History and Overview

V2K International, Inc. ("International") was incorporated as a Colorado corporation on March 13, 2006. Through our wholly owned subsidiaries, V2K Window Fashions, Inc., V2K Technology, Inc., V2K Manufacturing, Inc. and Marketing Source International, LLC, we sell and support franchises in the residential and commercial window fashion industry, develop and license proprietary software that allows users to decorate windows for both residential and commercial customers, act as a broker for the manufacturing of the resulting soft window treatment products and provide product development resources and act as a sales agent for overseas window covering manufacturers.

Details of the Company's subsidiaries as of March 31, 2009 are described below:

          Entity name            Place of         Principal        Effective
                                 incorporation    activities       interest
                                 and legal                         held
                                 entity

          V2K Window Fashions,   Colorado         Franchise        100%
          Inc. ("Windows")       corporation      sales and
                                                  support

          V2K Technology, Inc.   Colorado         Development      100%
          ("Technology")         corporation      and licensing
                                                  of software

          V2K Manufacturing,     Colorado         Broker for       100%
          Inc.                   corporation      manufacturing
          ("Manufacturing")                       of soft window
                                                  covering
                                                  products

          Marketing Source       Colorado         Product          100%
          International, LLC     limited          development
          ("MSI")                liability        and sales
                                 company          agent for
                                                  overseas
                                                  window
                                                  covering
                                                  manufacturers

In April 2006, in a share for share exchange, we acquired all issued and outstanding shares of Windows' preferred and common stock in exchange for shares of common stock in International on a 1 for 35 basis and 1 for 10 basis, respectively.

In August 2006, Windows opened its first company-owned franchise location, incorporated as Window Fashions Franchise, LLC. In July 2007, Windows sold 100% of its ownership interest in Window Fashions Franchise, LLC to a third party.

In April 2006, Windows transferred legal ownership of Manufacturing and the related equity interest to International. Windows had acquired Manufacturing in January 2004. In October 2007, we sold the inventory and fixed assets of Manufacturing to a third party. Manufacturing now acts as a broker for the manufacturing of soft window treatments supplied to Windows and its franchisees by managing strategic alliances with outside vendors.

In July 2006, in order to further protect the intellectual property associated with the software and to facilitate future licensing agreements, the software and software development team formerly held by

Windows were spun-off to form Technology. Technology is a wholly owned subsidiary of International and licenses a customized window fashions franchise software to Windows.

In April 2007, we organized MSI to generate revenues by acting as a product development resource and sales agent for overseas window coverings manufacturers. MSI has engaged in only preliminary discussions with overseas window coverings manufacturers as of the date of this filing.

Critical Accounting Policies

Franchise Operations - Overview. Franchisees are required to pay us an initial franchise fee, royalty fees aggregating between 4% and 8% of gross sales and an advertising contribution fee of 2% of gross sales. In addition, all materials and goods sold by franchisees are processed, billed and collected through us using approved vendors and suppliers.

Franchise Operations - Reacquired Franchise Rights. We occasionally reacquire the rights to a franchise territory. When this occurs we contract with the franchisee to reacquire the territory for a specified amount that can consist of cash, a note payable, and/or forgiveness of debt. While these territories provide benefits to the Company, they lack physical substance, thus, under Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", we record reacquired franchise rights as intangible assets at fair value. Fair value is established as the total amount of consideration that changed hands, not to exceed the estimated resale amount of the territory less all related costs of sales. We have concluded that reacquired territories have indeterminate lives, so the resulting intangible assets are not amortized. When reacquired territories are resold, the intangible assets are offset against the cost of the sale, and the related carrying value is reduced. We assess impairment of intangible assets on an annual basis. If any impairment is found, the carrying amount of the asset is written down to the fair value. Franchise rights reacquired in the six-month periods ended March 31, 2009 and March 31, 2008 totaled 0 and 1, respectively.

