Infusion Brands International (INBI) 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

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

Commission file number 000-51599

Infusion Brands International, Inc.

(Exact name of small business issuer as specified in its charter)

Nevada (State or other jurisdiction of incorporation or organization) 54-2153837 (I.R.S. Employer Identification No.)

14375 Myerlake Circle

Clearwater, Florida 33760

(Address of principal executive offices)

(727) 230-1031

(Issuer's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 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 the filing requirements for the past 90 days.   Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ 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 company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act).   Yes oNo þ

The number of shares of the issuer’s common stock outstanding as of August 15, 2011 is 181,457,508.

INFUSION BRANDS INTERNATIONAL, INC. AND SUBSIDIARIES

QUARTERLY PERIOD ENDED

JUNE 30, 2011

Table of Contents

Part	Item and Description	Page
Part I	Financial Information
	Forward-Looking Statements	2
	Item 1. Financial Statements	3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
	Item 3. Quantitative and Qualitative Disclosures about Market Risks	41
	Item 4. Controls and Procedures	41
Part II	Other Information
	Item 1. Legal Proceedings	42
	Item 1A. Risk Factors	43
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
	Item 3. Defaults Upon Senior Securities	43
	Item 4. Removed and Reserved	43
	Item 5. Other Information	44
	Item 6. Exhibit Index	44
Signatures		45

1

PART I - FINANCIAL INFORMATION

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains “forward-looking statements” relating to Infusion Brands International, Inc. (referred to as the “Company” or “we”, “us” or “our” in this Form 10-Q), which represent the Company’s current expectations or beliefs including, but not limited to, statements concerning the Company’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipation”, “intend”, “could”, “estimate”, or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue its growth strategy and competition, certain of which are beyond the Company’s control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

2

Infusion Brands International, Inc. and Subsidiaries

Consolidated Balance Sheets

Item1. Financial Statements.

	June 30,		��	December 31,
	2011			2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,038,757		$	1,746,510
Accounts receivable, net of allowances for returns and bad debts of $166,530 and $216,413		1,640,420			393,851
Inventories, net		1,941,689			2,067,226
Prepaid expenses and other current assets		279,672			22,796
Total current assets		4,900,538			4,230,383
Property and equipment, net		2,891,275			2,418,357
Other assets		529,893			125,516
Total assets	$	8,321,706		$	6,774,256
Liabilities, Redeemable Preferred Stock and Deficit
Current liabilities:
Accounts payable and accrued expenses	$	2,664,742		$	1,855,861
Notes payable and current maturities of long-term debt		326,115			286,262
Total current liabilities		2,990,857			2,142,123
Advances		3,000,000			—
Long-term debt		2,113,829			1,891,542
Security deposits on leases		9,193			9,193
Total liabilities		8,113,879			4,042,858
Commitments and contingencies (Note 13)		—			—
Redeemable preferred stock		7,290,446			9,497,444
Deficit:
Infusion Brands shareholders’ deficit:
Series C Preferred Stock, $0.00001 par, 10,620,000 shares authorized, 1,024,210 shares issued and outstanding		4,946,910			—
Series E Preferred Stock, $0.00001 par, 13,000,000 shares authorized and issued, 2,856,282 and outstanding		2,344,776			2,344,776
Common Stock, $0.00001 par, 400,000,000 shares authorized; 181,457,508 and 158,795,060 shares outstanding		1,861			1,589
Paid-in capital		47,124,119			49,593,421
Accumulated deficit		(61,928,431	)		(58,712,607	)
Accumulated other comprehensive income (loss)		(22,872	)		—
Total Infusion Brands shareholders’ deficit		(7,533,602	)		(6,772,821	)
Non-controlling interests		450,983			6,775
Total deficit		(7,082,619	)		(6,766,046	)
Total liabilities, redeemable preferred stock and deficit	$	8,321,706		$	6,774,256

See accompanying notes.

3

Infusion Brands International, Inc. and Subsidiaries

Consolidated Statements of Operations

	Three Months Ended June 30,
	2011			2010
	(Unaudited)			(Unaudited)
Revenues and cost of product sales:
Product sales	$	5,216,743		$	570,208
Cost of product sales		2,744,280			812,298
Gross profit (loss)		2,472,463			(242,090	)
Rental income		61,081			72,835
Services and other income		—			742,167
		61,081			815,002
Other costs and operating expenses:
Advertising and promotional		1,734,550			289,045
Employment costs		1,683,292			319,766
Other general and administrative		606,750			522,926
Accounting and professional		431,005			700,529
Bargain purchase gain, net of expenses		(155,780	)		—
Depreciation, excluding depreciation classified in cost of product sales		67,265			397,101
Impairments		—			3,881,462
		4,367,082			6,110,829
Loss from operations		(1,833,538	)		(5,537,917	)
Other income (expense):
Interest and other income		193,838			18,034
Interest expense		(76,289	)		(28,946	)
Loss on asset sales		(75,000	)		—
Derivative income		—			3,849,673
Total other income, net		42,549			3,838,761
Loss from continuing operations		(1,790,989	)		(1,699,156	)
Loss from discontinued operations		—			(22,117,433	)
Loss attributable to Infusion Brands International		(1,790,989	)		(23,816,589	)
(Loss) income attributable to non-controlling interests		(105,483	)		119,151
Net loss	$	(1,896,472	)	$	(23,697,438	)

Continued on next page.

See accompanying notes.

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Infusion Brands International, Inc. and Subsidiaries

Consolidated Statements of Operations

	Three Months Ended June 30,
	2011			2010
	(Unaudited)			(Unaudited)
Reconciliation of loss from continuing operations to loss attributable to Infusion Brands common shareholders:
Loss from continuing operations	$	(1,790,989	)	$	(1,699,156	)
(Loss) income attributable to non-controlling interests		(105,483	)		66,748
Preferred dividends and accretion		(1,584,861	)		—
Loss from continuing operations attributable to Infusion Brands common shareholders	$	(3,481,333	)	$	(1,632,408	)
Loss from discontinued operations attributable to Infusion Brands common shareholders:	$	—		$	(22,117,433	)
Income attributable to non-controlling interests		—			52,403
Loss from discontinued operations attributable to Infusion Brands common shareholders	$	—		$	(22,065,030	)
Loss per common share:
Basic:
Continuing operations	$	(0.02	)	$	(0.01	)
Discontinued operations	$	(0.02	)	$	(0.14	)
Diluted:
Continuing operations	$	—		$	(0.01	)
Discontinued operations	$	—		$	(0.14	)
Weighted average common shares—basic		180,386,079			159,111,254
Weighted average common shares—diluted		180,386,079			159,111,254

See accompanying notes.

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Infusion Brands International, Inc. and Subsidiaries

Consolidated Statements of Operations

	Six Months Ended June 30,
	2011			2010
	(Unaudited)			(Unaudited)
Revenues and cost of product sales:
Product sales	$	9,373,459		$	3,101,568
Cost of product sales		4,704,703			2,033,695
Gross profit		4,668,756			1,067,873
Rental income		124,308			168,573
Services and other income		—			742,167
		124,308			910,740
Other costs and operating expenses:
Advertising and promotional		3,923,837			550,956
Employment costs		2,362,748			1,235,097
Other general and administrative		1,017,562			1,221,289
Accounting and professional		805,597			1,301,173
Bargain purchase gain, net of expenses		(155,780	)		—
Depreciation, excluding depreciation classified in cost of product sales		120,593			787,050
Impairments		—			3,881,462
		8,074,557			8,977,027
Loss from operations		(3,281,493	)		(6,998,414	)
Other income (expense):
Interest and other income		264,266			20,776
Interest expense		(111,645	)		(64,817	)
Gain on asset sales		11,756			—
Derivative income		—			20,334,558
Total other income, net		164,377			20,290,517
(Loss) income from continuing operations		(3,117,116	)		13,292,103
Loss from discontinued operations		—			(23,489,579	)
Loss attributable to Infusion Brands International		(3,117,116	)		(10,197,476	)
(Loss) income attributable to non-controlling interests		(98,708	)		132,351
Net loss	$	(3,215,824	)	$	(10,065,125	)

Continued on next page.

See accompanying notes.

6

Infusion Brands International, Inc. and Subsidiaries

Consolidated Statements of Operations

	Six Months Ended June 30,
	2011			2010
	(Unaudited)			(Unaudited)
Reconciliation of loss from continuing operations to loss attributable to Infusion Brands common shareholders:
(Loss) income from continuing operations attributable to Infusion Brands	$	(3,117,116	)	$	13,292,103
Loss (income) attributable to non-controlling interests		(98,708	)		79,948
Preferred dividends and accretion		(2,862,931	)		—
(Loss) income from continuing operations attributable to Infusion Brands common shareholders	$	(6,078,755	)	$	13,372,051
Loss from discontinued operations attributable to Infusion Brands common shareholders:	$	—		$	(23,489,579	)
Income attributable to non-controlling interests		—			52,403
Loss from discontinued operations attributable to Infusion Brands common shareholders	$	—		$	(23,437,176	)
(Loss) income per common share:
Basic:
Continuing operations	$	(0.03	)	$	0.08
Discontinued operations	$	—		$	(0.15	)
Diluted:
Continuing operations	$	(0.03	)	$	0.08
Discontinued operations	$	—		$	(0.15	)
Weighted average common shares—basic		174,217,398			159,043,408
Weighted average common shares—diluted		174,217,398			159,043,408

See accompanying notes.

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Infusion Brands International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	Six Months Ended June 30,
	2011			2010
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net (loss) income	$	(3,117,116	)	$	(10,197,476	)
Adjustments to reconcile loss to net cash used in operating activities:
Share-based payment		393,936			518,886
Bargain purchase gain related to HSE		(200,416	)		—
Depreciation expense		119,682			111,474
Bad debts expense and returns and allowances		10,076			397,176
Impairments		—			22,972,854
Derivative income		—			(20,334,558	)
Impairment of investments		—			1,998,492
Amortization of intangible assets		—			1,150,958
Amortization of deferred revenue		—			(349,197	)
Equity in losses of investees		—			341,604
Non-cash severance		—			76,077
Amortization of deferred costs		—			20,983
Changes in operating assets and liabilities:
Accounts receivable		(559,250	)		1,180,963
Inventories		1,165,524			(199,289	)
Prepaid expenses and other assets		(413,921	)		54,666
Accounts payable and accrued expenses		(932,216	)		(802,009	)
Net cash (used) in operating activities		(3,533,701	)		(3,058,396	)
Cash flows from investing activities:
Purchases of HSE, net of $17,856 cash received		(57,298	)		—
Purchases of property and equipment		(56,629	)		(47,640	)
Purchase of other investments		—			(83,791	)
Other investing activities		—			5,261
Net cash flow (used) in investing activities		(113,927	)		(126,170	)
Cash flows from financing activities:
Proceeds from advances		3,000,000			5,000,000
Principal payments on long-term debt		(37,253	)		(15,849	)
Redemption of common stock		—			(100,000	)
Net cash flow provided by in financing activities		2,962,747			4,884,151
Foreign currency translation adjustments		(22,872	)		—
Net change in cash and cash equivalents		(684,881	)		1,699,585
Cash and cash equivalents at beginning of period		1,746,510			3,991,837
Cash and cash equivalents at end of period	$	1,038,757		$	5,691,422

Supplemental Cash Flow Information
Cash paid for interest	$	112,743	$	58,293
Cash paid for income taxes	$	—	$	—

See accompanying notes.

