General 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 who 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. We also believe we have a potentially important portfolio of patents for licensing related to the use of flash memory in portable devices and we are investigating monetizing our patent portfolio. We have engaged an intellectual property consultant and are consulting with outside legal firms and are evaluating the licensing potential of our patents to the cell phone, PDA/Pocket PC, portable A/V recorder, digital camera, camcorder and other portable device industries. Our future revenue is expected to be derived from the sale or lease 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 license revenue in the future from our flash memory patent portfolio. Our business and technology is high risk in nature. There can be no assurance we can successfully introduce the eVU to market or produce future revenues from existing or 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. As of January 31, 2007 we had an order backlog of approximately $0.5 million for eVU units and accessories. We believe the majority of the backlog will ship to customers in the fourth quarter ending March 31, 2007. Backlog orders are subject to modification, cancellation or rescheduling by our customers. Future shipments may also be delayed due to production delays, component shortages and other production and delivery related issues. Overall Performance Management of our company has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) controlling overhead and expenses; (b) expanding sales and marketing to business customers and markets and (c) raising additional capital and/or obtaining third party financing. We improved our financial position in the most recent quarter ended December 31, 2006 through: The conversion in the third quarter of fiscal 2007 of the $1,300,000 balance of our 12% Subordinated Promissory Notes due December 31, 2006 into 16,250,000 shares of common stock. One director converted $50,000 of the Subordinated Notes into 625,000 shares. At December 31, 2006 no such notes remained outstanding. The exchange on December 12, 2006 of two short-term 15% Unsecured Promissory Notes due December 31, 2006 with Davric Corporation for (i) a new 7.5% Convertible Subordinated Term Note, with principal and interest payable monthly, in the principal amount of $970,752 due November 30, 2009 and (ii) 500,000 shares of common stock representing consideration for extending the maturity date and reducing the interest rate from 15% to 7.5%. As a consequence of the exchange, the previously outstanding 15% Unsecured Promissory Notes due December 31, 2006 were cancelled. Delivery of a delayed 1,250 unit digEplayer order resulting in $713,750 of revenue through the reduction of $713,750 in our customer deposit obligations and reversal of a $603,750 impairment charge recorded in March 2006. For the nine months ended December 31, 2006: Our revenues were $1,336,434. Sales to two customer accounted for 53% and 46% of our revenues and our results have been highly dependent on the timing and quantity of eVU orders by this customer and the potential of other airline customers. During the quarter we recognized $0.7 million in digEplayer revenue We recorded a gross profit of $944,456 compared to a gross profit of $591,719 for the comparable nine months of the prior year. Gross profit increased due to the shipment of eVU units accompanied with the recognition of the digEplayer revenue where the costs were previously recorded as an impairment expense in the prior year. We anticipate improved eVU margins once the product is in full production with our contract manufacturer and volumes of scale are realized. Operating expenses were $2.3 million, an increase from $1.9 million for the first nine months of fiscal 2006 consisting primarily from the adoption of SFAS 123R in which the company recognized approximately $163,227 as stock-based compensation expense and approximately $177,863 for preproduction and engineering costs incurred in the development of the eVU product. Other income and expenses were a net expense of $1.5 million consisting primarily of non-cash interest of $1.1 million related to amortization of warrants issued with debt and $230,709 as warrant inducement expense. Our net loss increased to $2.9 million from $1.8 million for the prior nine months ended December 31, 2005. Our monthly cash operating costs have been on average approximately $185,000 per month for the period ending December 31, 2006. 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. The introduction of the eVU will also require additional expenditures, the amount and timing not currently estimable by management. 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 We do not have off-balance sheet arrangements, financings, or relationships with unconsolidated entities or other persons, also known as "special purposes entities" (SPEs). Results of Operations Nine months ended December 31, 2006 compared to nine months ended December 31, 2005 We had no service revenues for the nine months ended December 31, 2006 as we focused on our internally developed eVU product. We had services revenues of $46,933 for the comparable nine months of the prior year. Cost of sales includes manufacturing costs for products sold, operation costs associated with product support and other costs associated with the delivery of engineering support and services. Cost of sales for the nine months ended December 31, 2006 consisted of $391,798 of product costs and $0 of service costs, consisting primarily of manufacturing costs associated with the production of eVU units that were shipped in the period. In fiscal 2006, the company recorded an impairment charge related to the cost paid for digEplayers not received. Subsequently the units have been shipped and accepted by our customer digEcor. However, since the cost of this was previously recorded as impairment there are no cost of sales for those units in the current period. Cost of sales for the nine months ended December 31, 2005 consisted of $2,506,450 of product costs and $4,875 of service costs, consisting mostly of research and development labor funded in part by OEM development agreements. Gross profit for the first nine months of fiscal 2007 was $944,456 compared to a gross profit of $591,719 for the first nine months of fiscal 2006. Gross profit as a percent of sales for the first nine months of fiscal 2007 was 71% compared to 19% for the same period last year. The increase in the gross profit is due in