Summary of TNX TELEVISION HOLDINGS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

In this section, "Management's Discussion and Analysis or Plan of Operation," references to "TNX", "we," "us," "our," and "ours" refer to TNX Television Holdings, Inc. and its consolidated subsidiaries.

The following discussion and analysis should be read in conjunction with the financial statements, related notes and other information included in this Quarterly Report on Form 10-QSB.

FORWARD-LOOKING INFORMATION

Except for historical information contained herein, this "Management's Discussion and Analysis or Plan of Operation" contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks and uncertainties that may cause our actual results or outcome to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Factors that might cause such differences include, but are not limited to the risk factors set forth under the caption "Risk Factors" in our Annual Report on Form 10-KSB for the period ended December 31, 2003. In addition to statements that explicitly describe such risks and uncertainties, investors are urged to consider statements labeled with the terms "believes," "belief," "expects," "intends," "plans" or "anticipates" to be uncertain and forward-looking.

BUSINESS OVERVIEW

We are engaged in the development, installation and operation of in-carriage broadcast systems on commuter railways. We have developed an integrated solution for railway commuter services that delivers news, entertainment and information programming to passengers via the operation of an in-carriage broadcast system (the TNX system). We believe that we are the only company in the UK, currently with a total solution for in-train television broadcasting. Our business model is designed to make the adoption of the system very simple for railway companies. We develop, install, maintain and finance all of the necessary equipment on the trains. We also provide all content programming and revenue generation management. We intend to generate revenues by selling commercial time to advertisers that would be broadcast during the programming similar to conventional television broadcasting. In return, we pay the train operator a negotiated fee for the concession rights to install the TNX system on their trains. We believe that installation of our TNX system offers considerable benefits to train operators beyond the additional revenues they would receive, including the ability to offer a more entertaining passenger experience and enhanced communication of information to passengers.

We believe that the success of our business model is predicated upon the accomplishment of the following objectives by us: (1) implementing a cost-effective technology system that meets regulatory approval and performs reliably on the trains, (2) securing contracts with train operating companies (TOCs), (3) sourcing compelling and engaging content and (4) securing advertisers at competitive market rates.

Our initial focus is on commuter train lines in the United Kingdom, where we already have exclusive commercial relationships for the provision of our TNX system with a number of the privately owned TOCs, including definitive six-year agreements with Central Trains Ltd. ("Central Trains"), c2c Rail Limited ("c2c"), Arriva Train Wales ("Arriva"), WAGN (now part of Great Anglia) and Silverlink and a five-year agreement with New Southern Railway Limited ("Southern") and letters of intent giving us 12-month negotiating exclusivity with several other operators. Collectively, these TOCs and the TOCs with whom we have entered into agreements represent over 45% of the UK commuter train market and over 50% of the London commuter market. We have focused on the UK market, because the privatized environment has made train operators more innovative and receptive to offering the railway passenger a better travel experience. The UK commuter market encompasses approximately 900 million passenger journeys per year.

If the implementation of our system is successful, we plan to expand into other markets in the second half of 2005, with targeted installation beginning in 2006. Other markets will be evaluated based on several criteria, including:
number of passenger journeys per year, average journey length, passenger demographics, concentration of riders per journey, regulatory environment, competition, technology issues, strategic partnership opportunities and strength of advertising market, among others.

Currently, we have entered into a six year agreement with Central Trains beginning in March 2004 to install our system in Central Trains' Birmingham commuter services, representing approximately 36.5 million passenger journeys per year of which we are initially targeting installations to serve 18 million passenger journeys per year. In April 2004, we entered into a five-year agreement with South Central Limited to install our TNX system on South Central's fleet of trains, representing approximately 115 million passenger journeys per year of which we expect to install systems initially serving 75 million passengers per year. In May 2004, we entered into six-year agreements with c2c Rail Limited to install our TNX system on c2c's fleet of trains, representing all of their approximately 29 million passenger journeys per year and with Arriva Trains Wales ("Arriva") to install our TNX system on Arriva's fleet of trains, representing approximately 16 million passenger journeys per year of which we expect to install systems initially serving 10 million passengers per year. In July 2004, we entered into six-year agreements with WAGN to install our TNX system on WAGN's fleet of trains, representing all of their approximately 36 million passenger journeys per year and with Silverlink to install our TNX system on Silverlink's fleet of trains, representing approximately 36 million passenger journeys per year of which we expect to install systems initially serving 20 million passengers per year.