Franchise Operations - Repossessed Franchises. We have the right to repossess (cancel) franchises. When this occurs we cancel a franchise agreement and take the franchise territory back from the franchisee. We cancel franchises for failure to abide by the terms and conditions of franchise agreements, and for failure to meet minimum performance standards pursuant to franchise agreements. Occasionally, franchisees voluntarily surrender their territories. No consideration is exchanged in these situations, and none of the franchise fee is refunded, thus under SFAS No. 45, "Accounting for Franchise Fee Revenue", no fair value is assigned to these transactions. In the six months ended March 31, 2009 and March 31, 2008, we repossessed 26 and 19 franchises, respectively.

Intangible Asset Impairment. Intangible assets consist of reacquired franchise rights from the repurchase of franchise territories. We have determined that reacquired franchise rights have indefinite lives and are not subject to amortization. Intangible assets with indefinite lives are reviewed for impairment annually or more frequently if events or circumstances indicate the carrying amount of the assets may be impaired. No impairment has been recorded as of either March 31, 2009 or March 31, 2008.

Revenue Recognition. Initial franchise fees are recognized as revenue upon the commencement of operations by the franchisee, which is when we have performed substantially all initial services required by the franchise agreement. Unearned income represents franchise fees received for which we have not yet performed all of our initial obligations under the franchise agreement. Such obligations, consisting mostly of training, are generally fulfilled within 60 days of receipt of the initial franchise fee. Royalty and advertising fees are recognized as earned.

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. At this time, our operations are such that there are two primary areas of estimates and assumptions that could potentially have a material impact to the financial statements if significantly miscalculated. These areas are the allowance for doubtful accounts and share-based compensation.

Allowance for Bad Debts. The allowance for doubtful accounts incorporates protection against write-offs for bad debt with respect to both notes receivable and accounts receivable. This allowance is calculated based on historical write-offs as a percentage of these accounts and from current analysis of our existing franchise base. We believe that the current allowance is adequate for these potential write-offs based on these assumptions. This account is reviewed in detail monthly and adjusted as needed. At March 31, 2009 and September 30, 2008, allowance for doubtful accounts was $30,636 and $41,483, respectively.

The potential risk of these estimates can be material to the financial statements, because the receivables are the largest assets on the balance sheet. If we were to incur adjustments for write-offs that were not covered under the allowance it would be recorded as bad debt expense in operating expenses, and the offset would reduce the related receivables balance on the balance sheet. Based on the average receivable balances for the last 24 months, if the estimate was significantly miscalculated it could have a negative impact of $100,000 to $200,000 to the financial statements. We believe based on our knowledge and ongoing review that the risk of miscalculating to this level is low, barring any unforeseen economic downturn.

Share Based Compensation. Share-based compensation involves calculating the value of stock options granted under our stock option plan, following calculation methods prescribed by SFAS 123R. We use the Black-Scholes stock option pricing model, which requires assumptions for expected option life, a risk-free interest rate, dividend yield, and volatility. Expected option life represents the period of time that options granted are expected to be outstanding, the risk-free interest rate is based on the U.S. Treasury market, and volatility is derived from an analysis of trading prices of the stock of a peer company. For the six months ended March 31, 2009 and 2008, share-based compensation was $18,916 and $43,682, respectively. Share-based compensation is included in selling, general and administrative expenses as an operating expense and therefore has a significant impact on results of operations.

Results of Operations

At this point in our development, our results of operations are impacted primarily by the sales of franchises, as our existing franchise base is too small to generate enough royalty revenue and gross profit margin from sales of materials and supplies to support our operations. While revenues from sales of material and supplies comprise approximately 66%-81% of total revenues, the margin on these sales ranges from 2% to no more than 10%. Our margins are relatively low because we do not have enough volume to obtain better pricing from our vendors. We limit our mark-up to our franchisees so that they can be competitive in quoting prices to customers and also operate profitably.

Three Months Ended March 31, 2009 as Compared to Three Months Ended March 31, 2008. For the quarter ended March 31, 2009, sales of franchises decreased by $399,977 (91%) from the corresponding period of the previous fiscal year due primarily to a reduced marketing budget and a downturn in the economy. Our gross margin on sales of franchises was 49% for 2009 and 50% for 2008. The most significant component of cost of franchise sales is the selling commission. If we obtain the sale of a franchise through the assistance of a broker, we pay a commission equal to 40% of the franchise purchase price, with an additional 7.2% commission paid to our in-house sales personnel. If we obtain the sale of a franchise without the assistance of a broker, we pay a 12% commission to our in-house sales personnel. For the quarters ended March 31, 2009 and 2008, our sales with the assistance of a broker were about the same.

