UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - - Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2009~~March 31, 2010

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number - 001-32217

InfoSonics Corporation

(Exact name of registrant as specified in its charter)

Maryland		33-0599368
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

4350 Executive Drive, Suite #100, San Diego, CA 92121

(Address of principal executive offices including zip code)

(858) 373-1600

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting companyx
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of ~~November 10, 2009,~~May 14, 2010, the Registrant had ~~14,184,147~~14,184,146 shares outstanding of its ~~$.001~~$0.001 par value common stock.

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InfoSonics Corporation and Subsidiaries

Quarterly Report on Form 10-Q For The Three ~~and Nine~~ Months Ended ~~September 30, 2009~~March 31, 2010

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PART I. FINANCIAL INFORMATION			2

Item 1.	Financial Statements	2

·	Consolidated Balance Sheets at ~~September 30, 2009~~March 31, 2010 (unaudited) and December 31, ~~2008~~2009	2

·	Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ (unaudited)	3

·	Consolidated Statements of Comprehensive Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ (unaudited)	4

·	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ (unaudited)	5

·	Condensed Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1412

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2418

Item ~~4T.~~4.	Controls and Procedures	2518

PART II. OTHER INFORMATION			25

Item 1.	Legal Proceedings	2519

Item 1A.	Risk Factors	2619

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2921

Item 3.	Defaults Upon Senior Securities	2921

Item 4.	~~Submission of Matters to a Vote of Security Holders~~Reserved	2921

Item 5.	Other Information	2921

Item 6.	Exhibits	2921

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

InfoSonics Corporation and Subsidiaries

Consolidated Balance Sheets

	September 30, 2009			December 31, 2008			March 31, 2010			December 31, 2009
	(unaudited)			(audited)			(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	14,711,099		$	24,714,753		$	25,734,245		$	18,418,066
Accounts receivable, net of allowance for doubtful accounts of $582,046 (unaudited) and $429,126	54,692,864			22,727,738
Other receivables	610,166			4,209,658
Inventory, net of reserves of $119,556 (unaudited) and $161,556	3,839,635			4,375,334
Prepaids	562,290			244,103
Accounts receivable, net of allowance for doubtful accounts of $184,814 (unaudited) and $589,720							19,195,460			41,914,231
Accounts receivable other							796,394			1,003,940
Inventory, net of reserves of $99,693 (unaudited) and $112,135							3,363,184			3,423,244
Prepaid assets							388,504			368,959
Assets of discontinued operations	3,014,776			3,264,817			923,453			879,896

Total current assets	77,430,830			59,536,403			50,401,240			66,008,336

Property and equipment, net	410,175			498,079			332,952			315,669
Intangible assets	504,000			504,000
Other assets	205,268			115,900			58,520			97,768

Total assets	$	78,550,273		$	60,654,382		$	50,792,712		$	66,421,773

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	10,824,366		$	10,982,306		$	7,737,659		$	9,618,865
Accrued expenses	9,240,740			7,304,090			6,012,872			5,665,460
Line of credit	30,066,060			14,273,978			12,626,234			25,494,140
Income taxes payable	46,021			24,100			93,846			91,096
Liabilities of discontinued operations	1,365,226			1,310,434			63,136			724,366

Total current liabilities	51,542,413			33,894,908			26,533,747			41,593,927

Total liabilities	51,542,413			33,894,908			26,533,747			41,593,927

Commitments and Contingencies (Note #13)
Commitments and Contingencies (Note 12)

Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized (no shares issued and outstanding as of applicable period end)	—			—			—			—
Common stock, $0.001 par value, 40,000,000 shares authorized; 14,745,755 and 15,010,807 shares issued and 14,184,147 and 14,956,270 shares outstanding as of September 30, 2009 and December 31, 2008, respectively	14,184			14,956
Treasury stock, at cost, 561,608 and 54,537 shares as of September 30, 2009 and December 31, 2008, respectively	(434,381		)	(16,900		)
Common stock, $0.001 par value, 40,000,000 shares authorized; 14,184,146 shares issued and outstanding as of March 31, 2010 and December 31, 2009							14,184			14,184
Additional paid-in capital	31,715,535			31,666,434			31,738,360			31,727,090
Accumulated other comprehensive loss	(5,632		)	(25,211		)	(19,945		)	(6,944		)
Accumulated deficit	(4,281,846		)	(4,879,805		)	(7,473,634		)	(6,906,484		)

Total stockholders’ equity	27,007,860			26,759,474			24,258,965			24,827,846

Total liabilities and stockholders’ equity	$	78,550,273		$	60,654,382		$	50,792,712		$	66,421,773

Accompanying notes are an integral part of these financial statements.

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InfoSonics Corporation and Subsidiaries

Consolidated Statements of Operations

(unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2009			2008			2009			2008			2010			2009

Net sales	$	65,261,978		$	52,883,848		$	169,593,200		$	179,857,086		$	27,541,043		$	42,625,118
Cost of sales	60,928,056			49,982,339			157,832,519			170,141,235			26,099,608			39,270,497

Gross profit	4,333,922			2,901,509			11,760,681			9,715,851			1,441,435			3,354,621
Operating expenses	4,023,129			3,210,515			10,459,022			10,127,587			1,974,431			2,876,972

Operating income (loss) from continuing operations	310,793			(309,006		)	1,301,659			(411,736		)	(532,996		)	477,649

Other income (expense)
Other income	7,322			653,181			7,575			582,700
Interest expense, net	(79,828		)	(33,735		)	(217,005		)	(477,456		)
Other income (expense)													(405		)	42
Interest expense (net)													(23,331		)	(27,878		)

Income (loss) from continuing operations before provision for income taxes	238,287			310,440			1,092,229			(306,492		)	(556,732		)	449,813
Provision for income taxes	(6,300		)	(128,410		)	(23,100		)	(1,054		)	4,350			9,700

Income (loss) from continuing operations	231,987			182,030			1,069,129			(307,546		)	(561,082		)	440,113
Loss from discontinued operations, net of tax (Note #11)	(46,755		)	(80,633		)	(406,384		)	(2,237,452		)
Loss from discontinued operations, net of tax (Note 10)													(6,068		)	(193,061		)

Net income (loss)	$	185,232		$	101,397		$	662,745		$	(2,544,998	)	$	(567,150	)	$	247,052

Basic earnings (loss) per share
From continuing operations	$	0.02		$	0.01		$	0.07		$	(0.02	)	$	(0.04	)	$	0.03
From discontinued operations	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.15	)	$	0.00		$	(0.01	)
Net income (loss)	$	0.01		$	0.01		$	0.05		$	(0.17	)	$	(0.04	)	$	0.02
Diluted earnings (loss) per share
From continuing operations	$	0.02		$	0.01		$	0.07		$	(0.02	)	$	(0.04	)	$	0.03
From discontinued operations	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.15	)	$	0.00		$	(0.01	)
Net income (loss)	$	0.01		$	0.01		$	0.04		$	(0.17	)	$	(0.04	)	$	0.02

Basic weighted-average number of common shares outstanding	14,184,147			14,910,808			14,550,416			14,850,469			14,184,146			14,881,774

Diluted weighted-average number of common shares outstanding	14,932,300			15,298,685			14,874,702			14,850,469			14,184,146			14,885,887

Accompanying notes are an integral part of these financial statements.

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InfoSonics Corporation and Subsidiaries

Consolidated Statements of Comprehensive Operations

(unaudited)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,					For the Three Months Ended March 31,
	2009		2008			2009		2008			2010			2009

Net profit income (loss)	$	185,232	$	101,397		$	662,745	$	(2,544,998	)	$	(567,150	)	$	247,052
Other comprehensive income (loss):
Foreign currency translation adjustments	4,691		(3,504		)	19,580		(7,407		)	(13,001		)	16,954
Comprehensive income (loss)	$	189,923	$	97,893		$	682,325	$	(2,552,405	)	$	(580,151	)	$	264,006

Accompanying notes are an integral part of these financial statements.

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InfoSonics Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

For the Nine Months Ended
September 30,

2009

2008

Cash flows from operating activities:

Net income (loss)

$
662,745

$
(2,544,998
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

Depreciation

223,364

498,782

Provision for bad debt

152,920

(131,016
)
Impairment on fixed assets

—

(13,126
)
Provision for obsolete inventory

(42,000
)
(322,882
)
Stock option and stock grant expense

49,101

67,481

(Increase) decrease in

Accounts receivable

(32,118,046
)
133,197

Other receivable

3,599,492

(3,434,937
)
Inventory

577,699

5,497,980

Prepaids

(318,187
)
313,548

Other assets

(89,368
)
(7,412
)
Deferred tax asset current

—

(67,340
)
Deferred tax asset non current

—

(53,118
)
Increase (decrease) in

Accounts payable

(157,940
)
(8,961,021
)
Accrued expenses

1,936,650

6,445,564

Income tax liabilities

21,921

(39,560
)
Cash used in continuing operations

(25,501,649
)
(2,618,858
)
Cash provided by discontinued operations

304,833

5,042,304

Net cash provided by (used in) operating activities

(25,196,816
)
2,423,446

Cash flows from investing activities:

Purchase of property and equipment

(136,891
)
125,038

Cash used in discontinued operations

—

(192,142
)
Net cash used in investing activities

(136,891
)
(67,104
)

Cash flows from financing activities:

Borrowings from line of credit

192,070,828

186,370,107

Payments on line of credit

(176,278,746
)
(199,215,710
)
Cash received from stock options

—

34,286

Cash paid for treasury stock

(483,040
)
—

Cash provided by (used in) discontinued operations

—

—

Net cash provided by (used in) financing activities

15,309,042

(12,811,317
)

Effect of exchange rate changes on cash

21,011

(7,405
)

Net decrease in cash and cash equivalents

(10,003,654
)
(10,462,380
)

Cash and cash equivalents, beginning of period

24,714,753

20,652,154

Cash and cash equivalents, end of period

$
14,711,099

$
10,189,774

Cash paid for interest

217,013

513,999

Cash paid for taxes

—

—

~~Non-Cash Supplemental Disclosure:~~

During the nine months ended September 30, 2009, $4.15 million of the accrued legal settlement was paid by the insurance carrier and the corresponding receivable and liability have been reduced. (see Note #7 to the Company’s’ financial statements)

~~During the nine months ended September 30, 2009, the Company retired 265,053 shares of its treasury stock. The retirement reduced treasury stock and increased accumulated deficit by $65,559.~~

	For the Three Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	(567,150	)	$	247,052
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation	71,456			74,097
Provision for bad debt	(404,906		)	(5,079		)
Impairment on fixed assets	398			—
Provision for obsolete inventory	(12,442		)	—
Stock -based compensation expense	11,270			13,445
(Increase) decrease in
Accounts receivable	23,123,677			(14,014,159		)
Accounts receivable other	207,546			2,867,913
Inventory	72,502			376,592
Prepaids	(19,543		)	(364,814		)
Other assets	39,248			5,726
Increase (decrease) in
Accounts payable	(1,881,206		)	(8,303,771		)
Accrued expenses	347,412			(1,044,953		)
Income tax liabilities	2,750			8,030
Cash provided by (used in) continuing operations	20,991,012			(20,139,921		)
Cash provided by (used in) discontinued operations	(704,787		)	163,504
Net cash provided by (used in) operating activities	20,286,225			(19,976,417		)

Cash flows from investing activities:
Purchase of property and equipment	(89,139		)	(111,839		)
Net cash used in investing activities	(89,139		)	(111,839		)

Cash flows from financing activities:
Net Borrowings (Payments on) line of credit	(12,867,906		)	7,250,523
Cash paid for treasury stock	—			(36,557		)
Net cash provided by (used in) financing activities	(12,867,906		)	7,213,966

Effect of exchange rate changes on cash	13,001			16,032

Net increase (decrease) in cash and cash equivalents	7,316,179			(12,858,258		)

Cash and cash equivalents, beginning of period	18,418,066			24,714,753

Cash and cash equivalents, end of period	$	25,734,245		$	11,856,495
Cash paid for interest	23,331			27,885
Cash paid for taxes	—			—

Accompanying notes are an integral part of these financial statements.

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InfoSonics Corporation

Condensed Notes to Consolidated Financial Statements

(unaudited)

NOTE 1. Basis of Presentation

The accompanying unaudited consolidated financial statements and these condensed notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results are likely to differ from those estimates, but management does not believe such differences will materially affect the financial position or results of operations of InfoSonics Corporation (the “Company”), although they may. These unaudited consolidated financial statements and condensed notes should be read in conjunction with the financial statements and notes as of and for the year ended December 31, ~~2008~~2009 included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2008.~~2009. 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 Latin 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 ~~Corporation Chile y Compania Limitada,~~De Panama S.A, InfoSonics Colombia S.A., verykool Hong Kong Limited and verykool USA, Inc., 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 sheet as of ~~September 30, 2009,~~March 31, 2010, the unaudited consolidated statements of operations and the unaudited consolidated statements of comprehensive operations for the three ~~and nine~~ months ended ~~September 30, 2009~~March 31, 2010 and the unaudited consolidated statement of cash flows for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 are not necessarily indicative of the financial condition, operating results or cash flows that may be expected for the full fiscal year of ~~2009~~2010 or for any future period.

NOTE 2. Stock-Based Compensation

The Company has three equity incentive plans, the 2006 Equity Incentive Plan (“2006 Plan”), the 2003 Stock Option Plan (“2003 Plan”) and the 1998 Stock Option Plan (“1998 Plan”). Each of the plans has been approved by our stockholders. The 2006 Plan authorizes the grant of up to 1,000,000 shares for equity incentives. There are no options available for grant under the 2003 and the 1998 Plans.

As of ~~September 30, 2009,~~March 31, 2010, options to purchase ~~388,500~~273,500 shares, 12,444 shares and 400,000 shares were outstanding under the 2006 Plan, the 2003 Plan and the 1998 Plan, respectively. As of March 31, 2010, options to purchase ~~112,000~~113,500 shares ~~have been exercised or~~were forfeited under the 2006 Plan. The Company is also a party to non-plan option agreements with several non-employee ~~directors and several institutions.~~directors.

