We may from time to time make written or oral forward-looking statements, including those contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations. The words "estimate," "project," "believe," "intend," "expect," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. In order to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we are hereby identifying certain important factors that could cause our actual results, performance or achievement to differ materially from those that may be contained in or implied by any forward-looking statement made by or on our behalf. The factors, individually or in the aggregate, that could cause such forward-looking statements not to be realized include, without limitation, the following: (1) difficulty in developing and implementing marketing and business plans, (2) industry competition factors and other uncertainty that a market for our products will develop, (3) challenges associated with distribution channels, including both the retail distribution channel and high speed data operators (e.g., uncertainty that they will offer our products, inability to predict the manner in which they will market and price our products and existence of potential conflicts of interests and contractual limitations impeding their ability to offer our products), (4) continued losses,
(5) difficulty or inability to raise additional financing on terms acceptable to us, (6) departure of one or more key persons, (7) changes in regulatory requirements, (8) delisting of our Common Stock, par value $0.01 per share ("Common Stock") from the OTCBB and (9) other risks identified in our filings with the Securities and Exchange Commission, including the risks identified in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. We caution you that the foregoing list of important factors is not intended to be, and is not, exhaustive. We do not undertake to update any forward-looking statement that may be made from time to time by us or on our behalf, other than as required by the federal securities law.

General

We are currently in the process of transforming the Company from a manufacturer of high quality consumer video phones, into a service operating company that also provides "turn-key" digital video phone services (meaning a complete, ready-to-use digital video phone services solution) directly to end using customers. Inherent in this strategy is a monthly recurring revenue stream that would be based on the particular services provided by us to each company we partner with. Also key to this strategy is that it enables many non-traditional companies and organizations who have a very broad distribution reach, but do not have an infrastructure to provide telephone and video services, to provide their distribution networks with a video phone service solution. We are currently in the process of developing a new video phone needed for the transition to a digital video phone service and will make the video phone available to ACN as well as all of our customers. The first prototypes are expected be available in the fourth quarter of 2009 with customer availability expected in the second quarter of 2010.

We expect some companies will look to us to wholesale to them select services from the platform as they are already providing services such as billing, customer care and customer order entry. Our wholesale offering will include our video phone, provisioning, network and technical support services. Our platform will be modular so customers can choose the services that best fit their needs.

While we expect revenues related to the new business model to begin in late 2009, or early next year, the extent and timing of future revenues for our digital video phone services depends on several factors, including the rate of market acceptance of our products, the degree of competition from similar products, and our ability to access funding necessary to provide the time runway to roll out product and services. We cannot predict to what extent our service business will produce revenues, or when, or if, we will reach profitability.

Relationship with AequusTechnologies. In the spring of 2006, we entered into a multiyear agreement with Aequus Technologies Corp. ("Aequus") to purchase Ojo video phones through its wholly owned subsidiary Snap Telecommunications Inc. ("Snap!VRS"), a provider of Video Relay Services ("VRS") and Video Remote Interpreting ("VRI") services for the deaf and hard of hearing. In the spring of 2007, we announced an expansion of our relationship with Aequus and Snap!VRS agreeing to work collaboratively to develop the preferred VRS phone for the VRS community. From 2006, we were reliant on the Aequus relationship as our primary customer relationship.

On February 4, 2008, we disclosed that we were in a dispute with Aequus over the payment of significant monies that we believed Aequus owed to us. The refusal by Aequus to pay such monies had contributed to a shortfall in our available operating cash needed to continue operations, and accordingly, on January 30, 2008, we shut down our operations. This was a first step to winding down our business, which would occur if we were not able to secure payment of the monies believed to be owed to us by Aequus and/or secure new financing.

On March 31, 2008, we entered into a new agreement with Aequus and Snap!VRS. This new agreement provides for the (i) resolution of a dispute with Aequus regarding amounts we claimed were owed to us by Aequus and the termination by us of video phone service to Aequus, (ii) payment to us by Aequus of approximately $5,000 in scheduled payments over ten months commencing March 31, 2008, (iii) agreement to arbitrate approximately $1,354 claimed by us to be owed by Aequus and (iv) purchase of an additional $1,475 of video phones by Aequus.