We expect to begin the commercial launch of our Television Network on September 1, 2004. The launch of the network will mark the Company's first advertising revenues, and will commence on Central Trains. At such time, the Company expects to have installed its Network on Central Trains' fleet of 323 cars containing 78 vehicles. The balance of the 152 vehicle installation is scheduled to be completed in the third quarter of 2004. We have begun logistical preparations for the next several train system installations, which are planned to commence in the last quarter of 2004.

We are in the process of seeking to enter into definitive agreements with the TOCs that have signed letters of intent (LOI). As our system becomes fully operational with our first TOC, we believe that we will be able to further convert our existing LOIs into definitive agreements on an accelerated basis. We believe that as a "first mover" we have a significant competitive advantage in the market. Additionally, as we gain critical mass, we expect advertisers to show a greater interest in showing commercials or sponsoring programming content on our system.

We have conducted a pilot phase of the TNX system on both the Birmingham and London commuter train networks, from which customer feedback has been very positive. Based on the results of a leading independent research firm, we found that the advertising recall rate during the pilot phase compared quite favorably with other mediums, including television. Furthermore, the UK commuter market is made up disproportionately of passengers with very desirable demographics to advertisers - upscale, well-educated, 18 to 44 years old, who in general are more difficult for advertisers to reach because they watch less television than the population, as a whole. We believe the TNX system presents advertisers a new, effective means to reach a captive group with highly desirable demographics. We are currently working together with a leading UK independent media sales house to market the opportunity to both media buyers and outdoor media specialists.

We have entered into a content supply contract with ITN, a leading international news organization, to provide us comprehensive national and international news service on an exclusive basis to be shown on TNX's commuter rail television service in the UK. The term of the contract is three years and can be extended by mutual agreement. The content provided to us pursuant to this agreement will represent a significant portion of the content we expect to procure for the UK commuter market. We expect that the general interest items will be sourced from a range of production companies, mostly based in the UK, where there is a wide choice and competitive pricing.

We understand that the rail environment presents unique challenges to a company broadcasting near real time programming and general interest features and are currently working on enhancing the look and feel of our video content, as well as strengthening our brand equity with consumers.

In July 2004 the Company selected LMIC, Inc, as the manufacturer of approximately 1,100 television systems. The contract is comprised of approximately $15 million in manufacturing services, and $250,000 of engineering services. This represents the second contract that we awarded LMIC, Inc. In November 2003, LMIC and the Company signed a contract for $2.4 million to design and manufacture the first 164 television systems.

On April 27, 2004, we completed a private placement of securities in which we raised approximately $10,080,000 in gross proceeds from a group of institutional and accredited investors. The private placement resulted in net proceeds to us of approximately $9,300,000 after deducting the placement agent fees and other expenses related to the private placement. Please see PART II, Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities, of this Quarterly Report on Form 10-QSB for a description of the offering.

At the present time, we are purchasing and plan to purchase in the near-term the on-train equipment with cash raised from investors. Based on our discussions with leading equipment financing companies, we expect that by the first half of 2005 to have demonstrated to their satisfaction that our business model is sustainable and will generate sufficient funds to pay for the equipment on a financing basis out of cash flows from operations.

CRITICAL ACCOUNTING POLICIES

Our Management's Discussion and Analysis or Plan of Operation section discusses 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 financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to accrued expenses, financing operations and contingencies and litigation and bases its estimates and judgments on historical experience and on various other factors that are believed 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.

The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of income tax assets and liabilities.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets are reviewed for impairment whenever events such as product discontinuances, product dispositions or other changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of nondiscounted cash flows expected to result from the asset's use and eventual disposition. An impairment loss is measured as the amount by which the carrying amount exceeds its fair value, which is typically calculated using discounted expected future cash flows. The discount rate applied to these cash flows is based on our weighted average cost of capital, which represents the blended after-tax costs of debt and equity.

ACCOUNTING FOR INCOME TAXES

We account for income taxes in accordance with FASB Statement No. 109, "Accounting for Income Taxes," or SFAS 109, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of or all of the deferred tax asset will not be realized.

The ability to recognize the deferred tax assets is evaluated quarterly by assessing the valuation allowance and by adjusting the amount of the allowance, if necessary. The factors used to assess the likelihood of realization are the forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. We have used tax-planning strategies to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

REVENUES

During the three months ended June 30, 2004 and June 30, 2003, we recorded no operating revenues. We expect to begin generating revenues from our advertising-based sales model by the third quarter of 2004. We expect that our revenues will initially consist of sales of commercial time to advertisers interspersed during our general programming content shown to train passengers.

OPERATING EXPENSES

During the three months ended June 30, 2004, our direct and operating expenses were $3,002,831 as compared to $772,368 for the three months ended June 30, 2003, an increase of 289%. This increase was primarily due to additional expenditures related to our first TOC contract, which included an increase in personnel and associated overhead, installation and operation for three train cars, as well as added corporate costs associated with becoming a public company, including engaging in investor relations activities, due diligence and investigation for listing on the AIM and increased professional services fees, such as legal and accounting fees.

