General

iDNA, Inc. (the "Company" or "iDNA"), began operations in 1969 and was incorporated in Delaware in 1971. iDNA's operations are comprised of three principal reportable segments: (i) strategic communications services, (ii) information services and (iii) entertainment. iDNA manages each segment separately as a consequence of different marketing, service requirements and technology strategies for the respective segments.

The strategic communications services segment provides content development via the design, development and production of media, collateral material, logistics, support and/or broadcast services for presentations at corporate and institutional events, meetings, training seminars and symposiums. The presentations may be live at single or multi-site venues and can include video conferencing, satellite broadcasting and webcasting, or the presentations may be provided via on-demand access via internet websites, DVD or video tape.

The information services segment utilizes custom wireless communication technology and proprietary software to facilitate client audience interaction, participation and polling to collect, exchange and/or analyze data and information in real-time during a meeting or event. The wireless communication services are available as a turn-key service provided by iDNA during a scheduled meeting or event or alternatively, a client can purchase from iDNA the required electronic components and related proprietary software to administer its needs independently.

As of consequence of iDNA's investment in the Angelika Film Centers, LLC ("AFC"), iDNA operates in the movie exhibition and entertainment industry.

Recent Developments

Effective as of July 3, 2008, iDNA entered into a Reduction of Purchase Price Agreement (the "Reduction Agreement") with Steven Campus, president of the Campus Group (defined below), the Campus Family 2000 Trust (the "Family Trust") and the Trust Established Under the Will of Nancy Campus (the "Shelter Trust" and, collectively with the Family Trust, the "Trusts" and each a "Trust"). (The Trusts and Steven Campus are herein referred to collectively as the "Stockholders" and each as a "Stockholder").

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Pursuant to and as provided in that certain Stock Purchase Agreement dated July 31, 2003 between iDNA and the Stockholders, iDNA acquired from the Stockholders all of the issued and outstanding shares of capital stock of each of (i) Campus Group Companies, Inc. ("CGCI"), (ii) Multi-Video Services, Inc. ("Multi-Video"),
(iii) Interactive Conferencing Network, Inc. ("Interactive") and (iv) Audience Response Systems, Inc. ("ARSI" and, collectively with CGCI, Multi-Video, Interactive and ARSI, the "Campus Group"). In consideration for the shares of the Campus Group so acquired, iDNA (i) made a cash payment to the Stockholders and (ii) issued to the Stockholders certain promissory notes in an aggregate principal amount of $9.9 million and a convertible promissory note in the principal amount of $2.8 million (collectively, the "Promissory Notes") (the cash amount and Promissory Notes collectively, the "Purchase Price"). At July 2, 2008, iDNA had outstanding principal obligations under the terms of the Promissory Notes of $12.1 million and accrued interest of $156,000.

Pursuant to the Reduction Agreement, iDNA and the Stockholders agreed, among other matters, that the Purchase Price was reduced to a remaining balance of three hundred seventy-five thousand dollars ($375,000) (the "Purchase Price Balance"). The parties further agreed that, inasmuch as the Promissory Notes were intended to represent iDNA's obligation to pay the unpaid portion of the Purchase Price, the aggregate outstanding amount of the Promissory Notes was reduced from an aggregate of $12.1 million to an amount equal to the Purchase Price Balance. The Promissory Notes were modified and amended so that the outstanding principal amounts due thereunder were reduced to an aggregate of $375,000. (The Promissory Notes, as modified and amended pursuant to the Reduction Agreement, are hereinafter referred to as the "Amended Promissory Notes.")

Furthermore, pursuant to the Reduction Agreement, in July 2008 the Stockholders surrendered and delivered to iDNA each and all of the Amended Promissory Notes, marked cancelled, and iDNA, in full payment, discharge and satisfaction of the Amended Promissory Notes, issued to the Stockholders an aggregate of two million five hundred thousand (2,500,000) shares of iDNA's common stock, $0.05 par value per share (the "Issued Shares"), such Issued Shares to be allocated proportionally among the Stockholders. iDNA and the Stockholders agreed that upon the issuance of the Issued Shares to the Stockholders, the Purchase Price Balance shall be paid, discharged and satisfied in full, and no additional amount (whether pursuant to the Promissory Notes or otherwise) shall be payable by iDNA on account of or with respect to the Purchase Price.

