THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING, "BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2007.

Cautionary Note on Forward Looking Statements

In addition to the other information in this report, the factors listed below should be considered in evaluating our business and prospects. This prospectus contains a number of forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below and elsewhere herein, that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned to consider the specific factors described below and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements, to reflect events or circumstances that may arise after the date hereof.

General

We are a holding company that operates through our wholly-owned California subsidiary of the same name and is incorporated under the laws of Delaware. We have innovated a proprietary secure digital video/audio technology platform ("DVAP") that can be applied to produce complex portable electronic products. In 2003 our DVAP was applied to an in-flight entertainment ("IFE") device, the digEplayer™, for one customer. In February 2006 we introduced a new and improved DVAP device, the eVU™ mobile entertainment device targeted at the IFE and additional markets. We commenced eVU customer trials in the late 2006 and commercial shipments to customers in the third quarter of fiscal 2007.

We believe we are the leading producer of dedicated portable IFE products delivering over 13,000 units since 2003 for airline use. Our latest model, eVU, features sharp images on a 7" or 8" high resolution LCD screen, a 40 GB (gigabyte) to 200 GB of rugged and reliable storage, high audio fidelity, dual stereo headphone jacks, a full feature graphical user interface, patent-pending hardware security technology, and up to 20 hours of high resolution video playback on a single battery charge. We also have the capability to include features such as an embedded credit card reader/processor, touch screen capabilities and we can further customize the product for target markets or select customers.

We also own an important portfolio of patents related to the use of flash memory in portable devices (our Flash-R™ portfolio) and we are actively engaged in a strategy to monetize our patent portfolio. We have an over 19 year record of innovation and significant investment in our intellectual property asset base which includes being the first company to employ and patent important aspects of the use of removable flash memory in portable recording devices. In June 2006 we engaged an intellectual property consultant to investigate, document and develop the portfolio and to liaison with outside legal counsel. In March 2007 we selected and engaged the international legal firm Duane Morris LLP to handle certain patent enforcement matters on a contingent fee basis. We, and our advisors, have performed certain due diligence on our patents and we believe we have strong intellectual property rights that can be licensed. During the second quarter of fiscal 2008 we commenced enforcement action with respect to our patent portfolio. We expect to bring additional patent enforcement actions during this fiscal year.

Our strategy is to market our eVU products and services to a growing base of U.S. and international companies in the airline, healthcare, military, and other travel and leisure industries which desire to market eVU to consumers at their facilities. We employ both direct sales to customers and sales through value added distributors (VARs) that provide marketing, logistic and/or content services to customers.

Our revenue is derived from the sale of DVAP products and accessories to customers, warranty and technical support services and content fees and related services. We also are experienced and available to customize DVAP products for customers with special applications. We also expect that we can obtain revenue from our Flash-R patent portfolio.

Our business and technology is high risk in nature. There can be no assurance we can achieve sufficient eVU revenues to become profitable or produce future revenues from our patent portfolio or from new products or services. We continue to be subject to the risks normally associated with any new business activity, including unforeseeable expenses, delays and complications. Accordingly, there is no guarantee that we can or will report operating profits in the future.

Overall Performance and Trends

We have incurred significant operating losses and negative cash flow from operations in the current period and in each of the last three fiscal years and these losses have been material. We have an accumulated deficit of $81.5 million and a working capital deficit of $1,057,026 at December 31, 2007. Our operating plans require additional funds which may take the form of debt or equity financings. There can be no assurance that any additional funds will be available to our company on satisfactory terms and conditions, if at all. Our company's ability to continue as a going concern is in substantial doubt and is dependent upon achieving a profitable level of operations and obtaining additional financing.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining operations for the next twelve months and beyond. These steps include (a) expanding sales and marketing to new customers and new markets; (b) monetizing the Flash-R patent portfolio; (c) controlling overhead and expenses; and (c) raising additional capital and/or obtaining financing. We obtained $640,000 of equity proceeds pursuant to a common stock purchase agreement with Fusion Capital Fund II, LLC ("Fusion") during the nine months ended December 31, 2007. We may have access to up to $1.38 million of additional funding pursuant to this agreement (or a maximum of $7.36 million at higher stock prices). Future availability under the Fusion agreement is subject to many conditions, some of which are predicated on events that are not within our control. The availability of additional funding under the Fusion agreement is subject to many conditions, some of which are predicated on events that are not within our control. There can be no assurance this capital resource will be available or be sufficient.

Although we have had limited resources and personnel to build our business, we are experiencing growing acceptance and success from our eVU product line. Last year we were transitioning from our prior product version to the new eVU product that was introduced in the third quarter. Our revenues for the nine months ended December 31, 2007 were $4,977,662 compared to $1,336,434 for the comparable prior period reflecting acceptance of the eVU product by customers.

