compared to 2009. Although we made reductions in other expenses as well, such reductions were not proportionate to the decline in revenue. In response to the declining sales, we made reductions in headcount, but we were only able to reduce wages and benefits by approximately 24% in 2010 compared to the prior year. In addition, we curtailed marketing spending, but had commitments that could not be terminated, thus marketing expenses declined by 13% in 2010 compared to 2009. As a percentage of net sales, total operating expenses increased to 12.1% in 2010 compared to 6.2% in 2009.

For the year ended December 31, 2010, we sustained an operating loss from continuing operations of $4.0 million, compared to operating income of $0.9 million for the year ended December 31, 2009. The loss was the result of the significant decrease in sales and gross profit, which was only partially offset by a decrease in operating expenses.

Interest Expense and Other Income

During the year ended December 31, 2010, borrowing under our bank revolving line of credit was greatly reduced compared to 2009, and we had no borrowings after June 30, 2010. The line of credit was terminated on September 22, 2010. As a consequence, interest expense in 2010 amounted to $23,000 compared to $342,000 in 2009.

Income (Loss) from Continuing Operations

For the year ended December 31, 2010, we sustained a loss from continuing operations of $3.6 million compared to income of $484,000 in 2009. The 2010 loss from continuing operations, which benefited from a tax refund of $423,000 from the carry back of net operating losses in 2007 and 2008 to prior years, was primarily due to the significant decrease in sales and gross profit during the year as discussed above.

Income (Loss) from Discontinued Operations

During the second quarter of 2008, we assessed opportunities in the United States and Mexico and decided to implement actions necessary to close sales operations in both of those countries, which we substantially completed in the second half of 2009, although we generated $44,000 in income from discontinued operations during 2010 from the salvage sale of remaining inventories. We are continuing efforts to obtain a refund of the VAT taxes prepaid in Mexico in connection with our discontinued operations and expect to continue to record adjustments and expenses through discontinued operations as necessary until that process is completed.

Net Loss

For the year ended December 31, 2010, our net loss was $3.6 million, compared to a net loss of $1.5 million in 2009. The 2010 loss was the result of a significant reduction in sales and gross profit caused primarily by the Argentine tariff first instituted in late 2009 that negatively impacted our distribution business.

Year Ended December 31, 2009 Compared With Year Ended December 31, 2008

Net Sales

For the year ended December 31, 2009, our net sales of $231.3 million increased $18.1 million, or 8.5%, compared to net sales of $213.2 million in 2008. The average selling price of wireless handsets sold in 2009 increased 13.4% relative to 2008, due primarily to increased volume of higher-priced handsets, including some of ourverykool^® and OEM products. The increase in average selling price was partially offset by a 1.2% decrease in overall wireless handset sales volume. The geographic mix of net sales shifted slightly in the twelve months ended December 31, 2009 as sales in South America were more than 91% of net sales, compared to 76% of net sales for 2008. Sales in Central America decreased to 9% of total net sales in the twelve months ended December 31, 2009, as compared to 24% for 2008. These regional shifts in net sales resulted from the factors discussed below.

In 2009 in South and Central America, we continued to expand our customer base and geographic presence by seeking new customers and additional business with existing customers for both our distribution business and ourverykool^® line of products. In South America, net sales were $210.7 million for the twelve months ended December 31, 2009, a 30% increase from 2008. This increase was primarily due to increased sales in existing countries where we sell products, primarily Argentina. In Central America, net sales decreased 59% to $20.6

million for the twelve months ended December 31, 2009, which was primarily due to the continuing low demand during the year, which we believe was related to the worldwide and regional economic downturn. Despite the year-over-year decline, we saw sequential quarterly improvement in Central America in the second and third quarters of 2009. Net sales in the second quarter of 2009 increased 81% over the first quarter of 2009, and sales in the third quarter of 2009 increased 124% over the first quarter of 2009. A seasonal decrease in sales resulted in a smaller increase in the fourth quarter of 2009 of 58% over the first quarter of 2009.

Cost of Sales, Gross Profit and Gross Margin

For the year ended December 31, 2009, cost of sales was $216.0 million, or 93.4% of net sales, and gross margin was 6.6%, as compared with $203.2 million, or 95.3% of net sales, and 4.7% for gross margin for the year ended December 31, 2008. The increase in gross margin was due to a product mix shift, including increased sales of higher-margin products (including ourverykool^®products), improved product sourcing for ourverykool^®line of products and beneficial purchasing opportunities.