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In addition, subject to the terms and conditions set forth in the Reduction Agreement, iDNA (i) assumed certain obligations to redeem or repurchase from the Stockholders their Issued Shares and (ii) granted to the Stockholders certain rights to sell (or "put") the Issued Shares to iDNA. iDNA is required to semi-annually offer to redeem certain Issued Shares from the Stockholders at the rate of $2.00 per share for a maximum total redemption payment equal to the excess (if any) of certain minimum operating cash flow thresholds of the Campus Group for the period from August 1, 2008 through July 31, 2013. At any time, the Stockholders are free to (i) accept or decline iDNA's offer to redeem or repurchase the Issued Shares and (ii) sell, redeem, transfer or otherwise dispose of the Issued Shares to third parties. (All shares redeemed by iDNA, or sold, transferred or otherwise disposed of to third parties are hereinafter referred to as "Excluded Shares".)

Pursuant to the Reduction Agreement, iDNA also granted to the Stockholders the right, subject to certain criteria, to sell (or "put") to iDNA, and require iDNA to purchase from the Stockholders, any or all of the Issued Shares (exclusive of all Excluded Shares) at the rate of $2.00 per share during the period October 31, 2013 through November 15, 2013 (the "Put Right"). However, the Put Right shall not be exercisable if one or more of the Stockholders shall have received (or be deemed to have received) aggregate consideration of at least five million dollars ($5,000,000) on account of or with respect to the sale, transfer, redemption or other disposition of some or all of the Issued Shares. At July 31, 2008, iDNA recorded a $3.1 million obligation representing the fair value of the future redemption obligation for the Issued Shares (exclusive of all Excluded Shares).

In order to secure its obligations to the Stockholders under the Reduction Agreement, iDNA has (i) pledged to the Stockholders all of iDNA's right, title and interest in and to all of the capital stock of the Campus Group held by iDNA and (ii) caused the Campus Group to guaranty such obligations, with such guaranty to be secured by the assets of the Campus Group.

In addition, pursuant to the Reduction Agreement, Mr. Campus, the Campus Group and iDNA are entering into an employment agreement (the "Employment Agreement") under which Mr. Campus shall serve as President of the Campus Group until the earliest to occur of (i) the redemption of all Issued Shares (exclusive of any Excluded Shares) or (ii) the lapse of the Put Right. Mr. Campus is entitled to base compensation of $100,000 per year and standard employment benefits pursuant to the Campus Group's employment benefits program offered to all personnel from time-to-time.

As a consequence of the various terms of the Reduction Agreement, iDNA (i) realized a gain of $9.0 million for the restructuring of debt, (ii) recorded a $3.1 million obligation for the fair value of the redemption obligation for the Issued Shares and (iii) realized the abatement of interest of $156,000 for the three months and six months ended July 31, 2008. Prospectively, the fair value of the redemption obligation is subject to adjustment each reporting period as a consequence of changes, if any, to (i) the number of Issued Shares (exclusive of all Excluded Shares) held by the Stockholders at the end of a period, (ii) actual redemption accepted or declined, by the Stockholders and/or (iii) sales of Issued Shares to third parties.

