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.

InfoSonics Corporation and Subsidiaries

Consolidated Statements of IncomeOperations
(unaudited)

(unaudited)

Accompanying notes are an integral part of these financial statements.

INFOSONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

Accompanying notes are an integral part of these financial statements

InfoSonics Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)

Accompanying notes are an integral part of these financial statements.

InfoSonics Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

Accompanying notes are integral part of these financial statements.

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InfoSonics Corporation

Condensed Notes to Unaudited Consolidated Financial Statements

as of and at September 30, 2006

March 31, 2007
(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 footnotes 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, 20052006 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.2006.  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 financial statements include the accounts of the Company and its subsidiaries, Axcess Mobile LLC, InfoSonics DeLatin America, Inc. InfoSonics de Mexico S.A. de C.V., InfoSonics de Guatemala S.A., InfoSonics El Salvador S.A. de C.V., InfoSonics S.A., InfoSonics Chile y Compania Limitada and InfoSonics Colombia S.A., all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in consolidation of these consolidated financial statements.

The unaudited Consolidated Balance Sheetconsolidated balance sheet at September 30, 2006March 31, 2007 does not include all of the information and footnotes required by GAAP for complete financial statements. Due to seasonality of the Company’s business and other factors, the Company’s interim results may not be indicative of the condition at or the results for the full fiscal year of 2006 or at2007 or for any other future period. The unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2006March 31, 2007 and the unaudited Consolidated Statement of Cash Flows for the ninethree months ended September 30, 2006March 31, 2007 are not necessarily indicative of the operating results or cash flows that may be expected for the full fiscal year of 20062007 or for any future period.

Share and per share amounts for all periods presented in this report (unless otherwise stated) have been adjusted to reflect the two-for-one common stock split in the form of a stock dividend effected on June 19, 2006.  See Note 10 belowAdditionally amounts presented for additional information.the period ended March 31, 2006 are restated.

NOTE 2. Acquisition

On January 19, 2005, the Company purchased Primasel S.A., from Fanrock Investments Limited for up to 240,000 shares of the Company’s common stock, based on sales of certain levels being achieved in the next three years.  During the year ended December 31, 2005, 240,000 shares of stock were issued in full satisfaction of the Company’s potential share issuance in connection with this transaction.  In addition, under the terms of the acquisition, the Company is obligated to share certain profits based on sales and profitability achieved in Argentina. During the three and nine months ended September 30, 2006, the Company recorded expense and related accrual of $677,000 and $1.5 million, respectively, related to these profit-sharing terms. The Company accounted for the transaction as a stock purchase. The purchase price has been recorded as an intangible asset on the Consolidated Balance Sheet.  Primasel had a distribution agreement and a management agreement which was the purpose for the transaction, and the implied value of those agreements is the value of the 240,000 shares issued in October 2005.  The Company allocated 75% of the non-cash cost of this stock issuance towards the management agreement and 25% towards the distribution agreement. In February 2005, Primasel S.A. changed its name to InfoSonics S.A.

NOTE 3. Discontinued Operations

During the quarter ended September 30, 2004, the Company’s Board of Directors reviewed Axcess Mobile, LLC and its mall-based kiosk locations and implemented actions necessary to close the Company’s mall-based kiosk locations. On October 28, 2004, the Company assigned the leases for nine of its mall-based kiosk locations to an unrelated assignee;

however, the assignment did not release the Company from its future lease obligations, including up to $702,975 as of September 30, 2006. The assignee operates approximately 400 mall-based kiosks in 28 states. A third party is holding in escrow two months rent for the assigned locations  from the assignee, and in the event of default by the assignee, those funds will be released to the Company.  The Company’s other four lease locations were closed in October 2004.  SFAS No. 142, “Goodwill and Other Intangible Assets” prohibits the amortization of goodwill, but requires that it be reviewed for impairment at least annually or on an interim basis if an event occurs or circumstances change that could indicate that its value has diminished or been impaired. As a result of the discontinued operations, the Company has reassessed the goodwill and written down the value associated with its mall-based kiosk locations to zero.  This write-down was recorded as an operating expense in the year ended December 31, 2004.

NOTE 4.2. 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 shareholders. 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 equity incentives. The Company is also a party to non-plan option agreements with several non-employee directors and several institutions.