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Infusion Brands International, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

For the six months ended June 30, 2011

													Accumulated Other
	Preferred Stock		Common Shares		Common Amount		Paid-in Capital			Accumulated Deficit			Comprehensive Income			Total (Deficit)			Non-Controlling Interests		Infusion Brands Deficit
Balances, January 1, 2011	$	2,344,776		158,795,060	$	1,589	$	49,593,421		$	(58,712,607	)	$	—		$	(6,772,821	)	$	6,775	$	(6,766,046	)
Reclassification of Series C		4,946,910		—		—		—			—			—			4,946,910			—		4,946,910
Share-based payment—employees		—		2,500,000		25		190,020			—			—			190,045			—		190,045
Share-based payment—consultant		—		20,162,448		202		203,689			—			—			203,891			—		203,891
Acquisition of HSE		—		—		—		—			—			—			—			345,500		345,500
Accretion of Series G Preferred		—		—		—		(2,664,575	)		—			—			(2,664,575	)		—		(2,664,575	)
Dividends on Series G Preferred		—		—		—		(198,356	)		—			—			(198,356	)		—		(198,356	)
Foreign currency translation		—		—		—		—			—			(22,872	)		(22,872	)		—		(22,872	)
Net loss		—		—		—		—			(3,215,824	)		—			(3,215,824	)		98,708		(3,117,116	)
Balances, June 30, 2011	$	7,291,686		181,457,508	$	1,816	$	47,124,199		$	(61,928,431	)	$	(22,872	)	$	(7,533,602	)	$	450,983	$	(7,082,619	)

For the six months ended June 30, 2010

	Series E			Common Stock						Paid-in			Comprehensive			Accumulated			Total			Non-Controlling			Infusion Brands
	Preferred			Shares			Amount			Capital			Income Items			Deficit			Equity (Deficit)			Interests			Equity (deficit)
Balances, January 1, 2010	$	3,177,317			159,122,243		$	1,591		$	46,370,212		$	425,000		$	(42,642,655	)	$	7,331,465		$	155,659		$	7,487,124
Conversions of preferred		(240,313	)		251,080			3			240,310			—			—			—			—			—
Redemption		—			(1,300,000	)		(13	)		(99,987	)		—			—			(100,000	)		—			(100,000	)
Share-based payment		—			—			—			518,886			—			—			518,886			—			518,886
Unrealized gains (losses)		—			—			—			—			(395,000	)		—			(395,000	)		—			(395,000	)
Consolidation of Wineharvest		—			—			—			—			—			—			—			93,066			93,066
Income from continuing operations		—			—			—			—			—			13,372,051			13,372,051			(79,948	)		13,292,103
Loss from discontinued operations		—			—			—			—			—			(23,437,176	)		(23,437,176	)		(52,403	)		(23,489,579	)
Balances, June 30, 2010	$	2,937,004			158,073,323		$	1,581		$	47,029,421		$	30,000		$	(52,707,780	)	$	(2,709,774	)	$	116,374		$	(2,593,400	)

See accompanying notes.

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Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 – Basis of presentation:

Infusion Brands International, Inc. is a Nevada Corporation. We are a global consumer products company, specializing in developing innovative solutions and marketing profitable brands through our international direct-to-consumer channels of distribution.

The accompanying unaudited condensed consolidated financial statements as of June 30, 2011 and for the three months and six months ended June 30, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, they do not include all the information and footnotes required for complete financial statements. However, the unaudited condensed consolidated financial information includes all adjustments which are, in the opinion of management, necessary to fairly present the consolidated financial position and the consolidated results of operations for the interim periods presented. The operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results for the year ending December 31, 2011. The unaudited condensed consolidated financial statements included in this report should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Transition Report on Form 10-KT for the transition period ended December 31, 2010, filed with the Securities and Exchange Commission.

Note 2 – Going concern and management’s plans:

The preparation of financial statements in accordance with generally accepted accounting principles contemplates that operations will be sustained for a reasonable period. However, we have incurred operating losses of $1,833,538 and $3,281,493 during the three and six months ended June 30, 2011, and we have used $3,533,701 of cash in our operations for the six months ended June 30, 2011. As of June 30, 2011, we have cash on hand of $1,038,757 and working capital of $1,909,681. Since our inception, we have been substantially dependent upon funds raised through the sale of preferred and common stock and warrants to sustain our operating and investing activities. These are conditions that raise substantial doubt about our ability to continue as a going concern for a reasonable period.

Our management began implementing strategic plans designed and developed during the fourth quarter of the prior year with the intention of alleviating ongoing operating losses. The principal focus of these plans was an intensified emphasis on the redesign of the consumer products business, shifting its focus from the highly expensive product based distribution model to a global brand development and brand ownership model. Management believes that the planned model, which is currently under development, will provide more predictable revenue streams as well as current and long-term profitability by curtailing the cost structure, allowing for longer product life, and providing for next-version, next-generation and follow-on opportunities to those branded products. However, substantial investment is required to support this change. The Company received $3,000,000 of funding from advances on the sale of preferred stock and warrants during the six months ended June 30, 2011. Notwithstanding this additional funding, our ability to continue as a going concern for a reasonable period is dependent upon achieving our management’s plans for the Company’s reorganization and, ultimately, generating profitable operations from those restructured operations. We cannot give any assurances regarding the success of management’s plans. Our consolidated financial statements do not include adjustments relating to the recoverability of recorded assets or liabilities that might be necessary should we be unable to continue as a going concern.

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Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3 – Acquisition:

On May 9, 2011, we purchased 50% of the outstanding common stock of Home Shopping Express S.A. (“HSE”) for cash consideration of $75,154, and an option to purchase the remaining 50% of the outstanding common stock of HSE based upon its forward revenue levels. HSE, which is located in Baleares, Spain, is engaged in the development and retail sale of consumer products throughout most of Europe, in particular, HSE's flagship product is the Dual Saw by Startwin. Through this acquisition, we became the principle owners of the intellectual property related to Dual Saw in geographic regions whereby Startwin already took ownership of this trademark right. By combining our enterprises, we believe this acquisition helps to unify the worldwide brand for Dual Saw. Moreover, with a global presence this acquisition will help open channels of distribution for cross border promotion of our other respective branded products. 

Our rights associated with our purchase contractually provide for management and governance control over all operational and financial aspects of HSE. Upon our purchase, all pre-acquisition HSE board members resigned and our Chief Executive Officer was appointed as the sole board member. We also have rights to all earnings of HSE. As a result of the rights associated with our initial investment in HSE and following the guidance in ASC 810 Consolidation, we have concluded that HSE is a variable interest entity on the basis that our 50% interest in the HSE common stock affords us symmetrically higher voting rights than would typically accompany a 50% ownership intrest in common stock; in this instance our voting rights effectively rise to 100%. Further, we have concluded that the Company is the primary beneficiary to the variable interest entity pursuant to ASC 810, because we have the controlling financial interest. That is, we possess the power to direct the activities of HSE and we have the right to receive all of its residual returns. Accordingly, the assets, liabilities and results of operations of HSE have been consolidated commencing with May 1, 2011, which date was used for convenience after our conclusion that there were no material intervening transactions between May 1, 2011 and May 9, 2011.

The following table reflects the assets of HSE acquired and liabilities assumed, at their respective fair values, as reconciled with our purchase consideration:

Assets acquired:
Cash	$	17,856
Accounts receivable		697,395
Inventories		1,039,987
Land, buildings and operating equipment		535,971
Other assets with future benefits		171,995
Liabilities assumed:
Accounts payable and accrued liabilities		(1,472,811	)
Notes payable		(299,393	)
Non-controlling interest		(345,500	)
Purchase consideration:
Cash consideration disbursed		(75,154	)
Contingent consideration, recorded in liabilities		(69,930	)
Bargain purchase gain		200,416
Less, acquisition costs that were expensed		(44,636	)
Bargain purchase, net of expenses reflected in operations	$	155,780

The following unaudited condensed pro forma financial information gives effect to our acquisition of HSE as if it had occurred at the beginning of the respective periods. Pro forma financial information is not necessarily indicative of the results of operations that would have been achieved had the acquisition occurred on the dates noted.

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Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3 – Acquisition (continued):

	Three months ended June 30,
	2011			2010
Pro forma results:
Revenue	$	5,284,654		$	2,010,716
Loss from continuing operations		(2,049,132	)		(1,737,260	)
Loss  per common share, basic and diluted		(0.01	)		(0.01	)

	Six months ended June 30,
	2011			2010
Pro forma results:
Revenue	$	10,815,021		$	5,712,681
(Loss) income from continuing operations		(3,271,049	)		13,261,898
(Loss) earnings per common share, basic and diluted		(0.02	)		0.08

Note 4 – Dispositions and discontinued operations:

During the prior year quarterly period ended December 31, 2010, management with the support of our Board of Directors, concluded that the continuing losses from our holdings in the former Fashion Goods and eCommerce Segments (the “Discontinued Segments”) and the associated drain on our limited capital resources warranted discontinuance of the businesses and disposal of the assets comprising the Discontinued Segments. We accounted for and reported our disposals of the Discontinued Segments as discontinued operations pursuant to ASC 205-20 Presentation of Financial Statements. Under ASC 205–20, a component of an entity that can be clearly distinguished operationally and for financial reporting purposes from the rest of the entity is reported in discontinued operations if both (a) the operations and cash flows have been or will be eliminated from the ongoing operations and (b) the continuing entity will have no significant ongoing involvement or obligations associated with the components disposed. The Discontinued Segments meet these criteria for purposes of presentation of discontinued operations.

All disposals under this plan were completed during the quarterly period ended December 31, 2010. Operating activities of the Discontinued Segments for the three and six months ended June 30, 2010 are presented as a one-line caption in our consolidated statements of operations. The composition of the operations of the Discontinued Segments for the three and six months ended June 30, 2010 is as follows:

	Three months ended June 30, 2010			Six months ended June 30, 2010
Revenues of discontinued segments	$	1,981,767		$	4,305,318
Cost of revenues		2,806,668			4,991,246
Gross loss		(824,901	)		(685,928	)
Costs and operating expenses:
Impairments of assets		19,091,392			19,091,392
General and administrative		427,431			883,910
Depreciation and amortization		244,147			482,378
Total costs and expenses		19,762,970			20,457,680
Loss from operations		(20,587,871	)		(21,143,608	)
Other expenses:
Impairments of investments		(1,627,129	)		(1,998,491	)
Equity in losses of investees accounted for by applying the equity method		103,443			(341,604	)
Interest expense		(5,876	)		(5,876	)
Loss from discontinued operations	$	(22,117,433	)	$	(23,489,579	)

12

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 5 – Inventories:

Our inventories consisted of the following as of June 30, 2011 and December 31, 2010:

	2011			2010
Finished goods	$	2,311,233		$	2,335,800
Reserves for obsolescence and excess quantities		(369,534	)		(268,574	)
	$	1,941,689		$	2,067,226

Approximately $1,019,000 of our inventory is physically located in Europe as of June 30, 2011. See Notes 3 and 12.

Note 6 – Property and equipment:

Our property and equipment consisted of the following as of June 30, 2011 and December 31, 2010:

	2011			2010
Land	$	643,212		$	500,000
Buildings and improvements		1,814,397			1,554,333
Office equipment		1,032,718			834,972
Computer software and minor intangibles		39,335			—
Leasehold improvements		16,093			16,093
		3,545,755			2,905,398
Accumulated depreciation and amortization		(654,480	)		(487,041	)
	$	2,891,275		$	2,418,357

Our land, buildings and building improvements serve as security under mortgage loan agreements with lending institutions. All of our assets serve as security for our obligations under the redeemable preferred stock. Property and equipment with a carrying cost of $478,364 at June 30, 2011are physically located in Europe. See Notes 3 and 12.

13

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 7 – Accounts payable and accrued expenses:

Our accounts payable and accrued expenses consisted of the following as of June 30, 2011 and December 31, 2010:

	2011		2010
Accounts payable – trade	$	1,613,603	$	1,060,914
Accrued expenses:
Dividends on Series G Preferred Stock		410,836		205,904
Media Funding (1)		150,532		—
Sales tax		111,143		��
Contingent purchase price for HSE		69,930		—
Employment		44,828		31,550
Warranty		42,672		85,343
Deposits and refunds		28,307		187,302
Interest		6,276		2,521
Other		181,246		282,327
	$	2,664,742	$	1,855,861

(1) On March 2, 2011, we entered into a media funding arrangement with a financial institution that provides for the financing of certain of our defined media and marketing material expenditures. The borrowing facility does not have a stated maximum, although borrowings are limited to certain defined account receivable levels. The facility has an initial term of one year with consecutive one year renewal terms unless terminated by either party. It provides for fees to the lender equal to 2.5% of the qualified amounts paid plus deferred payment arrangements that provide for interest at an approximate rate of 8.7% per annum. The lender has a first creditor’s secured priority interest in substantially certain accounts receivable and inventories that are specific to the direct-response marketing campaigns that they finance.