The Company’s stock-based compensation is classified in the same expense line items as cash compensation. Information about stock-based compensation included in the unaudited results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ is as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Three Months Ended March 31, (unaudited)
	2009		2008		2009		2008		2010		2009

Officer compensation	$	3,145	$	—	$	6,765	$	—	$	4,004	$	—
Non-employee directors	1,425		3,451		2,376		10,353
Sales, general and administrative	12,970		34,809		39,960		57,128		7,266		13,445
Total stock option expense, included in total operating expenses	$	17,540	$	38,260	$	49,101	$	67,481	$	11,270	$	13,445

~~Our~~The Company’s stock options vest on an annual or a monthly basis. The Company recognizes stock-based compensation ~~costs~~expense on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Such ~~amounts~~amount may change as a result of additional grants, forfeitures, modifications in assumptions and other factors. Income tax effects of share-based payments are

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recognized in the financial statements for those awards which will normally result in tax deductions under existing tax law. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010, we recorded an expense of $11,270 related to options previously granted. During

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the three months ended March 31, 2009, we recorded an expense of ~~$17,540 and $49,101, respectively,~~$13,445 related to options previously granted and options granted during the three and nine months ended September 30, 2009. During the three and nine months ended September 30, 2008, we recorded an expense of $38,260 and $67,481, respectively, related to options previously granted and options granted during the three and nine months ended September 30, 2008.granted. Under current U.S. federal tax law, we 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~~expense for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in our consolidated statements of operations.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in ~~2008 and 2009:~~2009 (there have been no grants in 2010): risk-free interest rate of ~~1.47% in 2008 and~~ 0.91% in 2009, based on the U.S. Treasury yields in effect at the time of grant; expected dividend yields of 0% as the Company has not, and does not intend to, ~~issue~~declare dividends; and expected ~~lives~~life of 3 to 6 years based upon the historical life of options. For grants in ~~2008 and~~ 2009, the expected volatility used ranged from 88% to 108%, based on the Company’s historical stock price fluctuations for a period matching the expected life of the options. As of ~~September 30, 2009,~~March 31, 2010, there was ~~$151,000~~$89,000 of total unrecognized compensation ~~costs~~expense related to ~~the~~ non-vested stock options. That ~~cost~~expense is expected to be recognized over the remaining weighted-average period of ~~4.25~~3.75 years.

A summary of option activity under all of the above plans as of ~~September 30, 2009~~March 31, 2010 and changes during the ~~nine~~three months then ended is presented in the table below:

	Shares	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Life	Aggregate Intrinsic Value	Shares	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at December 31, 2008	1,575,944	$	1.46	2.73	—
Outstanding at December 31, 2009						1,282,444	$	1.65	3.25	—
Granted	252,500	$	0.51	6.64	—	—	$	—	—	—
Exercised	—	$	—		—	—	$	—	—	—
Forfeited	72,500	$	1.52		—	596,500	$	0.51	—	—
Outstanding at September 30, 2009	1,755,944	$	1.32	2.91	—
Outstanding at March 31, 2010						685,944	$	1.07	2.67	—
Vested and expected to vest	1,755,944	$	1.32	2.91	—	685,944	$	1.07	2.67	—
Exercisable at September 30, 2009	1,434,763	$	1.45	2.18	—
Exercisable at March 31, 2010						490,305	$	1.21	1.51	—

A summary of the status of the Company’s non-vested options at ~~September 30, 2009~~March 31, 2010 and changes during the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 is presented below:

	Shares	Weighted-average grant-date fair value		Shares	Weighted-average grant-date fair value
Non-vested at December 31, 2008	146,660	$	1.27
Non-vested at December 31, 2009				255,285	$	0.72
Granted	252,500	$	0.51	—	$	—
Vested	37,979	$	1.14	7,146	$	1.97
Forfeited	40,000	$	1.04	52,500	$	0.51
Non-vested at September 30, 2009	321,181	$	0.72
Non-vested at March 31, 2010				195,639	$	0.73

NOTE 3. Earnings Per Share

Basic earnings per share are 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.

Common shares from the potential exercise of certain options and warrants have been excluded from the computation of diluted earnings per share because their exercise prices are greater than the Company’s weighted-average stock price for the period. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and 2009, the number of shares excluded was ~~1,007,791~~503,038 and ~~1,431,657,~~1,600,944, respectively. ~~For the three months ended September 30, 2008 the number of shares excluded was 2,957,628.~~

Since their effect would have been anti-dilutive for the nine months ended September 30, 2008, 3,150,644 common shares from the potential exercise of certain options and warrants have been excluded from the computation of net loss per share for the nine months ended September 30, 2008.

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NOTE 4. Income Taxes

The Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with ~~recognition~~applicable standards ~~established for certain tax positions.~~of the Financial Accounting Standards Board (“FASB”). 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. AtAs a result of this review, the ~~date of adoption, and as of December 31, 2008 and September 30, 2009, the Company does not have a liability for unrecognized tax benefits. The~~ Company concluded that at this time there are no uncertain tax ~~positions. There was~~positions, and there has been no cumulative effect on retained earnings.

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The Company is subject to U.S. federal income tax as well as income tax in multiple states and foreign jurisdictions. For all major taxing jurisdictions, the tax years ~~2003~~2004 through 2008 remain open to examination. As of ~~September 30, 2009,~~March 31, 2010, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.

The Company recognizes 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~~the Company’s financial position or ~~our~~ results of operations. For the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, deferred income tax assets and the corresponding valuation allowance increased by ~~$1,638,612.~~$224,200.

NOTE 5. Inventory

Inventory is stated at the lower of cost (first-in, first-out) or market and consists primarily of cellular phones and cellular phone accessories. The Company provides for the possible inability to sell its inventory by recording a reserve. As of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, the inventory reserve was ~~$119,556~~$99,693 and ~~$161,556,~~$112,135, respectively. From time to time, the Company has prepaid inventory as a result of payments for products which have not been received by the balance sheet date. As of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, the prepaid inventory ~~balances were $308,120~~balance was $84,053 and ~~$170,~~$119,145, respectively, which are included in ~~prepaids~~prepaid assets in the accompanying consolidated balance sheets. ~~Included in Assets of Discontinued Operations as of September 30, 2009 and December 31, 2008 are inventory balances of $1,069,434 and $1,307,463, respectively.~~ Inventory ~~consisted~~consists of the following:

	September 30, 2009			December 31, 2008
	(unaudited)			(audited)			March 31, 2010 (unaudited)			December 31, 2009 (audited)
Finished goods	$	3,626,970		$	4,536,890		$	3,462,877		$	3,535,379
Inventory in-transit	332,221			—
Inventory reserve	(119,556		)	(161,556		)	(99,693		)	(112,135		)
Net inventory	$	3,839,635		$	4,375,334		$	3,363,184		$	3,423,244

NOTE 6. Property and Equipment

Property and equipment are primarily located in the United States, with the exception of certain tooling and product molds ~~which are~~ located in Asia, and consisted of the following as of the dates presented:

	September 30, 2009 (unaudited)		December 31, 2008 (audited)		March 31, 2010 (unaudited)		December 31, 2009 (audited)
Machinery and equipment	$	453,030	$	469,411	$	396,337	$	471,953
Furniture and fixtures	106,314		106,314		127,594		106,314
Tooling and molds	482,668		330,828		549,779		481,984
Subtotal	1,042,012		906,553		1,073,710		1,060,251
Less accumulated depreciation	631,837		408,474		740,758		744,582
Total	$	410,175	$	498,079	$	332,952	$	315,669

Depreciation expense was ~~$102,156~~$71,456 and ~~$223,364~~$74,097 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and 2009, ~~respectively, and $161,725 and $498,782 for the three and nine months ended September 30, 2008,~~ respectively.

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NOTE 7. Accrued Expenses

As of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, accrued expenses consisted of the following:

September 30,
2009
(unaudited)

December 31,
2008
(audited)

Accrued product costs

$
6,092,978

$
3,070,058

Accrued legal settlement*

—

4,150,000

Other accruals (including taxes)**

3,147,762

84,032

Total

$
9,240,740

$
7,304,090

* As of September 30, 2009, $4.15 million of the accrued legal settlement was paid by our insurance carrier and is being held in an escrow account for the benefit of the plaintiffs of the class action lawsuit and derivative suit, and thus has been removed from the balance sheet at September 30, 2009.

** This amount includes general ~~accruals, amounts held on behalf of our vendor partners, and potential amounts owed to operational partners.~~

	March 31, 2010 (unaudited)		December 31, 2009 (audited)
Accrued product costs	$	2,133,572	$	1,476,677
Other accruals (including taxes)	3,879,300		4,188,783
Total	$	6,012,872	$	5,665,460

NOTE 8. Borrowings

~~On April 30, 2008,~~Pursuant to the ~~Company entered into a~~Company’s Loan, Security and Bulk Purchase Agreement and a Letter of Credit and Security Agreement (collectively, the “Agreement”) with Wells Fargo Century, Inc. (“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 the Company based on the expected collections of eligible receivables as well as value of the Company’s eligible inventory determined in accordance with the

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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.~~Agreement ($12.8 million as of March 31, 2010). At ~~September 30, 2009,~~March 31, 2010, the majority of ~~our~~the Company’s 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 the assets of the Company. The terms automatically roll over annually; however, the terms and conditions of such credit facility (including, without limitation, rates, eligibility, borrowing base and maximum line) may change. Subsequent to March 31, 2010, the Agreement was renewed under its current terms and conditions through April 2011. The interest rate for each borrowing under the credit facility is, at the option of the Company, either the Wells Fargo Bank N.A. prime rate minus 0.50% (3.25% ~~less~~minus 0.50% at ~~September 30, 2009)~~March 31, 2010) or the LIBOR rate plus 2.00% ~~(0.298%~~(0.292% plus 2.00% at ~~September 30, 2009)~~March 31, 2010). At ~~September 30, 2009,~~March 31, 2010, the amount drawn against the ~~Lender~~ line of credit was ~~$30,066,060~~$12,626,234 and the total amount available at ~~September 30, 2009~~March 31, 2010 was ~~$41,156,101.~~$12,778,276. As of ~~September 30, 2009,~~March 31, 2010, the Company was in compliance with the covenants of the credit facility. If any adverse events occur or we are unable to renew our credit facility or enter into an adequate credit relationship as needed, our business’ financial condition or operating results could be negatively affected.

The Company has no other notes payable.

~~NOTE 9. Stockholders’ Equity~~

~~Stock Options~~

~~Effective March 18, 2008 and May 13, 2008, the Company granted options to purchase an aggregate of 180,500 and 2,500 shares, respectively, of its common stock to certain non-executive employees~~ (the “Employee Options”). One-fourth of the total shares subject to these options became exercisable one year from the date of grant, and 1/48th of the total shares subject to these options become exercisable each month thereafter until fully vested. These options have exercise prices of $1.04 per share, which was the closing price per share of the Company’s common stock on each of March 18, 2008 and May 13, 2008, and expire six years from the date of grant. See Note 2 for Stock-Based Compensation discussion.

Effective May 19, 2009, the Company granted options to purchase an aggregate of 252,500 shares, of its common stock to certain executive and non-executive employees and the members of the Board of Directors (the “Employee Options”). One-fourth of the total shares subject to these options become exercisable one year from the date of grant, and 1/48th of the total shares subject to the options become exercisable each month thereafter until fully vested. These options have exercise prices of $0.51 per share, which was the closing price per share of the Company’s common stock on May 19, 2009, and expire six years from the date of grant. See Note 2 for Stock-Based Compensation discussion.

~~Treasury Stock~~

On December 15, 2008, the Company announced a share buyback program, authorizing up to $500,000 to be used for stock repurchases. As of September 30, 2009 and December 31, 2008, we had purchased 826,661 and 54,537 shares, respectively, at a total cost of $499,994 and $16,955, respectively. During the nine months ended September 30, 2009, the Company retired 265,053 shares of stock. The retirement reduced treasury stock and increased the accumulated deficit by $65,559.

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NOTE ~~10.~~9. Recent Accounting Pronouncements

Recently Adopted:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurement. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS No. 157, fair value measurements are disclosed by level within that hierarchy. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which permitted a one-year deferral for the implementation of SFAS No. 157 with regard to nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The Company adopted SFAS No. 157 for the fiscal year beginning January 1, 2008, except for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, which was adopted in the first quarter of 2009. The adoption of the remaining provisions of SFAS No. 157 did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51,” (SFAS 160). SFAS 160 amends Accounting Research Bulletin 51, “Consolidated Financial Statements to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.” This standard defines a noncontrolling interest, sometimes called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent’s equity; consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated statement of income; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. SFAS 160 became effective for the Company on January 1, 2009. The adoption of SFAS 160 did not have a material impact to our condensed consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures and Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133, (“SFAS No. 161”), which requires additional disclosures about objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and related interpretations, and how the derivative instruments and related hedged items affect our financial statements. SFAS No. 161 also requires disclosures about credit risk-related contingent features in derivative agreements. The adoption of SFAS No. 161 did not have a material impact to our condensed consolidated financial statements as the Company does not have derivative instruments for purposes of hedging activities.