Prior to December 31, 2005, the Company accounted for employee stock option plans based on the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, and had adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Accordingly, compensation cost for stock options was measured as the excess, if any, of the quoted market price of the Company’s stock at the grant date over the amount an employee must pay to acquire the stock. The Company granted stock options with exercise prices equal to the market price of the underlying stock on the date of grant; therefore, the Company did not record stock-based compensation expense under APB Opinion No. 25.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “ Share-Based Payments,” to require that compensation cost relating to share-based payment arrangements be recognized in the financial statements. As ofEffective January 1, 2006 the Company adopted Financial Accounting Standards Board SFAS No. 123R, “Share Based Payments” using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for stock options in footnote disclosures required under SFAS 123, as amended by SFAS 148. Such fair value is recognized as expense over the service period, net of estimated forfeitures.

If the Company had adopted SFAS 123R as of January 1, 2005 for its stock-based compensation plans, then the Company’s net income for the three and nine months ended September 30, 2005 would have been adjusted to the pro forma amounts indicated below:

On September 27, 2001, the FASB Emerging Issues Task Force (“EITF”) issued EITF Issue 96-18 “Accounting for Equity Instruments That are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires that equity instruments issued in exchange for certain services be valued at the more accurate of the fair value of the services provided or the fair value of the equity instruments issued.  For equity instruments issued that are subject to a required service period the expense associated with the equity instruments is recorded as the instruments vest or the services are provided.  The Company has granted options and warrants to non-employees and recorded the fair value of the equity instruments on the date of issuance using the Black-Scholes valuation model.  For grants subject to vesting or service requirements, the expense is deferred and is recognized over the more appropriate of the vesting period or as the services are provided.

On March 29, 2005, the Securities and Exchange Commission (“SEC”) published Staff Accounting Bulletin (“SAB”) No. 107, which provides the SEC Staff’s views on a variety of matters relating to stock-based payments. SAB 107 requires stock-based compensation to be classified in the same expense line items as cash compensation. Information about stock-based compensation included in the results of operations for the three and nine months ended September 30,March 31, 2007 and 2006 is as follows:

Our stock options vest on an annual or a monthly basis. As of September 30, 2006,March 31, 2007, there was $762,000$709,000 of total unrecognized compensation costs related to the non-vested stock options.  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.   That cost is expected to be recognized over the next weighted-average period of 2.53.75 years.  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 thirdfirst quarter of 2006,2007, we recorded an expense of $133,448,$97,449, related to options granted to our non-employee directors.  These options had been previously granted or were granted during the current quarter.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 the income statement.our Consolidated Statements of Income.

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 2007, 2006 and 2005: risk-free interest rate of between4.66% in 2007 and ranging from 4.88% to 5.04% in 2006 and 3.22% to 4.41% in 2005 based on the U.S. Treasury yields in effect at the time of grant; expected dividend yields of 0zero percent as the Company has not, and does not intend to, issue dividends; and expected lives of 3 to 7 years in 2006 and 2005 based upon the historical life of options. For grants in 2007, 2006 and 2005, the expected volatility used ranged from 62% to 91%, based on the Company’s historical stock price fluctuations for a period matching the expected life of the options.

A summary of option activity under all of the above plans as of September 30, 2006,March 31, 2007, and changes during the ninethree months then ended is presented in the table below:

A summary of the status of the Company’s non vested options at September 30, 2006,March 31, 2007, and changes during the ninethree months ended September 30, 2006,March 31, 2007, is presented below:

The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2006March 31, 2007 was $5.44 and $6.77, respectively.$3.79. The total intrinsic value of options exercisedgranted during the three and nine months ended September 30,March 31, 2007 and 2006 was $0 and $0 respectively. There was $276,000$253,000 and $1.2 million$164,000 cash received from options exercised for the three and nine months ended September 30,March 31, 2007 and 2006, respectively. There were no options exercised in the three and nine months ended September 30, 2005. The stock based compensation unrecognized expense for future periods as of September 30, 2006March 31, 2007 is approximately $762,000$709,000 with a weighted average remaining vesting period of 2.53.75 years.

NOTE 5.3. 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.