Accounts payable and accrued expenses with a carrying value of $1,100,562 at June 30, 2011 related to the HSE operations. See Notes 3 and 12.

Note 8 – Derivative financial instruments:

Our derivative financial instruments (liabilities) in prior periods consisted of warrants and compound embedded derivatives that originated in connection with our financing arrangements. On December 17, 2010, we modified the warrant agreements and the Series G Preferred Stock Certificate of Designation to eliminate the down-round anti-dilution protection features that prevented equity classification of the financial instruments. Modifications to the Series G Preferred Stock, which was an akin-to-liability type financial instrument, as more fully discussed in Note 10, did not rise to substantive levels for purposes of extinguishment accounting. Accordingly, on the modification date, we adjusted these financial instruments to fair value and reclassified the balance, amounting to $3,584,182, to paid-in capital. No change to the carrying value of the Series G Preferred Stock resulted from these modifications and this financial instrument will continue to be accreted to its future redemption value, also more fully discussed in Note 10.

14

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 8 – Derivative financial instruments (continued):

The following table summarizes the components of derivative (income) expense arising from fair value adjustments during the three and six months ended June 30, 2010:

Three months ended June 30, 2010 Financing—Financial Instrument	Embedded Derivatives		Warrant Derivatives			Total
New Vicis Warrant	$	—	$	(3,430,000	)	$	(3,430,000	)
Series B Warrants		—		(19,585	)		(19,585	)
Series C Put Derivative and Warrants		172		(122,905	)		(122,733	)
Series G Warrants (issued on June 30, 2010)		—		—			—
Placement Agent Warrants		—		(277,355	)		(277,355	)
Derivative (income) expense	$	172	$	(3,849,845	)	$	(3,849,673	)

Six months ended June 30, 2010 Financing—Financial Instrument	Embedded Derivatives		Warrant Derivatives			Total
Vicis Warrant	$	—	$	(18,095,000	)	$	(18,095,000	)
Series B Warrants		—		(196,176	)		(196,176	)
Series C Put Derivative and Warrants		1,174		(645,389	)		(644,215	)
Series G Warrants (issued on June 30, 2010)		—		—			—
Placement Agent Warrants		—		(1,399,165	)		(1,399,165	)
Derivative (income) expense	$	1,174	$	(20,335,732	)	$	(20,334,558	)

The following table summarizes the number of common shares that were indexed to derivative financial instruments as of June 30, 2010:

Financing—Financial Instrument	June 30, 2010
Vicis Warrant		70,000,000
Series B Preferred Financing—Investor warrants		480,000
Series C Preferred Financing—Investor warrants		2,731,228
Series G Preferred Financing—Investor warrants		50,000,000
Placement agent warrants		5,546,980
		128,758,208

15

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 8 – Derivative financial instruments (continued):

Derivative warrants were valued using Black-Scholes-Merton. The following significant assumptions and ranges of assumptions were developed from Level 1 and Level 3 inputs:

	Number		Strike		Term	Volatility	Rate
Vicis Warrant		70,000,000	$	0.10	9.05	70.8%	2.97%
Series B Warrants		480,000	$	0.10	1.90	186.2%	0.61%
Series C Warrants		2,731,228	$	0.10	2.30—7.31	77.8%—173.2%	0.61%—2.42%
Series G Warrants		50,000,000	$	0.10	10.00	68.0%	2.97%
Placement Agent Warrants		5,546,980	$	0.10	8.63—9.26	70.0%—71.4%	2.97%

Bifurcated put derivatives were valued using probability weighted cash flow models. Credit-risk adjusted rates ranged from 8.07% to 9.50% for periods of one to three years, respectively.

Changes in our derivative liabilities for the three and six months ended June 30, 2010 are as follows:

	Three months ended June 30, 2010			Six months ended June 30, 2010
Beginning balances	$	(5,905,630	)	$	(22,390,515	)
Issuances:
Series G Preferred Stock and Warrant Financing (Note 10):
Warrants		(1,330,000	)		(1,330,000	)
Derivative conversion feature		(800,000	)		(800,000	)
Unrealized gains and losses		3,849,673			20,334,558
Balances at June 30, 2010	$	(4,185,957	)	$	(4,185,957	)

Note 9 – Long-term debt and financing arrangements:

Long-term debt consisted of the following at June 30, 2011 and December 31, 2010:

	2011			2010
Initial $2,000,000 six-year, variable rate mortgage note, with interest at the Wall Street Prime Rate, plus 1.5%, with a floor of 6.5% and a cap 7.75% during the first three years and a floor of 6.75% and a cap of 8.75% during the second three years; principal and interest payments of $13,507 are payable over the six year term based upon a twenty-five year amortization schedule, with $1,775,557 payable at maturity; secured by real estate; guaranteed by related parties.	$	1,911,700		$	1,928,199
Bank lending rate (3.5% at June 30, 2011 and December 31, 2010) demand bank note.		249,605			249,605
4.6% to 6.2% bank term, due at various dates through September 2013 (debt of HSE; see Notes 3 and 12).		169,912			—
11.7% mortgage note, with monthly payments of $1,545 through May 2016; secured by real estate located in Europe (debt of HSE; see Notes 3 and 12).		108,727			—
		2,439,944			2,177,804
Less current maturities		(326,115	)		(286,262	)
Long-term debt	$	2,113,829		$	1,891,542

16

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 9 – Long-term debt and financing arrangements (continued):

Maturities of long-term debt are as follows as of June 30, 2011:

Six months ending December 31, 2011	$	306,919
Years ending December 31:
2012		71,088
2013		140,783
2014		1,812,425
2015		—
2016		108,729
	$	2,439,944

We have concluded that the interest rate collar on the variable rate mortgage note is clearly and closely related to the host debt instrument and, accordingly, it does not require bifurcation and recognition at fair value. The interest rate in effect during the current quarterly period was at the 6.5% floor.

Accounts Receivable Financing Arrangement:

On January 28, 2011, we entered into an accounts receivable sales and financing arrangement that provides for the assignment and sale of certain qualified accounts receivable to a financial institution. The facility has an initial term of one year and provides for cash advances in amounts of 75% of qualified accounts receivable balances assigned up to an amount of $1,000,000. The initial term may be extended in one year periods upon the mutual agreement of the Company and the lender. The lender receives an initial discount of 1.75% of the net realizable value of the qualified receivable. Subsequently, the lender receives an additional 1.0% discount for each 15 day period that the qualified receivable has not been collected. Further, the lender has a secured priority interest in the accounts receivable balances that they finance. This arrangement does not qualify for sales accounting under current accounting standards and is, therefore, subject to accounting as a financing arrangement wherein we will carry the assigned receivables in our accounts until they are settled and advances that we receive from the lender will be reflected as liabilities. The discounts will be classified as interest expense. There were no balances outstanding under this arrangement as of June 30, 2011.

Note 10 – Redeemable preferred stock:

Redeemable preferred stock consists of the following as of June 30, 2011 and December 31, 2010:

	2011		2010
Series C Convertible Preferred Stock, 1,024,210 shares issued and outstanding at December 31, 2010 (liquidation value $1,024,210); on March 31, 2011 this Series was reclassed to stockholders’ equity. See note below.	$	—	$	4,946,910
Series G Convertible Preferred Stock, 5,000,000 shares issued and outstanding at June 30, 2011 and December 31, 2010 respectively; liquidation value $5,000,000, respectively.		7,290,446		4,550,534
	$	7,290,446	$	9,497,444

17

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Redeemable preferred stock (continued):

Redeemable preferred stock represents preferred stock that is either redeemable for cash on a specific date or contingently redeemable for cash for events that are not within the control of management. Preferred stock where redemption for cash is certain to occur is classified in liabilities. We currently have no preferred stock classified in liabilities. Redeemable preferred stock is required to be classified outside of stockholders’ equity (in the mezzanine section).

On March 31, 2011, the Certificate of Designation underlying the Series C Convertible Preferred Stock was amended to remove a provision that, while improbable of occurrence, could result in redemption in cash. The provision required redemption in the event of a change in control. Since the removed provision was the only term that caused the Series C Preferred to be classified outside of stockholders’ equity, upon removal of that provision, the carrying value was reclassified to stockholders’ equity.

On June 30, 2010, we sold 5,000,000 shares of Series G Convertible Preferred Stock for proceeds of $5,000,000. The financing included the issuance of warrants to the investors to purchase 50,000,000 shares of our common stock for $0.10 per share. Pursuant to the financing arrangement, we extended a secured priority interest in substantially all of our assets to the investor. Subsequently, pursuant to inter-creditor agreements, the investor subordinated their interest in assets that secure the media finding finance agreement that is described in Note 7 and the accounts receivable financing agreement that is described in Note 9.

On March 16, 2011 and April 6, 2011, we entered into oral agreements with a certain accredited investor (the “Investor”) to sell the Investor, subject to the filing of an amendment to the Certificate of Designation of its Series G Convertible Stock 1,000,000 and 2,000,000 shares of its Preferred Stock, respectively, and Series G Warrants to purchase an aggregate of 10,000,000 and 20,000,000 shares of the common stock, respectively. The purchase prices of $1,000,000 and $2,000,000 were received from the Investor in the form of advances on March 16, 2011 and April 6, 2011, respectively. The Preferred Stock purchase agreements and other related transaction documents (the “Transaction Documents”) were executed on July 8, 2011. The proceeds from the advances received through June 30, 2011 are carried in non-current liabilities pending allocation to the financial instruments issued in July 2011.

Terms, Features and Conditions of our Series G Redeemable Preferred Stock are as follows:

Series	Date of Designation	Number of Shares		Par Value		Stated Value		Liquidation Value		Dividend Rate			Initial Conversion		Current Conversion
G	6/30/2010		8,000,000	$	0.00001	$	1.00	$	1.00		8.0	%	$	0.10	$	0.10

The conversion price is subject to adjustment solely for traditional capital restructurings, such as splits, stock dividends and reorganizations (traditional restructuring events). The Certificate of Designation also provides for voting rights equal to the if-converted number of common shares. Dividends are cumulative and payable quarterly whether or not declared by our Board of Directors. Accordingly, we accrue dividends payable as they are earned by the investors.

18

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Redeemable preferred stock (continued):

The outstanding 5,000,000 shares of Series G Preferred are mandatorily redeemable for cash of up to $50,600,000, which is mandatorily payable $5,000,000 on June 30, 2011 and $45,600,000 on June 30, 2013 as follows:

· The stated value of $5,000,000 is payable on June 30, 2013.

· An additional dividend equal to $1.00 per share of Series G Preferred is payable on June 30, 2011 if the special preferred distribution discussed in the next bullet point has not been paid before that date (aggregate redemption value $5,000,000).

· A special preferred distribution equal to $8.12 per share of Series G Preferred is payable on June 30, 2013 or earlier at our option (aggregate redemption value of $40,600,000). This special preferred distribution is reduced by the amount of the additional dividend discussed in the preceding bullet point if the additional dividend is paid on the June 30, 2011.

In summary, if the additional dividend described in the second bullet point above is paid on or before June 30, 2011, the mandatory redemption amount is $45,600,000. If the additional dividend is not paid on or before June 30, 2011, the mandatory redemption amount is $50,600,000. Quarterly and annual regular dividend requirements are $100,000 and $400,000, respectively, while the Series G Preferred Stock is outstanding. These dividends are payable quarterly irrespective of declaration by our Board.