For the twelve months ended December 31, 2009, our gross profit increased 52.9% to $15.3 million from $10.0 million for 2008. This increase in gross profit was primarily the result of the increased net sales and of the factors which increased our gross margin as described above.

Operating Expenses and Operating Income (Loss) from Continuing Operations

For the year ended December 31, 2009, operating expenses increased 4.3%, to $14.5 million, from 2008. As a percentage of net sales from continuing operations, operating expenses decreased to 6.2% in the year ended December 31, 2009, compared with 6.5% for 2008. The total increase in operating expenses was related to the opening of a new market in South America and other support required in additional markets due to the global and regional economic downturn. It also included the write-off of intangible assets related to our Argentina business described in Item 8, Note 5 to the Consolidated Audited Financial Statements. Operating expenses decreased as a percentage of net sales as we took action to reduce fixed operational costs to match current market conditions.

For the year ended December 31, 2009, our operating income from continuing operations was $0.9 million, as compared with an operating loss of $3.9 million for the year ended December 31, 2008. As a percentage of net sales, operating income from continuing operations was 0.4% for the year ended December 31, 2009, compared to an operating loss of 1.8% for the year ended December 31, 2008.

Interest Expense and Other Income

During 2009 we incurred $342,000 of interest expense compared to $545,000 for 2008, due to lower interest rates. During 2008, we settled an outstanding claim against a former service provider in which we received a gross amount of $655,000, of which $87,000 represented reimbursement for legal fees, and also had a gain from an insurance settlement.

Income (Loss) from Continuing Operations

During the year ended December 31, 2009, our income from continuing operations was $484,000, compared to loss from continuing operations of $6.3 million for the year ended December 31, 2008. The net income from continuing operations was primarily due to the increased gross margin and gross profit discussed above. Included in the loss for 2008 is a non-cash valuation allowance of $3.2 million related to our deferred tax assets (see Item 8, Note 10 to our Consolidated Audited Financial Statements), in addition to the $2.5 million of inventory write-downs taken during the year, which enabled us to significantly reduce inventory levels and the associated carrying costs.

Loss from Discontinued Operations

For the year ended December 31, 2009, we incurred a loss of $2.0 million from discontinued operations, as compared to a loss of $4.1 million for the year ended December 31, 2008. The losses were the result of very low sales in the discontinued U.S. and Mexico operations during 2009 and 2008, as we wound down our business in these areas, as well as the other matters discussed in Item 8, Note 2 to the Consolidated Audited Financial Statements.

Net Loss

During the year ended December 31, 2009, our net loss was $1.5 million, compared to a net loss of $10.4 million in 2008. The loss was attributable to our loss from discontinued operations as we continued to wind down business in the United States and Mexico. The loss in the year ended December 31, 2008 was related to the general economic downturn and other factors such as inventory write-downs, marketing, engineering and tooling expenses, as well as the non-cash valuation allowance for deferred tax assets described above.

Financial Condition, Liquidity and Capital Resources

Historically, we have used cash from our sale of products, lines of credit (bank and vendor) and the sale of securities and exercise of stock options (from time to time) to provide the capital needed to support our business.

The primary drivers affecting our cash and liquidity are net income (losses) and working capital requirements. Capital equipment is not significant in our business, and at December 31, 2010 we did not have any material commitments for capital expenditures. Our largest working capital requirement is for accounts receivable, as we move more toward a build-to-order model to minimize our inventory levels. We typically bill customers on an open account basis subject to our standard credit quality and payment terms ranging between net 30 and net 60 days. If our net revenue increases, it is likely that our accounts receivable balance will also increase. Our accounts receivable could further increase if customers delay their payments or if we grant them extended payment terms.

As of December 31, 2010, we had $12.5 million of cash and cash equivalents and $20.9 million of working capital compared to $18.4 million of cash and cash equivalents and $24.4 million of working capital as of December 31, 2009. As of December 31, 2010 we had no bank debt, compared to $25.5 million of revolving bank debt as of December 31, 2009. These changes are further discussed below.

As of December 31, 2010, cash and cash equivalents consisted of cash on hand and in bank accounts.