The following table represents a reconciliation of the shares used to calculate basic and diluted earnings per share for the respective periods indicated:

Certain potential commonCommon shares from exercise of certain options and warrants have been excluded from the computation of diluted earnings per share due tobecause their exercise price beingprices are greater than the Company’s weighted-average stock price for the period. For the three months ended September 30,ended March 31, 2006, and 2005, the number of shares excluded were 1,894,583was 1,926,753.

Since their effect would have been, anti-dilutive, 2,963,324, stock options and 1,881,726, respectively, andwarrants to purchase shares of common stock have been excluded from the computation of diluted net loss per share for the ninethree months ended September 30, 2006 and 2005, the number of shares excluded were 1,849,317 and 2,070,814, respectively.March 31, 2007.

NOTE 6.4. 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 2006 remain open to examination. As of March 31, 2007, 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 7.5. Inventory

Inventory is valued at the lower of cost or market using standard costs that approximate average cost. Inventories are reviewed periodically and items considered to be slow moving or obsolete are reduced to estimated net realizable value through an appropriate reserve.  In addition, included in our prepaid inventory at September 30, 2006,March 31, 2007, we had consignedin-transit inventory of $1.5$1 million, which is located atunder the distribution center and retail locationscontrol of a certain carrier.common freight carrier until it arrives at one of our warehouse facilities.  This inventory is owned by the Company untilwhile it is sold by the carrier.  There was no consigned inventory at December 31, 2005.in-transit.  Inventory consists of the following:

NOTE 8.6. Property and Equipment

Property and equipment are primarily located in the United States, with the exception of $258,000$262,000 of machinery and equipment located at our Mexico facility (installed in June 2006 and included in the table below) and consisted of the following as of the dates presented:

Depreciation expense was $34,269$43,032 and $29,392$31,935 for the three months ended September 30,March 31, 2007 and 2006, and 2005, respectively Depreciation expense was $108,220 and $59,929 for the nine months ended September 30, 2006 and 2005, respectively.

NOTE 9.7. Line of Credit

The Company has a line of credit from Wells Fargo HSBC Trade Bank N.A., which provides for advances not to exceed 80% of eligible domestic accounts receivable and 85% of foreign-insured accounts receivable (depending on the country of the debtor), up to a maximum of $25,000,000.$30,000,000. As of September 30, 2006,March 31, 2007, the majority of our debt was based on foreign accounts receivable.

Interest is payable on a monthly basis (i) at Wells Fargo’s prime rate minus 0.25% (8.25% at September 30, 2006)March 31, 2007) or (ii) at the one-month LIBOR plus 1.50% (5.32% at September 30, 2006) plus 1.50%March 31, 2007). The interest rate is floating at Wells Fargo’s prime rate or is at LIBOR plus 1.5% if the debt is a fixed amount draw down.drawn upon.  The line of credit is collateralized by substantially all of the assets of the Company, and expires NovemberOctober 1, 2006.2008. In addition to reporting and other non-financial covenants, the line of credit contains certain financial covenants which require the Company to maintain a tangible net worth of not less than $12,500,000,$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. Management believes the Company was in compliance with these covenants at September 30, 2006.March 31, 2007. At September 30, 2006March 31, 2007 and December 31, 2005,2006 the amounts drawn against the line of credit were $20,890,100$22,369,071 and $10,000,000,$25,648,614, respectively.  See Note 13 Subsequent Events for additional information regarding the amendment of this line of credit in October 2006.

The Company has no other notes payable.

NOTE 10.8. Stockholders’ Equity

Stock Split as Dividend

On May 30, 2006, the Company’s Board of Directors approved a two-for-one stock split of the Company’s outstanding common stock.  The stock split was accomplished through a 100% stock dividend, providing the Company’s stockholders with one additional share of common stock for every one share held as of the record date.  The split was paid on June 19, 2006 to stockholders of record as of June 9, 2006.  Immediately following the stock split, the Company’s outstanding shares of common stock increased from 6,948,034 shares to 13,896,068 shares of common stock.

Sale of Common Stock and Warrants

On January 30, 2006, the Company sold an aggregate of 2,200,000 shares of its common stock at $6.55 per share with accompanying warrants, for total gross proceeds of $14,410,000.  The purchasers were also issued warrants as described below.