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Critical Accounting Policies

iDNA's consolidated financial statements are prepared in accordance with generally accepted accounting principles, which require iDNA to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses of iDNA. iDNA's significant accounting policies are described in Note 1 of Notes to Condensed Consolidated Financial Statements included under Item 1 of this Part I (hereinafter, the "Notes"). However, certain accounting policies are deemed "critical", as they require management's highest degree of judgment, estimates and assumptions. These accounting estimates and disclosures have been discussed with the Audit Committee of iDNA's Board of Directors. A discussion of iDNA's critical accounting policies, the judgments and uncertainties affecting their application and the likelihood that materially different amounts would be reported under different conditions or using different assumptions are as follows:

Revenues: iDNA's revenues are earned within short time periods, generally less than one week. iDNA recognizes revenue from its strategic communications segment, including the video production, video editing, meeting services and broadcast satellite or webcast services, and its information services segment when the services are complete and delivered or all technical services have been rendered. Deposits and other prepayments are recorded as deferred revenue until revenue is recognized. iDNA does not have licensing or other arrangements that result in additional revenues following the delivery of the video or a broadcast. Costs accumulated in the production of the video, meeting services or broadcasts are deferred until the sale and delivery are complete. Deferred production costs of $73,000 and $90,000, respectively, are reported as other current assets at July 31, 2008 and January 31, 2008.

iDNA recognizes revenue from the sale of electronic equipment, proprietary software and related components at the time of shipment. Deposits and other prepayments received prior to shipment are recorded as deferred revenue until the electronic equipment and related software are shipped. iDNA has licensing and technical support arrangements for future software enhancements and upgrades for technical support for previously delivered electronic equipment. Revenues derived from licensing and technical support are recognized over the term of the licensing and technical support period, which generally are sold in increments of one year of coverage. For the three months ended July 31, 2008 and 2007, electronic equipment sales were $347,000 and $508,000, respectively. For the six months ended July 31, 2008 and 2007, electronic equipment sales were $823,000 and $1.1 million, respectively.

Cost of Revenues: Cost of revenues consists of direct expenses specifically associated with client service revenues. The cost of revenues includes direct salaries and benefits, purchased products or services for clients, web hosting, support services, shipping and delivery costs.

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Accounts Receivable: iDNA extends credit to clients in the normal course of business. iDNA continuously monitors collections and payments from clients and maintains an allowance for doubtful accounts based upon historical experience and any specific client collection issues that have been identified. Since accounts receivable are concentrated in a relatively few number of clients, a significant change in the liquidity or financial position of any of these clients could have a material adverse impact on the collectibility of the accounts receivable and future operating results. iDNA does not have any off-balance sheet credit exposure related to its customers.

Valuation of Long-lived Assets and Goodwill: iDNA reviews the carrying value of its long-lived assets (other than goodwill) whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When indicators of impairment exist, iDNA determines whether the estimated undiscounted sum of the future cash flows of such assets is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by which the carrying amount of such assets exceeds their respective fair values. The determination of fair value is based on quoted market prices in active markets, if available, or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to be commensurate with iDNA's business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property and equipment additions and retirements; industry competition; and general economic and business conditions, among other factors.

At January 31, 2008, the goodwill for each of iDNA's business segments (information services and strategic communications services) was tested for impairment. As a consequence of the testing, iDNA determined that the carrying value of both its information services and its strategic communications services business segments exceeded their fair value, which was estimated based upon the present value of each reporting units expected future cash flows. As a consequence, iDNA charged to operations an aggregate of $8.0 million for the estimated impairment of goodwill and other intangible assets relating to (i) its information services segment in the amount of $5.9 million, and (ii) strategic communication services segment in the amount of $2.1 million, respectively, resulting in the carrying value of all goodwill and other intangible assets being reduced to zero. Prior to the impairment charge during the fourth quarter of Fiscal 2008, iDNA charged to operations $203,000 and $405,000 for the amortization of these intangibles for the three months and six months ended July 31, 2007.

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Self-Insurance Claims: iDNA's wholly-owned subsidiary ARAC, Inc. ("ARAC") maintained and continues to maintain self-insurance for claims and associated litigation expenses relating to bodily injury or property damage from accidents involving the vehicles rented to customers by its discontinued automobile rental operations occurring in Fiscal 1996 and prior. ARAC was, when required by either governing state law or the terms of its rental agreement, self-insured for the first $1.0 million per occurrence, and for losses in excess of $5.0 million per occurrence, for bodily injury and property damage resulting from accidents involving its rental vehicles. ARAC was also self-insured, up to certain retained limits, for bodily injury and property damage resulting from accidents involving ARAC vehicles operated by employees within the scope of their employment.