Sales to three customers accounted for 37%, 26% and 20% of our first nine-month revenues and our results are dependent on the timing and quantity of eVU orders by a limited number of airline customers. We have not yet developed a sufficient customer base to provide a consistent order flow. The failure to obtain future eVU orders or delays of future orders could have a material impact on our operations. We expect our quarterly results will vary significantly due to the timing and amount of order deliveries and recent quarterly revenue results should not be relied on as a trend for future quarters due to the early nature of our eVU market development and penetration.

Our current year to date gross profit of $1,239,864 along with reduced operating expenses and other non-cash expenses has resulted in a significant reduction in net loss compared to the prior year. Our net loss decreased to $1,148,517 for the first nine months of the current year from $2,885,471 for the comparable period of the prior year ended December 31, 2006. Due to the uncertainty of revenues and variability in margins and costs there is significant uncertainty regarding this trend to lower losses in the current year compared to the prior year. Management's goal is to expand business with existing customers and develop new customers to increase revenues while improving product margins and controlling operating costs to achieve future profitability.

We recently commenced enforcement actions of our Flash-R™ patent portfolio. Our international legal firm Duane Morris LLP is handling our patent enforcement matters on a contingent fee basis. It is too early to evaluate the likelihood of success or timing of results of our enforcement actions.

Our monthly cash operating costs have been on average approximately $225,000 per month for the period ending December 31, 2007. However, we may increase expenditure levels in future periods to support and expand our revenue opportunities and continue advanced product and technology research and development. Accordingly, our losses are expected to continue until such time as we are able to realize revenues and margins sufficient to cover our costs of operations. We may also face unanticipated technical or manufacturing obstacles and face warranty and other risks in our business. See Part II, Item 1A (Risk Factors) below.

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, estimates are evaluated, including those related to revenue recognition, allowance for doubtful accounts, and intangible assets, taxes, impairment of long-lived assets, product warranty, stock-based compensation, and contingencies and litigation. These estimates are based 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 values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Additional information about our critical accounting policies and estimates is provided in our Form 10-K for March 31, 2007. As our revenues from both products and services related to our eVU product line have increased we refined and expanded our critical accounting policy titled "Revenue Recognition" as follows:

Revenue recognition

The Company recognizes product revenue upon shipment of a product to the customer, FOB shipping point, or upon acceptance by the customer depending on the specific contract terms, if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and there are no resulting obligations. Research and development contract revenues on short-term projects or service revenue is recognized once the services or product has been delivered, the fee is fixed and determinable, collection of the resulting receivable is probable and there are no resulting obligations. If all of the service or product has been delivered and there is one element that is more than perfunctory to the services or product that has not been delivered, revenue will be recognized evenly over the remaining term of the undelivered element.

The Company enters into arrangements that include multiple elements such as hardware and content and other services. Revenue from these arrangements is allocated based on the fair value of each element. The Company defers revenue for any undelivered elements, and recognizes revenue when the product is delivered or over the period in which the service is performed, in accordance with the Company's revenue recognition policy for such element. If the Company cannot objectively determine the fair value of any undelivered element included in a multiple-element arrangement, revenue is deferred until all elements are delivered and/or services have been performed, or until the Company can objectively determine the fair value of all remaining undelivered elements.

Revenue from separately priced extended warranty or product replacement arrangements is deferred and recognized to income on a straight-line basis over the contract period. The Company evaluates these arrangements to determine if there are excess costs greater than future revenues to be recorded as a loss.

Funds received in advance of meeting the criteria for revenue recognition are deferred and are recorded as revenue as they are earned.

In June 2006 the Financial Standards Accounting Board, or FASB, issued Interpretation No. 48, or FIN 48 Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. As a result of our adoption of FIN 48 on April 1, 2007, our critical accounting policy titled "Income Taxes" has been revised and restated as follows:

Income taxes

The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect for the year in which the differences are expected to reverse. The Company provides a full valuation reserve related to its substantial net deferred tax assets. In the future, if sufficient evidence of an ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, the Company may be required to reduce the valuation allowances, resulting in income tax benefits in the consolidated statement of operations. The Company evaluates the realizability of the deferred tax assets and assess the need for valuation allowance quarterly. The utilization of the net operating loss carry forwards could be substantially limited due to restrictions imposed under federal and state laws upon a change in ownership.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, the tax benefit from uncertain tax positions may be recognized only if it is more likely than not that the tax position will be sustained, based solely on its technical merits, with the taxing authority having full knowledge of all relevant information. After initial adoption of FIN 48, deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities along with net operating loss and tax credit carryovers are recognized only for tax positions that meet the more likely than not recognition criteria. Additionally, recognition and derecognition of tax benefits from uncertain tax positions are recorded as discrete tax adjustments in the first interim period that the more likely than not threshold is met.