For the 2009 period, royalty and advertising fees decreased by $56,827 (37%). Sales of materials and supplies decreased by $586,273 (51%). There were
29 (17%) fewer number of franchisees in operation during the 2009 period, and the retail sales by franchisees in 2009 appear to reflect a significant downturn in the housing market and general economy. Our franchisees report that with fewer homes being sold, there seemed to be less demand for window covering products.

While our revenues decreased by $1,043,077 (60%), our operating expenses decreased by $945,327 (50%), resulting in an increase of $97,750 (80%) in loss from operations.

Selling, general and administrative expenses decreased by $147,487 (31%), with the most significant decreases being in payroll (approximately $109,000), a decrease in advertising expense (approximately $25,000) and a decrease in accounting and legal fees of (approximately $27,000). Research and development expenses decreased by $35,247 (45%), primarily due to reductions in personnel.

Interest expense increased by $23,129 (255%) for the 2009 period, primarily due to additional proceeds of $159,964 from notes payable - related parties.

As a result of the above, our net loss for the quarter ended March 31, 2009 was $237,727 as compared to $119,420 for the comparable 2008 quarter, an increase of $118,307 (99%).

Six Months Ended March 31, 2009 as Compared to Six Months Ended March 31, 2008. For the six months ended March 31, 2009, sales of franchises decreased by $636,677 (86%) from the corresponding period of the previous fiscal year due primarily to a reduced marketing budget and economic times. Our gross margin on sales of franchises was 46% for 2009 and 43% for 2008. The most significant component of cost of franchise sales is the selling commission. If we obtain the sale of a franchise through the assistance of a broker, we pay a commission equal to 40% of the franchise purchase price, with an additional 7.2% commission paid to our in-house sales personnel. If we obtain the sale of a franchise without the assistance of a broker, we pay a 12% commission to our in-house sales personnel. For the quarter ended March 31, 2009, all sales were made with the assistance of a broker.

While our revenues decreased by $1,563,083 (46%), our operating expenses decreased by $1,577,161 (41%), resulting in a decrease of $14,078 (3%) in loss from operations.

Selling, general and administrative expenses decreased by $336,091 (32%), with the most significant decreases being in payroll (approximately $200,000), rent (approximately $18,000) accounting/legal (approximately $70,000), telephone (approximately $18,000) and travel/meals (approximately $20,000). Offsetting these decreases were increases in credit card fees (approximately $9,000). Research and development expenses decreased by $67,188 (40%), primarily due to reductions in personnel.

Interest expense increased by $44,630 (310%) for the 2009 period, primarily due to the $891,417 of notes payable - related parties used to cover operational losses, that did not exist at March 31, 2008.

As a result of the above, our net loss for the six months ended March 31, 2009 was $474,872 as compared to $457,468 for the comparable 2008 period, a decrease of $17,404 (4%).

Liquidity and Financial Condition

We have incurred negative operating cash flows, operating losses, and negative working capital. We have relied upon sales of our common stock and borrowing in the form of bridge loans and convertible debentures to address our liquidity needs. To a lesser extent, we have also used bank financing.

Some of the key components to our operating cash flows are the changes in accounts receivable and accounts payable. As we are essentially a product distributor, our level of activity is reflected in our accounts receivable and accounts payable. We receive invoices from vendors for product and simultaneously bill our franchisees. The Days Sales Outstanding ("DSO") as of March 31, 2009 and September 30, 2008 was 37 days and 36 days, respectively, as compared to 29 days at September 30, 2007.

As of March 31, 2009. At March 31, 2009, we had a working capital deficit of $1,518,003 as compared to a deficiency of $1,151,926 at September 30, 2008. While our current assets decreased by $389,874, our current liabilities decreased by only $23,797. The most significant decrease in current assets was with respect to accounts receivable totaling $324,766. The decrease in accounts receivable was primarily due to decreased sales and increased collection efforts.