Stock Options

Effective April 13, 2006 and June 1, 2006,March 9, 2007, the Company granted options to purchase an aggregate of 32,000 and 50,00040,000 of its common stock to certain employees, including one inducement grant to a newly-hired Company officerforeign contractors (the “Employee“Contractor Options”). One-thirdOne-fourth of the total options subject to these option grants become exercisable one year from the employeecontractor’s grantee’s first date of employment,duties, and 1/36th48th of the total options become exercisable each month thereafter until fully vested.  The Employee OptionsThese options have exercise prices of $5.33 and $15.17$3.79 per share, which werewas the closing pricesprice per share of the Company’s common stock on April 13, 2006March 9, 2007, and June 1, 2006.  The Employee Options expire fivesix years from the date of grant.

Effective June 12, 2006, the stockholders of the Company approved previously granted options to purchase an aggregate of 180,000 of the Company’s common stock to certain non-employee Directors (the “Director Options”). These grants had vested 90,000 on January 21, 2005 and 90,000 on December 30, 2005. The Director Options have exercise prices of $1.65 and $8.12, per share, which were the closing prices per share of the Company’s common stock on the original grant dates of January 21, 2005 and December 30, 2005, respectively. The Director Options expire three and five years, respectively, from the date of grant.

Effective August 14, 2006 and August 29, 2006, the Company granted options to purchase an aggregate of 15,000 and 10,000, respectively of its common stock to certain employees (the “Employee Options” and a non-employee Director (the “Director Options”). One-third of the Employee Options subject to these option grants become exercisable one year from the employee grantee’s first date of employment, and 1/36th of the total options become exercisable each month thereafter until fully vested.  One third of the Director Options subject to this grant become exercisable at each of December 31, 2006, 2007 and 2008.  The Employee and Director Options have exercise prices of $5.12 and $5.91 per share, which were the closing prices per share of the Company’s common stock on August 14, 2006 and August 29, 2006, respectively.  The Employee Options expire seven years from the date of grant.

Warrants

In June 1998, FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.

In January 2006, the Company sold shares of common stock and warrants to purchase common stock.  The Company evaluated the warrants in the transaction as derivative liabilities in accordance with SFAS No. 133 until the date that the Company’s registration statement registering the shares of common stock underlying such warrants was declared effective on February 17, 2006, after which such warrants were classified as equity.  The change in the fair value of the warrants, determined under the Black- Scholes option pricing formula from the initial transaction date to the effectiveness date of the registration statement is recorded as an adjustment to the liability. The income relating to the change in the fair value of the Company’s stock reflected in the change in the fair value of the warrants is included as other income (expense). As the warrants have been classified as equity, the Company will no longer need to “mark to market” the change in fair value of such warrants.

NOTE 11.9. Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS 123R. SFAS 123R supersedes APB Opinion No. 25 and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the fair value approach in SFAS 123R is similar to the fair value approach described in SFAS 123. In 2005, the Company used the Black-Scholes formula to estimate the fair value of stock options granted to employees. The Company adopted SFAS 123R, using the modified-prospective method, beginning January 1, 2006.  Based on the terms of our stock option plans, there was no cumulative effect upon adoption. The Company elected to continue to estimate the fair value of stock options using the Black-Scholes formula. In the first nine months of 2006, the adoption of SFAS 123R included an operating expense of $1,376,512. Further, we believe the adoption of SFAS 123R could have a material impact on our Company’s future stock-based compensation expense.  As of September 30, 2006, there was $762,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our plans. That cost is expected to be recognized over the next three and one-half years. This expected cost does not include the impact of any future stock-based compensation awards.

In May 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections.” SFAS 154 applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS 154 eliminates the requirement in APB Opinion No. 20, “Accounting Changes,” to include the cumulative effect of changes in accounting principle in the income statement in the period of change and, instead, requires changes in accounting principle to be retrospectively applied. Retrospective application requires the new accounting principle to be applied as if the change occurred at the beginning of the first period presented by modifying periods previously reported if an estimate of the prior period impact is practicable and estimable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not currently anticipate any changes in accounting principle other than the adoption of SFAS 123R discussed above, which has its own adoption transition provision and is therefore not within the scope of SFAS 154. As a result, we do not believe the adoption of SFAS 154 has had a material impact on the Company’s consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity.  The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement.  Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 became effective in December 2005. Retrospective application of interim financial information is permitted but is not required.  Management does not expect adoption of FIN 47 to have a material impact on the Company’s financial statements.