The mandatory redemption feature embodied in the Series G Preferred Stock is probable of payment. Accordingly, we are required to accrete the carrying value of the Series G Preferred Stock to its redemption value by charges to paid-in capital using the effective interest method. The following summarizes the annual accretion for each fiscal year ending December 31:

	Accretion Table
Carrying value on June 30, 2011	$	7,290,446
Future accretion (charges to stockholders’ equity):
Six months ending December 31, 2011		4,224,821
Year ending December 31, 2012		17,319,770
Year ending December 31, 2013		16,764,963
Redemption value	$	45,600,000

On June 30, 2010, we entered into a securities purchase agreement with Vicis pursuant to which Vicis purchased 5,000,000 shares of our newly designated Series G Convertible Preferred Stock and Series G Warrants to purchase 50,000,000 shares of our common stock for $0.10 per share for a period of ten years. Aggregate proceeds amounted to $5,000,000.

19

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 – Redeemable preferred stock (continued):

The Series G Preferred embodies a conversion option which (i) meets the definition of a derivative and (ii) is not considered clearly and closely related to the host preferred stock based upon economic risks. Establishing a clear and close relationship between the host preferred contract and the embedded feature is necessary to avoid bifurcation, liability classification and fair value measurement of the embedded feature. In order to establish a clear and close relationship, we were first required to establish the nature of the host preferred instrument as either an akin to equity or an akin to debt type instrument. Because the Series G Preferred Stock is both redeemable for cash on a specific future date and embodies a periodic return (i.e. cumulative dividend) that was consistent with returns for debt we concluded that the Series G Preferred Stock bore risks more closely associated with debt-type financial instruments.

The risks of the equity linked conversion option, not being clearly and closely related to the risks of the debt-type preferred host contract, required us to bifurcate the embedded conversion feature at its fair value and classify such amount in liabilities because there were no exemptions available based on the terms.

The Series G Warrants were evaluated for classification in either liabilities or equity. Generally, a freestanding warrant agreement must both (i) be indexed to the Company’s own stock and (ii) meet certain explicit criteria in order to be classified in stockholders’ equity. Because the Series G Warrants embodied anti-dilution features that would adjust the exercise price in the event of a sale of securities below the $0.10 exercise price, the Series G Warrants do not meet the indexed test; and, therefore, the explicit criteria does not require evaluation. As a result, the Series G Warrants require liability classification at their fair value both on the inception date of the financing arrangement and subsequently.

The following table summarizes the allocation of the proceeds from the Series G Preferred Stock and Warrant Financing Arrangement on June 30, 2010:

	Allocation
Financial Instrument:
Series G Preferred, classified in redeemable preferred stock	$	2,870,000
Embedded Conversion Feature		800,000
Series G Warrants		1,330,000
	$	5,000,000

Our allocation methodology provided that the proceeds were allocated first to the Series G Warrants at their fair value, second to the Embedded Conversion Feature at its fair value and, lastly, the residual to the Series G Preferred. Information about the valuation of these derivative financial instruments is provided in Note 10. We will accrete the Series G Preferred to its redemption value with charges to stockholders’ equity over the term to its mandatory redemption date using the effective interest method.

On December 17, 2010, we amended the Certificate of Designation and the warrants to exclude adjustment to the conversion and exercise prices in the event that we sell common shares or share linked contracts for per share amounts that are less. By eliminating this feature, the Series G Preferred Stock became a conventional convertible financial instrument which is exempt from bifurcation of its embedded conversion option. Similarly, the elimination of this feature in the warrants resulted in them becoming indexed to our own stock and, therefore, exempt for derivative classification.

20

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11 – Equity (deficit):

Series C Convertible Preferred Stock:

On March 31, 2011, the Certificate of Designation underlying the Series C Convertible Preferred Stock was amended to remove a provision that, while improbable of occurrence, could result in redemption in cash. Upon removal of that provision, the carrying value was reclassified to stockholders’ equity. Terms, Features and Conditions of our Series C Preferred Stock are as follows:

Series	Date of Designation	Number of Shares		Par Value		Stated Value		Liquidation Value		Dividend Rate		Initial Conversion		Current Conversion
C	10/18/2007		10,620,000	$	0.00001	$	1.00	$	1.00		—	$	0.75	$	0.25

The conversion price is subject to adjustment for anti-dilution protection for (i) traditional capital restructurings, such as splits, stock dividends and reorganizations (traditional restructuring events), and (ii) sales or issuances of common shares or contracts to which common shares are indexed at less than the stated conversion prices (down-round protections). As it relates to adjustments to conversion prices arising from down-round financing triggering events, we account for the incremental value to convertible preferred stock classified as liabilities by charging earnings. For convertible preferred stock classified in stockholders’ equity or redeemable preferred stock (mezzanine classification) we charge the incremental value to paid-in capital or accumulated deficit, if paid-in capital is exhausted, as a deemed dividend.

The Series C Preferred has voting rights equal to the if-converted number of common shares and is redeemable for cash in an amount representing the stated value only in the event of a redemption triggering event as discussed below:

· The Corporation shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon a conversion hereunder;

· Unless specifically addressed elsewhere in the Certificate of Designation as a Triggering Event, the Corporation shall fail to observe or perform any other covenant, agreement or warranty contained in the Certificate of Designation, and such failure or breach shall not, if subject to the possibility of a cure by the Corporation, have been cured within 20 calendar days after the date on which written notice of such failure or breach shall have been delivered;

· There shall have occurred a Bankruptcy Event or Material Monetary Judgment;

If the Company fails to pay the Series C Preferred Triggering Redemption amount on the date it is due, interest will accrue at a rate equal to the lesser of 18% per year, or the maximum rate permitted by applicable law, accruing daily from the date of the Triggering event until the amount is paid in full.

21

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11 – Equity (deficit) (continued):

Series E Convertible Preferred Stock:

On December 3, 2008, we designated 13,001,000 shares of our newly designated $0.00001 par value, $1.00 stated value, Series E Convertible Preferred Stock (the “Series E Preferred Stock”) of which 13,000,000 were issued on August 27, 2009 in connection with our acquisition of Abazias. The Series E Preferred Stock votes with the common shareholders on an if-converted basis. The Series E Preferred Stock does not provide for either a liquidation preference or a dividend right. The Series E Preferred Stock was initially convertible into common stock on a one-for-one basis. However, this conversion rate was subject to a one-time adjustment, on the closing date of the Abazias purchase, where the conversion price was adjusted downward on a pro rata basis for common market values below $1.20, subject to a floor of $0.50. Since the market value on the closing date, August 27, 2009, was $1.01, the effective conversion price is $0.84; resulting in the 13,000,000 Series E Convertible Preferred Shares issued being indexed to 15,476,190 common shares. In addition to the aforementioned conversion adjustment, the Series E Preferred Stock provides for down-round price protection in the event that we sell shares or indexed securities below $1.20 during the two year period following issuance. In the event of a down-round financing, the conversion price is adjusted similarly to the one-time adjustment described above. That is, on a pro rata basis for down round financings at less than $1.20. This protection has a floor of $0.50. The current conversion price is $0.50. The Series E Preferred Stock conversion price is otherwise subject to adjustment for traditional reorganizations, such as stock splits, stock dividends and similar restructuring of equity. Finally, Infusion Brands is precluded from changing the designations of the Series E Preferred Stock without the approval of at least 80% of the holders.

The following table reflects the activity in our Series E Convertible Preferred Stock during the year ended June 30, 2010 and the six months ended December 31, 2010. There were no conversions during the six months ended June 30, 2011.

	Shares			Amount
Shares issued to acquire Abazias, Inc. on August 27, 2009		13,000,000		$	15,841,323
Beneficial conversion feature		—			(2,605,158	)
Conversion into 12,012,239 shares of common stock		(10,115,399	)		(10,299,161	)
Balances at June 30, 2010		2,884,601			2,937,004
Conversion into 721,737 shares of common stock		(357,825	)		(592,228	)
Balances at December 31, 2010 and June 30, 2011		2,526,776		$	2,344,776

The Series E Preferred shares issued in connection with the acquisition of Abazias were recorded at their fair value. Fair value was established based upon the common stock equivalent value of the Series E Preferred, using our trading market price on the closing date of the transaction ($1.01 on August 27, 2009), plus the incremental value associated with the anti-dilution protections afforded the holders of the Series E Preferred.

The effective conversion price of the Series E Preferred on the closing date of the Abazias acquisition was $0.84, which gave rise to a beneficial conversion feature. The beneficial conversion feature, which is recorded as a component of paid-in capital, was calculated by multiplying the linked common shares (15,476,190 common shares) times the spread between the trading market price of $1.01 and the conversion price of $0.84, or $2,605,158.

As of June 30, 2011, the remaining shares of Series E Preferred are convertible into 5,769,200shares of common stock.

22

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11 – Equity (deficit) (continued):

Stock Options and Warrants:

The following table summarizes the activity related to warrants and stock options for the six months ended June 30, 2011 and 2010:

	Linked Common Shares					Exercise Prices Per Share				Weighted Average Exercise Prices Per Share
	Warrants		Stock Options			Warrants		Stock Options		Warrants		Stock Options
Outstanding at January 1, 2011		128,758,209		32,960,337		$	0.10	$	0.01—1.00	$	0.10	$	0.05
Granted		—		—			—		—		—		—
Exercised		—		—			—		—		—		—
Cancelled or expired		—		(2,271,666	)		—		0.19—1.00		—		0.97
Outstanding at June 30, 2011		128,758,209		30,688,671		$	0.10	$	0.01—0.35	$	0.10	$	0.01
Outstanding at January 1, 2010		80,238,208		4,536,666		$	0.20—1.00	$	0.35—1.00	$	0.20	$	0.53
Granted		—		4,825,000			—		0.19		—		0.19
Exercised		—		—			—		—		—		—
Cancelled or expired		—		(1,825,000	)		—		0.05—1.00		0.20		0.58
Outstanding at June 30, 2010		80,238,208		7,536,666		$	0.20—1.00	$	0.19—1.00	$	0.20	$	0.38
Exerciseable at June 30, 2011		80,238,208		—		$	0.10		—	$	0.10		—
Compensation expense:
Grant date fair values:
Outstanding, June 30, 2011			$	1,825,840
Compensation expense recorded:
Six months June 30, 2011			$	165,045
Six months June 30, 2010			$	518,886
Compensation subject to amortization in future periods as options vest at June 30, 2011			$	1,489,651

23

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11 – Equity (deficit) (continued):

Stock Options: Grant date fair values of stock options are calculated using the Binomial Lattice Valuation Technique. In previous years we used Black Scholes Merton; the effect of this change was immaterial and we believe that Binomial Lattice is a preferable technique.

We awarded stock options and similar arrangements, as follows:

· On May 6, 2011, as part of our acquisition of HSE, we awarded the subsidiary’s president (i) 2,500,000 shares of common stock that had a fair value of $25,000 and (ii) an option to receive between 1,250,000 and 2,500,000 shares of common stock that are contingent upon achieving certain revenues and profitability levels. The bonus shares were expensed upon issuance. The fair value of the contingent option was calculated at $25,000 and is being amortized into compensation expense over the contingency period that is one year. During the three and six months ended June 30, 2011, $3,904 in compensation expense was recorded under this arrangement. The number of shares issuable under this arrangement is not determinable; therefore, no shares have been reflected in the previous table.

· On December 31, 2009, we awarded employees 2,400,000 stock options with exercise prices of $0.35, pro rata vesting of four years and terms of four years. The grant date fair value amounted to $689,450. Volatility assumptions ranged from 139.35% to 282.51%; Risk-free rate assumptions ranged from 0.06% to 1.70%.

· On March 31, 2010, we awarded employees 4,825,000 stock options with exercise prices of $0.19, pro rata vesting of five years and terms of five years. The grant date fair value amounted to $435,025. Volatility assumptions ranged from 138.40% to 211.91%; Risk-free rate assumptions ranged from 0.16% to 1.60%.

· On June 30, 2010, we awarded 30,243,671 stock options to employees and consultants (12,097,468 shares) (of which 4,800,000 replaced previously issued stock options) with exercise prices of $0.01, pro rata vesting of three years and terms of ten years. The grant date fair value amounted to $1,723,890. Volatility assumptions ranged from 156.05% to 217.79%; Risk-free rate assumptions ranged from 0.18% to 1.00%.