In October 2008, Aequus failed to pay $953 owed to us for the purchase of video phones, and as a result we terminated our reseller agreement with Aequus. We have most of the units sold to Aequus in our possession and we are attempting to sell the units elsewhere to recover the $953 while continuing to resolve our dispute with Aequus. We continue to believe that the VRS and VRI markets provide an attractive opportunity for the sale of video phones and have initiated shipments of video phones to other VRS/VRI providers. In addition, on January 27, 2009, we resolved arbitration proceedings with Aequus, and in full satisfaction of the outstanding $1,354 arbitration claim, Aequus agreed to terminate any obligation on our part to provide certain prepaid engineering services pursuant to a previous agreement with Aequus. As a result of the arbitration, we retained $725 of the approximately $900 prepaid by Aequus for these engineering services.

Relationship with WGI and ACN. On April 6, 2009, we completed a private placement of securities to WGI Investor LLC ("WGI"), pursuant to the terms of a Securities Purchase Agreement, dated December 12, 2008 (the "Securities Purchase Agreement"), between WGI and the Company. In connection with the closing on April 6, 2009 of the transactions contemplated by the Securities Purchase Agreement, we issued to WGI an aggregate of 202,462,155 shares of our Common Stock, representing approximately 63% of the total number of issued and outstanding shares of our Common Stock, as well as a warrant to purchase up to approximately 140.0 million shares of our Common Stock in certain circumstances (the "Anti-Dilution Warrant") in exchange for (i) cash consideration of $1,450 (of which $750 had been previously advanced to us by WGI), (ii) the cancellation of convertible debentures held by WGI under which approximately $5,100 in principal and accrued interest was outstanding, and (iii) the cancellation of certain outstanding warrants held by WGI. In December 2008, WGI had acquired from YA Global Investments, L.P. ("YA Global") the convertible debentures that we had previously issued to YA Global and the outstanding warrants to purchase our Common Stock then held by YA Global. We expect to use the proceeds from the closing on April 6, 2009 of the transactions contemplated by the Securities Purchase Agreement primarily for working capital purposes.

The Anti-Dilution Warrant entitles WGI to purchase up to 140.0 million shares of Common Stock at an exercise price of $0.01 per share to the extent the Company issues any capital stock upon the exercise or conversion of (i) any warrants, options and other purchase rights that were outstanding as of April 6, 2009 ("Existing Contingent Equity"), (ii) up to 19.7 million shares underlying future options, warrants or other purchase rights issued by the Company after April 6, 2009 ("Future Contingent Equity"), or (iii) the ACN Warrant described below. The Anti-Dilution Warrant is designed to ensure that WGI may maintain 63% of the issued and outstanding shares of the Company's capital stock in the event that any of the Company's capital stock is issued in respect to the Existing Contingent Equity, the Future Contingent Equity or the ACN Warrant. The term of the Anti-Dilution Warrant is ten years from the date of issuance, and the shares subject to the Anti-Dilution Warrant will be decreased proportionally upon the expiration of Existing Contingent Equity, Future Contingent Equity and the ACN Warrant.

WGI is a private investment fund whose ownership includes owners of ACN Digital Phone Service, LLC ("ACN"), a direct seller of telecommunications services and a distributor of video phones. Concurrently with the closing of the closing on April 6, 2009 of the transactions contemplated by the Securities Purchase Agreement, we entered into a commercial relationship with ACN pursuant to which we will design and sell video phones to ACN (the "Commercial Relationship"). As part of the Commercial Relationship, we entered into two agreements, a Master Purchase Agreement pursuant to which ACN has committed to purchase three hundred thousand videophones over a two-year period and a Software Development and Integration and Manufacturing Assistance Agreement pursuant to which ACN committed and paid $1,200 to fund certain software development costs. In connection with the Commercial Relationship, we granted ACN a warrant to purchase up to approximately 38.2 million shares of our Common Stock at an exercise price of $0.0425 per share (the "ACN Warrant"). The ACN Warrant will vest incrementally based on ACN's purchases of video phones under the Commercial Relationship.

Critical Accounting Policies and Estimates.

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require 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 the reported amounts of net revenues and expenses during the reporting period. Actual results could differ from those estimates.