In September 2005, EITF ratified EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Beginning April 1, 2006, EITF 04-13 requires arrangements whereby purchase and sales transactions with the same counterparty that are entered into in contemplation of one another to be combined (i.e., net basis). The Company has had such arrangements whereby it purchases wireless devices from certain counterparties and sells similar items to the same counterparties. These arrangements have been and are accounted for on a net basis within logistic services. Therefore, the effect of adopting EITF 04-13 will have no impact on the Company’s results of operations.

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In February 2006 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 155 “Accounting for Certain Hybrid Financial Instruments”.Instruments.”  SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principal cash flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative financial instrument. Generally, FASB Statement of Financial Accounting Standards SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”,Activities,” requires that a derivative embedded in a host contract that does not meet the definition of a derivative be accounted for separately (referred to as bifurcation) under certain conditions. That general rule notwithstanding, SFAS No. 133 (prior to amendments made to it by SFAS No. 155) provides a broad exception for interest-only and principal-only strips initially resulting from the separation of rights to receive contractual cash flows of a financial instrument that itself does not contain an embedded derivative that would have been accounted for separately. SFAS 155 amends SFAS 133 to restrict the scope exception to strips that represent rights to receive only a portion of the contractual interest cash flows or of the contractual principal cash flows of a specific debt instrument.  Prior to amendments made by SFAS 155, , SFAS 140, , “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”,Liabilities,” permitted a qualifying special-purpose entity (SPE) to hold only passive derivative financial instruments pertaining to beneficial interests (other than another derivative financial instrument) issued or sold to parties other than the transferor. SFAS 155 amends SFAS 140 to allow a qualifying SPE to hold a derivative instrument pertaining to beneficial interests that itself is a derivative financial instrument.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS NO. 156”), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting.  This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities.  The Statement (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable;  (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities; (4) permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entity’s exposure to changes in the fair value of the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and servicing liabilities.  SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances.  The Statement also describes the manner in which it should be initially applied.  The Company does not believe that SFAS No. 156 will have a material impact on its financial position, results of operations or cash flows.  As a

result, we do not believe the adoption of SFAS 156 has a material impact on the Company’s Consolidated Financial Statements.

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.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), which improves financial reporting by requiring an employer to recognize the over or under funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization.  This statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions.  This Statement amends Statement 87, FASB Statement No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, Statement 106, and FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”.  Upon the initial application of this statement and subsequently, and employer should continue to apply the provisions in Statements, 87, 88, and 106 in measuring plan assets and benefit obligations as of the date of its statement of financial position and in determining the amount of net periodic benefit cost.  An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 31, 2006.  An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007.  Early application of the recognition or measurement date provisions is encouraged; however, early application must be for all of an employer’s benefit plans.  Retrospective application of the Statement is not permitted.

In September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the Company’s balance sheet and statement of operations financial statements and the related financial statement disclosures. The SAB No. 108 permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.  We are currently evaluating the impactThe adoption of SAB 108 maydid not have to our consolidated balance sheeta material impact on the Company’s results of operations and statement of operations.financial position.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position, that based solely on its technical merits is more likely than not to be sustained upon examination by the applicable taxing authority. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 must be applied to all existing tax positions upon initial adoption. The cumulative effect of applying FIN 48 at adoption, if any, is to be reported as an adjustment to opening retained earnings for the year of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006, although early adoption is permitted.  The Company does not believe thatadoption of FIN 48 willdid not have a material impact on itsthe Company’s results of operations and financial position.

In October 2006, the Emerging Issues Task Force (EITF) issued EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation) to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge

from the taxing authority. If taxes subject to EITF 06-3 are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006 (the first quarter of our fiscal year 2007). The adoption of EITF 06-3 did not have a material impact on the Company’s results of operations, financial position or cash flow.

