Forward Looking Statements

Certain statements in the Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section under "Risk Factors". We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

As used in this Form 10-Q, unless the context requires otherwise, "we" or "us" or the "Company" or "Infosmart" means Infosmart Group, Inc. and its subsidiaries.

Overview

We are in the business of developing, manufacturing, marketing and sales of recordable digital versatile disc ("DVDR") media and recordable compact discs ("CDR"). We manufacture DVDRs with 8x and 16x writable speeds as well as CDRs with 52x writable speeds, and have been developing our DVD-R manufacturing basis in both Hong Kong and Brazil to capture the worldwide market. As the "war" between high density format DVDR ("HD-DVD") and Blu-ray DVD formats has ended with the Blu-ray DVD format surviving in the marketplace to become the latest format of DVD recordable media, we have a new perspective in business development in the world market for the next five years. We acquired the first set of Blu-ray DVD replication systems in China and Hong Kong and will devote more resources to developing the market for Blu-ray DVD replication systems. A test order has already been successfully produced on our newly installed Anwell Blu-rayŽ equipment line. As the only Blu-rayŽ producer in Hong Kong and the first in China, we expect to see several future new orders as Blu-rayŽ begins to dominate the visual media market. Initial orders for short runs of a Blu-rayŽ disk reproduction are used to confirm Blu-rayŽ's high reproduction standards are achieved prior to initiating production runs. Blu-rayŽ unit sales produce the highest margins of all the media the Company produces. We have customers in Western Europe, Australia, China, and South America.

We produce our products through our three main operational business subsidiaries, Info Smart Technology Limited ("IS Technology"), Info Smart International Enterprises Limited ("IS International"), and Infoscience Media Limited ("IS Media") at our state-of-the-art DVDR manufacturing facilities in Hong Kong.

In March 2006, IS Media formed Discobras, a Brazilian company, with a local partner, with registered capital of US$8 million for our new Brazilian DVDR production facility. We relocated some of our DVDR manufacturing equipment to Brazil in November 2006 and installed them in January 2007. Trial production in Brazil began in March 2007, and is currently producing at full capacity. In addition, the owners of the technologies and intellectual property necessary for the production of our products require that we obtain separate Patent Licenses for the use of intellectual property in our new DVDR manufacturing facility in Brazil. We are currently in the process of obtaining these Patent Licenses.

In December 2006, IS Media acquired 100% of the issued and outstanding common stock of Infoscience Holdings Limited ("IS Holdings"). IS Media has a cooperation agreement with IS Holdings wherein it manufactures its DVDRs using certain patent licenses owned by IS Holdings. IS Media acquired IS Holdings to guarantee the continuation of this cooperation agreement. We also have a Brazilian subsidiary, Discobras Industria E Comercio de Electro Eletronica Limiteda ("Discobras"), which was formed in March 2006 by IS Media and a local partner, with registered capital of US$8 million for our new Brazilian DVDR production facility. IS Media currently holds a 99.42% ownership interest in Discobras, and the local partner holds the remaining 0.58% ownership interest in Discobras. In addition, we incorporated a new subsidiary, Portabello Global Limited ("Portabello"), for distributing and reselling our recordable digital versatile discs and media to customers in South America.

Critical Accounting Policies and Estimates

Principles of consolidation. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company balances and transactions are eliminated on consolidation.

Non-controlling Interests. For the development of the market in Brazil, the Company entered into an agreement on March 20, 2006 with two independent third parties for setting up a subsidiary, Discobrás, in Brazil. Discobrás has a social capital of $8,046,281 (equivalent to R$17,385,600),of which 99.42% or $8,000,000 (equivalent to R$17,285,600) ("Investment Cost") has been subscribed by the Company. As of September 30, 2007, neither one of the two independent third parties had fully satisfied their required capital contribution by any means. The minority interests have been recognized in the accompanying financial statements. For the development of the market in Blu-ray, the Company entered into an agreement on April 11, 2008 with independent third parties for setting up a subsidiary, Manwin International Limited ("Manwin") in Hong Kong. Manwin has a capital of $0.24 (equivalent to HK$2) and 50% or US$0.12 (equivalent to HK$1) ("Investment Cost") of which has been subscribed by the Company. The minority interests have been recognized in the accompanying financial statements.

Use of estimates. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of property, plant and equipment. Actual results could differ from those estimates.

Intangible assets. Intangible assets are license usage rights and stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the remaining term of the license obtained by one of the Company's subsidiaries, Infoscience Holdings Limited ("IHL").

Revenue recognition. Revenue from sales of the Company's products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time of delivery and the sales price is fixed or determinable and collection is reasonably assured.

Stock-based payment. The Company adopted the SFAS No. 123R, "Share-Based Payment" ("SFAS 123R") using the modified prospective method. Under SFAS 123R, equity instruments issued to service providers for their services are measured at the grant-date fair value and recognized in the statement of operations over the vesting period.

Basic and diluted earnings per share. The Company reports basic earnings per share in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the common stock outstanding during the periods presented.