In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP No. APB 14-1 nullifies EITF Issues No. 90-19 and No. 03-7 and amends No. 98-5, No. 99-1, No. 00-27, No. 04-8, No. 05-1 and No. 06-7. This FSP applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under FASB No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Under this FSP, companies are required to separately account for the liability and equity components of convertible debt by first determining the carrying amount of the liability component by measuring the fair value of a similar liability that does not have an associated equity component and then determining the carrying amount of the equity component embedded in the instrument by deducting the fair value of the liability component from the initial proceeds ascribed to the convertible debt instrument as a whole. The carrying amount of the equity component will then be amortized over the expected life of the debt to interest expense. The Company adopted the FSP during the first quarter of 2009, which did not have a material impact to the condensed consolidated financial statements as the Company does not have convertible notes outstanding which can be converted in whole or in part, to cash.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (SFAS 141(R)). SFAS 141(R) replaces SFAS No. 141, “Business Combinations,” (SFAS 141) and retains the fundamental requirements in SFAS 141, including that the purchase method be used for all business combinations and for an acquirer to be identified for each business combination. This standard defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. SFAS 141(R) requires an acquirer in a business combination, including business combinations achieved in states (step acquisition), to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquire at the acquisition date, measured at their fair values of that date, with limited exceptions. It also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. SFAS 141(R) became effective for the Company on January 1, 2009. The adoption of SFAS No. 141(R) did not have a material impact to our consolidated financial statements as the Company did not make any acquisitions in the first three quarters of 2009.

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In June 2008, the FASB ratified EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” (“EITF 07-5”). Paragraph 11(a) of SFAS No. 133, “Accounting for Derivatives and Hedging Activities, (“SFAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF 07-5 became effective for the Company beginning January 1, 2009. The ratification of EITF 07-5 did not have a material impact on the Company’s condensed consolidated financial statements.

On June 30, 2009, we adopted Statement of Financial Accounting Standards (SFAS) No. 165, “Subsequent Events,” (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of SFAS 165 did not have a material impact on the Company’s condensed consolidated financial statements.

On June 30, 2009, we adopted FASB Staff Position (FSP) No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance for identifying circumstances that indicate a transaction is not orderly. This guidance is necessary to maintain the overall objective of fair value measurements, which is that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The adoption of FSP FAS 157-4 had no impact on the condensed consolidated financial statements.

On June 30, 2009, we adopted FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” (FSP FAS 115-2/124-2). FSP FAS 115-2/124-2 amends existing other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The adoption of FSP FAS 115-2/124-2 had no impact on the condensed consolidated financial statements.

On June 30, 2009, we adopted FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (FSP FAS 107-1/APB 28-1). FSP FAS 107-1/APB 28-1 requires a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such disclosures include the fair value of all financial instruments, for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position; the related carrying amount of these financial instruments; and the method(s) and significant assumptions used to estimate the fair value. The adoption of FSP FAS 107-1/APB 28-1 had no impact on the condensed consolidated financial statements.

Effective January 1, 2009, we adopted FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” (FSP FAS 141(R)-1), which was issued on April 1, 2009. FSP FAS 141(R)-1 applies to all assets acquired and liabilities assumed in a business combination that arise from certain contingencies as defined in this FSP and requires (i) an acquirer to recognize at fair value, at the acquisition date, an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period otherwise the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be recognized initially at fair value; (iii) subsequent measurements of assets and liabilities arising from contingencies be based on a systematic and rational method depending on their nature and contingent consideration arrangements be measured subsequently in accordance with the provisions of SFAS 141(R); and (iv) disclosures of the amounts and measurement basis of such assets and liabilities and the nature of the contingencies. The provisions of FSP FAS 141(R)-1 did not have a material impact to our condensed consolidated financial Statements, as the Company did not make any acquisitions in the first three quarters of 2009.

On January 1, ~~2009, we~~2010, the Company adopted FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142) in order to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP. The adoption of FSP FAS 142-3 did not have a material impact to our condensed consolidated financial statements.

~~In June 2009, the Financial Accounting Standards Board (FASB)~~changes issued ~~SFAS No. 168, “The FASB Accounting Standards Codification~~TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162,” (SFAS 168). SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes the FASB

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~~Accounting Standards Codification~~TM ~~(Codification) as the source of authoritative accounting principles recognized~~ by the FASB to ~~be applied by nongovernmental entities~~accounting for variable-interest entities. These changes require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. The issuance of SFAS 168 and the Codification does not change GAAP. SFAS 168 became effective for us for the period ended September 30, 2009. Management has determined that the adoption of SFAS 168 did not have a ~~material impact on the condensed consolidated financial statements.~~

~~ISSUED (Not adopted yet):~~

In June 2009, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140” (“SFAS 166”). The objective of this statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets, the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 is effective for fiscal years and interim periods beginning after November 15, 2009. Management does not expect the adoption of SFAS 166 to have a material impact on the Company’s financial statements.

In June 2009, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). This Statement amends Interpretation 46(R)variable-interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a ~~variable interest entity. Before SFAS 167, Interpretation 46(R)~~variable-interest entity; to eliminate the solely quantitative approach previously required ~~reconsideration of whether an enterprise is~~for determining the primary beneficiary of a ~~variable interest entity only when specific events occurred. This Statement amends Interpretation 46(R)~~variable-interest entity; to add an additional reconsideration event for determining whether an entity is a ~~variable interest~~variable-interest entity when any changes in facts and circumstances occur such that ~~the~~ holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic ~~performance. SFAS 167~~performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable-interest entity. The adoption of these changes had no impact on the condensed consolidated financial statements.

On January 1, 2010, The Company adopted changes issued by the FASB to accounting for transfers of financial assets. These changes remove the concept of a qualifying special-purpose entity and remove the exception from the application of variable interest accounting to variable-interest entities that are qualifying special-purpose entities; limit the circumstances in which a transferor derecognizes a portion or component of a financial asset; define a participating interest; require a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and require enhanced disclosure. The adoption of these changes had no impact on the condensed consolidated financial statements.

Effective January 1, 2010, The Company adopted changes issued by the FASB on January 6, 2010, for a scope clarification to the FASB’s previously issued guidance on accounting for noncontrolling interests in consolidated financial statements. These changes clarify the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a consolidated subsidiary. An entity is ~~effective as~~required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the ~~beginning~~retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in its ownership interest of ~~each reporting period~~a subsidiary that ~~begins after November 15, 2009. Management~~ does not ~~expect~~result in a change of control of the subsidiary as an equity transaction. The adoption of these changes had no impact on the condensed consolidated financial statements.

Effective January 1, 2010, The Company adopted changes issued by the FASB on January 21, 2010, to disclosure requirements for fair value measurements. Specifically, the changes require a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. The changes also clarify existing disclosure requirements related to how assets and liabilities should be grouped by class and valuation techniques used for recurring and nonrecurring fair value measurements. The adoption of these changes had no impact on the condensed consolidated financial statements.

Effective January 1, 2010, The Company adopted changes issued by the FASB on February 24, 2010, to accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued, otherwise known as “subsequent events.” Specifically, these changes clarified that an entity that is required to file or furnish its financial statements with the SEC is not required to disclose the date through which subsequent events have been evaluated. Other than the elimination of disclosing the date through which management has performed its evaluation for subsequent events (see Note 12), the adoption of ~~SFAS 167 to have a material~~these changes had no impact on the ~~Company’s~~condensed consolidated financial statements.

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ISSUED (Not adopted yet):

In October 2009, the FASB issued changes to revenue recognition for multiple-deliverable arrangements. These changes require separation of consideration received in such arrangements by establishing a selling price hierarchy (not the same as fair value) for determining the selling price of a deliverable, which will be based on available information in the following order: vendor-specific objective evidence, third-party evidence, or estimated selling price; eliminate the residual method of allocation and require that the consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement to each deliverable on the basis of each deliverable’s selling price; require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis; and expand the disclosures related to multiple-deliverable revenue arrangements. These changes become effective for the Company on January 1, 2011. Management has determined that the adoption of these changes will not have an impact on the condensed consolidated financial statements, as the Company does not currently have any such arrangements with its customers.

In January 2010, the FASB issued changes to disclosure requirements for fair value measurements. Specifically, the changes require a reporting entity to disclose, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), separate information about purchases, sales, issuances and settlements (i.e., on a gross basis rather than as a single net number). These changes become effective for The Company beginning January 1, 2011. Other than the additional disclosure requirements, management has determined these changes will not have an impact on the condensed consolidated financial statements.

In ~~September 2009,~~March 2010, the FASB issued ~~Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). It updates the~~changes related to existing multiple element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting ~~and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure~~ requirements for ~~revenue recognition. ASU 2009-13 will be~~embedded credit derivatives. Specifically, the changes clarify the scope exception regarding when embedded credit derivative features are not considered embedded derivatives subject to potential bifurcation and separate accounting. These changes become effective for the ~~first annual reporting period beginning~~Company on ~~or after June 15, 2010, with early adoption permitted provided that~~July 1, 2010. Management has determined these changes will not have an impact on the ~~revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its~~condensed consolidated financial statements.

~~In September 2009, the FASB ratified final EITF Issue 08-01,~~ ~~Revenue Arrangements with Multiple Deliverables~~ (EITF 08-01). EITF 08-01 supersedes EITF 00-21, primarily codified into Accounting Standards Update (“ASU”) No. 2009-13, and was issued in response to practice concerns related to the accounting for revenue arrangements with multiple deliverables under EITF 00-21. EITF 08-1 applies to all deliverables in contractual arrangements in all industries in which a vendor will perform multiple revenue-generating activities, except when some or all deliverables in a multiple deliverable arrangement are within the scope of other revenue recognition guidance. EITF 08-1 is effective for fiscal years beginning after June 15, 2010. The effects of the adoption, if any, of EITF 08-1 on our consolidated financial position, results of operations and cash flows have not been determined.

~~In September 2009, the FASB ratified final EITF 09-3,~~ ~~Software Revenue Recognition~~ ~~. Entities that sell tangible products containing both hardware elements and software elements that are currently within the scope of AICPA Statement of Position (“SOP”) Number 97-2,~~ ~~Revenue Recognition for Software Products with Multiple Deliverables~~ ~~, (“SOP 97-2”), primarily codified into ASU 2009-14. This Issue would amend EITF 03-05,~~ ~~Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software~~ , primarily codified into ASC 985-605, to exclude from their scope all tangible products containing both software and no software components that function together to deliver the product’s essential functionality. EITF 09-3 is effective for fiscal years beginning after June 15, 2010. The effects of the adoption, if any, of EITF 09-3 on our consolidated financial position, results of operations and cash flows have not been determined.

NOTE ~~11.~~10. Discontinued Operations

During the quarter ended ~~September~~June 30, 2008, the Company assessed opportunities in the United States and Mexico, and the Company began to implement actions necessary to close sales operations in both of those countries, which actions continue, although were substantially completed by the end of ~~2008.~~2009. These two areas accounted for less than 1% of ~~our~~the Company’s net sales in the first three ~~and nine~~ months of ~~2009~~2010 and ~~2008.~~2009. Due to the changing environment and consolidation in the United States of the regional cellular carriers, along with the challenges of opening sales relations with the cellular carriers in Mexico, management determined that it was necessary to take decisive actions to mitigate further losses. The results of the unaudited discontinued operations are as follows:

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2009

2008

2009

2008

Net Sales

$
6,210

$
113,876

$
489,558

$
847,312

Gross profit

(2,210
)
(4,568
)
(313,778
)
(1,328,603
)
Operating income (loss)

(46,755
)
(257,571
)
(406,384
)
(3,569,356
)
Identifiable assets

3,014,776

4,733,849

3,014,776

4,733,849

Capital expenditures

—

—

—

—

Depreciation and amortization

—

5,420

—

20,787

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	For the Three Months Ended March 31, (unaudited)
	2010			2009
Net Sales	$	24,000		$	246,946
Gross profit	24,000			(155,304		)
Operating income (loss)	(6,068		)	(192,040		)
Identifiable assets	923,453			3,104,980

Liabilities of discontinued operations consist primarily of accounts payable. Assets of discontinued operations are as follows:

	September 30, 2009 (unaudited)		December 31,2008 (audited)		March 31, 2010 (unaudited)		December 31,2009 (audited)
Accounts Receivable	$	1,038,613	$	1,050,758	$	47,551	$	13,228
Inventory	1,069,434		1,307,463
Prepaid Taxes	890,958		897,955		847,671		850,694
Other Assets	15,771		8,641		28,231		15,974
Total	$	3,014,776	$	3,264,817	$	923,453	$	879,896

As of ~~September 30, 2009,~~March 31, 2010, the plans for the discontinued operations, although continuing to be implemented, were largely completed. However, the Company expects to continue to record potentially significant adjustments and expenses through discontinued operations as necessary.

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The Company ~~has~~ re-evaluated its discontinued operations as of ~~September 30, 2009~~March 31, 2010 in accordance with ~~FAS 144~~applicable FASB guidance due to the Company’s remaining discontinued operations being outstanding for more than one year since the declaration to discontinue.

~~The remaining accounts receivable and accounts payable are part of an ongoing arbitration currently in process, the timing of which is out of the Company’s control to settle.~~ The prepaid taxes identified above are in the process of being recovered from a foreign government, ~~also out of~~with the ability to settle beyond the Company’s control to settle. The remaining inventory has been marked to market and significantly discounted from the original cost to adjust for the unforeseen changes in the current economic condition and the markets for which the Company sells. The final resolution of one or more of these items could result in a potentially significant adjustment. The Company has taken action to reduce its prices to market and aggressively sell its remaining product. Pursuant to FAS 144, p.31, as these are out ofcontrol. As this matter is beyond the Company’s control classification as discontinued operations is still deemed appropriate.