Our significant accounting policies are described in the Management's Discussion and Analysis section and the notes to the consolidated financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2008. Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. Following are some of the areas requiring significant judgments and estimates: revenue recognition, inventory valuation, stock based compensation, deferred revenues, deferred tax asset valuation allowances and valuation of derivative liabilities and related warrants. Management has discussed the development and selection of these policies with the Audit Committee of our Board of Directors, and the Audit Committee of the Board of Directors has reviewed our disclosures of these policies. There have been no material changes to the critical accounting policies or estimates reported in the Management's Discussion and Analysis section or the audited financial statements for the year ended December 31, 2008 as filed with the Securities and Exchange Commission.

Results of Operations:

Three and Six Months Ended June 30, 2009 and June 30, 2008.

Revenues.

                             For the three months ended June 30,                      For the six months ended June 30,
                       2009            2008                Change                2009            2008             Change
Product revenues     $     16       $      812      $   (796 )       (98 )%   $      365       $    831     $  (466 )       (56 )%
Service revenues     $     89       $      164      $    (75 )       (46 )%   $      182       $    259     $   (77 )       (30 )%
Other revenues       $     38       $      279      $   (241 )       (86 )%   $      833       $    279     $   554         199 %
Total net revenues   $    143       $    1,255      $ (1,112 )       (89 )%   $    1,380       $  1,369     $    11           1 %

Product Revenue. Product revenue consists of the sale of Ojo video phones. For the three months ended June 30, 2009 compared with the three months ended June 30, 2008, the decrease in product revenue primarily reflects reduced shipments of product to Aequus. For the six months ended June 30, 2009 compared with the six months ended June 30, 2008, the decrease in product revenue primarily reflects reduced shipments of product to Aequus, partially offset by $322 of product shipments to another customer during the six months ended June 30, 2009.

Service Revenue. Service revenue consists of subscription service revenues and service provided to service operators. For the three and six months ended June 30, 2009 compared with the three and six months ended June 30, 2008, the decrease in service revenue primarily reflects the reduction in service provided to Aequus.

Other Revenue. Other revenue consists of non-recurring engineering and other non recurring services. For the three months ended June 30, 2009 compared with the three months ended June 30, 2008, the decrease in other revenue primarily reflects the reduction in realized revenues from non recurring engineering services, support and transition training and service center usage provided to Aequus under the March 31, 2008 agreement. For the six months ended June 30, 2009 compared with the six months ended June 30, 2008, the increase in other revenue primarily reflects the increased revenue in the quarter ended March 31, 2009 that included $725 related to the settlement of a dispute with Aequus wherein the settlement eliminated $725 of the Company's $900 obligation to provide NRE to Aequus and that was credited to NRE services provided under the March 31, 2008 agreement with Aequus.

Net Revenue. For the three months ended June 30, 2009 compared with the three months ended June 30, 2008, the decrease in net revenue primarily reflects the decrease in product, service and other revenues related to revenue realized from Aequus. For the six months ended June 30, 2009 compared with the six months ended June 30, 2008, the increase in other revenue primarily reflects the increased revenue in the quarter ended March 31, 2009 that included $725 related to the settlement of a dispute with Aequus which was partially offset by the decrease in product and service revenue from Aequus as noted above which was the result of the conclusion of the March 31, 2008 agreement in January 2009.

Cost of Revenues and Gross Margin

                          For the three months ended June 30,                     For the six months ended June 30,
                     2009            2008               Change               2009            2008             Change
Total net
revenues           $    143       $    1,255     $ (1,112 )       (89 )%   $   1,380       $  1,369     $    11           1 %

Cost of product
revenues           $      5       $      678     $   (673 )       (99 )%   $     919       $    716     $   203          28 %
Cost of service
revenues           $      0       $        0     $      0         N/A      $       0       $      0     $     0         N/A
Cost of other
revenues           $      0       $      159     $   (159 )      (100 )%   $       0       $    159     $  (159 )      (100 )%
Total cost of
revenues           $      5       $      837     $   (832 )       (99 )%   $     919       $    875     $    44           5 %

Gross margin       $    138       $      418     $   (280 )       (67 )%   $     461       $    494     $   (33 )        (7 )%

Cost of Revenues. The cost of revenues consists of product and delivery costs relating to the deliveries of video phones, and direct costs related to non-recurring engineering services revenues. For the three months ended June 30, 2009 compared with the three months ended June 30, 2008, the decrease in cost of revenues primarily reflects decreased costs related to reduced product shipments of $674, and decreased other revenue engineering services costs of $159. For the six months ended June 30, 2009 compared with the six months ended June 30, 2008, the increase in cost of revenues primarily reflects the recording of a $600 inventory reserve for certain excess and obsolete inventory that may not be utilized in the future development of our video phones.