Diluted earning per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

The Company's common stock equivalents at June 30, 2009 include the following:

Detachable common stock warrants     28,510,347
Placement agent warrants             19,553,970
                                     48,064,317

Trade receivables. Trade receivables are stated at original amount less allowance made for doubtful receivables, if any, based on a review of all outstanding amounts at the period end. The Company extends unsecured credit to customers in the normal course of business and believes all trade receivables in excess of the allowances for doubtful receivables to be fully collectible. Full allowances for doubtful receivables are made when the receivables are overdue for one (1) year and an allowance is also made when there is objective evidence that the Company will not be able to collect all amounts due according to original terms of receivables. Bad debts are written off when identified. The Company does not accrue interest on trade accounts receivable.

Inventories. Inventories are valued at the lower of cost or market with cost determined on a first-in, first-out basis. In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company's reserve requirements generally increase/decrease due to management projected demand requirements, market conditions and product life cycle changes. During the reporting periods, the Company did not make any allowance for slow-moving or defective inventories.

Plant and equipment. Plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.

Depreciation of plant and equipment is provided using the straight-line method over their estimated useful lives. The principal annual rates are as follows:

Production lines and equipment 10% with 30% residual value Leasehold improvements and others 20%

Construction in progress. Construction in progress represents a factory under construction and production lines and equipment not ready for use, which are stated at cost less any impairment losses, and are not depreciated. Construction in progress is reclassified to the appropriate category of fixed assets when completed and ready for use.

Impairment of long-live assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cashflows attributable to such assets. No impairment of long-lived assets was recognized for any of the periods presented.

Recent accounting pronouncements.

In March 2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (an amendment to SFAS No. 133). This statement is effective for financial statements issued for fiscal year and interim periods beginning after November 15, 2008 and requires enhanced disclosures with respect to derivative and hedging activities. The Company will comply with the disclosure requirements of this statement if it utilizes derivative instruments or engages in hedging activities upon its effectiveness.

In April 2008, the FASB issued FASB Staff Position No. 142-3, DETERMINATION OF THE USEFUL LIFE OF INTANGIBLE ASSETS ("FSP No. 142-3") to improve the consistency between the useful life of a recognized intangible asset (under SFAS No. 142) and the period of expected cash flows used to measure the fair value of the intangible asset (under SFAS No. 141(R)). FSP No. 142-3 amends the factors to be considered when developing renewal or extension assumptions that are used to estimate an intangible asset's useful life under SFAS No. 142. The guidance in the new staff position is to be applied prospectively to intangible assets acquired after December 31, 2008. In addition, FSP No.142-3 increases the disclosure requirements related to renewal or extension assumptions. The Company does not believe implementation of FSP No. 142-3 have a material impact on its financial statements.

In May 2008, the FASB issued statement No. 162, THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "the Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles".

In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. As we do not have convertible debt at this time, we currently believe the adoption of FSP APB 14-1 will have no effect on our combined results of operations and financial condition.

In May 2008, the FASB issued Statement No. 163, ACCOUNTING FOR FINANCE GUARANTEE INSURANCE CONTRACTS - AN INTERPRETATION OF FASB STATEMENT NO. 60. The premium revenue recognition approach for a financial guarantee insurance contract links premium revenue recognition to the amount of insurance protection and the period in which it is provided. For purposes of this statement, the amount of insurance protection provided is assumed to be a function of the insured principal amount outstanding, since the premium received requires the insurance enterprise to stand ready to protect holders of an insured financial obligation from loss due to default over the period of the insured financial obligation. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008.

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No. 03-6-1, DETERMINING WHETHER INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT TRANSACTIONS ARE PARTICIPATING SECURITIES ("FSP EITF No. 03-6-1"). Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on the Company's financial statements.

None of the above new pronouncements has current application to the Company, but may be applicable to the Company's future financial reporting

Results of Operations

Comparison of Three months ended June 30, 2009 and 2008

Net Sales. For the three months ended June 30, 2009, net sales increased relative to the three months ended June 30, 2008, from $6,768,637 to $7,315,422. The increase in net sales is an increase specifically in the sale of DVDRs in Brazil, which resulted from our policy of geographical diversification and our shift of focus from the lower margin Hong Kong markets to higher margin markets such as Asia and Brazil. Market trends show a growth slower than our expectation for the new Blu-ray discs and a lower demand for DVDR discs.

Cost of Sales. Cost of sales decreased from $5,025,074, or approximately 74% of net sales for the three months ended June 30, 2008, to $4,706,257, or approximately 64% of net sales for the three months ended June 30, 2009. The decrease in cost of sales is primarily due to the improvement in production efficiency from the upgrade and good maintenance of the existing production lines.

Gross Profit. Gross profit increased approximately 50% from $1,743,563 for the three months ended June 30, 2008 to $2,609,165 for the three months ended June 30, 2009. This increase in gross profit was primarily due to the increase in net sales and lower cost of sales.