part to the recognition of the digEplayers as revenue which was previously classified as impaired in fiscal year 2006. Gross profit percentage is highly dependent on sales, price, volume, purchasing costs and overhead allocations. Gross margins may vary significantly from period to period. At the present time, warranty costs are not significant. Selling, general and administrative expenses include payroll, employee benefits, and other costs associated with financing, customer support functions, facilities, stock-based compensation and depreciation expenses. Selling, general and administrative costs for the nine months ended December 31, 2006, was $1,179,613 compared to $940,767 for the first nine months of fiscal 2006. The increase of $238,846 can be attributed to an increase of stock-based compensation expense of $110,337 and an increase of $143,340 in legal services. Recent quarterly selling and administrative expenses have been relatively constant as we maintained staffing levels and had no significant outside selling costs. However in the future we may incur additional legal costs associated with current litigation and additional costs to comply with Section 404 of the Sarbanes-Oxley Act. We anticipate quarterly selling and administrative expenses to be constant as we are focused on business customer opportunities. Research and development expenses include payroll, employee benefits, and other costs associated with product development. Research and development expenses also include third-party development and programming costs. Research and related expenditures for the nine months ended December 31, 2006 were $1,101,231, as compared to $968,602 for the nine months ended December 31, 2005. The increase of $132,629 can be attributed to the increase in preproduction costs of $24,335, an increase of $35,613 for consulting and engineering services, an increase of $52,890 for stock-based compensation and an increase of $17, 750 in postage and shipping costs associated with the production of the eVU product. Research and development costs are subject to significant quarterly variations depending on the use of outside services, the assignment of engineers to development projects, reimbursement by OEM contracts and the availability of financial resources. We reported an operating loss of $1,336,388 for the nine months ended December 31, 2006 as compared to an operating loss of $1,317,650 for the nine months ended December 31, 2005. The increase in operating loss resulted from the increase in gross profit for the nine month period offset by the increase of $371,475 in operating expenses. We believe, but we cannot guarantee, that our strategy of investing in digital video/audio platform developments with supply or royalty provisions will provide positive margins in future periods. The timing and amount of product sales and the recognition of contract service revenues impact our operating losses. Accordingly, there is uncertainty about future operating results and the results for the nine months are not necessarily indicative of operating results for future periods or the fiscal year. We reported a loss for the nine months of the current fiscal year of $2,885,471 as compared to a loss of $1,686,387 for the prior year's nine months. For the nine months ended December 31, 2006, we incurred interest expense of $1,319,135 as compared to $374,901 for the comparable period in the prior year. This included non-cash amortization of debt discount of $1,105,876 and $178, 107 for the nine months ended December 31, 2006 and 2005, respectively. We also recorded a warrant inducement expense for $230,709 representing the fair value of the 2,331,572 New Warrants issued as an inducement for early exercise. The loss available to common stockholders for the nine months ended December 31, 2006 and 2005 was $2,981,408 and $1,814,658 respectively. Included in the loss available to common stockholders for the nine months ending December 31, 2006 and 2005 was accrued dividends of $95,937 and $128,271 respectively on preferred stock. Three months ended December 31, 2006 compared to three months ended December 31, 2005 Service revenues for the third quarter of fiscal 2007 were $0 compared to $8,334 for the comparable period of the prior year. Cost of sales for the three months ended December 31, 2006 consisted of $362,768 of product costs primarily for manufacturing costs associated with the production of in-flight entertainment devices that were shipped in the period. Cost of sales for the three months ended December 31, 2005 consisted of $105,550 of product costs and $0 of service costs. Gross profit for the third quarter of fiscal 2007 was $939,544 compared to a gross profit of $9,146 for the third quarter of fiscal 2006. Gross profit as a percent of sales for the first quarter of fiscal 2007 was 72% compared to 8% for the same period last year. The gross profit increase was due primarily due to the digEcor sale as described above where costs of the product were expensed in fiscal 2006. Selling, general and administrative costs for the three months ended December 31, 2006, was $366,559 compared to $205,383 for the third quarter of fiscal 2006. The $161,176 increase can be attributed to an increase of $44,316 for stock-based compensation expense, an increase of $40,758 in professional services, an increase of $12,355 in travel and entertainment. Included in the third quarter of fiscal 2006 was a decrease of $84,270 for accounts payable write offs. No write offs were generated in for the comparable period of fiscal 2007. Research and related expenditures for the three months ended December 31, 2006 were $346,982, as compared to $318,358 for the three months ended December 31, 2005. We reported an operating profit of $226,003 for the three months ended December 31, 2006, as compared to an operating loss of $514,594 for the three months ended December 31, 2005. The 144% decrease in operating loss resulted primarily from the increase of revenue from the digEplayer order in which an impairment was recorded in the prior year offset by an increase in total operating expense. We reported interest expense of $373,170 for the three months ended December 31, 2006 versus $141,909 for the prior comparable period. This included non-cash amortization of debt discount of $321,497 and $60,031 for the three months ended December 31, 2006 and 2005, respectively. We reported a loss for the third quarter of fiscal 2007 of $156,433 as compared to a loss of $656,486 for the prior third quarter of fiscal 2006. The loss attributable to common