ARAC is the subject to certain self-insurance claims and associated litigation expenses relating to its discontinued automobile rental operations. iDNA's management estimates the required self-insurance liability based upon specific identification of the known matters subject to future claims, the nature of the claim and the estimated costs to be incurred. These estimates include, but are not limited to, ARAC's historical loss experience and projected loss factors. The required self-insurance liability is subject to adjustment in the future based upon changes in the nature of the remaining claims or the ultimate cost. As a consequence of iDNA's sale of its automobile rental operations in 1995, iDNA believes that all incurred claims have been reported to ARAC and that there are no longer any incurred but not yet reported claims to be received by ARAC. iDNA's self-insurance liability at July 31, 2008 and January 31, 2008 was $142,000 and $172,000, respectively.

Because of the uncertainties related to several residual small claims and legal proceedings involving iDNA's former rental operations and self-insurance claims, it is difficult to project with precision the ultimate effect that the adjudication or settlement of these matters will have on iDNA. As additional information regarding iDNA's potential liabilities becomes available, iDNA will revise its estimates as appropriate.

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Stock-Based Compensation: Effective February 1, 2006, iDNA adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123R (revised 2004), Share-Based Payment ("SFAS No. 123(R)"), which replaced SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), and superseded APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after December 15, 2005. iDNA elected the prospective method of adopting SFAS No. 123(R) which requires that compensation expense be recorded over the remaining periods for what would have been the remaining fair value under SFAS No. 123 of all unvested stock options and restricted stock at the beginning of the first quarter of adoption. The compensation costs for that portion of awards is based on the grant-date fair value of the awards as calculated for pro forma disclosures under SFAS No. 123. iDNA charged to operations $40,000 and $74,000, respectively, for share-based compensation for the three months ended July 31, 2008 and 2007. iDNA charged to operations $162,000 and $151,000, respectively, for share-based compensation for the six months ended July 31, 2008 and 2007.

Income Taxes: iDNA recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Loss carrybacks, reversal of deferred tax liabilities, tax planning and estimates of future taxable income are considered in assessing the need for a valuation allowance. At the time it is determined that iDNA will more likely than not be able to realize deferred tax assets in excess of the recorded amount, net of its valuation allowance, an adjustment to reduce the valuation allowance would be recorded that would increase income in the period such determination was made. Likewise, should management determine that iDNA would not be able to realize all or part of net deferred tax assets generated in the future, an increase to the valuation allowance would be charged to and reduce income in the period such determination was made.

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Financial Condition and Results of Operations Results from Operations for the Three Months Ended July 31, 2008 as Compared to the Three Months Ended July 31, 2007

The following table sets forth for the three months ended July 31, 2008 and 2007 certain statements of operations data by segment obtained from iDNA's consolidated statement of operations (in thousands). All figures described in the ensuing discussion (as derived from the table) are stated in approximate amounts, based upon rounding of figures presented in the table.

                                                                   Strategic
                               Information Services         Communications Services        Intersegment Elimination
                                Three Months Ended            Three Months Ended              Three Months Ended
                                     July 31,                      July 31,                        July 31,
                               2008           2007           2008            2007            2008             2007

Revenues                    $     2,189    $     2,337   $      1,984    $         514   $        (27 )   $        (27 )
Cost of revenues                  1,251          1,438          1,338              634            (27 )            (27 )
Selling, general and
administrative expenses           1,029          1,182            718              915              -                -
Operating income (loss)             (91 )         (290 )          (72 )         (1,035 )            -                -
Depreciation and
amortization expense                138            217             60              177              -                -