Operating Activities

Net cash provided by operating activities for the year ended December 31, 2010 amounted to $20.0 million compared to $16.9 million of cash used in operations for the year ended December 31, 2009. Although the net loss of $3.6 million in 2010 was larger than the $1.5 million loss in 2009, cash flow was positive in 2010 as our business contracted significantly, compared to negative cash flow in 2009, when our revenues expanded.

In 2010, we generated $24.0 million of positive cash flow from a reduction in net working capital. This consisted primarily of a $30.0 million reduction in trade accounts receivable, reflecting the 68.6% drop in annual revenue for the year. Days sales outstanding in receivables at December 31, 2010 was 77 days, which reflects a significant portion of fourth quarter shipments made in the last month of the quarter, as well as several customers making payments shortly after year end. An additional $1.7 million was generated from a reduction of inventories, offset by a combined reduction in accounts payable and accrued expenses of $8.0 million.

In 2009, we invested $18.2 million in net working capital, consisting principally of a $19.3 million increase in accounts receivable, reflecting the 8.5% growth in annual sales for the year, the timing of sales in the fourth quarter and some slowness in payments at the end of the year by our customers. Days sales outstanding in receivables at December 31, 2009 was 66 days, compared with 56 days at December 31, 2008. This increase was due to several customers making payments shortly after year end. We also used approximately $3.0 million to pay down trade accounts payable and accrued expenses. These amounts were partially offset by cash inflow from a $3.2 million reduction in other accounts receivable and a $1.0 million reduction in inventories.

Investing Activities

Net cash used in investing activities was $325,000 and $154,000 for the years ended December 31, 2010 and 2009, respectively. Cash used in both years included investment in tooling and molds for our proprietaryverykool^® products, and 2010 also included the purchase of computers and office equipment for our newly established design center in Beijing.

Financing Activities

Net cash used in financing activities in the year ended December 31, 2010 of $25.5 million represented the complete retirement of outstanding balances under our revolving credit facility. In the year ended December 31, 2009, net cash of $10.7 million was provided by financing activities. This consisted of $11.2 million of funding from our credit facility, partially offset by the purchase of treasury stock at a cost of $483,000.

We previously had a revolving credit facility with a bank pursuant to which we could borrow up to $45 million based on a borrowing base of our accounts receivable and inventories. The credit facility was secured by all our assets. On July 22, 2010, although we had no outstanding borrowings at the time and were in compliance with all of our covenants under the credit facility, we received a notice from the Lender of its election to terminate the credit facility on September 22, 2010, the end of the 60-day notice period. It is our belief that the principal reasons for the Lender’s actions were the decreased utilization of the facility by us, the high level of capital reserves required by the Lender to support the facility and our lack of profitability.

Based on our reported resultscurrent outlook for our business, we believe that our current cash resources and working capital are sufficient to fund our operations for the foreseeable future. However, our cash and working capital needs could change significantly if our business begins to grow rapidly. The lack of operations and financial condition.a line of credit could inhibit our growth. For this reason, we continue evaluating potential lines of credit.

Contractual Obligations and Off-Balance Sheet Arrangements

At December 31, 2010, we did not have any relationship with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest, or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving non-exchange traded contracts.

Contractual Obligations

We lease corporate and administrative office facilities and equipment under non-cancelable operating leases. Certain of these leases contain renewal options. Rent expense under these leases was approximately $483,000, $534,000 $558,000, and $628,000$558,000 for the years ended December 31, 2009, 2008 and 2007, respectively. We also have a line of credit facility, which is shown on our balance sheet as a current liability and the balance was $25.5 million and $14.3 million at December 31,2010, 2009 and 2008, respectively.

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The following is a schedule of aggregate future minimum rental payments required by the above leases.leases (in thousands):

 We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term "market risk"“market risk” for us refers to the risk of loss arising from adverse changes in interest rates and various foreign currencies. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.

Interest Rate

        We are exposed to market risk from changes in interest rates on our outstanding revolving line of credit. At December 31, 2009,2010, we had approximately $25.5 millionno outstanding which could be affected by changes in short-term interest rates. The interest rate for the revolving line of credit is the prime rate minus 0.50% (2.75% at March 19, 2010) or LIBOR plus 2.00% (2.26% at March 19, 2010). For every 1% increase in our bank's prime rate or LIBOR, our interest expense would increase by $255,000 assuming the same $25.5 million remained outstanding for the entire year.