Gross Margin. For the three months ended June 30, 2009 compared with the three months ended June 30, 2008, the decrease in gross margin primarily reflects the reduction of product revenues and the decrease in engineering services, partially offset by the result of an improved product mix to higher margin service and engineering service revenues. For the six months ended June 30, 2009 compared with the six months ended June 30, 2008, gross margin was reduced by $600 relating to the establishment of an inventory reserve for certain excess and obsolete inventory. Before this adjustment, gross margin for the six months ended June 30, 2009 was $1,061, or 77%, compared to $494, or 36%, for the same period in 2008. This improvement in gross margin was primarily the result of the increase in revenue from the non-recurring engineering , training and service center usage revenues recognized from our agreement with Aequus, with the respective costs of these increased revenues having been previously incurred and recorded in 2008 (See Note 14 of the accompanying financial statements), engineering services provided to ACN for software development (See Note 14 of the accompanying financial statements), and increased selling prices and lower unit costs of the product shipped during the six months ended June 30, 2009 compared to the same period in 2008.

Expenses From Operations.

                             For the three months ended June 30,                       For the six months ended June 30,
                       2009             2008               Change                 2009           2008              Change
Engineering and
development         $       763       $     498     $    265           53 %    $    1,405      $  1,075     $    330           31 %
Sales and
marketing           $        67       $     140     $    (73 )        (52 )%   $      105      $    359     $   (254 )        (71 )%
General and
administrative      $     1,576       $     978     $    598           61 %    $    2,441      $  1,877     $    564           30 %
Excess fair value
Transferred to
WGI                 $    14,463       $       0     $ 14,463          100 %    $   14,463      $      0     $ 14,463          100 %
Depreciation and
amortization        $        80       $      81     $     (1 )         (1 )%   $      119      $    180     $    (61 )        (34 )%

Engineering and Development. Engineering and development expenses primarily consist of compensation, and the cost of design, programming, testing, documentation and support of our video phone product. For the three and six months ended June 30, 2009 compared with the three and six months ended June 30, 2008, the increase in engineering and development expenses primarily reflects that in 2008 certain direct engineering development costs charged to cost of revenues that were related to revenues reported for NRE services performed for Aequus during the three and six months ended June 30, 2008 for non recurring engineering services, support and transition training and service center usage provided to Aequus under the March 31, 2008 agreement .

Sales and Marketing. Sales and marketing expenses consist primarily of compensation (which includes compensation to manufacturer's representatives and distributors), attendance at conferences and trade shows, travel costs, advertising, promotions and other marketing programs (which include expenditures for co-op advertising and new market development) related to the continued sales of our video phone product For the three and six months ended June 30, 2009 compared with the three and months ended June 30, 2008, the decrease in sales and marketing expenses is primarily the result of reduced marketing, customer service and promotional expenditures and reduced compensation costs.

General and Administrative. General and administrative expenses consist primarily of expenditures for administration, office and facility operations, as well as finance and general management activities, including legal, accounting and professional fees. For the three and six months ended June 30, 2009 compared with the three and six months ended June 30, 2008, the increase in general and administrative expenses is primarily the result of the accrual of $626 in compensation and severance expenses related to officers that were terminated. The terminated officer's compensation will cease on April 7, 2010. In addition the six months ended June 30, 2009, included a bad debt reserve of $157 relating to certain product shipped and invoiced to a customer that has not been paid.