                                                                Undistributed
                                   Entertainment             Corporate Expenses            Consolidated
                                Three Months Ended           Three Months Ended         Three Months Ended
                                     July 31,                     July 31,                   July 31,
                               2008            2007          2008           2007         2008         2007

Revenues                    $         -     $         -   $         -    $        -   $    4,146    $   2,824
Cost of revenues                      -               -             -             -        2,562        2,045
Selling, general and
administrative expenses               -               -           340           252        2,087        2,349
Operating income (loss)             (22 )            65         8,554          (302 )      8,369       (1,562 )
Depreciation and
amortization expense                  -               -            11            12          209          406

Revenues: Revenues increased $1.3 million to $4.1 million for the three months ended July 31, 2008 as compared to $2.8 million for the three months ended July 31, 2007.

Revenues attributed to the information services segment decreased $148,000 to $2.2 million for the three months ended July 31, 2008 as compared to $2.3 million for the three months ended July 31, 2007. The decrease in revenues was principally due to a decline in electronic equipment sales of $161,000 during the three months ended July 31, 2008 as compared to the three months ended July 31, 2007.

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Revenues attributed to the strategic communications services segment increased $1.5 million to $2.0 million for the three months ended July 31, 2008 as compared to $514,000 for the three months ended July 31, 2007. The increase in revenues was principally due to an increase in the scope and size of projects completed during the three months ended July 31, 2008 as compared to the three months ended July 31, 2007.

The nature of iDNA's business is such that the nature and timing of assignments completed for clients, and the resulting revenue, will vary from period to period in terms of scope, size of projects and the ultimate revenues derived. The timing and fluctuations between periods for assignments is particularly apparent for our strategic communications segment where assignments tend to be fewer in number but larger in scope than the information services segment. As a consequence, revenues tend to fluctuate from quarter-to-quarter based upon the client determined timing for completion of an assignment.

Cost of Service Revenues: Cost of revenues for the three months ended July 31, 2008 and 2007 was $2.6 million and $2.0 million, respectively.

Cost of revenues attributed to the information services segment was $1.3 million for the three months ended July 31, 2008 as compared to $1.4 million for the three months July 31, 2007.

The gross profit realized by the information services segment for the three months ended July 31, 2008 and 2007 was $938,000 and $899,000, respectively. The gross profit increase of $39,000 for the three months ended July 31, 2008 as compared to the three months ended July 31, 2007 is due principally to the net effect of (i) an increase in project margins for the period, (ii) a decrease of $18,000 in project overhead costs offset by (iii) a decrease in revenues. The gross margin for the three months ended July 31, 2008 increased 4.3% to 42.8% as compared to 38.5% for the three months ended July 31, 2007, principally due to the net effect of (i) an increase of 17.8% associated with equipment sales due to a favorable product mix sold, (ii) a decrease in direct project costs of 3.7% that resulted in higher project margins, offset by (iii) an increase of 0.5% in indirect production overhead expenses as a percentage of revenues.

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Cost of revenues attributable to the strategic communications segment increased $704,000 to $1.3 million for the three months ended July 31, 2008 as compared to $634,000 for the three months ended July 31, 2007. The increase in the costs of revenues was principally due to an increase in revenues for the three months ended July 31, 2008 as compared to the three months ended July 31, 2007. The gross profit realized by the strategic communications segment for the three months ended July 31, 2008 and 2007 was $646,000 and ($120,000), respectively. The gross profit increase of $766,000 for the three months ended July 31, 2008 as compared the three months ended July 31, 2007 was principally due to an increase in production projects completed during the period which utilized internal production staff and resources. The nature of the strategic communications segment's cost of revenues includes various fixed production, operating and personnel costs as well as variable direct project costs. As a consequence, the absorption of the fixed production operating and personnel costs can cause quarter-to-quarter fluctuations in gross profit realized as iDNA experiences quarter-to-quarter fluctuations in revenues.

Selling, General and Administrative ("SG&A"): SG&A for the three months ended July 31, 2008 and the three months ended July 31, 2007 was $2.1 million and $2.3 million, respectively.

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