        The above sensitivity analysis for interest rate risk excludes accounts receivable, accounts payablebearing debt and accrued liabilities because of the short-term maturity of such instruments. The analysis does not consider the effect this movement may have on other variables, such as changes in sales volumes, which could be indirectly attributed to changes in interest rates. The actions that we would take in response to such a change are also not considered. If it were possible to quantify this impact, the results could well be different than the sensitivity effects shown above.no rate-sensitive investments.

Market Risk

        Substantial portionsSubstantially all of our revenues, costs and expenses are transacted in markets outside the United States, however, all sales transactions and accounts receivable are denominated in U.S. dollars. Product costs, and the majority of our operating expenses are also denominated in U.S. dollar, but payroll and other costs of our Beijing development team are denominated in Chinese Yuan Renminbi. As a result of our international sales, our future operating results could be adversely affected by a variety of factors, including changes in specific countries'countries’ political, economic or regulatory conditions and trade protection measures.measures, particularly China. Our market risk management includes an accounts receivable insurance policy for both our foreign sales, as well as any domestic and foreign sales. However, there can be no assurance that our insurance policy will substantially offset the impact of fluctuations in currency exchange rates, political, economic or

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regulatory conditions on its results of operations and financial position. We do not believe that foreign currency fluctuations had a material impact on our financial results during 2010, 2009 2008 or 2007.2008.

Item 8.    Financial Statements and Supplementary Data.

The information required by this item is included below in "Item“Item 15 Exhibits, Financial Statements and Financial Statement Schedules"Schedules” and incorporated by reference herein.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

        None.

Item 9A(T).    Controls and Procedures.

(i) Disclosure Controls and Procedures

An evaluation was performed pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”) under the supervision and with the participation of our management, including the President and Chief Executive Officer and President and the Interim Chief Financial Officer, of the effectiveness of the Company'sCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report. These disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC'sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, the President and Chief Executive Officer and President and the Interim Chief Financial Officer concluded that the Company'sCompany’s disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.

(ii) Internal Control Over Financial Reporting.

Management'sManagement’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our President and Chief Executive Officer and President and Interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20092010 as required by the Exchange Act Rule 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—IntegratedControl-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.2010. This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management'sManagement’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporarylaw, rules of the Securities and Exchange Commissionregulations that permitspermit us to provide only management'smanagement’s report in this Annual Report.

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(iii) Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2009,2010, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

None.

Item 9B.    Other Information.
PART III

 None.

PART III

Item 10.    Directors and Executive Officers and Corporate Governance.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

We have adopted a Code of Ethics that applies to our President and Chief Executive Officer, Chief Financial Officer principal accounting officer and controller and a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. Copies of these codes are available on our website (www.infosonics.com) and are also available without charge upon written request directed to Investor Relations, InfoSonics Corporation, 4350 Executive Drive Suite #100, San Diego, California 92121.

If we make changes to our Code of Ethics or Code of Business Conduct and Ethics in any material respect or waive any provision of either such Code for certain management persons covered by either such Code, we expect to provide the public with appropriate notice of any such change or waiver by publishing a description of such event on our corporate website,www.infosonics.com, or by other appropriate means as required by applicable rules of the Securities and Exchange Commission.SEC.

Item 11.    Executive Compensation.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

Item 13.    Certain Relationships and Related Transactions and Director Independence.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

Item 14.    Principal Accountant Fees and Services.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

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PART IV

(a) The following documents, included elsewhere in this annual report on Form 10-K (see F-pages herein regarding financial statement information) are incorporated herein by reference and filed as part of this report:

(1) Financial Statement Schedules.
statements:

(a)(1)The consolidated balance sheets as of December 31, 2010 and (a)2009, and the consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years ended December 31, 2010, 2009 and 2008, together with notes thereto.

(2) Financial Statementsstatement schedule:

Schedule II – Valuation and Financial Statement SchedulesQualifying Accounts.

See the financial statements and supplementary data beginning on page F-1 and F-22, which are incorporated by reference.(3) Exhibit index

(a)(3)Exhibits.

See Exhibit Index, which is incorporated by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.