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. If elected, the implementation of FAS 159 is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 12.10. Geographic Information

The Company currently operates in one business segment.  All fixed assets are located in Company facilities in the UntiedUnited States and Mexico. Net sales by geographical area for the three and ninethree months ended September 30, 2006March 31, 2007 and September 30, 2005 were:

NOTE 13. Subsequent Events

On October 12, 2006, the Company amended its line of credit with Wells Fargo HSBC Trade Bank N.A., to increase the maximum borrowing amount to $30,000,000 and extend the term to October 1, 2008.  In addition, the following covenants apply to the line of credit. Interest is payable on a monthly basis (i) at Wells Fargo’s prime minus 0.25% (8.25% at October 12, 2006) or (ii) at the one-month LIBOR (5.33% at October 12, 2006) plus 1.50%. The interest rate is floating at Wells Fargo’s prime rate or is at LIBOR plus 1.5% if the debt is a fixed amount draw down.  The line of credit is collateralized by substantially all of our assets, and expires in October 2008. In addition to reporting and other non-financial covenants, the line of credit contains certain financial covenants which require us to maintain a tangible net worth of not less than $30,000,000 through DecemberMarch 31, 2006 and not less than $30,000,000 plus 50% of net profit after tax from January 1, 2007 and thereafter, 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 on a rolling four quarter basis.were:

NOTE 14.11.  Commitments and Contingencies

Securities Class Actions

BetweenSix securities actions, originally filed between June 13, 2006 and July 14, 2006, seven securities class actions were filed in the United States District Court for the Southern District of California against us and certain of our officers and directors.  One of these securities class actions was voluntarily dismissed, and the remaining six lawsuits wererecently consolidated as In Re: InfoSonics Corporation Securities Litigation, Lead Case No. 06 CV 1231, before Judge Moskowitz in the Southern District of California.  The longest class period alleged in the securities cases is from May 8, 2006 to June 12, 2006.  EachPlaintiffs’ consolidated complaint was filed on February 14, 2007.  Plaintiffs assert claims for violation of the substantially similar consolidated lawsuits allege that the defendants violated Sectionssection 10(b), 20(a) and/or 20A of the Exchange Act as well as theand associated Rule 10b-5, 20(a) and 20A in connection with ourthe Company’s restatement announced on June 12, 2006.  In2006 and allegedly false and/or misleading statements and accounting related to the lawsuits, plaintiffsCompany’s distribution agreement with VK Mobile.  Plaintiffs seek declarationsa declaration that eachtheir 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 costs, equitable/injunctive relief, and/or such other relief as is just and proper.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 October 23, 2006, the Court appointed Robert Sibley as lead plaintiff in the consolidated suits and appointed lead counsel.  The Company is waiting for plaintiffs to file a consolidated complaint.  When required to respond to a consolidated complaint,April 16, 2007, the defendants anticipate filingfiled a motion to dismiss the consolidated complaint on the grounds, among others, that the plaintiffs have failed to adequately plead violations of the securities laws.

  Plaintiffs’ response to defendants’ motion to dismiss is due May 16, 2007 and the motion is currently scheduled to be heard on June 15, 2007.  As of this time, the Court has not set a date for trial or completion of discovery.

Derivative Lawsuits

The derivative lawsuit filed on July 12, 2006 in the California Superior Court, in the County of San Diego, by Peter J. Cunningham, purportedly on behalf of the Company against certain officers and directors of the Company, and the Company as a nominal defendant, was dismissed.

The three derivative lawsuits originally filed on June 27, 2006, July 14, 2006, and July 28, 2006 in the United States District Court for the Southern District of California, purportedly on behalf of the Company against certain of our officers and directors, and the Company as a nominal defendant, have been consolidated as In Re InfoSonics Corporation Derivative Litigation,, Lead Case No. 06 CV 1336, and transferred to Judge Moskowitz in the Southern District of California.  Plaintiffs’ consolidated derivative complaint was received on November 8, 2006.  The consolidated complaintIt asserts claims for disgorgement under the Sarbanes-Oxley Act of 2002, violation of Section 14(a) of the Exchange Act, violation of California Corporations Code section 25402,25403, violation of California Corporations Code section 25403,254403, breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, 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.

When required to respond to these derivative lawsuits, the  On January 12, 2007, defendants anticipate filingfiled a motion to dismiss on the ground,grounds, among others, that the plaintiff hasplaintiffs had failed to make a demand on the Company’s board of directors.