On June 30, 2010, we granted 4,800,000 stock options to three officers and/or directors in exchange for an equal number of previously issued stock options. The 4,800,000 stock options have an exercise price of $0.01. The 4,800,000 stock options exchanged had exercise prices ranging from $0.19 to $0.35. The difference in fair value between the newly issued stock options and those exchanged amounted to $47,600, which amount was charged to compensation expense.

On January 21, 2010, 1,825,000 exercisable options were redeemed and cancelled in connection with the separation of an officer and an employee of the Company. None of our stock options are contractually redeemable for cash or other assets; rather, in the case of our former CEO, we agreed to redeem 1,800,000 stock options for a price of $50,000 pursuant to a separation agreement. The payment was charged to employment cost on the date of the officer’s separation. The remaining 25,000 stock options associated with the separation of another employee were cancelled.

24

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11 – Equity (deficit) (continued):

On January 15, 2009, we issued 1,845,000 stock options to employees and related parties 1,520,000 to employees and 325,000 to affiliates classified as non-employees. The options have strike prices of $0.50 and expire in five years; the grant date fair market value per common share was $1.00. The awards vest to the benefit of each recipient upon grant. Total grant date fair value of these options amounted to $344,339, using the Black-Scholes-Merton valuation technique, and was recorded as compensation in the period of grant. This amount is included in other operating expenses in the accompanying statements of operations. We used the remaining contractual term for the expected term, volatility ranging from 45.73% to 49.17% and risk-free rates ranging from 0.73% to 1.36%.

Common stock issued under a consulting agreement:

On February 8, 2011, we granted 20,162,448 shares of common stock to a consultant as partial consideration under a consultancy agreement. The common shares that we issued vest monthly, on a pro-rata basis over twelve months, as the services are rendered. We are expensing the costs associated with these shares and related services monthly, based upon the trading market price of our shares at the vesting dates, which is the measurement date for the share-based payment. We recorded $74,369 and $203,891 of consulting expense during the three and six months ended June 30, 2011. Charges to consulting expense over the remaining term of the contract are dependent upon the trading market prices on the measurement dates.

In addition to the shares above, we also agree to issue common shares to the consultant equaling 5.0% of our outstanding common stock after we redeem our Series G Convertible Preferred Stock, which is more fully discussed in Note 10. Current accounting standards provide that when the quantity of shares issuable in a share-based arrangement are dependent upon the achievement of a condition, the lowest possible value of all possible outcomes should be used to value the shares. The lowest possible value under this condition is zero provided for under a scenario where we are unable to pay the redemption on our Series G Convertible Preferred Stock.

25

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11 – Equity (deficit) (continued):

(Loss) income per common share:

The following tables reflect the components of our calculation of (loss) income per common share for continuing operations and discontinued operations for the three and six months ended June 30, 2011 and 2010:

Three months ended June 30	2011			2010
Loss from continuing operations	$	(1,896,472	)	$	(1,632,408	)
Preferred stock dividends and accretion		(1,584,861	)		—
Numerator for basic	$	(3,481,333	)	$	(1,632,408	)
Loss from discontinued operations	$	—		$	(22,065,030	)
Denominator:
Weighted averages shares		180,386,079			159,111,254
Potentially dilutive equity-linked contracts:
Warrants and options		—			—
Convertible preferred stock		—			—
		180,386,079			159,111,254
Loss per common share, continuing operations
Basic	$	(0.02	)	$	(0.01	)
Diluted	$	(0.02	)	$	(0.01	)
Loss per common share, discontinued operations
Basic	$	—		$	(0.14	)
Diluted	$	—		$	(0.14	)

Six months ended June 30	2011			2010
(Loss) income from continuing operations	$	(3,215,824	)	$	13,372,051
Preferred stock dividends and accretion		(2,862,931	)		—
Numerator for basic	$	(6,078,755	)	$	13,372,081
Loss from discontinued operations	$	—		$	(23,437,176	)
Denominator:
Weighted averages shares		174,217,398			159,043,408
Potentially dilutive equity-linked contracts:
Warrants and options		—			—
Convertible preferred stock		—			—
		174,217,398			159,043,408
(Loss) income per common share, continuing operations
Basic	$	(0.03	)	$	0.08
Diluted	$	(0.03	)	$	0.08
Loss per common share, discontinued operations
Basic	$	—		$	(0.15	)
Diluted	$	—		$	(0.15	)

26

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11 – Equity (deficit) (continued):

The effects of warrants, stock options and convertible preferred stock are excluded from the denominator during the six months ended June 30, 2011 because their effect is anti-dilutive.

Settlement redemption:

On January 21, 2010, we redeemed 300,000 shares of common stock and stock options to purchase 1,500,000 shares of common stock for $50,000, which was in partial settlement of an employment arrangement with a former officer. The amount paid is included in compensation expense.

Foreign Currency:

As discussed in Note 3 and 12, we purchased HSE on May 9, 2011, which is based in Spain and maintains its records in Euros. Local currencies generally are considered the functional currencies outside the United States. Assets and liabilities for operations in local-currency environments are translated at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in shareholders' equity. Exchange gains (losses), which were immaterial during the periods presented herein, are recorded in income.

Note 12 – Geographic areas:

Commencing May 9, 2011 with our acquisition of Spain-based HSE, we operate and sell retail products to consumers in Europe. The following tables summarize the composition of our operations, assets, liabilities, redeemable preferred stock and (deficit) by geographic area:

	Three months ended June 30, 2011
	United States			Europe		Consolidated
Revenues	$	4,504,973		$	711,770	$	5,216,743
(Loss) income from continuing operations		(2,107,438	)		210,966		(1,896,472	)

	Six months ended June 30, 2011
	United States			Europe		Consolidated
Revenues	$	8,661,689			711,770	$	9,373,459
(Loss) income from continuing operations		(3,426,790	)		210,966		(3,215,824	)

	June 30, 2011
	United States			Europe		Consolidated
Assets:
Current assets	$	3,176,639		$	1,723,899	$	4,900,538
Long-lived assets		2,886,772			534,396		3,421,168
	$	6,063,411		$	2,258,295	$	8,321,706
Liabilities, redeemable preferred stock and equity:
Current liabilities	$	1,851,558		$	1,139,299	$	2,990,857
Non-current liabilities		4,883,120			239,902		5,123,022
Redeemable preferred stock		7,290,446			—		7,290,446
(Deficit) equity		(7,961,713	)		879,094		(7,082,619	)
	$	6,063,411		$	2,258,295	$	8,321,706

27

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13 – Commitments and contingencies:

Consulting Agreements:

On June 30, 2010, we entered into consulting agreements with two former members of our Board of Directors with two year terms. Each provides for annual compensation of $125,000 and a one-time stock option for 1.5% of our fully-diluted common ownership as calculated on the date of the agreement to each former member. The agreements provide for extension solely for cash compensation. The aggregate number of common shares linked to both stock options was 12,097,468 and the aggregate grant date fair value amounted to $689,556 using the Trinomial Lattice Technique. The stock options have a strike price of $0.01, vest over two years and expire in ten years. However, exercise of the stock options is restricted to periods following the payment of the special dividends on our Series G Preferred Stock (see Note 10). We record the annual compensation as the services are earned, which is expected to be ratably over the term of the agreements. We will record the compensation expense associated with the stock options over the vesting period (see Note 11).

Litigation, claims and assessments:

We are involved in the following matters:

Mediaxposure Limited (Cayman) v. Omnireliant Holdings, Inc., Kevin Harrington, Timothy Harrington, Chris Philips, Richard Diamond, Paul Morrison, Vicis Capital Master Fund and Vicis Capital LLC:

Supreme Court of the State of New York, County of New York, Index No. 09603325

On October 30, 2009, Mediaxposure (Cayman) Limited filed a complaint against the named defendants alleging certain causes of actions, including aiding and abetting a breach of fiduciary duty. In January 2010, all defendants moved to dismiss the complaint. The Company’s motion was fully briefed and argued. The Company’s motion to dismiss was granted on October 25, 2010. On or about November 18, 2010, Mediaexposure moved to amend the complaint to add a claim against the Company. By Order entered on or about June 29, 2011, the court denied Mediaexposure’s motion to amend the complaint.

OmniReliant Holdings, Inc v. ResponzeTV, et al.:

Supreme Court of the State of New York, County of New York, Index No. 600646/2009

The Company commenced this action on March 2, 2009 in the Supreme Court of the State of New York, County of New York against ResponzeTV, PLC, and two of its directors, Grahame Farquhar and Steven Goodman to recover $2,000,000, due and owing the Company pursuant to a promissory note executed by ResponzeTV, PLC in favor of the Company, and also asserts causes of action for fraud and unjust enrichment.

Defendants have moved to dismiss the Complaint, and the Company has opposed this motion. The court denied the motion as against Grahame Farquhar.

Based upon ResponzeTV’s dissolution, the Company stipulated to dismiss the action against it, without prejudice. The Company moved to amend the complaint in July, 2010 to add Mediaxposure (Cayman) as a defendant. The motion to leave to amend the complaint to add Mediaxposure (Cayman) as a defendant was withdrawn.  On or about April 13, 2011, this acton was discontinued in its entirety, without prejudice.

28

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13 – Commitments and contingencies (continued):

Local Ad Link, Inc., et al. v. AdzZoo, LLC, et al. v. OmniReliant Holdings, Inc., et ano:

United States District Court, District of Nevada, Case No. 2:08-cv-00457-LRH-PAL

On or about February 19, 2010, AdzZoo, LLC (“AdzZoo”) and the other defendants in the above-referenced action commenced a third-party action against the Company and Zurtvita Holdings, Inc.  In the Third-Party Complaint, AdzZoo alleges a cause of action for fraud against the Company, in which it seeks unspecified monetary damages.  Defendants also allege a claim for a declaratory judgment in which they seek a judgment declaring the rights with respect to certain representative agreements entered into between certain individual Defendants and Plaintiff.

On April 13, 2010, the Company moved to dismiss the Third-Party Complaint as asserted against it. By Order, dated September 9, 2010, the Court granted the Company’s motion and dismissed the Third-Party Complaint against the Company.

OmniReliant Holdings, Inc. v. Professor Amos’s Wonder Products and Network 1,000,000 Inc. (d/b/a/ PA Wonder Products and Professor Amos Wonder Products, Inc.) et al. Case No. 10-2556-TPA

On October 4, 2010, the Company, the exclusive licensee of the “Professor Amos” brand, commenced this action against Professor Amos Wonder Products, the licensor, and certain of its officers and employees arisingfrom certain wrongful and tortious conduct of the defendant.  Plaintiff alleges claims for breach of an amended license agreement, tortious interference with the contract, tortious interference with business relationships, trade libel, fraud and seeks permanent injunctive relief. No answer has been filed as of the date of this Report. Defendant, Professor Amos Wonder Products and Network 1,000,000 Inc., filed for bankruptcy and defendants removed the action to the bankruptcy court for the Western District of Pennsylvania.

On February 28, 2011, Defendants answered the Complaint and asserted counterclaims against the Company for breach of the amended license agreement. On March 21, 2011, the Company served its answer to the counterclaims in which it denied the material allegations thereof.  On or about May 9, 2011, the parties executed a Settlement Agreement which was approved by the Court on June 23, 2011, and on June 23, 2011, the Court entered an Order dismissing this action, with prejudice.

As of June 30, 2011, the Company was subject to the various legal proceedings and claims discussed above, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. In the opinion of management, the Company does not have a potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially adversely affect its financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in these legal matters, the operating results of a particular reporting period could be materially adversely affected.

Other contingencies:

In connection with our business, we enter into other arrangements from time to time that are routine and customary for the operation of our business that include commitments, typically of a short duration. These arrangements include, among other things, infomercial development and production arrangements and royalty or contingent consideration to product manufacturers or infomercial hosts. As of June 30, 2011, we do not believe that our routine and customary business arrangements are material for reporting purposes.