Excess Fair Value Transferred to WGI. As a result of the value of the shares and antidilution warrants received by WGI on the closing on April 6, 2009 of the transactions contemplated by the Securities Purchase Agreement, the Company has determined that the value received by WGI exceeded the fair value received by the Company by $74,463. Since the WGI transaction is related to the ACN purchase agreement whereby ACN agreed to purchase 300,000 video phones, the excess in fair value was deemed to be an inducement to a vendor per Emerging Issues Task Force 96-18 and EITF-01-9 and accordingly the excess above fair value is requires to be offset as a reduction of revenues to the extent of cumulative revenue recorded from that customer. However, since the excess in fair value exceeds the expected future revenues of the ACN transaction by $14,463 EITF-01-9 requires the amount of the excess in fair value provided to a vendor over the expected revenue ($14,463) to be recorded as a non-cash expense against operations. The amount of the excess in fair value equal to expected future revenue of $60,000 has been recorded as a $4,200 current asset and $55,800 long-term deferred asset (presented as "Revenue incentive asset") in the balance sheet at June 30, 2009, and will offset revenue when the revenue is realized.
(See Note 8 of the accompanying condensed consolidated financial statements)

Other Income and Expenses.

                          For the three months ended June 30,                      For the six months ended June 30,
                      2009           2008              Change                 2009          2008              Change
Interest and
other income       $        0      $      4     $     (4 )       (100 )%   $        8     $     10     $     (2 )        (20 )%
Change in fair
value of
derivative
warrants and
conversion
options            $      284      $ (1,674 )   $  1,958          117 %    $    4,209     $ (1,807 )   $  6,016          333 %
Income from
service fee
contract
termination        $        0      $  1,056     $ (1,056 )       (100 )%   $      348     $  1,056     $   (708 )        (67 )%
Amortization of
debt discount      $   (2,235 )    $   (707 )   $   1528          216 %    $   (2,918 )   $   (926 )   $  1,992          215 %
Loss on
equipment
disposal           $        0      $   (295 )   $   (295 )       (100 )%   $        0     $   (295 )   $   (295 )       (100 )%
Interest and
other expense             (40 )         (99 )   $    (59 )        (60 )%         (113 )       (186 )   $    (73 )        (39 )%

Interest and Other Income. Interest and other income consisted of interest earned on cash and cash equivalents. During the three and six months ended June 30, 2009, we earned interest on an average cash balance of approximately $732 and $576, respectively. During the three and six months ended June 30, 2008, we earned interest on an average cash balance of approximately $490 and $562, respectively.

Change in fair value of derivative warrants and conversion options. The fair value adjustments of our derivative warrants and conversion options issued in our June 2004 private placement of our Series A Convertible Preferred Stock and Warrants and our August 11, 2006 and October 13, 2006 private placements of secured convertible debentures and warrants are primarily a result of changes in our common stock price during each reporting period and anti-dilution provisions that increased the number of outstanding warrants and reduced the warrant exercise price as of June 30, 2008 (See Note 7 of the accompanying financial statements).

Income from Service Fee Contract Termination. Income from service fee contract termination consists of payments from Aequus for the elimination of previously agreed service fees with Aequus, which we realized over a ten month period ending January 2009 (See Note 14 of the accompanying financial statements).

Amortization of Debt Discount. Amortization of debt discount consists of the amortization of the secured convertible debentures issued in the August 11, 2006 and October 13, 2006 private placements. The increase of amortization of debt discount for the three and six months ended June 30, 2009, when compared to the same periods in 2008, is primarily the result of the application of the effective interest rate method to determine the monthly amortization of the discount over the term of the convertible debentures. This method increases the periodic amortization charged as the convertible debentures reach maturity (See Note 6 of the accompanying financial statements). On the closing on April 6, 2009 of the transactions contemplated by the Securities Purchase Agreement, the convertible debentures were terminated and the remaining unamortized discount on the convertible debentures of $2,235 was charged to income and included in amortization of debt discount expense.

Loss on Equipment Disposal. During the three months ended June 30, 2008, certain equipment, furniture and fixtures were sold and disposed of during the Company's move to smaller facilities. The net loss realized during the three and six months ended June 30, 2008 was $295. There was no loss or gain realized during the three and six months ended June 30, 2009.

Interest and Other Expense. The reduction in interest expense for the three and six months ended June 30, 2009, when compared to the same periods in 2008, . . .