NOTE ~~12.~~11. Geographic Information

The Company currently operates in one business segment. All fixed assets are located in Company or ~~third party~~third-party facilities in the United States and Asia. The unaudited net sales by geographical area for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ were:

	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended
	September 30, 2009		September 30, 2008		September 30, 2009		September 30, 2008		March 31, 2010 (unaudited)		March 31, 2009 (unaudited)
Central America	$	6,974,909	$	8,826,072	$	15,713,223	$	43,519,895	$	1,494,540	$	3,114,597
South America	58,287,069		44,057,776		153,879,977		136,337,191		26,046,503		39,510,521
Total	$	65,261,978	$	52,883,848	$	169,593,200	$	179,857,086	$	27,541,043	$	42,625,118

The unaudited net sales for the Company’s discontinued operations in the United States and Mexico for the three months ended ~~September 30,~~March 31, 2010 and 2009 were $24,000 and ~~2008 were $6,210 and $113,876,~~$246,946, respectively. ~~The unaudited net sales for the Company’s discontinued operations for the nine months ended September 30, 2009 and 2008 were $489,558 and $847,312, respectively.~~

NOTE ~~13.~~12. Commitments and Contingencies

~~Securities Class Actions~~

~~InfoSonics has settled the securities class action against the Company and certain of its officers and directors, captioned~~ ~~In Re: InfoSonics Corporation Securities Litigation~~, Lead Case No. 06 CV 1231, filed in the United States District Court for the Southern District of California. Plaintiffs’ third amended consolidated complaint had alleged violations of Section 10(b) of the Exchange Act and associated Rule 10b-5, Section 20(a) and Section 20A in connection with the announcement of the Company’s restatement of first quarter 2006 earnings and in connection with allegedly false and/or misleading statements related to the Company’s distribution of the VK Mobile phone. On October 17, 2008, the parties entered a Stipulation and Agreement of Settlement (the “Securities Settlement”) of the case, which provides for, among other things, a dismissal with prejudice of the lawsuit, releases of the defendants, and a payment by the Company or its insurer of $3.8 million to plaintiffs (inclusive of any plaintiffs’ attorneys fees, to be determined by the Court). The Securities Settlement further provides that defendants deny any liability or responsibility for the claims made and make no admission of any wrongdoing. On February 10, 2009, the Company’s insurer funded the full settlement payment. On May 5, 2009, the Court entered an order finally approving the Securities Settlement as fair and reasonable, and directing the clerk to enter final judgment and dismissing the action with prejudice. This settlement was fully funded and paid by the Company’s insurer.

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~~Derivative Action~~

~~InfoSonics has settled the derivative action purportedly on behalf of the Company against certain of its officers and directors, and the Company as a nominal defendant, captioned~~ ~~In Re InfoSonics Corporation Derivative Litigation~~, Lead Case No. 06 CV 1336, filed in the United States District Court for the Southern District of California. Plaintiffs’ consolidated complaint had alleged claims for violations of Section 14(a) of the Exchange Act, Sections 25402 and 25403 of the California Corporations Code, disgorgement under the Sarbanes-Oxley Act of 2002, breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, rescission, a constructive trust, and an accounting, in connection with the Company’s restatement of first quarter 2006 earnings and in connection with allegations of wrongdoing with respect to granting, exercising, accounting and reporting of the stock options that the Company granted in December 2005. On September 4, 2007, the Court granted defendants’ motion to dismiss for failure to make a demand on the board, and also granted with prejudice the motion to dismiss the Sarbanes-Oxley claim. On October 17, 2008, the parties entered into a Stipulation and Agreement of Settlement (the “Derivative Settlement”), which provides for, among other things, a dismissal with prejudice of the lawsuit, releases of the defendants, corporate governance changes and a payment by the Company or its insurer of plaintiffs’ attorneys fees to be ordered by the Court up to a maximum of $350,000. The Derivative Settlement further provides that defendants deny any liability or responsibility for the claims made and make no admission of any wrongdoing. The Company’s insurer funded the full settlement payment. On June 3, 2009, the Court approved the settlement and entered the final judgment and order of dismissal with prejudice of the case. This settlement was fully funded and paid by the Company’s insurer.

LG Electronics Litigation

On July 1, 2009, the Company filed suit in the Superior Court of the State of California, County of San Diego ~~(the Superior Court)~~ (Case No. 37-2009-00092797-CU-BT-CTL) against defendants LG Electronics, Inc., LG Electronics USA, Inc., LG Electronics Panama S.A., LG Electronics Inc. Chile LTDA, LG Electronics Guatemala S.A. de C.V. ~~(collectively LG)~~ and DOES ~~1-10 (and together with LG, the Defendants).~~1-10. The complaint alleges claims for interference with contractual relations/inducing breach of contract, intentional interference with prospective economic relations, negligent interference with prospective economic relations, breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment, fraud, promissory estoppel and violation of California Business and Professions Code §§ 17200, et seq. The Company is seeking in excess of $5 million in damages On July 31, 2009, the ~~Defendants~~defendants removed the case to federal court in San Diego, CA. ~~The defendants have~~On April 23, 2010, the Company filed ~~a motion to dismiss based on jurisdictional grounds. Such motion is currently pending.~~an amended complaint.

WeNasdaq Delisting Notice

On May 4, 2010, the Company received a Nasdaq Staff Deficiency letter indicating that for the prior thirty consecutive business days the bid price for its common stock had closed below the minimum $1.00 per share requirement for continued listing on The NASDAQ Global Market under Nasdaq Marketplace Rule 5450(a)(1). In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), the Company was provided an initial period of 180 calendar days, or until November 1, 2010, to regain compliance. The letter stated that the Nasdaq staff would provide written notification that the Company had achieved compliance with Rule 5450(a)(1) if at any time prior to November 1, 2010, the bid price of its common stock closed at $1.00 per share or more for a minimum of ten consecutive business days.

During this period before November 1, 2010, absent the occurrence of any unexpected events, the Company’s common stock is expected to continue to trade on The NASDAQ Global Market. If compliance with Nasdaq Marketplace 5450(a)(1) cannot be demonstrated by November 1, 2010, the staff of The Nasdaq Stock Market Listing Qualifications department is expected to deliver a written notification to the Company that its common stock will be delisted from The NASDAQ Global Market. If the Company receives a delisting notice, it may appeal the Nasdaq staff’s determination to a Listing Qualifications Panel. Alternatively, it may apply to transfer the listing of its common stock to The NASDAQ Capital Market or another exchange or trading market. The Company intends to monitor the bid price of its common stock and consider available options if its common stock does not trade at a level likely to result in its regaining compliance with Nasdaq’s minimum bid price rule.

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The Company may become involved in certain other legal proceedings and claims which arise in the normal course of business. Other than as described above, as of ~~September 30, 2009, we~~the filing date of this report, the Company did not have any significant litigation outstanding.

NOTE ~~14.~~13. Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses. The book value of all other financial instruments is representative of their fair values.

~~NOTE 15. Subsequent Events~~

~~Management evaluated all activity through November 16, 2009 (the issue date of~~Cash and cash equivalents are the ~~condensed consolidated~~Company’s only financial ~~statements)~~instruments required to be measured at fair value and ~~except as noted below, concluded that no subsequent events have occurred that would require recognition~~are measured using quoted prices for identical assets in ~~the condensed consolidated financial statements or disclosure in the Notes to the condensed consolidated financial statements.~~an identical market.

Effective October 6, 2009, the Company entered a separation agreement with one of its executives. Pursuant to the separation agreement, the Company made a lump sum severance payment of $75,000 (less withholdings), and in consideration for such payment, the executive provided a full release of all claims and the executive forfeited 463,500 (vested and unvested) options with a weighted average exercise price of $0.40.

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

Forward-Looking Statements and Other General Information

This discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and condensed notes thereto and other information included in this report and our Annual Report on Form 10-K for the year ended December 31, ~~2008~~2009 (including our ~~2008~~2009 audited consolidated financial statements and related notes thereto and other information). Our discussion and analysis of financial condition and results of operations are based upon, among other things, our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires us to, among other things, make estimates and assumptions that affect the reported amounts of assets

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and liabilities, the disclosures of contingent liabilities as of ~~and at~~ the ~~financial statement~~ date of our most recent balance sheet, and the reported amounts of revenues and expenses during the reporting periods. ~~On an ongoing basis, we~~We review our estimates and ~~assumptions.~~assumptions on an ongoing basis. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from these estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations, although they may. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments are outlined below in “Critical Accounting Policies.” All references to results of operations in this discussion generally are to results from continuing operations, unless otherwise noted.

We decided during the second quarter of 2008 to discontinue our operations in Mexico and the U.S. Although we have largely completed this process, we continue to implement and record potentially significant adjustments required in the financial statements, which affects certain amounts of our results of operations and the classifications on the balance sheet, statement of operations and statement of cash flows for prior periods, and as of prior dates, as well as our disclosure in this report, including management’s discussion and analysis. The amounts related to our discontinued operations are ~~now~~ shown separate from our continuing operations in our consolidated financial statements.

Safe Harbor Statement

~~The matters in this~~This report ~~that are forward-looking~~contains “forward-looking statements, ~~within the meaning of the Private Securities Litigation Reform Act of 1995,~~” including, without limitation, statements about future ~~revenues,~~impacts of a new Argentina tariff and possible actions to be taken in response, customer relationships, marketing of our verykool® products, sales levels, ~~operating income and margins, wireless handset sales, stock-based compensation expense, gain/loss in value of derivatives,~~ cost ~~synergies,~~reductions, operating efficiencies and profitability, ~~market share, and rates of return,~~that are based on current management expectations ~~that~~and which involve certain risks and uncertainties. These risks and uncertainties, in whole or in part, could cause such expectations to fail to be achieved and have a material adverse effect on our business, financial condition and results of operations, and include, without limitation: (1) intense competition internationally, including competition from alternative business models, such as manufacturer-to-carrier sales, which may lead to reduced prices, lower sales, lower gross margins, extended payment terms with customers, increased capital investment and interest costs, bad debt risks and product supply shortages; (2) our dependency on Latin American ~~sales;~~sales, a majority of which are from Argentina, which may be significantly reduced or eliminated as a result of the recently adopted tariff in Argentina; (3) our ability to successfully design, manufacture, introduce and sell our verykool® products and the related inventory risk of such products; (4) our ability to successfully establish, integrate and operate our new design facility in Beijing, China, (5) the extended ~~general~~effects of the global economic downturn; ~~(4)~~(6) an inability to secure adequate supply of competitive products on a timely basis and on commercially reasonable terms; ~~(5)~~(7) foreign exchange rate fluctuations, devaluation of a foreign currency, adverse governmental controls or actions, political or economic instability, or disruption of a foreign market, including, without limitation, the imposition, creation, increase or modification of tariffs, taxes, duties, levies and other charges and other related risks of our international operations, such as the ~~pending tax change~~recently adopted tariff in Argentina on certain electronics (including cellular phones), which could significantly increase selling prices to our customers and end-users; ~~(6) the~~(8) our ability to attract new sources of profitable business from the expansion of products or services orand risks associated with entry into new markets, including geographies, products and services; ~~(7)~~(9) an interruption or failure of our information systems or subversion of access or other system controls, which may result in a significant loss of business, assets, or competitive information; ~~(8)~~(10) significant changes in supplier terms and relationships; ~~(9)~~(11) termination of a

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supply or services agreement with a major supplier or product supply shortages; ~~(10)~~(12) continued consolidation in the wireless handset carrier market; ~~(11)~~(13) loss of business from one or more significant ~~customers; (12)~~customers, such as what we have experienced with a large customer in Argentina; (14) customer and geographical accounts receivable concentration risk and other related risks; ~~(13)~~(15) rapid product improvement and technological change resulting in inventory obsolescence; ~~(14)~~(16) terrorist or military actions; ~~(15)~~(17) the loss of a key executive officer or other key employees; ~~(16)~~(18) changes in consumer demand for multimedia wireless handset products and features; ~~(17)~~(19) our failure to adequately adapt to industry changes and to manage potential growth and/or contractions; ~~(18)~~(20) seasonal buying patterns; ~~(19)~~(21) uncertain political and economic conditions internationally; ~~(20)~~(22) the resolution of any litigation for or against ~~us; (21) our ability to successfully introduce~~the Company; and ~~sell our~~ ~~verykool~~~~® products and the related inventory risk of such products; and (22)~~(23) our ability to generate taxable income in future periods in order to utilize and realize any quarterly tax benefits recorded. Our actual results and condition could differ materially from those anticipated in our forward-looking statements.

We have instituted in the past, and continue to institute, changes to our strategies, operations and processes to address risks and uncertainties and to mitigate their impacts on our results of operations and financial condition. However, no assurances can be given that we will be successful in these efforts. For a further discussion of significant risk factors to consider, ~~concerning InfoSonics,~~ see “Risk Factors” below in this report and “Item 1A. Risk Factors” of ~~InfoSonics’~~our Annual Report on Form 10-K for the year ended December 31, ~~2008 and Quarterly Reports on Form 10-Q filed thereafter.~~2009. In addition, other risks or uncertainties may be detailed from time to time in ~~InfoSonics’~~our future SEC filings.

Overview

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

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Our distribution and solution services include product testing, approval and certification, warehousing, logistics services (packing, shipping and delivery), marketing campaigns, warranty services and end-user support. These services are provided for OEMs and our verykool® ~~branded~~-branded wireless handsets and accessories ~~in order~~ to facilitate sales to network carriers, agents, resellers, distributors, independent dealers and retailers in Central and South America. In addition, for our verykool® ~~branded~~-branded products, we design, test and contract with manufacturers to build these products.

~~Due to seasonal and other factors, our~~Our interim financial condition or operating results may not be indicative of the entire fiscal year ~~2009~~2010 or other future financial condition or operating results. Our financial condition and operating results are influenced by several seasonal, general economic and other factors, which may cause our financial condition and operating results to fluctuate on a quarterly basis, including, but not limited to, inventory management and obsolescence, the timing and introduction of new products by our suppliers and competitors, promotions and subsidies by network operators, technical and certification delays by industry bodies ~~as well as~~and operators, purchasing and payment patterns of customers, the timing of holidays, the success of our proprietary verykool® products line and other events affecting our consumers.