29

Infusion Brands International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 14 – Related party transactions:

Financing Transaction – As more fully discussed in Note 15, we completed a financing transaction on July 8, 2011 with a certain accredited investor that beneficially owns approximately 89% of our common stock prior to the financing and whose principals are represented on our Board of Directors.

Placement Agent and Related Services - Midtown Partner & Co. LLC and Apogee Financial Investments, serve as our placement agents and merchant banker, respectively, in connection with certain of our financing and other strategic transactions. These companies are owned by certain shareholders and former Board Members. We compensated these companies in warrants with fair values of $382,761 during the twelve months ended June 30, 2010, related to financing arrangements. Further, these companies are entitled to receive commissions from us upon the exercise by investors of warrants that were issued in connection with financings that they arranged for us.

Note 15 – Subsequent events:

We have evaluated subsequent events arising following the balance sheet date of June 30, 2011 through the date of August 15, 2011. There have been no material subsequent events not provided elsewhere herein or in filings on Form 8-K.

Financing Transaction – On March 18, 2011 and April 12, 2011, we received $1,000,000 and $2,000,000, respectively, in advances related to oral agreements between the Company and a certain accredited investor (“Investor”) whereby the Company agreed to sell to the Investor an aggregate of 3,000,000 shares of its Series G Convertible Preferred Stock and Series G Warrants to purchase an additional 30,000,000 shares of the Company’s common stock over a ten year term and with an exercise price of $0.10 per share for an aggregate purchase price of $3,000,000. The oral agreement provided that the securities issuable were to be issued to the Investor upon the execution of transaction documents and upon the amending of the certificate of designation of the Series G Convertible Preferred Stock, terms of which are discussed in Note 10, to increase the number of authorized shares to 8,000,000. On June 13, 2011, the Company amended the certificate of designation and on July 8, 2011 entered into a securities purchase agreement with the Investor pursuant to which the Investor purchased the aforementioned financial instruments for an aggregate purchase price value of $3,000,000, which was previously advanced.

In addition, the Company and the Investor have entered into a registration rights agreement pursuant to which if at any time after the date of the agreement the Company shall decide to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the stock option or other employee benefit plans, then the Company shall send to each holder a written notice of such determination and, if within fifteen days after the date of such notice, any such holder shall so request in writing, the Company shall include in such registration statement, all or any part of such Registrable Securities (as defined in the Registration Rights Agreement) such holders request to be registered.

As further consideration for above-described transaction, the Company and the Investor amended and restated their prior security agreement. Additionally, the Investor and the Company’s wholly owned subsidiaries amended and restated both their prior subsidiary guarantee and guarantor security agreement.

We have not completed the accounting for this financing as of the filing date of this Quarterly Report on Form 10-Q.

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

The following discussion and analysis is intended to help the reader understand the results of operations, financial condition, and cash flows of Infusion Brands International, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements included elsewhere herein.

Material event affecting comparability of results:

On May 9, 2011, we entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Home Shopping Express S.A. (“HSE”) and the holders of 100% of the issued and outstanding common stock of HSE pursuant to which we purchased 50% of the issued and outstanding HSE Shares for an aggregate purchase price of 50,000 Euros ($75,154 based upon the exchange rate on the transaction date). HSE, which is located in Baleares, Spain, is engaged in the development and retail sale of consumer products throughout most of Europe, in particular, HSE's flagship product is the Dual Saw by Startwin. Through this acquisition, we became the principle owners of the intellectual property related to Dual Saw in geographic regions whereby Startwin already took ownership of this trademark right. By combining our enterprises, we believe this acquisition helps to unify the worldwide brand for Dual Saw. Moreover, with a global presence this acquisition will help open channels of distribution for cross border promotion of our other respective branded products. Pursuant to the terms of the Stock Purchase Agreement, we have the option for a period of twelve months to purchase the remaining 50% of the outstanding HSE common shares from the remaining HSE Shareholders based upon revenue and profitability milestones.

The Stock Purchase Agreement extends controlling rights to the Company regarding all financial and operational matters of HSE. In addition, all of the members of HSE’s current board of directors resigned and our Chief Executive Officer was appointed as the sole director of HSE. Finally, all operating profits of HSE were assigned to the Company. As a result of the terms of the Stock Purchase Agreement, we control HSE and it meets the definition of a variable interest entity wherein the Company is the primary beneficiary. Accordingly, we have applied acquisition accounting to our purchase and consolidate HSE in our financial statements following our acquisition.

Accordingly, commencing May 9, 2011 with our acquisition of Spain-based HSE, we operate and sell retail products to consumers in Europe. The following tables summarize the composition of our operations, assets, liabilities, redeemable preferred stock and (deficit) by geographic area, which are further discussed in this management’s discussion and analysis, below:

	Three months ended June 30, 2011
	United States			Europe		Consolidated
Revenues	$	4,504,973		$	711,770	$	5,216,743
(Loss) income from continuing operations		(2,107,438	)		210,966		(1,896,472	)

	Six months ended June 30, 2011
	United States			Europe		Consolidated
Revenues	$	8,661,689			711,770	$	9,373,459
(Loss) income from continuing operations		(3,426,790	)		210,966		(3,215,824	)

The above operating results include a bargain purchase gain of $200,416 and acquisition expenses of $44,636. A bargain purchase gain arises when the fair values of the net assets that we acquired are greater than our purchase price. Acquisition expenses are required to be expensed under current accounting standards.

31

	June 30, 2011
	United States			Europe		Consolidated
Assets:
Current assets	$	3,176,639		$	1,723,899	$	4,900,538
Long-lived assets		2,886,772			534,396		3,421,168
	$	6,063,411		$	2,258,295	$	8,321,706
Liabilities, redeemable preferred stock and equity:
Current liabilities	$	1,851,558		$	1,139,299	$	2,990,857
Non-current liabilities		4,883,120			239,902		5,123,022
Redeemable preferred stock		7,290,446			—		7,290,446
(Deficit) equity		(7,961,713	)		879,094		(7,082,619	)
	$	6,063,411		$	2,258,295	$	8,321,706

Three months ended June 30, 2011 compared to three months ended June 30, 2010:

Revenues and costs of revenues – We derive the majority of our revenues from the sale of tangible branded consumer products through global direct to consumer channels of distribution. Commencing May 9, 2011, we conduct sales, marketing, distribution and fulfillment operations in two geographic areas: The United States and Europe. We also collect rents from leasing a portion of the real estate we own in Clearwater, Florida. Our comparison of material components of revenues are as follows:

Product sales: Our consolidated product sales increased by $4,646,535 or 815% to $5,216,743 for the three months ended June 30, 2011 from $570,208 for the three months ended June 30, 2010. Of this increase, $711,770 was contributed by our European operations. The balance of the increase in consolidated product sales is attributable to the redirection, focus and application of Company assets, wherein our management team has initiated the recruitment of leading product and brand development and experts with many years of experience in the direct to consumer marketing industry. Moreover, the Company has continued to enhance and diversify its channels of distribution for its brands by generating sales through domestic retailers, as well as generating sales to international distributors in Central America and Europe. During the three months ended June 30, 2010 the management team had substantially curtailed revenue producing activities in order to reduce the drain on capital and evaluate opportunities available to the Company. The management team is now fully executing on our vision of becoming a global consumer products company which builds and markets brands globally through an ecosystem of direct to consumer marketing channels. This management team has also initiated a strategic redirection of the former Consumer Products Segment away from its roots of simply being a reseller of “products” through infomercials to becoming more focused on growing long term predictable revenue and earnings by creating and marketing innovative branded consumer products, combined with product line extension of its new and existing brands.

Cost of product sales: Our cost of product sales increased by $1,931,982 or 238% to $2,744,280 for the three months ended June 30, 2011 from $812,298 for the three months ended June 30, 2010. Of this increase, $258,341 was contributed by our European operations. The increase was attributable to the significant increase in our consumer products sales for reasons discussed in the previous section. Our gross margin as a percent of product sales during the three months ended June 30, 2011 amounted to 47%  (44% in the United States and 63% in Europe) compared to (42%) during the three months ended June, 2010. Margins on retail products are dependent upon the types and demands for specific types of products. Accordingly, our ongoing margins will likely be volatile until we establish the types of products that will serve as our long-term base of offerings. The negative margin in the prior year quarter was attributable to inventory adjustments that became necessary during the curtailment period discussed in the preceding section.

32

Other revenue: Rental income of commercial real estate amounted to $61,081 for the three months ended June 30, 2011, a decrease of $11,754 or 16% when compared to $72,835 of rental income that we reported for the three months ended June 30, 2010. The decrease is attributable to our corporate offices displacing tenants and assuming a higher level of occupancy in our building. Services revenue that was recorded in the prior year has been discontinued.

Other operating expenses – Other operating expenses consist of advertising expense, accounting and professional expenses, employment costs, depreciation and amortization and administrative expenses. Our analysis of the material components of changes in other operating expenses are as follows:

Advertising and promotion: Advertising and promotion expense increased by $1,445,505 or 500% for the three months ended June 30, 2011 to $1,734,550 from $289,045 for the three months ended June 30, 2010. Because we offer product for sale leveraging direct to consumer marketing methods, there is often times a direct correlation between our product sales revenue and our advertising expense. Advertising and promotion will continue to be volatile and uncertain as we enter new distribution channels and proactively promote our brands to create brand awareness and create brand relationships with consumers.

Employment Costs: Employment related costs consist of salaries and payroll, employee insurance, and share-based payment. These costs increased by $1,363,526 or 426% to $1,683,292 for the three months ended June 30, 2011 from $319,766 for the three months ended June 30, 2010. Employment costs for the current quarter include $679,793 ($675,889 cash and $28,904 share-based) that was paid to the operator of HSE pursuant to an employment contract.  The European operations contributed $87,871 to the total for the three months ended June 30, 2011. The balance of the increase is attributable to additional employees hired during the period. Employment costs for the three months ended June 30, 2011 include $109,333 in share-based payment expense related to employees and $74,369 related to outside consultants. We may use stock options in future periods to compensate our employees, which will increase our employment costs.

Other general and administrative: These costs and expenses include royalties, bad debts, occupancy costs and general office expenses. Our general and administrative costs increased by $83,824 or 16% to $606,750 for the three months ended June 30, 2011 from $522,926 for the three months ended June 30, 2010. The increase was attributable to a combination of increases in our general office expenses and travel expenses. We anticipate that our other general and administrative expenses will increase proportionately as our business grows.

Accounting and professional expense: Accounting and consulting professional expenses decreased by $269,524 or 38% to $431,005 for the three months ended June 30, 2011 from $700,529 for the three months ended June 30, 2010. These costs include fees relating to other professional consulting and audit related expenses. The decrease results from the staffing of our finance department that is performing many services previously provided by consultants.

Bargain purchase gain, net of expenses: The fair value of net assets of HSE that we acquired on May 6, 2011 exceeded the purchase price that we paid by $200,416. Bargain purchases are recorded in operating income. Our direct expenses related to this acquisition amounted to $44,636 that we netted against the gain.

33

Depreciation and amortization: Depreciation and amortization expense (excluding amounts included in cost of sales) decreased $329,836, or 83% to $67,265 for the three months ended June 30, 2011 compared to $397,101 during the three months ended June 30, 2010. The decline is due to the impairment of intangible assets in prior periods. Depreciation and amortization during the three months ended June 30, 2011 is in line with our future expectations.

Impairments: During the three months ended June 30, 2010 certain long-lived tangible and intangible assets were evaluated for impairment. The result of the review was a charge to operations in the amount of $3,881,462. Our ongoing review of the carrying values of our long lived assets resulted in no impairment charges during the three months ended June 30, 2011.

Other income (expense): Other income and expense include fair value adjustments related to our derivative financial instruments, interest expense and income, extinguishments and impairments. Our analysis of the material components of changes in the other income (expense) section of the statement of operations are as follows:

Interest and other income: Interest and other income results from deposits and other short-term investment. Our interest and other income increased $175,804 or 975%, to $193,838 during the three months ended June 30, 2011 compared to $18,034 during the three months ended June 30, 2010. The increase is due to higher average balances and focused treasury management.