Whiledirectors and to adequately allege their other purported claims.  The two non-resident director defendants also filed motions to dismiss based upon a lack of personal jurisdiction in California.  The motion to dismiss for failure to make a demand and failure to state a claim was submitted on April 27, 2007.  The hearing on the above lawsuits are in their early stages, atpersonal jurisdiction motion has been continued until May 22, 2007 to allow plaintiffs to conduct limited discovery on the personal jurisdiction issue.  As of this time, we dothe Court has not believe they will haveset a material adverse effect on our financial condition.  However, the ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the usedate for trial or completion of estimates in recording liabilities for potential litigation settlements.  Estimates for losses from litigation are disclosed if considered reasonably possible and accrued if considered probable after consultation with outside counsel.  If estimates of potential losses increase or the related facts and circumstances change in the future, the Company may be required to record additional litigation expense.  discovery.

NOTE 12. Restatement

The Company intendshas reassessed its application of certain provisions of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, expense legal costs as incurredand Potentially Settled in a Company’s Own Stock, it recorded $564,000 of other income during the quarter ended March 31, 2006 related to this matter.a mark to market adjustment of certain warrants.  Since these warrants became part of permanent equity on February 17, 2006, InfoSonics should have ceased applying the mark to market provisions of EITF 00-19, on that date.  Accordingly, the net income for the quarter ended March 31, 2006 has been reduced by a non-cash amount of $564,000.

The following tables set forth for the quarter ended March 31, 2006 the amounts of the restatement adjustments and reconciliation from previously reported amounts to restated amounts for the quarter.

Statement of Operations

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

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 included in this report and with our Annual Report on Form 10-K for the year ended December 31, 20052006 (including our 20052006 audited consolidated financial statements and related notes thereto). InfoSonics Corporation’s (“InfoSonics” or the “Company”) discussion and analysis of financial condition and results of operations are based upon 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, disclosure of any contingent liabilities as of and at the financial statement date, and reported amounts of revenue and expenses during the reporting period. 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. Although management believesActual results are likely to differ from these judgments, estimates andunder different assumptions to be reasonably accurate, actual results may differ significantly.or conditions, but we do not believe such differences will materially affect our consolidated statement of operations. 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 are to results from continuing operations, unless otherwise noted.

Safe Harbor Statement

The matters in this report that are forward-looking statements, including without limitation to 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 which, if realized, 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, including, without limitation: (1) intense competition, regionally and 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) inability to secure adequate supply of competitive products on a timely basis and on commercially reasonable terms; (3) 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; (4) 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; (5) 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; (6) significant changes in supplier terms and relationships; (7) termination of a supply or services agreement with a major supplier or product supply shortages; (8) continued consolidation in the wireless handset carrier market; (9) extended general economic downturn; (10) loss of business from one or more significant customers; (11) customer and geographical accounts receivable concentration risk; (12) rapid product improvement and technological change resulting in inventory obsolescence; (13) future terrorist or military actions; (14) the loss of a key executive officer or other key employees; (15) changes in consumer demand for multimedia wireless handset products and features; (16) our failure to adequately adapt to industry changes and to manage potential growth and/or contractions; (17) future periodic assessments required by current or new accounting standards such as those relating to long-lived assets, goodwill and other intangible assets and expensing of stock options and valuing gain or loss on fair value of derivatives may result in additional non-cash income or expenses; (18) seasonal buying patterns;

(19) dependency on Latin American sales; and (20) uncertain political and economic conditions internationally; (21) the impact, if any, of changes in EITF 00-19 or SFAS 133 guidance as it relates to warrants and registration rights; and (22) the resolution of any litigation against the company.company and (23) the ability of the Company to generate 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.

InfoSonics has instituted in the past and continues to institute changes to its strategies, operations and processes to address risks and uncertainties and to mitigate their 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 “Item 1A. Risk Factors” of InfoSonics’ Annual Report on Form 10-K for the year ended December 31, 20052006 and “Part II. Item 1A. Risk Factors” of this report. In addition, other risks or uncertainties may be detailed from time to time in InfoSonics’ future SEC filings.

Overview

We are one of the fastest growingpremier providers and distributors of wireless handsets and accessories in Latin America and we distribute wireless handsets and accessories in the United States. We provide end-to-end wireless handset and wireless terminal solutions for carriers in both Latin America and the United States.   We distribute products of several key original equipment manufacturers, including Samsung, Alcatel, Motorola,Alcatel/TCL, VK Mobile, i-mate andCorporation, LG, Novatel and others.  We also distribute semi-proprietary products under the Disney brand in Latin America, and are designing and distributing our recently announced proprietary line of products under our own verykool™ brand, which will include entry level, mid-tier and high-end products.