Areas of Management Focus and Performance Indicators

We focus on the needs of our customers, developing and maintaining close relationships with manufacturers, ~~looking to expand~~seeking expansion in current and ~~enter into~~ new markets, and sourcing and developing new and innovative products, while maintaining close attention to operational efficiencies and costs. We are particularly focused on increasing shipping volumes and improving efficiencies to achieve ~~higher levels of~~ 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 for our own proprietary line of verykool® handsets. Performance indicators that are important for the monitoring and management of our business include operating and net income, cost of sales and gross margin percentage, operating expenses as a percent of revenues, and overall net sales growth, as well as balances of accounts receivable and inventory. We make extensive use of our customized information system to closely monitor all aspects of our business, including customer relationship management, intelligent purchasing, inventory control, inventory flow, ~~line item~~line-item margin control for every order, and ~~weighted average~~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.

Management and employees ~~spend a significant amount of time traveling~~frequently travel to Latin America and Asia ~~visiting~~to spend time with key customers, suppliers and employees. We believe that these relationships are vital to our success, and we will continue to dedicate a significant amount of time to developing these relationships.

13 ~~this area.~~

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Industry Trends and Risks

~~According to~~Since 2008, a June 2009 report by Cowen and Company, overall worldwide wireless handset sales increased by approximately 6% in 2008. However, according to the Cowen report, they are forecasted to decrease in 2009 by 8%, before returning to growth in 2010 and 2011, with growth estimated at 7% and 4%, respectively. 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 ~~current~~extended effects of the recent 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 during the first nine months of 2009 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 ~~which~~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, ~~in particular,~~ our industry has been impacted by the recent worldwide economic slowdown. ~~We believe that some~~Some of the countries in the regions where we operate, particularly in Central America, have close economic relations with the United States, and we believe that weak economic conditions in the United States have ~~been impacted by this economic situation. We believe this~~adversely impacted consumer demand for the wireless handsets we sell in ~~some of the~~those countries, ~~we operate,~~ and ~~therefore~~as a result our overall operations, including net sales, during the first ~~half~~quarter of ~~2009 were adversely impacted. We~~2010. Although we began to ~~see~~experience a small increase in the demand for handsets in the third quarter of 2009, ~~which positively impacted our net sales for the quarter. We~~we have also begun to ~~see~~observe a decrease in some subsidies offered by operators in the region, which increases the handset price to the consumer, ~~and this is impacting~~reducing overall handset volumes. We are also beginning to see more ~~low cost~~low-cost manufacturers gaining traction with ~~entry level~~entry-level products, which is ~~impacting~~negatively affecting both our OEM and verykool™ sales in the ~~entry level~~entry-level segment.

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~~Company Specific~~Company-Specific Trends and Risks

Our long-term strategy ~~incorporates overall~~targets market growth for the various elements for our business, which we hope will result in future growth as global economic conditions recover. Our verykool® proprietary line of products, for which we had several models selling as of ~~September 30, 2009, continued to show increased orders and sales during the first nine months of 2009 and~~March 31 2010, is expected to become an increasing part of our overall business in the future.

~~Our~~ ~~verykool®~~ products continue to increase product diversification in Central and South America, which we believe should continue to be beneficial as we move forward and work towards continued profitability. We have more control overArgentina, one of the ~~production and supply of our~~ ~~verykool~~® line of products than the OEM products we distribute. On a quarterly year-over-year basis, we were able to increase our gross margins to 6.6% for the quarter ended September 30, 2009, compared to 5.5% for the quarter ended September 30, 2008. These results were primarily due to product mix shift, including increased sales of higher-margin products (including our ~~verykool®~~ ~~products), better product sourcing for our~~ ~~verykool®~~ ~~line of products and beneficial purchasing opportunities.~~

~~Argentina, a country~~countries where we ~~sell~~have historically sold a significant amount of OEM products and where we generated 87% of our ~~products, purportedly~~net sales in 2009, passed a new tariff in November 2009 ~~potentially impacting~~affecting certain imported electronics, including ~~cellular~~wireless handsets. ~~At this time we are unaware of the timing and any necessary final approval of this tariff. However, from the preliminary information we have obtained, this~~This new tariff could impact the pricing at the point of sale in excess of 30%, and ~~could have an impact on the~~it will reduce significantly our overall ~~consumer demand and the~~OEM sales volume in Argentina. ~~For the year ended December 31, 2008~~This tariff had a material adverse impact on our sales, results of operations and ~~the nine months ended September 30, 2009, sales of~~prospects for our OEM products in Argentina ~~represented approximately 66% and 87%, respectively~~in the first three months of ~~our total net sales.~~2010. We ~~are unable to assess when or if~~believe that this tariff will be finally implemented, and if implemented, what specific impact it could have on our business and prospects in Argentina. However, if implemented, a significant increase in importation tariffs couldcontinue to have a material adverse impact on our sales, results of operations and prospects for our OEM products in Argentina.

During the first three months of 2010, we provided products and services to approximately 25 customers in Central and South America. Our three largest customers in this period, all carriers in South America, represented 43%, 28% and 11% of our net sales. In 2010, a customer accounting for 28% of our net sales for 2009 began significantly reducing its purchases from us as a result of the newly enacted Argentina tariff. Additional Argentina customers are expected to decrease or eliminate their purchases of imported wireless handsets in the coming fiscal quarters.

Recent Events

~~Effective October 6, 2009,~~On May 4, 2010, we ~~entered~~received a ~~separation agreement~~Nasdaq Staff Deficiency letter indicating that for the prior thirty consecutive business days the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing on The NASDAQ Global Market under Nasdaq Marketplace Rule 5450(a)(1). In accordance with ~~one~~Nasdaq Marketplace Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until November 1, 2010, to regain compliance. The letter stated that the Nasdaq staff would provide written notification that we had achieved compliance with Rule 5450(a)(1) if at any time prior to November 1, 2010, the bid price of our ~~executives. Pursuant~~common stock closed at $1.00 per share or more for a minimum of ten consecutive business days.

During the period before November 1, 2010, absent the occurrence of any unexpected events, our common stock is expected to continue to trade on The NASDAQ Global Market. If compliance with Nasdaq Marketplace 5450(a)(1) cannot be demonstrated by November 1, 2010, the ~~separation agreement,~~staff of The Nasdaq Stock Market Listing Qualifications department is expected to deliver a written notification to us that our common stock will be delisted from The NASDAQ Global Market. If we ~~made~~receive a ~~lump sum payment~~delisting notice, we may appeal the Nasdaq staff’s determination to a Listing Qualifications Panel. Alternatively, we may apply to transfer the listing of ~~$75,000 (less withholdings), and in consideration for such payment,~~our common stock to The NASDAQ Capital Market or another exchange or trading market. We intend to monitor the ~~executive provided a full release of all claims and the executive forfeited 463,500 (vested and unvested) options, with a weighted average exercise~~bid price of ~~$0.40.~~our common stock and consider available options if our common stock does not trade at a level likely to result in our regaining compliance with Nasdaq’s minimum bid price rule.

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Results of Operations

Three months ended ~~September 30, 2009~~March 31, 2010 compared with three months ended ~~September 30, 2008~~March 31, 2009

Net Sales

For the three months ended ~~September 30, 2009,~~March 31, 2010, our net sales from continuing operations ~~of $65.3 million increased 23%~~decreased 35% compared to ~~our net sales from continuing operations of $52.9 million for~~ the same period last ~~year.~~year, to $27.5 million from $42.6 million for the three months ended March 31, 2009. The average selling price of wireless handsets sold in the three months ended ~~September 30, 2009 increased 18%, as~~March 31, 2010 decreased 23% compared to the same period last year, due primarily to the slower global economy, resulting in increased ~~volume~~volumes of ~~higher-priced~~lower-priced handsets, including some of our verykool® and OEM products. ~~This increase was in conjunction with a 10% increase in overall wireless handset sales volume.~~ The geographic mix of net sales shifted slightly in the three months ended ~~September 30, 2009~~March 31, 2010 as sales in South America were ~~more than 89%~~95% of net sales, as compared to ~~83%~~93% of net sales for the same period last year. Sales in Central America decreased to ~~11%~~5% of total net sales in the three months ended ~~September 30, 2009 as~~March 31, 2010, compared to ~~17%~~7% for the same period last year. Sales in Central America ~~increased~~decreased sequentially to ~~11%~~5% of total net sales in the three months ended ~~September 30, 2009, as~~March 31, 2010, compared to 9%8% in the prior quarter. These regional shifts in net sales resulted from the factors discussed below.

	For the Three Months Ended September 30,						For the Three Months Ended March 31,
	2009			2008			2010			2009
	(Dollar amounts in thousands) (unaudited)						(Dollar amounts in thousands) (unaudited)
Net sales	$	65,262		$	52,884		$	27,541		$	42,625
Units sold, increase (decrease) over prior year	10		%	(22		)%	(16		)%	(44		)%
Average selling price, increase over prior year	18		%	2		%
Average selling price, increase (decrease) over prior year							(23		)%	15		%

Net Sales by Geographic Region

In South and Central America, we have continued to work to ~~expand~~retain our customer base ~~as well as our~~and geographic presence by seeking ~~additional~~new customers and ~~further~~additional business with existing ~~customers for both~~customers. In addition, we have continued efforts to market and sell our ~~OEM and~~ proprietary verykool® ~~products.~~ line of products in South and Central America. In South America, net sales were ~~$58.3~~$26.0 million for the

~~Table of Contents~~

three months ended ~~September 30, 2009,~~March 31, 2010, a ~~32% increase~~34% decrease from the same period last year. ~~This increase was primarily due to increased~~Our sales in ~~existing countries~~Argentina, where we ~~sell~~generated 87% of our net sales in 2009 and 95% for the three months ending March 31, 2010, has been materially adversely affected by the new tariff described above. We have experienced a significant decrease in sales to Argentina as of the date of this report, and 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 manufacturing relationships in Argentina that eliminate the tariff on our OEM and proprietary products, ~~primarily Argentina.~~ focusing on increasing sales in other countries and aligning our cost structure with the level of sales.

In Central America, net sales decreased ~~21%~~52% to ~~$7.0~~$1.5 million for the three months ended ~~September 30, 2009,~~March 31, 2010, which was primarily due to the continuing low demand during the quarter, which we believe ~~was~~is related to the worldwide and regional economic downturn. Despite the year-over-year declines, we have seen sequential quarterly improvement in Central America since the first quarter of 2009. The third quarter of 2009 increased 24% over the second quarter of 2009, and 124% over the first quarter of 2009.

	For the Three Months Ended September 30,				Increase		For the Three Months Ended March 31,
	2009		2008		(Decrease)		2010		2009		(Decrease)
	(Dollar amounts in thousands) (unaudited)						(Dollar amounts in thousands) (unaudited)
Central America	$	6,975	$	8,826	(21	)%	$	1,495	$	3,115	(52	)%
South America	58,287		44,058		32	%	26,046		39,510		(34	)%
Total	$	65,262	$	52,884	23	%	$	27,541	$	42,625	(35	)%

Cost of Sales, Gross Profit and Gross Margin

For the three months ended ~~September 30, 2009,~~March 31, 2010, cost of sales was ~~$60.9~~$26.1 million, or ~~93.4%~~94.8% of net sales, and gross margin was ~~6.6%~~5.2%, as compared with ~~$50.0~~cost of sales of $39.3 million, or ~~94.5%~~92.1% of net sales, and gross margin ~~at 5.5%~~of 7.9% for the same period last year. The ~~increase~~decreases in our cost of sales and ~~increase~~ in gross margin were due to product mix shift, including increased sales of ~~higher-margin~~lower-margin products (including our entry-level verykool® ~~products), better product sourcing for our~~ ~~verykool®~~ ~~line of products and beneficial purchasing opportunities.~~products.

	For the Three months Ended March 31,
	2010			2009			Decrease
	(Dollar amounts in thousands) (unaudited)
Net sales	$	27,541		$	42,625		(35	)%
Cost of sales	26,100			39,270			(34	)%
Gross profit	$	1,441		$	3,355		(57	)%
Gross margin	5.2		%	7.9		%

~~For the three months ended September 30, 2009, our gross profit increased 49% to $4.3 million from $2.9 million for the same period last year. This increase in gross profit was primarily the result~~

Table of ~~the increased net sales and of the factors which increased our gross margin as described above.~~Contents

For the Three months
Ended September 30,

2009

2008

Increase

(Dollar amounts in thousands)
(unaudited)

Net sales

$
65,262

$
52,884

23
%
Cost of sales

60,928

49,982

22
%
Gross profit

$
4,334

$
2,902

49
%
Gross margin

6.6
%
5.5
%
20
%

Operating Expense and Operating Income (Loss) from Continuing Operations

For the three months ended ~~September 30, 2009,~~March 31, 2010, operating expense ~~increased 25%, as~~decreased 31% compared ~~with~~to the same period last year. As a percentage of net sales from continuing operations, operating expense increased ~~slightly~~ to ~~6.2%~~7.2% in the three months ended ~~September 30, 2009, as~~March 31, 2010, compared with ~~6.1%~~6.7% for the same period last year. The ~~increase~~decrease in total operating expense was related to the ~~opening of a new market~~decrease in ~~South America and other support required in additional markets due to the global and regional economic downturn. However,~~net sales described above, as management took action to reduce fixed operational costs to match current market conditions. Management continues to review expenses in an effort to better match the operational costs with the future business opportunities, including by shifting expenses from a fixed to a variable ~~component.~~components when possible. We believe such measures will assist us as we strive to ~~maintain~~achieve profitability in the current volatile market.

~~Table of Contents~~

~~Operating Expense~~

For the Three Months
Ended September 30,

2009

2008

Increase

(Dollar amounts in thousands)
(unaudited)

Net sales

$
65,262

$
52,884

23
%
Operating expense

$
4,023

$
3,211

25
%
Percentage of net sales

6.2
%
6.1
%
2
%

For the three months ended ~~September 30, 2009,~~March 31, 2010, our operating loss from continuing operations was $533,000, compared with operating income from continuing operations ~~was $311,000, as compared with operating loss from continuing operations~~ of ~~$309,000~~$478,000 for the same period last year. As a percentage of net sales, operating ~~income~~loss from continuing operations was ~~0.5%~~1.9% for the three months ended ~~September 30, 2009,~~March 31, 2010, compared to ~~a loss~~operating income from continuing operations of ~~0.6%~~1.1% for the same period last year. The ~~increase in~~ operating ~~income~~loss from continuing operations was a result of the ~~increase~~decreases in net sales, gross margin and gross profit due to the factors discussed above.