Interest expense: Interest expense arises from our mortgage note and note payable. Interest expense increased $47,343 or 164% to $76,289 for the three months ended June 30, 2011 compared to $28,946 during the three months ended June 30, 2010.

(Losses) gains on asset sales: We generated losses of $75,000 from the sale of assets. We do not anticipate significant additional sales of assets.

Derivative income (expense): On December 17, 2010, certain modifications were made to our investor warrants and convertible preferred stock that resulted in reclassification of the derivative liabilities to stockholders’ equity. We may enter into other financing arrangements that may give rise to derivative liabilities although no such arrangements are being considered at this time.

(Loss) income from continuing operations – We have reported a loss from continuing operations of $1,790,989 during the three months ended June 30, 2011 compared to a loss of $1,699,156 during the three months ended June 30, 2010. The change is reflected in the preceding discussion.

Loss from operations of discontinued segments – During the prior year we discontinued and disposed of all holdings in the Fashion Goods and eCommerce Segments. Operating activities of the discontinued segments are presented as one-line captions in our consolidated statements of operations. Since our disposals were completed by the end of the prior quarterly period, there are no discontinued operations during the three months ended June 30, 2011. The composition of the operations of the discontinued segments for the three and six months ended June 30, 2010 is as follows:

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	Three months ended June 30, 2010			Six months ended June 30, 2010
Revenues of discontinued segments	$	1,981,767		$	4,305,318
Cost of revenues		2,806,668			4,991,246
Gross loss		(824,901	)		(685,928	)
Costs and operating expenses:
Impairments of assets		19,091,392			19,091,392
General and administrative		427,431			883,910
Depreciation and amortization		244,147			482,378
Total costs and expenses		19,762,970			20,457,680
Loss from operations		(20,587,871	)		(21,143,608	)
Other expenses:
Impairments of investments		(1,627,129	)		(1,998,491	)
Equity in losses of investees accounted for by applying the equity method		103,443			(341,604	)
Interest expense		(5,876	)		(5,876	)
Loss from discontinued operations	$	(22,117,433	)	$	(23,489,579	)

We have no ongoing involvement with these discontinued companies or assets.

Net (loss) income – We have reported a net loss of $1,896,472 during the three months ended June 30, 2011 compared to a net loss of $23,697,438 during the three months ended June 30, 2010. The change is reflected in the preceding discussion.

Six months ended June 30, 2011 compared to six months ended June 30, 2010:

Revenues and costs of revenues – We derive the majority of our revenues from the sale of tangible branded consumer products through global direct to consumer channels of distribution. Commencing May 9, 2011, we conduct sales, marketing, distribution and fulfillment operations in two geographic areas: The United States and Europe. We also collect rents from leasing a portion of the real estate we own in Clearwater, Florida. Our comparison of material components of revenues are as follows:

Product sales: Our consolidated product sales increased by $6,271,891 or 202% to $9,373,459 for the six months ended June 30, 2011 from $3,101,568 for the six months ended June 30, 2010. Of this increase, $711,770 was contributed by our European operations. The balance of the increase in consolidated product sales is attributable to the redirection, focus and application of Company assets, wherein our management team has initiated the recruitment of leading product and brand development and experts with many years of experience in the direct to consumer marketing industry. Moreover, the Company has continued to enhance and diversify its channels of distribution for its brands by generating sales through domestic retailers, as well as generating sales to international distributors in Central America and Europe. During the three months ended June 30, 2010 the management team had substantially curtailed revenue producing activities in order to reduce the drain on capital and evaluate opportunities available to the Company. The management team is now fully executing on our vision of becoming a global consumer products company which builds and markets brands globally through an ecosystem of direct to consumer marketing channels. This management team has also initiated a strategic redirection of the former Consumer Products Segment away from its roots of simply being a reseller of “products” through infomercials to becoming more focused on growing long term predictable revenue and earnings by creating and marketing innovative branded consumer products, combined with product line extension of its new and existing brands.

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Cost of product sales: Our cost of product sales increased by $2,671,008 or 131% to $4,704,703 for the six months ended June 30, 2011 from $2,033,695 for the six months ended June 30, 2010. Of this increase, $258,341 was contributed by our European operations. The increase was attributable to the significant increase in our consumer products sales for reasons discussed in the previous section. Our gross margin as a percent of product sales during the six months ended June 30, 2011 amounted to 49.8%  (48.6% in the United States and 63.7% in Europe) compared to (34.4%) during the six months ended June, 2010. Margins on retail products are dependent upon the types and demands for specific types of products. Accordingly, our ongoing margins will likely be volatile until we establish the types of products that will serve as our long-term base of offerings.

Other revenue: Rental income of commercial real estate amounted to $124,308 for the six months ended June 30, 2011, a decrease of $44,265 or 26% when compared to $168,573 of rental income that we reported for the six months ended June 30, 2010. The decrease is attributable to our corporate offices displacing tenants and assuming a higher level of occupancy in our building. Services revenue that was recorded in the prior year has been discontinued.

Other operating expenses – Other operating expenses consist of advertising expense, accounting and professional expenses, employment costs, depreciation and amortization and administrative expenses. Our analysis of the material components of changes in other operating expenses are as follows:

Advertising and promotion: Advertising and promotion expense increased by $3,372,881 or 612% for the six months ended June 30, 2011 to $3,923,837 from $550,956 for the six months ended June 30, 2010. Because we offer product for sale leveraging direct to consumer marketing methods, there is often times a direct correlation between our product sales revenue and our advertising expense. Advertising and promotion will continue to be volatile and uncertain as we enter new distribution channels and proactively promote our brands to create brand awareness and create brand relationships with consumers.

Employment Costs: Employment related costs consist of salaries and payroll, employee insurance, and share-based payment. These costs increased by $1,127,651 or 91% to $2,362,748 for the six months ended June 30, 2011 from $1,235,097 for the six months ended June 30, 2010. Employment costs for the current quarter include $679,793 ($675,889 cash and $28,904 share-based) that was paid to the operator of HSE pursuant to an employment contract. The European operations contributed $87,871 to the total for the six months ended June 30, 2011. The balance of the increase is attributable to additional employees hired during the period. Employment costs for the six months ended June 30, 2011 include $190,045 in share-based payment expense related to employees and $203,891 related to outside consultants. We may use stock options in future periods to compensate our employees, which will increase our employment costs.

Other general and administrative: These costs and expenses include royalties, bad debts, occupancy costs and general office expenses. Our general and administrative costs decreased by $203,727 or 17% to $1,017,562 for the six months ended June 30, 2011 from $1,221,289 for the six months ended June 30, 2010. While we have experienced increases in our office and travel expenses in the current period, our bad debt expenses declined $300,000 from the same period of the prior year due to better collections and account management. We anticipate that our other general and administrative expenses will increase proportionately as our business grows.

Accounting and professional expense: Accounting and consulting professional expenses decreased by $495,576 or 38% to $805,597 for the six months ended June 30, 2011 from $1,301,173 for the six months ended June 30, 2010. These costs include fees relating to other professional consulting and audit related expenses. The decrease results from the staffing of our finance department that is performing many services previously provided by consultants.

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Bargain purchase gain, net of expenses: The fair value of net assets of HSE that we acquired on May 6, 2011 exceeded the purchase price that we paid by $200,416. Bargain purchases are recorded in operating income. Our direct expenses related to this acquisition amounted to $44,636 that we netted against the gain.

Depreciation and amortization: Depreciation and amortization expense (excluding amounts included in cost of sales) decreased $666,457, or 85% to $120,593 for the six months ended June 30, 2011 compared to $787,050 during the six months ended June 30, 2010. The decline is due to the impairment of intangible assets in prior periods. Depreciation and amortization during the six months ended June 30, 2011 is in line with our future expectations.

Impairments: During the six months ended June 30, 2010 certain long-lived tangible and intangible assets were evaluated for impairment. The result of the review was a charge to operations in the amount of $3,881,462. Our ongoing review of the carrying values of our long lived assets resulted in no impairment charges during the six months ended June 30, 2011.

Other income (expense): Other income and expense include fair value adjustments related to our derivative financial instruments, interest expense and income, extinguishments and impairments. Our analysis of the material components of changes in the other income (expense) section of the statement of operations are as follows:

Interest and other income: Interest and other income results from deposits and other short-term investment. Our interest and other income increased $243,490 or 1172%, to $264,266 during the six months ended June 30, 2011 compared to $20,776 during the six months ended June 30, 2010. The increase is due to higher average balances and focused treasury management.

Interest expense: Interest expense arises from our mortgage note and note payable. Interest expense increased $46,828 or 72% to $111,645 for the six months ended June 30, 2011 compared to $64,817 during the six months ended June 30, 2010.

(Losses) gains on asset sales: We generated net gains of $11,756 from the sale of assets. We do not anticipate significant additional sales of assets.

Derivative income (expense): On December 17, 2010, certain modifications were made to our investor warrants and convertible preferred stock that resulted in reclassification of the derivative liabilities to stockholders’ equity. We may enter into other financing arrangements that may give rise to derivative liabilities although no such arrangements are being considered at this time.

(Loss) income from continuing operations – We have reported a loss from continuing operations of $3,117,116 during the six months ended June 30, 2011 compared to income of $13,292,103 during the six months ended June 30, 2010. The change is reflected in the preceding discussion.

Loss from operations of discontinued segments – During the prior year we discontinued and disposed of all holdings in the Fashion Goods and eCommerce Segments. Operating activities of the discontinued segments are presented as one-line captions in our consolidated statements of operations. Since our disposals were completed by the end of the prior quarterly period, there are no discontinued operations during the six months ended June 30, 2011. The composition of the operations of the discontinued segments for the six and six months ended June 30, 2010 is as follows:

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	Three months			Six months
	ended			ended
	June 30, 2010			June 30, 2010
Revenues of discontinued segments	$	1,981,767		$	4,305,318
Cost of revenues		2,806,668			4,991,246
Gross profit		(824,901	)		(685,928	)
Costs and operating expenses:
Impairments of assets		19,091,392			19,091,392
General and administrative		427,431			883,910
Depreciation and amortization		244,147			482,378
Total costs and expenses		19,762,970			20,457,680
Loss from operations		(20,587,871	)		(21,143,608	)
Other expenses:
Impairments of investments		(1,627,129	)		(1,998,491	)
Equity in losses of investees accounted for by applying the equity method		103,443			(341,604	)
Interest expense		(5,876	)		(5,876	)
Loss from discontinued operations	$	(22,117,433	)	$	(23,489,579	)

We have no ongoing involvement with these discontinued companies or assets.

Net (loss) income – We have reported a net loss of $3,215,824 during the six months ended June 30, 2011 compared to a net loss of $10,065,125 during the six months ended June 30, 2010. The change is reflected in the preceding discussion.

Liquidity and Capital Resources

Cash and cash equivalents amounted to $1,038,757 as of June 30, 2011 compared to $1,746,510 at December 31, 2010. We have working capital of $1,909,681 as of June 30, 2011 and we had working capital of $2,088,260 at December 31, 2010. Our working capital declined as a result of paying our accounts payable, which decreased by $932,216.

Cash Flow from Operating Activities – We used cash of $3,533,701 and $3,058,390 in our operating activities during the six months ended June 30, 2011 and 2010, respectively. During the six months ended June 30, 2011, we recorded net losses attributable to Infusion Brands, Inc. (“Infusion Brands”) of $3,092,458, which included non-cash charges of $298,620. Of the non-cash charges $393,936 related to share-based payment; ($200,416) related to the bargain purchase gain we recorded related to HSE; $119,682 related to depreciation expense; and $10,786 related to bad debts. During the six months ended June 30, 2010, we recorded net loss attributable to Infusion Brands of $10,197,476, which included net non-cash credits and charges of $6,904,749. The non-cash credits consisted of derivative income of $20,334,558 and amortization of deferred revenue of $349,197. These credits were offset by non-cash charges for impairments of assets and investments of $22,972,854 and $1,998,492, respectively. Amortization of intangibles amounted to $1,150,958 and share-based payment amounted to $518,886 among the remaining non-cash charges.