The Company recognizes interest and penalties related to unrecognized tax benefits as part of the provision for income taxes.

The adoption of FIN 48 did not impact our financial condition, results of operations or cash flows. Since a full valuation allowance was recorded against the Company's net deferred tax assets and the unrecognized tax benefits determined under FIN 48 would not result in a tax liability, the Company has not accrued for any interest and penalties relating to these unrecognized tax benefits.

Results of Operations  Three months ended December 31, 2007 compared to the three months ended December 31, 2006                                           Three Months Ended December 31,                                   2007                        2006                                                 % of                        % of              Change                                 Dollars       Revenue        Dollars      Revenue      Dollars          % Revenues: Product revenues                 1,068,885         85.3 %    1,302,312        100.0 %   (233,427 ) Service revenues                   184,362         14.7 %            -          0.0 %    184,362                                 1,253,247         100.0 %    1,302,312        100.0 %    (49,065 ) Gross Profit: Product gross profit               257,956         20.6 %      939,544         72.1 %   (681,588 ) Service gross profit               138,395         11.0 %            -          0.0 %    138,395                                    396,351         31.6 %      939,544         72.1 %   (543,193 ) Operating Expenses: Selling and administrative         484,252         38.6 %      366,559                   117,693         32.1 % Research and related               243,345         19.4 %      346,982                  (103,637 )      (29.9 %)                                    727,597         58.1 %      713,541                    14,056          2.0 % Other expenses                     (66,125 )       (5.3 %)    (382,436 )                 316,311        (82.7 %)  Loss and comprehensive loss       (397,371 )      (31.7 %)    (156,433 )                (240,938 )      154.0 %  

Loss and Comprehensive Loss

We showed a net loss of $397,371 for the three months ended December 31, 2007 compared to a loss of $156,433 for the comparable period of the prior year. The prior year results included the recognition of $713,750 of older digEplayer revenue where the product costs of $613,750 had been previously recorded as an impairment expense in the previous year (fiscal 2006).

Revenues

Revenues of $1,253,247 in the third quarter of fiscal 2008 compared to $1,302,312 for the comparable prior period (which included recognition of $713,750 from one final delayed digEplayer order). During the prior year's third quarter we introduced our new eVU product. Product revenues in the most recent quarter were $1,068,885 from selling eVU players and related equipment for use by airline customers. Service revenues for the third quarter were $184,362. These revenues are from content and support services provided to airline customers.

Gross Profit

Gross profit for the third quarter of fiscal 2008 was $396,351 or 31.6% of revenues. The gross profit for the prior year's third quarter was 72.1% including the $613,750 impairment reversal benefit described above or 25% on an adjusted comparable basis.

Operating Expenses

Selling and administrative costs for the three months ended December 31, 2007, was $484,252 compared to $366,559 for the third quarter of fiscal 2007. The increase was due to patent research and consulting costs and increased personnel costs to support increased overall revenues.

Research and related expenditures for the three months ended December 31, 2007 were $243,345, as compared to $346,982 for the three months ended December 31, 2006. The decrease resulted primarily to reassigning engineers and technicians to customer support and service roles during the most recent quarter.

Other Expenses  Net other expenses were $66,125 for the third quarter. Other income of $11,679 consisted primarily of foreign exchange gains. Other expenses included interest of $56,115, of which $32,112 was non-cash interest from the amortization of debt discount, and $21,640 of financing royalties. Other expenses for the third quarter of prior fiscal 2007 were $382,436 and included $373,170 of interest expense ($321,497 for non-cash amortization of debt discount).  Nine months ended December 31, 2007 compared to the nine months ended December 31, 2006                                            Nine Months Ended December 31,                                   2007                         2006                                                 % of                         % of              Change                                 Dollars       Revenue        Dollars       Revenue       Dollars         % Revenues: Product revenues                 4,470,597         89.8 %     1,336,434        100.0 %   3,134,163 Service revenues                   507,065         10.2 %             -          0.0 %     507,065                                  4,977,662        100.0 %     1,336,434        100.0 %   3,641,228 Gross Profit: Product gross profit               849,139         17.1 %       944,456         70.7 %     (95,317 ) Service gross profit               390,725          7.8 %             -          0.0 %     390,725                                  1,239,864         24.9 %       944,456         70.7 %     295,408 Operating Expenses: Selling and administrative       1,427,344         28.7 %     1,179,613                    247,731        21.0 % Research and related               739,592         14.9 %     1,101,231                   (361,639 )     (32.8 %)                                  2,166,936         43.5 %     2,280,844                   (113,908 )      (5.0 %) Other expenses                    (221,445 )       (4.4 %)   (1,549,083 )                1,327,638       (85.7 %)  Loss and comprehensive loss     (1,148,517 )      (23.1 %)   (2,885,471 )                1,736,954       (60.2 %)  