Operating Expense

	For the Three Months Ended March 31,
	2010			2009			Decrease
	(Dollar amounts in thousands) (unaudited)
Net sales	$	27,541		$	42,625		(35	)%
Operating expense	$	1,974		$	2,877		(31	)%
Percentage of net sales	7.2		%	6.7		%

Operating Income (Loss) from Continuing Operations

	For the Three Months Ended September 30,								For the Three Months Ended March 31,
	2009			2008			Increase		2010			2009			Decrease
	(Dollar amounts in thousands) (unaudited)								(Dollar amounts in thousands) (unaudited)
Net sales	$	65,262		$	52,884		23	%	$	27,541		$	42,625		(35	)%
Operating income (loss) from continuing operations	$	311		$	(309	)	201	%	$	(533	)	$	478		(224	)%
Percentage of net sales	0.5		%	(0.6		)%	n/m		(1.9		)%	1.1		%

Other Income ~~(Expense)~~and Expense

For the three months ended ~~September 30, 2009,~~March 31, 2010, we incurred ~~$80,000~~$23,000 of interest expense, compared with ~~$34,000~~$28,000 for the same period last year. This iswas primarily due to a ~~higher~~lower average outstanding balance on our line of credit, resulting from, among other things, ~~increased~~decreased sales and ~~increased~~decreased accounts receivable levels as compared to the same period in the prior year. We expect to continue to regularly ~~utilize amounts~~draw on our revolving line of credit, which will impact our interest expense in future ~~periods depending on applicable interest rates and outstanding balances, among other things.~~periods.

During the three months ended September 30, 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 of $85,000 related to revenue sharing negotiations and an insurance settlement.

For the Three Months
Ended September 30,

Increase

2009

2008

(Decrease)

(Dollar amounts in thousands)

(unaudited)

Other Income

$
7

$
653

(99
)%
Interest income (expense)

(80
)
(34
)
(135
)%
Total other income (expense)

$
(73
)
$
619

(112
)%

~~Income (Loss) from Continuing Operations (before provision for income taxes)~~

During the three months ended September 30, 2009, our net income from continuing operations before income taxes was $238,000, as compared to income of $310,000 for the same period last year. This net income from continuing operations was primarily due to the increased gross margin and gross profit discussed above.

	For the Three Months Ended March 31,
	2010			2009			(Decrease)
	(Dollar amounts in thousands)
	(unaudited)
Other loss	$	(1	)	$	—		0	%
Interest income (expense)	(23		)	(28		)	(17	)%
Total other income (expense)	$	(24	)	$	(28	)	(14	)%

Loss from Discontinued Operations (net of tax)

During the three months ended June 30, 2008, we assessed opportunities in the United States and Mexico and began to implement actions necessary to close sales operations in both of those countries, which actions, although largely complete, we continued ~~to execute~~ in the ~~third~~first quarter of ~~2009.~~2010. For the three months ended ~~September 30, 2009,~~March 31, 2010, we incurred a loss from discontinued operations of ~~$47,000, as~~$6,000, compared to a loss of ~~$81,000~~$193,000 from discontinued operations for the same period last year. The loss from discontinued operations resulted as we continued to wind down our business in the United States and Mexico. As of September 30, 2009, our plans for the discontinued operations were substantially complete. However, weWe expect to continue to record adjustments and expenses through ~~the~~ discontinued operations as necessary. ~~One or more of these adjustments could be potentially significant.~~

~~Net Income (Loss)~~

During the three months ended September 30, 2009, our net income was $185,000, $0.01 per diluted share as compared to net income of $101,000, $0.01 per diluted share for the same period last year. Our net income resulted primarily from our increased gross margin and gross profit, which was offset by the increased operating expenses as discussed above.

~~Table of Contents~~

~~Nine months ended September 30, 2009 Compared with nine months ended September 30, 2008~~

~~Net Sales~~

For the nine months ended September 30, 2009, our net sales from continuing operations of $169.6 million decreased 6% compared to our net sales from continuing operations of $179.9 million for the same period last year. The average selling price of wireless handsets sold in the nine months ended September 30, 2009 increased 15%, as compared to the same period last year, due primarily to increased volume of higher-priced handsets, including some of our ~~verykool®~~ and OEM products. This increase was offset by a 14% decrease in overall wireless handset sales volume, primarily due to the impact of the economic slowdown in the markets we serve during the second half of 2008 and the first six months of 2009. The geographic mix of net sales shifted in the nine months ended September 30, 2009 as sales in South America increased to approximately 91% of net sales, as compared to approximately 76% of net sales for the same period last year. Sales in Central America decreased to approximately 9% of total net sales in the nine months ended September 30, 2009, as compared to approximately 24% for the same period last year. These regional shifts in net sales were the result of the factors discussed both above and below.

For the Nine Months
Ended September 30,

2009

2008

(Dollar amounts in thousands)
(unaudited)

Net sales

$
169,593

$
179,857

Units sold, increase (decrease) over prior year

(13
)%
12
%
Average selling price, increase (decrease) over prior year

15
%
(2
)%

~~Net Sales by Geographic Region~~

In South and Central America, we have continued to work to expand our customer base as well as our geographic presence by seeking additional customers and increased penetration with existing customers for both our OEM and proprietary ~~verykool®~~ products. In South America, net sales were $153.9 million for the nine months ended September 30, 2009, a 13% increase from the same period last year. This increase was primarily due to increased sales in existing countries where we sell products, primarily Argentina. In Central America, net sales decreased 64% to $15.7 million for the nine months ended September 30, 2009, which was primarily due to the continuing low demand during the period, which we believe was related to the worldwide and regional economic downturn. Despite the year-over-year declines we have seen sequential quarterly improvement in Central America since the first quarter of 2009.

For the Nine Months
Ended September 30,

Increase

2009

2008

(Decrease)

(Dollar amounts in thousands)
(unaudited)

Central America

$
15,713

$
43,520

(64
)%
South America

153,880

136,337

13
%
Total

$
169,593

$
179,857

(6
)%

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

For the nine months ended September 30, 2009, cost of sales was $157.8 million, or 93.1% of net sales, and gross margin was 6.9%, as compared with $170.1 million, or 94.6% of net sales, and gross margin of 5.4% for the same period last year. The decrease in our cost of sales and increase in gross margin were due to product mix shift, including increased sales of higher-margin products (including our ~~verykool®~~ ~~products), better product sourcing for our~~ ~~verykool®~~ ~~line of products and beneficial purchasing opportunities.~~

16~~Table of Contents~~

For the nine months ended September 30, 2009, our gross profit increased 21% to $11.8 million from $9.7 million for the same period last year. This increase in gross profit was primarily the result of our increased gross margin as described above.

For the Nine Months
Ended September 30,

Increase

2009

2008

(Decrease)

(Dollar amounts in thousands)
(unaudited)

Net sales

$
169,593

$
179,857

(6
)%
Cost of sales

157,832

170,141

(7
)%
Gross profit

$
11,761

$
9,716

21
%
Gross margin

6.9
%
5.4
%
28
%

~~Operating Expense and Operating Income (Loss) from Continuing Operations~~

For the nine months ended September 30, 2009, operating expense increased 3%, as compared with the same period last year. As a percentage of net sales, operating expense increased to 6.2% in the nine months ended September 30, 2009, as compared with 5.6% for the same period last year. The increase in operating expense as a percentage of net sales was primarily due to the decrease in total net sales, as well as increased variable operating expenses related to in-country brand efforts. However, management took action to reduce overall fixed operational costs to match current market conditions, by moving some fixed expenses to be variable, including a realignment of sales and marketing expenses. Management continues to review expenses in an effort to better match the operational costs with the future business opportunities. We believe such measures will assist us as we strive to maintain profitability in the current volatile market.

For the nine months ended September 30, 2009, our operating income from continuing operations was $1.3 million, as compared with operating loss from continuing operations of $412,000 for the same period last year. As a percentage of net sales, operating income from continuing operations was 0.8% for the nine months ended September 30, 2009, compared to an operating loss from continuing operations of 0.2% for the same period last year. The increase in operating income from continuing operations was a result of the increase in gross margin and gross profit as well as the factors discussed above.

~~Operating Expense~~

For the Nine Months
Ended September 30,

Increase

2009

2008

(Decrease)

(Dollar amounts in thousands)
(unaudited)

Net sales

$
169,593

$
179,857

(6
)%
Operating expense

$
10,459

$
10,128

3
%
Percentage of net sales

6.2
%
5.6
%
11
%

~~Operating Income (Loss) from Continuing Operations~~

For the Nine Months
Ended September 30,

Increase

2009

2008

(Decrease)

(Dollar amounts in thousands)
(unaudited)

Net sales

$
169,593

$
179,857

(6
)%
Operating income (loss) from continuing operations

$
1,302

$
(412
)
416
%
Percentage of net sales

0.8
%
(0.2
)%
n/m

Table of Contents

~~Other~~Net Income ~~(Expense)~~(Loss)

~~During~~For the ~~nine~~three months ended September 30, 2009, we incurred $217,000 of interest expense, compared to $477,000 for the same period last year, primarily due to a lower average outstanding balance on our line of credit, resulting from, among other things, lower inventory levels as compared to the same period in the prior year, offset by increased levels of accounts receivable in the current period. We expect to continue to regularly utilize amounts on our revolving line of credit, which will impact our interest expense in future periods depending on applicable interest rates and outstanding balances, among other things.

For the Nine Months
Ended September 30,

Increase

2009

2008

(Decrease)

(Dollar amounts in thousands)

(unaudited)

Other Income

$
8

$
583

(99
)%
Interest expense

(217
)
(477
)
(55
)%
Total other income (expense)

$
(209
)
$
106

(297
)%

~~Income (Loss) from Continuing Operations (before provision for income taxes)~~

~~During the nine months ended September 30, 2009,~~March 31, 2010, our net ~~income from continuing operations before income taxes~~loss was ~~$1.1 million, as compared to~~$567,150, or a loss of ~~$306,000~~$0.04 per diluted share, compared to net income of $247,052, or earnings of $0.02 per diluted share, for the same period last year. This net ~~income from continuing operations~~loss was primarily due to the ~~increased gross margin and other factors as discussed above.~~

~~Loss from Discontinued Operations (net of tax)~~

~~During the three months ended June 30, 2008, we assessed opportunities in the United States and Mexico, and began to implement actions necessary to close~~decreased net sales, operations in both of those countries, which actions, although largely complete we continued to execute in the first nine months of 2009. For the nine months ended September 30, 2009, we incurred a loss from discontinued operations of approximately $406,000, as compared to a loss of $2.2 million from discontinued operations for the same period last year. The loss from discontinued operations resulted as we continued to wind down our business in the United States and Mexico. As of September 30, 2009, our plans for the discontinued operations were substantially complete. However, we expect to continue to record adjustments and expenses through the discontinued operations, as necessary. One or more of these adjustments could be potentially significant.

~~Net Income (Loss)~~

During the nine months ended September 30, 2009, our net income was $663,000, as compared to a loss of $2.5 million for the same period last year. Our net income from continuing operations resulted primarily from our increased gross margin and gross profit discussed above.

Financial Condition, Liquidity and Capital Resources

We generally use cash from our ~~sale~~sales of products, lines of credit (bank and vendor) and ~~the~~from time to time sale ~~of securities~~ and exercise of ~~stock options (from time~~securities to ~~time) to~~ provide ~~the~~ capital needed to support our business. As of September 30, 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.

Net Cash ~~Used in~~Provided by (Used in) Operating Activities

At ~~September 30, 2009,~~March 31, 2010, we had ~~$14.7~~$25.7 million in cash, ~~a decrease~~an increase of ~~$10.0~~$7.3 million from December 31, ~~2008, and we had $30.1~~2009 due to an increased level of collection of our accounts receivables. The net cash provided by operating activities was $20.3 million ~~outstanding under our bank line of credit, an increase of $15.8 million from December 31, 2008.~~ ~~During~~for the ~~nine~~three months ended September 30, 2009, we used cash and continued to leverage our bank line of credit to fund our operations. The increase in our use of the bank line of credit was directly related to the significantly increased levels ofMarch 31, 2010, which resulted primarily from decreased accounts receivable and ~~our taking advantage of beneficial purchasing terms during the nine months ended September 30, 2009.~~inventory levels partially offset by decreased accounts payable and an increase in accrued expenses. The net cash used in operating activities was $25.2 million for the nine months ended September 30, 2009 compared to net cash provided from operating activities of $2.4 million for the same period last year. The change resulted primarily from significantly increased accounts receivable and decreased other receivables and decreased inventory. Trade accounts receivable increased by $32.1 million and other receivables decreased by $3.6 million from December 31, 2008. The increasedecrease in accounts receivable was primarily due to the decrease in sales activity ~~towards the later part of the period~~ and the standard payment terms of sales we provide our customers. ~~The decrease in other receivables was due to the settlement of our class action and derivative lawsuits, which were paid by our insurance carrier. Inventory~~Accounts payable at March 31, 2010 decreased ~~by $0.6 million and prepaids increased by $0.3~~$1.9 million from December 31, ~~2008. Accounts payable at September 30,~~ 2009, ~~decreased $0.2 million, compared to December 31, 2008,~~ primarily due to a decrease in vendor-provided lines of credit and lower levels of purchases, which resulted from the economic environment and our ~~taking advantage of~~2009 financial results, as well as from beneficial purchasing terms offered by other vendors and partners in the ordinary course during the period. ~~Accrued expenses at September 30, 2009 increased $1.9 million compared to December 31, 2008, primarily the result of amounts due to partners in South America.~~

Days of Sales Outstanding

Days of sales outstanding (the average number of days it takes to collect revenue after a sale is made) at ~~September 30, 2009~~March 31, 2010 was 63 days, compared with 5666 days at December 31, ~~2008.~~2009. This ~~increase~~decrease was due to ~~several customers making payments shortly after the close of the third quarter of 2009, as more than 80% of our accounts receivable at September 30, 2009 were still within~~

~~Table of Contents~~

~~current terms provided to our customers.~~improved collection rates. Normal payment terms require our customers to pay on a net 30-day or net 60-day basis depending on the customer. We are constantly working with our customers to reduce our days of sales outstanding. The extension of net 60-day terms ~~to some customers~~ is ~~necessary~~required to remain competitive in the regions where we currently ~~operate.~~operate, Central and South America. In an effort to obtain new customers and penetrate new markets, we may ~~offer terms beyond~~extend our normal payment terms.