stockholders for the three months ended December 31, 2006 and 2005 was $185,746 and $699,072, respectively. Included in the loss available to common stockholders for the period ending December 31, 2006 were accrued dividends on the preferred stock of $29,313. Included in the loss available to common stockholders for the period ending December 31, 2005 were accrued dividends on the preferred stock of $42,586. Liquidity and Capital Resources During the nine months ended December 31, 2006, we purchased no additional property and equipment. For the nine months ended December 31, 2006 and 2005, cash provided by and used in financing activities was $907,302 and $334,236, respectively with cash provided from the exercise of warrants and used for principal payments on notes. We normally secure payment prior to delivery so accounts receivables have not been significant during the current year. However we may grant terms in the future and therefore receivables may vary dramatically due to the timing of product shipments and contract arrangements. At December 31, 2006, we had cash and cash equivalents of $304,599. Other than cash and cash equivalents, we have no material unused sources of liquidity at this time. We have no material commitments for capital expenditures or resources. Based on our cash position and assuming currently planned expenditures and level of operation, we believe we will require approximately $1.5 million of additional funds for the next twelve months of operations. Actual results could differ significantly from management plans. We believe we may be able to obtain some additional funds from future product margins from product sales but actual future margins to be realized, if any, and the timing of shipments and the amount and quantities of shipments, orders and reorders are subject to many factors and risks, many outside our control. Accordingly we will need to seek equity or debt financing in the next twelve months for working capital and we may need to seek equity or debt financing for payment of existing debt obligations and other obligations reflected on our balance sheet. On January 2, 2007, we entered into a common stock purchase agreement with Fusion Capital Fund II, LLC, an Illinois limited liability company. Under the agreement, Fusion Capital is obligated, under certain conditions, to purchase shares from us in an aggregate amount of $8.5 million from time to time over a 25 month period. We have sold 4,166,666 shares of common stock to Fusion Capital under the agreement at a purchase price of $0.12 per share for total proceeds of $500,000. Under the terms of the common stock purchase agreement, Fusion Capital received a commitment fee consisting of 3,500,000 shares and an expense reimbursement of 200,000 shares of our common stock. We cannot guarantee that the agreement with Fusion Capital will be sufficient or available to fund our ongoing operations. The extent to which we are able to rely on Fusion Capital as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources, such as through the sale of our products or services or the licensing of our intellectual property. Additionally, we will not have the right to commence any additional sales of our shares to Fusion Capital under the common stock purchase agreement until after the Securities and Exchange Commission has declared the registration statement filed by us on January 30,2007 effective. After the Securities and Exchange Commission has declared such registration statement effective, generally we have the right but not the obligation from time to time to sell our shares to Fusion Capital in amounts between $80,000 and $1.0 million depending on certain conditions. If obtaining sufficient financing from Fusion Capital were to prove unavailable or prohibitively dilutive and if we are unable to raise additional funds through the sale of our products or services or the licensing of our intellectual property, we will need to secure another source of funding in order to satisfy our working capital needs. Even if we are able to access the full $8.5 million under the common stock purchase agreement with Fusion Capital, we may still need additional capital to fully implement our business, operating and development plans. There can be no guarantee that we will be able to raise additional capital, if required. Should additional funds not be available, we may be required to curtail or scale back staffing or operations. Failure to obtain additional financings will have a material adverse affect on our Company. Potential sources of such funds include exercise of outstanding warrants and options, or debt financing or additional equity offerings. However, there is no guarantee that warrants and options will be exercised or that debt or equity financing will be available when needed. Any future financing may be dilutive to existing stockholders. As of December 31, 2006, our contractual obligations and commercial commitments are summarized below:

                                                       Less than 
Cash Contractual Obligations by Period      Total        1 year      1 - 2 years     2 - 3 years     Over 3 years 
7.5% Unsecured Promissory Notes (1)        1,120,165      162,000         360,000         598,165                - 

(1) 7.5% unsecured note and estimated future interest payments to maturity at November 30, 2009. (2) Office sublease agreement. Future Commitments and Financial Resources We have an accrued lease liability of $515,000 that arose in the normal course of business for equipment delivered to the Company. This amount is approximately ten years old. The accrued lease liability reflects management's best estimate of amounts due for matters in dispute. Settlement of this liability may either be more or less than the amount recorded in the audited consolidated financial statements and accordingly may be subject to measurement uncertainty in the near term. In the future, if our operations increase significantly, we may require additional funds. We also may require additional capital to finance future developments, acquisitions or expansion of facilities. We currently have no plans, arrangements or understandings regarding any acquisitions. In March 2006, we entered into a sixty-two month lease, commencing June 1, 2006, for approximately 4,800 square feet at 16770 West Bernardo Drive, San Diego, California with an aggregate payment of $5,805 excluding utilities and costs. The aggregate payments adjust annually with maximum aggregate payments totaling $6,535 in the fifty-first through the sixty-second month.