Loss and Comprehensive Loss

The net loss of $1,148,517 for the nine months ended December 31, 2007 was a $1,736,954 decrease from the loss of $2,885,471 for the comparable period of the prior year. The improved financial results are the result of current year eVU product and service revenues and related product margins. We have also contained costs with operating expenses reduced from the comparable prior year period while supporting increased revenues. Other expenses were $1,327,638 less due to decreased non-cash debt amortization resulting from prior year debt and decreased warrant inducement costs.

Revenues

Revenues increased to $4,977,662 for the first nine months of fiscal 2008 compared to $1,336,434 for the comparable prior period. Product revenues were $4,470,597 from selling eVU players and related equipment for use by airline customers. Content and support service revenues for the nine-month period were $507,065. We are reliant on a limited number of customers with three customers accounting for 37%, 26% and 20% of our first nine-month revenues. Our revenues are dependent on the timing and quantity of eVU orders by a limited number of airline customers. We have not yet developed a sufficient customer base to provide a consistent order flow. The failure to obtain future eVU orders or delays of future orders could have a material impact on our operations and we expect our quarterly results will vary significantly due to the timing and amount of order deliveries.

Gross Profit

Gross profit for the first nine months of fiscal 2008 was $1,239,864 or 24.9% of revenues. The gross profit for the prior year's third quarter was 70.7% including the $613,750 impairment reversal benefit described above or 25% on an adjusted comparable basis. The timing and amount of orders and the amount of customer support required can dramatically affect future gross margins and current results are not indicative of future quarters. Management's goal is to improve gross margins over time from higher revenues, improved economies of scale and improvements in customer support activities.

Operating Expenses

Selling and administrative costs for the nine months ended December 31, 2007, were $1,427,344 compared to the $1,179,613 for the first nine months of fiscal 2007. We incurred increases in patent research and consulting costs, marketing expenses and sales commissions and personnel costs for new personnel to support increased revenues.

Research and related expenditures for the nine months ended December 31, 2007 were $739,592, as compared to $1,101,231 for the nine months ended December 31, 2006. The decrease resulted primarily to reassigning engineers and technicians to customer support and service roles during the current period. The prior year's period also included approximately $97,000 of eVU development related costs.

Other Expenses

Net other expenses were $221,445 for the most recent nine month period. Other income consisted of $20,000 from the sale of trademark rights and $17,778 of interest and foreign exchange income. Other expenses included interest of $187,783, of which $99,274 was non-cash interest from the amortization of debt discount, and $69,620 of financing royalties. Other expenses for the first nine months of prior fiscal 2007 were $1,549,083 and included $1,319,135 of interest expense ($1,105,876 for non-cash amortization of debt discount) and $230,709 of warrant inducement charges for the value of new warrants issued as an inducement to exercise warrants.

Loss Attributable to Common Stockholders

The loss attributable to common stockholders included the net loss for each period plus accrued dividends on convertible preferred stock of $27,225 and $81,975 for the three and nine months ended December 31, 2007, respectively. The preferred stock and related accumulated dividends was converted on December 31, 2007 ceasing future dividend requirements and extinguishing the accumulated $546,000 dividend liability.

Liquidity and Capital Resources

At December 31, 2007, we had a working capital deficit of $1,057,026 compared to a working capital deficit of $1.3 million at March 31, 2007. At December 31, 2007, we had cash on hand of $278,968.

Operating Activities

Cash used in operating activities of $974,412 for the nine months period ended December 31, 2007 included the $1,148,517 loss decreased by non-cash expenses of $426,701. Other major components providing operating cash was deferred revenue of $112,000, an increase of $49,562 in accrued employee benefits and a $51,723 reduction in inventory. Components using operating cash included a decrease of $165,837 in accounts payable and an increase of $131,800 in accounts receivable. We have negotiated terms with our contract suppliers reducing advance production payments required prior to product delivery. Our terms to customers vary but we often require payment prior to shipment of product and any such payments are recorded as deposits. We expect certain airline customers to demand commercial terms such as 30 or 60 days in the future and this could increase our need for working capital.

Cash used in operating activities during the nine months ended December 31, 2006 were $1,661,426. The $687,014 improvement in the most recent period resulted primarily from the reduced net loss. However, individual working capital components can change dramatically from quarter to quarter due to timing of sales and shipments and corresponding receivable, inventory and payable . . .