Net Cash Used in Investing Activities

The net cash used in investing activities was ~~$137,000~~$89,000 for the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, compared to net cash used of ~~$67,000~~$112,000 for the ~~same period last year.~~three months ended March 31, 2009. This use of cash continued to be primarily the result of our investment related to geographic expansion, ~~and~~ tooling and molds for our proprietary verykool® products.

Net Cash Provided by (Used in) Financing Activities

The net cash used in financing activities for the three months ended March 31, 2010 of $12.9 million was primarily used to make payments on our bank line of credit. The net cash provided by financing activities for the ~~nine~~three months ended ~~September 30,~~March 31, 2009 of ~~$15.3~~$7.2 million was primarily the result of borrowings on our bank line of credit, which was partially offset by the net repurchase of $483,000 of outstanding common stock. The net cash used in financing activities for the nine months ended September 30, 2008 of $12.8 million was primarily used to make payments on our line of credit, which was partially offset by cash received from the exercise of stock options.credit.

Working Capital

Our net working capital at ~~September 30, 2009~~March 31, 2010 was ~~$25.9~~$23.9 million, as compared ~~with $25.6~~to $24.4 million at December 31, ~~2008.~~2009. This slight ~~increase~~decrease was primarily due to the ~~significant increase~~decrease in accounts receivable and the ~~increase~~decreases in ~~accrued expenses~~accounts payable and the bank line of credit offset by ~~a decrease~~an increase in cash and cash ~~equivalents and an increase in amounts drawn on our line of credit.~~equivalents.

Borrowings

~~On April 30, 2008,~~ ~~we entered into a~~Pursuant to our Loan, Security and Bulk Purchase Agreement and a Letter of Credit and Security Agreement (collectively, the “Agreement”) with Wells Fargo Century, Inc. ~~(the Lender)~~(“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.~~Agreement ($12.8 million as of March 31, 2010). At ~~September 30, 2009,~~March 31, 2010, 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 assets of the Company. 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. Subsequent to March 31, 2010, the Agreement was renewed under its current terms and conditions through April 2011. 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~~minus 0.50% at ~~September 30, 2009)~~ March 31,

Table of Contents

2010) or the LIBOR rate plus 2.00% ~~(0.298%~~(0.292% plus 2.00% at ~~September 30, 2009)~~March 31, 2010). At ~~September 30, 2009,~~March 31, 2010, the amount drawn against the ~~Lender~~ line of credit was ~~$30,066,060 of~~$12,626,234 and the total amount available at ~~September 30, 2009 of $41,156,101.~~March 31, 2010 was $12,778,276. As of ~~September 30, 2009,~~March 31, 2010, we were in compliance with the covenants of the credit facility.

We have no other notes payable.

~~At December 31, 2008, the amount drawn against the Lender line of credit was $14.3 million.~~ 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 ~~September 30, 2009 and December~~March 31, ~~2008,~~2010 our $12.6 million in advances were at ~~73% and 96%~~99% of the available borrowing ~~base.~~base compared with advances of $25.5 million at 88% of the available borrowing base at December 31, 2009.

~~We have no other notes payable.~~

Critical Accounting Policies

~~We believe the following~~There have been no material changes to our critical accounting policies ~~are important to the presentation of our financial condition and operating results, and require management’s judgments to make assumptions~~ and estimates ~~about~~affecting the ~~effects~~application of ~~matters that are inherently uncertain.~~

~~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 of shipment. Sales are recorded net of discounts, rebates, cooperative arrangements (marketing, training and promotional funds), returns, and allowances. Consideration is giventhose accounting policies since our Annual Report on ~~select sales for cooperative arrangements related to market development, training and special promotions, usually agreed upon in advance. The amount given is generally in the form of~~

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a credit memo, which is applied as a reduction of the sale price and such amount is recorded as a current liability. Expenditures made pursuant to the agreed upon activity reduce this liability. To the extent that we incur costs in excess of the established cooperative fund, we recognize that 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 a reserve against the related receivables estimates for product returns based on historical experience and other judgmental factors. We evaluate these estimates on an on-going basis and adjust the estimates each period based on actual product return activity. We recognize freight costs billed to our customers in revenue and actual freight costs incurred as a component of cost of sale.

~~Allowance for Doubtful Accounts~~

We recognize allowance 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 or 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. Such was the case during 2008, as we adjusted some of our inventory levels down.

~~Inventory Write-Off and Effect on Gross Margin~~

We regularly monitor inventory quantities on hand and record a provision for excess 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 reserveForm 10-K for the costs of our inventories in excess of our relevant demand forecast for the applicable period. We attempt to control our inventory levels so that we limit inventories in excess of demand for the succeeding several months. However, because we need to place non-cancelable orders with significant lead time and because it is difficult to estimate product demand, we sometimes build inventories in excess of demand for the applicable future periods. If this occurs, we provide a reserve, which may have a negative impact on our reported results of operations and financial condition.year ended December 31, 2009.

Item 3. 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” 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 Risk

We are exposed to market risk from changes in interest rates on our outstanding revolving line of credit. At ~~September 30, 2009,~~March 31, 2010, we had ~~$30,066,060~~$12.6 million outstanding under our line of credit, which could be affected by changes in short-term interest rates. Under our current credit facility, the interest rate for funds borrowed is, at our option, ofeither the Wells Fargo prime rate minus 0.5% (3.25% minus 0.5% at ~~September 30, 2009)~~March 31, 2010) or the LIBOR rate plus 2.00% ~~(0.298%~~(0.292% plus 2.00% at ~~September 30, 2009)~~March 31, 2010). For every 1% increase in Wells Fargo’s prime rate or the LIBOR rate, our interest expense would increase by ~~$300,660~~$126,000 annually, assuming ~~$30,066,060~~$12.6 million remained outstanding for the entire year.

~~The above sensitivity analysis for interest-rate risk excludes accounts receivable, accounts payable~~ Our actual borrowings will depend on changes in our working capital and ~~accrued liabilities because of the short-term maturity of such instruments. The analysis does not consider the effect interest-rate movement may have on~~ other variables relating to our business, ~~including changes in sales volumes that~~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,~~affect the ~~results could differ from the~~foregoing sensitivity ~~effects shown above.~~

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Market Risk

Almost all ~~portions~~ of our ~~revenue~~sales and expenses are transacted in markets outside the United States. However, all sales transactions and accounts receivable are denominated in U.S. dollars. As a result of our international sales, ~~(at this time, Latin America),~~ our future operating results could be adversely affected by a variety of factors, including changes in specific countries’ political, economic or regulatory conditions, and trade protection measures. Our market risk management includes an accounts receivable insurance policy for our 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 regulatory conditions on our results of operations and financial position. We do not believe that foreign currency fluctuations had a material impact on our financial results during the three ~~and nine months~~month ended ~~September 30, 2009.~~March 31, 2010. See “Consolidated Statements of Comprehensive Operations” in our financial statements included in this report.

Item ~~4T.~~4. Controls and Procedures

Disclosure Controls

An evaluation was performed pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) under the supervision and with the participation of our management, including the Chief Executive Officer and President and the Interim Chief Financial Officer, of the effectiveness of the ~~design and operation of our~~Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the ~~Securities~~ Exchange ~~Act of 1934 (the “Exchange Act”))~~Act) as of the end of the period covered by this quarterly report pursuant to Exchange Act Rule 13a-15(b). Based on the evaluation, the Chief Executive Officer and President and the Chief Financial Officer concluded that as of the end of the period covered by this quarterly report, ourreport. These disclosure controls and procedures ~~were effective in ensuring~~are designed to ensure that information required to be disclosed by usthe Company in the reports ~~that we file~~it files or ~~submit~~submits under the Exchange Act is ~~(i)~~ recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and ~~forms,~~forms. Disclosure controls and ~~(ii)~~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 Chief Executive Officer and President and the Interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

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Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our ~~third~~ fiscal quarter ended ~~September 30, 2009,~~March 31, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~Securities Class Actions~~

~~Derivative Action~~

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stock options that the Company granted in December 2005. On September 4, 2007, the Court granted defendants’ motion to dismiss for failure to make a demand on the board, and also granted with prejudice the motion to dismiss the Sarbanes-Oxley claim. On October 17, 2008, the parties entered into a Stipulation and Agreement of Settlement (the “Derivative Settlement”), which provides for, among other things, a dismissal with prejudice of the lawsuit, releases of the defendants, corporate governance changes and a payment by the Company or its insurer of plaintiffs’ attorneys fees to be ordered by the Court up to a maximum of $350,000. The Derivative Settlement further provides that defendants deny any liability or responsibility for the claims made and make no admission of any wrongdoing. The Company’s insurer funded the full settlement payment. On June 3, 2009, the Court approved the settlement and entered the final judgment and order of dismissal with prejudice of the case.

LG Electronics Litigation

On July 1, 2009, the Company filed suit in the Superior Court of the State of California, County of San Diego ~~(the Superior Court)~~ (Case No. 37-2009-00092797-CU-BT-CTL) against defendants LG Electronics, Inc., LG Electronics USA, Inc., LG Electronics Panama S.A., LG Electronics Inc. Chile LTDA, LG Electronics Guatemala S.A. de C.V. ~~(collectively LG)~~ and DOES ~~1-10 (and together with LG, the Defendants).~~1-10. The complaint alleges claims for interference with contractual relations/inducing breach of contract, intentional interference with prospective economic relations, negligent interference with prospective economic relations, breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment, fraud, promissory estoppel and violation of California Business and Professions Code §§ 17200, et seq. The Company is seeking in excess of $5 million in damages. On July 31, 2009, the ~~Defendants~~defendants removed the case to federal court in San Diego, CA. ~~The defendants have~~On April 23, 2010, the Company filed ~~a motion to dismiss based on jurisdictional grounds. Such motion is currently pending.~~an amended complaint.

We may become involved in certain other legal proceedings and claims which arise in the normal course of business. Other than as described above, as of ~~September 30, 2009,~~March 31, 2010, we did not have any significant litigation outstanding.

Item 1A. Risk Factors

In addition to the risk factors included below and other information set forth in this report, you should carefully consider the factors discussed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2008,~~2009, which factors and information could materially affect our business, financial condition or operating results. The risk factors and uncertainties described in our last Annual Report on Form 10-K and this report are not the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition or operating results. Except as set forth below, there have been no material changes to the risk factors included in our last Annual Report on Form 10-K.

~~Despite being profitable~~A recently passed Argentina tariff will substantially increase the cost at the point of sale for certain imported electronics, including the products we sell, and this will have an adverse impact on our sales in Argentina.

Argentina, one of the countries where we currently sell a significant amount of OEM products and where we generated 95% of our net sales in the three months ended March 31, 2010, passed a new tariff in November 2009 affecting certain imported electronics, including wireless handsets. This new tariff impacts the pricing at the point of sale in excess of 30%, and has reduced significantly our overall OEM sales volume in Argentina. This tariff had a material adverse impact on our sales, results of operations and prospects for our OEM products in Argentina in the first three ~~quarters~~months of ~~2009,~~2010. We believe that this tariff will continue to have a material adverse impact on our sales, results of operations and prospects for our OEM products in Argentina on an ongoing basis.

The loss or reduction in orders from principal customers or a reduction in prices we are able to charge these customers will have ~~recently experienced net losses~~a negative impact upon our revenues and ~~net losses may reoccur in the near future. If we operate at a loss,~~could cause our ~~business may not be financially viable.~~stock price to decline.

~~Although~~Our three largest customers in the three months ended March 31, 2010, all carriers in South America, represented 43%, 28% and 11% of our net sales during that period. In 2010, a customer accounting for 28% of our net sales for 2009 began significantly reducing its purchases from us as a result of the newly enacted Argentina tariff. Additional Argentina customers are expected to decrease or eliminate their purchases of imported wireless handsets in the coming fiscal quarters. The markets we ~~had net income for~~serve are subject to significant price competition. Additionally, our customers are not contractually obligated to purchase products from us. For these and other reasons, such as competitive pricing and pressures, customers may seek to obtain products or services from us at lower prices than we have been able to charge in the ~~first three quarters~~past, and they could terminate our relationship or reduce their purchases from us in favor of ~~2009, w~~elower-priced alternatives. In addition, we have experienced losses ~~and negative cash flows for the year ended 2008. As~~ of ~~September 30, 2009, we had working capital of $25.9 million. Given the economic slowdown~~certain customer bases through industry consolidation, a trend that may increase in our markets, and ~~contraction~~ in the ~~wider markets, including the Central and South American markets that we serve and generally globally, we cannot adequately evaluate the financial viability~~ordinary course of business. The further loss of any of our ~~business or our long-term prospects.~~

~~To maintain profitability, we must, among other things:~~

· ~~Continue to increase gross profits while controlling operational expenses;~~

· ~~Generate sales and consumer demand for our~~ ~~verykool®~~ ~~products; and~~

· ~~Continue to work with our OEM vendors for increased margin opportunities.~~

~~If we do not succeed in these objectives, our business, among other things, might experience losses again and may not be sustainable in the future.~~

~~We have outstanding indebtedness, which is secured by substantially all our assets and could prevent us from borrowing additional funds, if needed.~~

~~As of September 30, 2009, we had outstanding debt~~principal customers, a reduction in the amount of ~~$30.1 million under a receivables-based credit facility. Under this credit facility, which expires in April 2010, Wells Fargo Century, Inc. may advance~~product or services our principal customers order from us upor the inability to ~~$45,000,000 based~~maintain current terms, including price, with these or other customers could have an adverse effect on ~~the expected collections~~our financial condition, results of eligible receivables as well as the value of our eligible inventory as determined in accordance with the terms of the facility. Any significant decrease in our level of eligible accounts receivable or inventory will reduce our ability to borrow additional funds under the credit facility and may affect our ability to adequately finance our operations and ~~expansion strategies. Further, if we violate~~liquidity and could cause our ~~loan covenants, default on our obligations or become subject~~stock price to ~~a change of control, our indebtedness would~~decline.