Selling and Distribution Costs. For the three months ended June 30, 2009, selling and distribution costs increased approximately 35% from $102,835 to $138,433 relative to the three months ended June 30, 2008. The increase was due to our promotion in blu-ray business.

Administrative Expenses. Administrative expenses included depreciation and amortization charges, and was $1,458,889 and $1,504,181 for the three months ended June 30, 2009 AND 2008, respectively. This decrease in administrative expenses was due to better management of the operation.

Net Income. Net income increased from net loss of $6,540 for the three months ended June 30, 2008 to net profit of $1,107,742 for the three months ended June 30, 2009. This is due to the increase in net sales and decrease in cost of sales and administrative expenses.

Comparison of Six months ended June 30, 2009 and 2008

Net Sales. For the six months ended June 30, 2009, net sales decreased relative to the six months ended June 30, 2008, from $14,329,084 to $14,211,912. There is no significant change in net sales due to market trends show a growth slower than our expectation for the new Blu-ray discs and a lower demand for DVDR discs.

Cost of Sales. Cost of sales decreased from $11,523,691, or approximately 80% of net sales for the six months ended June 30, 2008, to $10,970,238, or approximately 77% of net sales for the six months ended June 30, 2009. The decrease in cost of sales is primarily due to a corresponding decrease in sales

Gross Profit. Gross profit increased approximately 15% from $2,805,393 for the six months ended June 30, 2008 to $3,241,674 for the six months ended June 30, 2009. This increase in gross profit was primarily due to the decrease in cost of sales.

Selling and Distribution Costs. For the six months ended June 30, 2009, selling and distribution costs increased approximately 80% from $175,702 to $317,351 relative to the six months ended June 30, 2008. The increase was due to our promotion in blu-ray business.

Administrative Expenses. Administrative expenses included depreciation and amortization charges, and was $2,357,718 and $2,284,405 for the six months ended June 30, 2009 AND 2008, respectively. This increase in administrative expenses was due to our expansion in the administrative operation for the coming Blu-ray business and higher interest for the financing arrangement.

Net Income. Net income decreased approximately 268% from net profit of $826,443 for the six months ended June 30, 2008 to net loss of $177,676 for the six months ended June 30, 2009. This is due to higher interest for the financing arrangement.

Liquidity and Capital Resources

                    Six months
                  Ended June 30,                           2009             2008            Change

Net cash (used in) provided by operating activities     $  2,856,649     $ (2,548,654 )   $  5,405,303

Net cash (used in) investing activities                   (1,575,608 )        (72,729 )     (1,502,879 )

Net cash (used in) provided by financing activities       (3,051,468 )      2,142,900       (5,194,368 )

Net cash provided by operating activities was $2,856,649 for the six months ended June 30, 2009 and Net cash used in operating activities was $2,548,654 for the six months ended June 30, 2008. The increase in our net cash provided by operating activities was mainly due to the decrease of our trade receivables and the increase in trade payables.

Net cash used in investing activities was $1,575,608 for the six months ended June 30, 2009 and $72,729 for the six months ended June 30, 2008. The increase in net cash used in investing activities is mainly related to an increase in acquisitions of plant and equipment including the blu-ray machine.

Net cash used in financing activities was $3,051,468 for the six months ended June 30, 2009, and net cash provided by financing activities of $2,142,900 for the six months ended June 30, 2008. The increase in our net cash used in financing activities was mainly due to the repayment of bank loan and other loan.

Off-Balance Sheet Arrangements

A bank guarantee was given by a bank to an electric utility company on Infosmart's behalf. This guarantee exempted Infosmart from the obligation of paying a deposit required by the electric utility company. This off-balance sheet arrangement has no effect on Infosmart's liquidity, capital resources, market risk support, or credit risk support, other than allowing Infosmart to retain a $153,846 deposit that would have been required by the utility company. Infosmart is not aware of any events, demands, commitments, trends, or uncertainties that will result in, or reasonably likely to result in, the termination of this arrangement.

Other than the arrangement described above, we have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our condensed consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk, or credit support to us or engages in leasing, hedging, or research and development services with us.

Contractual Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

The following tables summarize our contractual obligations as of June 30, 2009, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

                                                     Payments Due by Period

                                             Less than
                                 Total        1 year       1-3 Years     3-5 Years     5 Years +
                                                          In Thousands
Contractual Obligations:
Bank Indebtedness                $  1,410      $  1,410      $      -       $     -       $     -
Other Indebtedness                 11,709         6,258         5,451             -             -
Operating Leases                      902           349           553             -             -
Total Contractual Obligations:   $ 15,828      $  8,996      $  6,832       $     -       $     -

Bank indebtedness consists of secured and unsecured borrowings from our banking facilities arrangements including letters of credit, bank overdrafts, and non-recurring bank loans.

Other indebtedness consists of loans and debt financing from independent third parties for working capital and the acquisition of DVDR production lines and equipment.

Operating leases amounts include a lease for factory premises under non-cancelable operating lease agreement that expires in year 2012, with an option to renew the lease. The lease is on a fixed repayment basis and does not include contingent rentals.