Our cash from operating activities also includes sources and (uses) of cash flow from changes in our operating assets and liabilities of $(739,863) and $234,337 for the six months ended June 30, 2011 and 2010, respectively.

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Cash Flow from Investing Activities – We used cash of $113,927 and $126,170 in our investing activities during the six months ended June 30, 2011 and 2010, respectively. Cash was used to purchase office equipment and make improvements to our building during each period. Cash of $57,298 was also used to acquire HSE during the period. During the six months ended June 30, 2010, we also made $83,791 in investments that were subsequently written off.

We have no commitments for the purchase of property and equipment or other long lived assets.

Cash Flow from Financing Activities – We obtained net $2,962,747 in cash from our financing activities during the six months ended June 30, 2011. On March 16, 2011, we generated proceeds of $1,000,000 from advances on the impending sale of Series G Preferred Stock and Warrants. On April 12, 2011, we generated an additional $2,000,000 of advances on the impending sale of Series G Preferred Stock and Warrants. The sales of the Series G Preferred Stock and Warrants were completed on July 8, 2011 and will be accounted for in our next quarterly reporting period. Other cash uses in our financing activities included the payment of principle on our mortgage note.

Series G Convertible Preferred Stock Redemption Requirements — On June 30, 2010, we sold 5,000,000 shares of Series G Convertible Preferred Stock. The 5,000,000 shares of Series G Preferred are mandatorily redeemable for cash of up to $50,600,000, which is mandatorily payable $5,000,000 on June 30, 2011 and $45,600,000 on June 30, 2013 as follows:

· The stated value of $5,000,000 is payable on June 30, 2013.

· An additional dividend equal to $1.00 per share of Series G Preferred is payable on June 30, 2011 if the special preferred distribution discussed in the next bullet point has not been paid before that date (aggregate redemption value $5,000,000).

· A special preferred distribution equal to $8.12 per share of Series G Preferred is payable on June 30, 2013 or earlier at our option (aggregate redemption value of $40,600,000). This special preferred distribution is reduced by the amount of the additional dividend discussed in the preceding bullet point if the additional dividend is paid on the June 30, 2011.

In summary, if the additional dividend described in the second bullet point above is paid on or before June 30, 2011, the mandatory redemption amount is $45,600,000. If the additional dividend is not paid on or before June 30, 2011, the mandatory redemption amount is $50,600,000. Quarterly and annual regular dividend requirements are $100,000 and $400,000, respectively, while the Series G Preferred Stock is outstanding. These dividends are payable quarterly irrespective of declaration by our Board.

On March 16, 2011 and April 6, 2011, we entered into oral agreements with a certain accredited investor to sell the Investor, subject to the filing of an amendment to the Certificate of Designation of its Series G Convertible Stock 1,000,000 and 2,000,000 shares of its Preferred Stock, respectively, and Series G Warrants to purchase an aggregate of 10,000,000 and 20,000,000 shares of the common stock, respectively. The purchase prices of $1,000,000 and $2,000,000, respectively, were received from the Investor in the form of advances on March 16, 2011 and April 6, 2011. The Preferred Stock purchase agreements and other related transaction documents (the “Transaction Documents”) were executed and the financial instruments issued on July 8, 2011.

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On January 28, 2011, we entered into an accounts receivable sales and financing arrangement that provides for the assignment and sale of certain qualified accounts receivable to a financial institution. The facility provides for cash advances in amounts of 75% of qualified accounts receivable balances assigned up to an amount of $1,000,000. The financial institution receives an initial discount of 1.75% of the net realizable value of the qualified receivable. Subsequently, the lender receives an additional 1.0% discount for each 15 day period that the qualified receivable has not been collected. Further, the lender has a secured priority interest in the accounts receivable balances that they finance. This arrangement does not qualify for sales accounting under current accounting standards and is, therefore, subject to accounting as a financing arrangement wherein we will carry the assigned receivables in our accounts until they are settled and advances that we receive from the lender will be reflected as liabilities. The discounts will be classified as interest expense. There were no balances outstanding under this arrangement as of June 30, 2011. However, we intend to use this facility in future periods.

On March 2, 2011, we entered into a media funding arrangement with financial institution that provides for the financing of certain of our defined media and marketing material expenditures. The borrowing facility does not have a stated maximum, although borrowings are limited to certain defined account receivable levels. The facility has an initial term of one year with consecutive one year renewal terms unless terminated by either party. It provides for fees to the lender equal to 2.5% of the qualified amounts paid plus deferred payment arrangements that provide for interest at an approximate rate of 8.7% per annum. The creditor has a first creditor’s secured priority interest in certain accounts receivable and inventories that are specific to the direct-response marketing campaigns that they finance. As of June 30, 2011, $150,532 was outstanding under this facility. We carry media funding advances in the accounts payable and accrued liabilities classification in our balance sheet.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to reserves, deferred tax assets and valuation allowance, impairment of long-lived assets, fair value of our financial instruments and equity instruments. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

While all of our accounting policies impact the consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require management’s most subjective or complex judgments and estimates. Management believes the policies that fall within this category are the policies on revenue recognition and accounts receivable and other intangible assets, investments, financial and derivative instruments.

Revenue recognition – Revenue is recognized when evidence of the arrangement exists, the product is shipped to a customer, or in the limited circumstances, at destination, when terms provide that title passes at destination, the fee for the service is fix or determinable and when we have concluded that amounts are collectible from the customers. Estimated amounts for sales returns and allowances are recorded at the time of sale. Shipping costs billed to customers are included as a component of product sales. The associated cost of shipping is included as a component of cost of product sales.

Accounts receivable – Accounts receivable represents normal trade obligations from customers that are subject to normal trade collection terms, without discounts or rebates. Notwithstanding these collections, we periodically evaluate the collectability of our accounts receivable and consider the need to establish an allowance for doubtful accounts based upon our historical collection experience and specifically identifiable information about our customers.

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Item 3. Quantitative and Qualitative Disclosures About Market Risks.

The information required by this item does not apply to smaller reporting companies.

Item 4. Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation of the effectiveness, as of June 30 2011, of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of June 30, 2011 to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Mediaxposure Limited (Cayman) v. Omnireliant Holdings, Inc., Kevin Harrington, Timothy Harrington, Chris Philips, Richard Diamond, Paul Morrison, Vicis Capital Master Fund and Vicis Capital LLC:

Supreme Court of the State of New York, County of New York, Index No. 09603325

On October 30, 2009, Mediaxposure (Cayman) Limited filed a complaint against the named defendants alleging certain causes of actions, including aiding and abetting a breach of fiduciary duty. In January 2010, all defendants moved to dismiss the complaint. The Company’s motion was fully briefed and argued. The Company’s motion to dismiss was granted on October 25, 2010. On or about November 18, 2010, Mediaexposure moved to amend the complaint to add a claim against the Company. By Order entered on or about June 29, 2011, the court denied Mediaexposure’s motion to amend the complaint.

OmniReliant Holdings, Inc v. ResponzeTV, et al.:

Supreme Court of the State of New York, County of New York, Index No. 600646/2009

The Company commenced this action on March 2, 2009 in the Supreme Court of the State of New York, County of New York against ResponzeTV, PLC, and two of its directors, Grahame Farquhar and Steven Goodman to recover $2,000,000, due and owing the Company pursuant to a promissory note executed by ResponzeTV, PLC in favor of the Company, and also asserts causes of action for fraud and unjust enrichment.

Defendants have moved to dismiss the Complaint, and the Company has opposed this motion. The court denied the motion as against Grahame Farquhar.

Based upon ResponzeTV’s dissolution, the Company stipulated to dismiss the action against it, without prejudice. The Company moved to amend the complaint in July, 2010 to add Mediaxposure (Cayman) as a defendant. The motion to leave to amend the complaint to add Mediaxposure (Cayman) as a defendant was withdrawn.  On or about April 13, 2011, this acton was discontinued in its entirety, without prejudice.

Local Ad Link, Inc., et al. v. AdzZoo, LLC, et al. v. OmniReliant Holdings, Inc., et ano:

United States District Court, District of Nevada, Case No. 2:08-cv-00457-LRH-PAL

On or about February 19, 2010, AdzZoo, LLC (“AdzZoo”) and the other defendants in the above-referenced action commenced a third-party action against the Company and Zurtvita Holdings, Inc.  In the Third-Party Complaint, AdzZoo alleges a cause of action for fraud against the Company, in which it seeks unspecified monetary damages.  Defendants also allege a claim for a declaratory judgment in which they seek a judgment declaring the rights with respect to certain representative agreements entered into between certain individual Defendants and Plaintiff.

On April 13, 2010, the Company moved to dismiss the Third-Party Complaint as asserted against it. By Order, dated September 9, 2010, the Court granted the Company’s motion and dismissed the Third-Party Complaint against the Company.

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OmniReliant Holdings, Inc. v. Professor Amos’s Wonder Products and Network 1,000,000 Inc. (d/b/a/ PA Wonder Products and Professor Amos Wonder Products, Inc.) et al. Case No. 10-2556-TPA

On October 4, 2010, the Company, the exclusive licensee of the “Professor Amos” brand, commenced this action against Professor Amos Wonder Products, the licensor, and certain of its officers and employees arisingfrom certain wrongful and tortious conduct of the defendant.  Plaintiff alleges claims for breach of an amended license agreement, tortious interference with the contract, tortious interference with business relationships, trade libel, fraud and seeks permanent injunctive relief. No answer has been filed as of the date of this Report. Defendant, Professor Amos Wonder Products and Network 1,000,000 Inc., filed for bankruptcy and defendants removed the action to the bankruptcy court for the Western District of Pennsylvania.

On February 28, 2011, Defendants answered the Complaint and asserted counterclaims against the Company for breach of the amended license agreement. On March 21, 2011, the Company served its answer to the counterclaims in which it denied the material allegations thereof.  On or about May 9, 2011, the parties executed a Settlement Agreement which was approved by the Court on June 23, 2011, and on June 23, 2011, the Court entered an Order dismissing this action, with prejudice.

Item 1A. Risk Factors

There have been no material change in our risk factors from those disclosed in our Transition Report on Form 10-KT filed with the Securities and Exchange Commission on March 31, 2011.

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

None.

Item 3. Defaults on Senior Securities.

None.

Item 4. Removed and Reserved.

Not applicable.

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Item 5. Other information

None.

Item 6. Exhibits

10.1	Stock Purchase Agreement (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on May 13, 2011)
10.2	Employment Agreement (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on May 13, 2011)
10.3	Securities Purchase Agreement (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on July 14, 2011)
10.4	Amendment to Series G Convertible Preferred Stock Certificate of Designation (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on July 14, 2011)
10.5	Form of Series G Warrant (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on July 14, 2011)
10.6	Registration Rights Agreement (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on July 14, 2011)
10.7	Amended and Restated Security Agreement (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on July 14, 2011)
10.8	Amended and Restated Subsidiary Guarantee(Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on July 14, 2011)
10.9	Amended and Restated Guarantor Security Agreement (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on July 14, 2011)
31.1	Certification of Periodic Financial Reports by Robert John DeCecco III in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Periodic Financial Reports by Mary Mather in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Periodic Financial Reports by Robert John DeCecco III in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350
32.2	Certification of Periodic Financial Reports by Mary Mather in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350
101 **	The following materials from Infusion Brands International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Cash Flow, (iii) the Consolidated Balance Sheets, and (iv) Notes to Consolidated Financial Statements tagged as blocks of text.

**  In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Infusion Brands International, Inc.
Date: August 15, 2011	By:	/s/ Robert DeCecco III
		Robert DeCecco III
		President and Chief Executive Officer (Principal Executive Officer)

Date: August 15, 2011	By:	/s/ Mary B. Mather
		Mary B. Mather
		Chief Financial Officer (Principal Financial and Accounting Officer)

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