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become immediately due and payable. In addition, the terms of our credit facility restrict us from incurring certain additional indebtedness, which could limit our ability to expand our operations. Some of our loan covenants subject us to, among other things, limits on our ability to sell certain assets and make certain payments, including, but not limited to, dividends, repurchases of common stock and other payments outside the normal course of business, as well as prohibits us regarding merging or consolidating with another corporation or selling all or substantially all of our assets. As of September 30, 2009, the Company was in compliance with the covenants of the credit facility. If any of these adverse events occur or we are unable to renew our new credit facility or enter into an adequate credit relationship as needed, our business’ financial condition or operating results could be negatively affected.

We buy a significant amount of our products from a limited number of suppliers, who may not provide us with competitive products at reasonable prices when we need them in the future.

We purchase wireless handsets and accessories principally from wireless communications OEMs and distributors. We depend on these suppliers to provide us with adequate inventories of currently popular brand name products on a timely basis and on favorable pricing and other terms, as well as on these suppliers’ quality products and services and financial stability. For the period ended ~~September 30, 2009,~~March 31, 2010, one vendor, Samsung Electronics de Amazonia, S.A., accounted for ~~84%,~~93% of our total cost of sales. We currently have one exclusive and several non-exclusive agreements with our principal suppliers, which can be terminated on short notice and provide for certain territorial restrictions. Our suppliers may not offer us competitive products on favorable terms or with timely delivery. The increased costs on importation of wireless handsets and other products into Argentina resulting from the recently enacted tariff will significantly reduce our supply of competitive products for Argentina. In addition, new products from other manufacturers could impact the demand for products from manufacturers we represent. From time to time, we have been unable to obtain sufficient product supplies. Any failure or delay by our suppliers, particularly our one primary vendor, in supplying us with products on favorable terms may severely diminish our ability to obtain and deliver products to our customers on a timely and competitive basis. If we lose any of our principal suppliers, or if these suppliers are unable to fulfill our product needs, or if any principal supplier imposes substantial price increases and alternative sources of supply are not readily available, it would have a material adverse effect on our results of operations and financial condition.

~~The~~We have recently experienced net losses and net losses may continue in the future. If we continue to operate at a loss, ~~or reduction in orders from principal customers or a reduction in prices we are able to charge these customers will have a negative impact upon~~ our ~~revenues and could cause our stock price to decline.~~business may not be financially viable.

~~Our three largest customers in~~We experienced losses for the three months ended ~~September 30, 2009 represented 32%, 28%~~March 31, 2010 and 13% of our net sales during that period. These customers are carriers in South America. The markets we serve are subject to significant price competition. Additionally, our customers are not contractually obligated to purchase products from us. For these and other reasons, such as competitive pricing and competitive pressures, customers may seek to obtain products or services from us at lower prices than we have been able to obtain from these customers in the past. This could occur, for example, in the case of a customer purchasing large quantities of a product from us, who then terminates this relationship because the customer can obtain a lower price by buying directly from the manufacturer or other supplier. The loss of any of our principal customers, a reduction in the amount of product or services our principal customers order from us or the inability to maintain current terms, including price, with these or other customers could have an adverse effect on our financial condition, results of operations and liquidity. In addition, we have experienced losses of certain customer bases through industry consolidation and in the ordinary course of business. Overall, there can be no assurance that any of our customers will continue to purchase products or services from us or that their purchases will be at the same or greater levels than in prior periods, with any such customer decisions having the potential to adversely affect our business operations and profitability.

~~Almost all of our revenues will be~~ ~~generated outside of the United States in countries that may have volatile currencies or other risks in the foreseeable future.~~

We now engage in all of our significant sales activities in territories and countries outside of the United States, specifically in Latin American countries. All our sales transactions are completed in U.S. dollars and therefore may be impacted by changes in the strength of the U.S. dollar. Further, the fact that we distribute a substantial amount of our products into a number of territories and countries other than the United States exposes us to, among other things, increased credit risks, customs duties, import quotas and other trade restrictions, potentially greater and more unpredictable inflationary and currency pressures, and shipping delays. Changes may occur in social, political, regulatory and economic conditions or in laws and policies governing foreign trade and investment in the territories and countries where we currently distribute products. United States laws and regulations relating to investment and trade in foreign countries could also change to our detriment. Any of these factors could have material adverse effects on our business and operations. Also, although we purchase and sell products and services in U.S. dollars and do not engage in exchange swaps, futures or options contracts or other hedging techniques, fluctuations in currency exchange rates could reduce demand for products sold in U.S. dollars. We cannot predict the effect that future exchange rate fluctuations will have on our operating results or financial position. We may in the future engage in currency hedging transactions, which could result in our incurring significant additional financial risks, including expenses and losses.

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A recently passed Argentina tariff may substantially increase the cost at the point of sale for certain imported electronics, including the products we sell, and this which could have an adverse impact on our sales in Argentina.

Argentina, a country where we sell a significant amount of our products, purportedly passed a new tariff in November 2009 potentially impacting certain imported electronics, including cellular handsets. At this time we are unaware of the timing and any necessary final approval of this tariff. However, from the preliminary information we have obtained, this new tariff could impact the pricing at the point of sale in excess of 30%, and could have an impact on the overall consumer demand and the sales volume in Argentina. For the year ended December 31, ~~2008~~2009. Given the impact of the recently passed Argentina tariff, the extended effects of the economic slowdown and contraction in the ~~nine months ended September 30, 2009, sales~~Central and South American markets that we serve, and general economic instability globally, we cannot adequately evaluate the financial viability of our ~~products~~business or our long-term prospects.

To achieve profitability, we must, among other things:

· increase gross profits while controlling operational expenses;

· generate sales and consumer demand for our verykool® products; and

· continue to work with our OEM vendors for increased margin opportunities.

If we do not succeed in Argentina represented approximately 66% and 87%, respectively of our total net sales. We are unable to assess when or if this tariff will be finally implemented, and if implemented, what specific impact it could have onthese objectives, our business, ~~and prospects in Argentina. However, if implemented, a significant increase in importation tariffs could have a material adverse impact on our sales and prospects for our products in Argentina.~~

~~Our ability~~among other things, will continue to ~~maintain future profitability depends on our ability to maintain~~experience losses and ~~increase existing margins, including through increased net sales, which we~~ may not be ~~able to do.~~

The gross margins that we realize on sales of wireless handsets may not increase or could be reduced due to, among other things, increased competition and a growing industry and customer emphasis on cost containment, thereby negatively affecting our ability to remain profitable. Our ability to obtain future profitability will continue to depend on our ability to increase our margins through increased sales (either through a higher volume of sales of wireless handset products or a higher average price per wireless handset product) or lower our cost of sales. However, we may not be able to increase existing margins for products or services we offer. Our ability to generate sales is based on demand for wireless handset products that we can deliver and our having an adequate supply of these products to cover demand. Even if our sales rates increase, the gross margins that we receive from our sales may not be sufficient to make our future operations profitable as our cost of sales may increase at higher rates. For example, in 2008, although we had higher sales, we did not have operating income from continuing operations due to lower gross margins, as well as, among other things, higher operating expenses. We cannot guarantee that we will be able to improve gross margins, including increasing sales, or do so in a profitable mannersustainable in the future.

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

~~Between January 1, 2008 and November 12, 2009, our common stock share price fluctuated between $0.10 and $2.51 per share, and on November 12, 2009 it closed at $1.03.~~ On ~~July 10, 2008,~~May 4, 2010, we received a Nasdaq Staff Deficiency letter ~~from the Listing Qualifications Department of The NASDAQ Stock Market~~ indicating that for the ~~then-last 30~~prior thirty consecutive ~~trading~~business days the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing on The ~~Nasdaq Stock~~NASDAQ Global Market under Nasdaq Marketplace Rule ~~4450(a)(5)~~5450(a)(1). ~~However, on July 7, 2009,~~In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we ~~received a~~were provided an initial period of 180 calendar days, or until November 1, 2010, to regain compliance. The letter ~~from The NASDAQ Stock Market indicating~~stated that the Nasdaq staff would provide written notification that we had ~~regained~~achieved compliance with Rule 5450(a)(1) if at any time prior to November 1, 2010, the ~~$1.00 minimum~~ bid price requirement under Listing Rule 5450(a)(1)(formerly Marketplace Rule 4450(a)(5)) and the matter noted in the July 10, 2008 letter was closed. If in the future we fail to comply with the continued listing standards of ~~The NASDAQ Global Market, including the minimum bid price requirement,~~ our common stock ~~would be delisted from that market.~~closed at $1.00 per share or more for a minimum of ten consecutive business days.

If ~~we are~~compliance with Nasdaq Marketplace 5450(a)(1) cannot be demonstrated by November 1, 2010, the staff of The Nasdaq Stock Market Listing Qualifications department is expected to deliver a written notification to us that our common stock will be delisted from The NASDAQ Global ~~Market,~~Market. If we receive a delisting notice, we may appeal the Nasdaq staff’s determination to a Listing Qualifications Panel. Alternatively, we may apply to transfer the listing of our common stock to The NASDAQ Capital ~~Market.~~Market or another exchange or trading 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 would 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 the ~~Pink Sheets~~OTCQX marketplace 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.

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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” (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 shareholders to borrow against or “margin” low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because 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 shareholder 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.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. ~~Submission of Matters to a Vote of Security Holders~~Reserved

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number		Description of Exhibit
3.2		Bylaws, as amended (+).
10.1		Addendum to Distribution Agreement ~~and General Release of Claims, dated October 6, 2009,~~ by and ~~among Abraham Rosler, the Abraham Rosler Family Trust~~between InfoSonics Corporation and ~~InfoSonics Corporation~~Samsung Electronics Argentina S.A. effective as of January 6, 2010 (1).
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (+).
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (+).
32.1		Section 1350 Certification of Chief Executive Officer (+).
32.2		Section 1350 Certification of Chief Financial Officer (+).

(1)Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-32217), filed on ~~October 8, 2009.~~January 12, 2010.

(+)Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		InfoSonics Corporation


Date:	~~November 16, 2009~~May 14, 2010	By:	/s/ Joseph Ram
			Joseph Ram
			Chief Executive Officer and President


Date:	~~November 16, 2009~~May 14, 2010	By:	/s/ ~~Jeffrey Klausner~~Roger Laungani
			~~Jeffrey Klausner~~Roger Laungani
			Interim Chief Financial Officer

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	For the Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	662,745		$	(2,544,998	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation	223,364			498,782
Provision for bad debt	152,920			(131,016		)
Impairment on fixed assets	—			(13,126		)
Provision for obsolete inventory	(42,000		)	(322,882		)
Stock option and stock grant expense	49,101			67,481
(Increase) decrease in
Accounts receivable	(32,118,046		)	133,197
Other receivable	3,599,492			(3,434,937		)
Inventory	577,699			5,497,980
Prepaids	(318,187		)	313,548
Other assets	(89,368		)	(7,412		)
Deferred tax asset current	—			(67,340		)
Deferred tax asset non current	—			(53,118		)
Increase (decrease) in
Accounts payable	(157,940		)	(8,961,021		)
Accrued expenses	1,936,650			6,445,564
Income tax liabilities	21,921			(39,560		)
Cash used in continuing operations	(25,501,649		)	(2,618,858		)
Cash provided by discontinued operations	304,833			5,042,304
Net cash provided by (used in) operating activities	(25,196,816		)	2,423,446

Cash flows from investing activities:
Purchase of property and equipment	(136,891		)	125,038
Cash used in discontinued operations	—			(192,142		)
Net cash used in investing activities	(136,891		)	(67,104		)

Cash flows from financing activities:
Borrowings from line of credit	192,070,828			186,370,107
Payments on line of credit	(176,278,746		)	(199,215,710		)
Cash received from stock options	—			34,286
Cash paid for treasury stock	(483,040		)	—
Cash provided by (used in) discontinued operations	—			—

Net cash provided by (used in) financing activities	15,309,042			(12,811,317		)

Effect of exchange rate changes on cash	21,011			(7,405		)

Net decrease in cash and cash equivalents	(10,003,654		)	(10,462,380		)

Cash and cash equivalents, beginning of period	24,714,753			20,652,154

Cash and cash equivalents, end of period	$	14,711,099		$	10,189,774
Cash paid for interest	217,013			513,999
Cash paid for taxes	—			—

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Net Sales	$	6,210		$	113,876		$	489,558		$	847,312
Gross profit	(2,210		)	(4,568		)	(313,778		)	(1,328,603		)
Operating income (loss)	(46,755		)	(257,571		)	(406,384		)	(3,569,356		)
Identifiable assets	3,014,776			4,733,849			3,014,776			4,733,849
Capital expenditures	—			—			—			—
Depreciation and amortization	—			5,420			—			20,787