Our salaries and employee related expenses for the three months ended June 30, 2004 totaled $798,865 as compared to $209,511 for the three months ended June 30, 2003, a 281% increase. Irwin L. Gross, our Chairman and CEO, began receiving a salary in May 2004, and received $34,615. As of June 30, 2004, we had 25 employees, including four individuals hired during the quarter as compared to a total of 10 employees as of end of the three months ended June 30, 2003. Expansion of overhead during 2003 and the first half of 2004, particularly in the area of operations, engineering, finance and media management, occurred as we geared up in order to satisfy the requirements of our first TOC contract. We do not believe that a proportionate increase will be required for future contracts with TOCs.

Our general and administrative expenses for the three months ended June 30, 2004 totaled $1,889,195 as compared to $519,198 for the three months ended June 30, 2003, a 264% increase. Such increase was due to the expansion of general and administrative expenses to meet the needs of our first and future TOC contracts, as well as added corporate costs associated with becoming a public company, including investigation and due diligence for listing on the AIM, increased professional services fees, such as legal and accounting fees in connection with, among other things, our financial audits and public filings. Other expenses of $881,512 were incurred in connection with investor relations.

During the three months ended June 30, 2004 and June 30, 2003, we did not have any research and development costs. We currently have no budget for research and development. We are, however, looking into new products to support our existing product line. Funding sources, however, would need to be developed to support those activities.

During the three months ended June 30, 2004, our non-employee sales and marketing compensation costs were approximately $37,900 as compared to approximately $30,000 for the three months ended June 30, 2003, an increase of 26%. The increase in spending was primarily due to the increased activity surrounding the impending launch of the Central Trains fleet of vehicles.

During the three months ended June 30, 2004, we granted options to purchase a total of 436,000 shares of our common stock. An employee was granted options to purchase 125,000 shares of common stock at an exercise price of $1.35 per share for recognition of services to the Company. The options granted to the employee resulted in a recorded compensation expense of $68,750. We granted options to purchase an aggregate of 30,000 shares to an unaffiliated consultant. These options were valued at $11,000, the fair market value of the options based on the Black-Scholes option pricing model. During the three months ended June 30, 2003, we did not grant any options to purchase shares of our common stock.

During the three months ended June 30, 2004, we granted warrants to purchase an aggregate of 4,106,669 shares as part of the 5% Series A convertible preferred stock private placement offering that was concluded on April 28, 2004, of which 3,733,338 warrants to purchase shares went to purchasers of the 5% Series A convertible preferred stock. The remaining warrants to purchase 373,331 shares went to the placement agents. These placement agent warrants were valued at $437,000, the fair market value of the warrants based on the Black-Scholes option pricing model. We also issued 150,000 shares of restricted stock to an unaffiliated consultant for services related to the private placement. These shares were valued at $375,000. During the three months ended June 30, 2003, we did not grant any warrants.

During the three months ended June 30, 2004, we issued to investors 10,080 shares of 5% Series A convertible preferred stock with a stated value of $1,000 per share, convertible into an aggregate of 7,466,664 shares of our common stock at a conversion price of $1.35 and warrants to purchase an aggregate of 3,733,338 shares of common stock at an exercise price of $1.75 per share. As of June 30, 2004, 500 shares of 5% Series A convertible preferred stock had been converted into 370,370 shares of common stock.

Each share of Series A preferred stock entitles the holder to receive a 5% cumulative dividend payable quarterly in arrears within three trading days of each of March 31, June 30, September 30 and December 31. We may pay the dividends, at our option, either in cash or shares of common stock. On June 30, 2004 we elected to pay the dividend in the form of common stock and as such issued 64,172 shares of common stock.

INTEREST EXPENSE AND INTEREST INCOME, NET

During the three months ended June 30, 2004, our interest expense and interest income, net, were ($7,335) and $16,947 respectively, as compared to $3,366 and $652, respectively, for the three months ended June 30, 2003. Our interest expenses for the three months ended June 30, 2004 was a negative $7,335 due to the reversal of previously accrued expense. Our interest expenses were related to interest paid on our investor and corporate office loans and our interest income, net, was comprised of accrued interest on our bank deposits.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

REVENUES

During the six months ended June 30, 2004 and June 30, 2003, we recorded no operating revenues. We expect to begin generating revenues from our advertising-based sales model by the third quarter of 2004.