The most significant increase in current liabilities was the result of an increase of $159,964 in our notes payable - related parties, which was partially offset by a decrease in accounts and accrued expenses of $176,140.

Unearned income represents franchise fees received for which we are performing our initial obligations under the franchise agreement and unutilized royalty credits issued as part of initial sale. Our primary obligation under the franchise agreement is providing training for two persons for each franchise. We reimburse the franchisee for travel expenses for one person (up to $500) and pay lodging expenses for one person to attend the training as part of the franchisee fee. At the training, the franchisee receives

equipment (a laptop computer, portable printer and carrying case), software (both V2K's proprietary software and non-proprietary software such as Microsoft Office and QuickBooks), manuals (training, as well as policy and procedure), and an electronic marketing kit. Samples of fabric and hard products and a starter set of printed materials (business cards, stationery and promotional materials) are shipped to the franchisee when training occurs. Accordingly, since we perform substantially all initial obligations required by the franchise agreement once training is completed, we recognize initial franchise fees as revenues at that time.

For the six months ended March 31, 2009, we used cash of $152,176 for operating activities, as compared to cash used by operating activities of $465,992 for the comparable period in 2008. The most significant factor in the decrease was a net change of $292,585 in accounts receivable. Financing activities, principally the proceeds from our notes payable - related parties, provided cash of $159,964 in 2009. In contrast, proceeds from the line of credit provided cash of $131,685 in 2008.

We have recently implemented a company-wide cost reduction program that we estimate will result in a monthly reduction of $85,000 in expenses and operating losses once the full effect of these measures is felt commencing in June of 2009.

In October 2007, we sold the inventory and fixed assets of V2K Manufacturing to a third party. This has resulted in a reduction of approximately $15,000 in consolidated monthly net operating losses and approximately $13,000 per month in negative cash flow, and an increase in revenue from margin on sales of material and supplies of approximately $5,000 per month.

We have also decreased the monthly operating expenses at V2K Technology by approximately $11,000 per month, through salary reductions and a reduction in personnel. In addition, since the version of the software for custom window treatments that is licensed to V2K Window Fashions is now complete, the costs associated with maintaining that system should incrementally decrease. We will continue to pursue licensing opportunities with synergistic manufacturers, distributors and retailers in the commercial and home décor markets, and will propose that any license agreements we enter into will include an upfront fee for software customization. We anticipate that development of new platforms for our technology, primarily an e-commerce/web based version of the software and a kiosk application, will not commence until fiscal 2010.

At V2K Window Fashions we have reduced monthly operating expenses by approximately $59,000, primarily via reductions in personnel and reducing the cost of some of the items we previously provided in conjunction with the purchase of a V2K Franchise. We do not believe that this will impair our ability to sell franchises. Beginning in fiscal 2007 we commenced a process of eliminating under-performing franchisees from our system, which we believe will in turn lead to a reduction in our costs to maintain that system. This process will continue into late fiscal 2009.

We believe that our quickest path to profitability is franchising, and thus our primary focus in fiscal 2009 will be on improving our execution of the franchise business model. We estimate that sales of 1 franchise unit per month, and retail sales by our franchisees of $600,000 per month, is necessary for profitable future operations.

Recently Issued Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board ("FASB") issued three final Staff Positions ("FSP") intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. The FSPs are effective for interim and annual periods ending after June 15, 2009.

FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. This FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly. The Company is currently evaluating the impact the adoption of this FSP will have on its financial statements.

FSP 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends existing guidance for determining whether an other than temporary impairment of debt securities has occurred. Among other changes, the FASB replaced the existing requirement that an entity's management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert (a) it does not have the intent to sell the security, and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. The Company is currently evaluating the impact the adoption of this FSP will have on its financial statements.

FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments requires an entity to provide the annual disclosures required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments, in its interim financial statements. The Company is currently evaluating the impact the adoption of this FSP will have on its financial statements.

Off-Balance Sheet Arrangements

As of March 31, 2009, we did not have any off-balance sheet arrangements.

Forward-Looking Statements

The forward-looking comments contained in this discussion involve risks and uncertainties. Actual results may differ materially from those discussed here due to factors such as, among others, limited operating history, difficulty in developing and refining manufacturing operations, and competition.