OPERATING EXPENSES

During the six months ended June 30, 2004, our direct and operating expenses were $5,551,548 as compared to $1,365,768 for the six months ended June 30, 2003, an increase of 306%. This increase was primarily due to additional expenditures related to our first TOC contract, which included an increase in personnel and associated overhead, installation and operation for three train cars, as well as added corporate costs associated with becoming a public company, including engaging in investor relations activities, due diligence and investigation for listing on the AIM and increased professional services fees, such as legal and accounting fees.

Our salaries and employee related expenses for the six months ended June 30, 2004 totaled $1,301,693 as compared to $427,053 for the six months ended June 30, 2003, a 205% increase. As of June 30, 2004, we had 25 employees, including six individuals hired during the first half as compared to a total of 10 employees as of June 30, 2003. Expansion of overhead during 2003 and the first half of 2004, particularly in the area of operations, engineering, finance and media management, occurred as we geared up in order to satisfy the requirements of our first TOC contract. We do not believe that a proportionate increase will be required for future contracts with TOCs.

Our general and administrative expenses for the six months ended June 30, 2004 totaled $3,737,992 as compared to $894,455 for the six months ended June 30, 2003, a 318% increase. Such increase was due to the expansion of general and administrative expenses to meet the needs of our first and future TOC contracts, as well as added corporate costs associated with becoming a public company, including investigation and due diligence for listing on the AIM, increased professional services fees, such as legal and accounting fees in connection with, among other things, our financial audits and public filings. Other expenses were incurred in connection with investor relations of $901,512 plus the issuance of 100,000 shares of restricted stock and an agreement with a third party to develop investor collateral material, pursuant to which we issued 25,000 options to purchase our common stock.

During the six months ended June 30, 2004 and June 30, 2003, we did not have any research and development costs. We currently have no budget for research and development. We are, however, looking into new products to support our existing product line. Funding sources, however, would need to be developed to support those activities.

During the six months ended June 30, 2004, our non-employee sales and marketing compensation costs were approximately $87,800 as compared to approximately $121,000 for the six months ended June 30, 2003, a decrease of 27%. During the first half of 2004, we utilized the services of a third party public relation firm to assist us in managing press and railway passenger interest in the system and conducted market research for a prospective TOC. The decrease in spending was primarily due to the fact that we no longer utilized the services of a consultant to assist with our sales and marketing efforts, as we did in the first half of 2003.

During the six months ended June 30, 2004, we granted options to purchase a total of 711,000 shares of our common stock. Nicolas Rogerson, a non-employee Director, was granted options to purchase 250,000 shares of common stock at an exercise price of $1.25 per share for his services as a director, Board committee member and consultant. The options granted to Mr. Rogerson were valued at $350,000. An employee was granted options to purchase 125,000 shares of common stock at an exercise price of $1.35 per share for recognition of services to the Company. The options granted to the employee resulted in a recorded compensation expense of $68,750. We granted options to purchase an aggregate of 30,000 shares to an unaffiliated consultant. These options were valued at $11,000, the fair market value of the options based on the Black-Scholes option pricing model. We granted options to purchase an aggregate of 25,000 shares to an unaffiliated consultant. These options were valued at $10,782, the fair market value of the options based on the Black-Scholes option pricing model. We also issued 100,000 shares of restricted stock to an unaffiliated consultant for investor relations services. These shares were valued at $247,000. During the six months ended June 30, 2003, we did not grant any options to purchase shares of our common stock.

During the six months ended June 30, 2004, we issued to investors 10,080 shares of 5% Series A convertible preferred stock with a stated value of $1,000 per share, convertible into an aggregate of 7,466,664 shares of our common stock at a conversion price of $1.35 and warrants to purchase an aggregate of 3,733,338 shares of common stock at an exercise price of $1.75 per share. As of June 30, 2004, 500 shares of 5% Series A convertible preferred stock had been converted into 370,370 shares of common stock.

Each share of Series A preferred stock entitles the holder to receive a 5% cumulative dividend payable quarterly in arrears within three trading days of each of March 31, June 30, September 30 and December 31. We may pay the dividends, at our option, either in cash or shares of common stock. For the six months ended June 30, 2004 we elected to pay the dividend in the form of common stock and as such issued 64,172 shares of common stock.

INTEREST EXPENSE AND INTEREST INCOME, NET

During the six months ended June 30, 2004, our interest expense and interest income, net, were $29 and $19,572 respectively, as compared to $3,366 and $1,032, respectively, for the six months ended June 30, 2003. Our interest expenses were related to interest paid on our investor and corporate office loans and our interest income, net, was comprised of accrued interest on our bank deposits.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have incurred significant operating and net losses due in large part to the start-up and development of our operations. At June 30, 2004, we had working capital (current assets less current liabilities) of . . .