Summary of AVINCI MEDIA CORP

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Some of the information in this filing contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they:

· discuss our future expectations;

· contain projections of our future results of operations or of our financial condition; and

· state other "forward-looking" information.

We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this prospectus.

Overview

Through our subsidiary, aVinci Media, LC, we deploy a software technology that employs "Automated Multimedia Object Models," a patent-pending way of turning consumer captured images, video, and audio into complete digital files in the form of full-motion movies, DVD's, photo books, posters and streaming media files. We make software technology and package the software in various forms available to mass retailers, specialty retailers, Internet portals and web sites that allow end consumers to use an automated process to create products such as DVD productions, photo books, posters, calendars, and other print media products from consumer photographs, digital pictures, video, and other media. Under our business model, our customers are retailers, online vendors and end customers. We enable our retail and online customers to sell our products to the end consumer who remain customers of the vendor. Through 2007, aVinci Media, LC generated revenues through the sales of DVD products created using its technology. During 2008, new photo book and poster product offerings were made available. Currently on websites www.avincistudio.com and www.myESPNhighlights.com, we sell products directly to end customers. During 2009 we launched myESPN Highlights which gives retailers, photographers, and photo labs the ability to showcase youth sports images in an authentic SportsCenter™ "highlight reel," complete with commentary by ESPN's Karl Ravech. Products include "customizable" SportsCenter branded digital photo products including personalized DVD movies, photo books and posters. In November 2009 we introduced additional personalized myESPN Highlights trading cards, 8 x 10 memory mates (a print photo product featuring an athlete and team) and fleece blankets.

Currently our products are available at the following retailers: Meijer (approximately 179 stores), Walmart (approximately 3,300 domestic stores), Walgreens (approximately 6,500 stores), and Costco (online at Costco.com). Walgreens officially launched the product line in its stores on June 28, 2009. Our products are also available to other customers and online at www.avincistudio.com.

During June 2009, we launched our newest product offering, myESPN Highlights pursuant to the licensing agreement we entered into with ESPN at the end of 2008. We made limited myESPN Highlights products available through Walmart stores in June 2009 and also launched a direct to consumer website at www.myESPNhighlights.com. To distribute and market the product, we created a distribution program to allow sports photographers and other interested parties to register with aVinci as sales associates to carry the myESPN Highlights product line. Photographers who are currently actively working with sports programs and athletic events provide an opportunity for us to utilize an established industry as a direct sales force. Sales associates make a commission on any sales they make to end customers. We continue to actively recruit and register sales associates to sell myESPN Highlight products.

On or about the last week of September, we reached a verbal agreement with Fujicolor to deploy our new archival software that allows customers to save digital files on CD, SD cards or other electronic media to DVD, in Walmart stores. As an advance against site license fees associated with deployment of our archive software, Fujicolor paid us approximately $247,500 in October 2009. The parties to the agreement intend to memorialize the verbal agreement in a written document that will provide for a three-year term with license fees of approximately $1 million per year starting in 2010.

During October 2009, we memorialized in a written contract our agreement with Walgreens to provide our DVD products for in-store fulfillment in approximately 6,500 domestic Walgreens stores. Our DVD products have been available in Walgreens stores since June 2009 and Walgreens has produced over 140,000 DVDs from June through October.

Subsequent to the end of the quarter, in November 2009 we introduced a new product offering to commercial photo labs servicing the youth sports market that allows the labs to offer, sell and create print products including trading cards, 8 x 10 prints and posters. Upon the creation of products, lab customers pay a royalty for products produced. We have engaged several labs and are in negotiations with several more at the present time.

Because of the success we have had working with ESPN to create personalized products associated with a leading brand, we are engaged in discussions with other leading brands, including ESPN's parent company Disney, to create similar product lines to leverage personalized association with the brands using our technology.

We currently manufacture DVDs for all end customers in our Draper, Utah facility with the exception of products sold at Meijer and Walgreens where DVDs are created on site at the store where the product is purchased by the end customer. We use the services of local third-party vendors to print DVD covers and inserts, photo books, and posters.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and disclosures. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates.

We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, and equity-based compensation have the greatest potential impact on our Condensed Consolidated Financial Statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2009 as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

For the first nine months of 2009, revenues increased 123% and operating losses decreased by 40% over the same period in 2008. For the nine months ended September 30, 2009, we had revenues of $673,728, an operating loss of $4,152,414, a net loss of $4,170,561, and a net loss applicable to common stockholders of $4,858,692. This compares to revenues of $302,351, an operating loss of $6,847,783, a net loss of $6,934,944, and a net loss applicable to common stockholders of $8,136,717 for the same period in 2008.

Revenues.

Total revenues increased $201,132, or 179%, to $313,784 for the three months ended September 30, 2009, as compared to $112,652 for the same period in 2008. The increase in revenue during the three months ended September 30, 2009 over the same period in 2008 is primarily due to sales in Walgreen's stores as a result of significant marketing efforts surrounding the launch of aVinci products in Walgreen's stores throughout the United States at the end of the second quarter and the start of the third quarter of 2009. For the nine months ended September 30, 2009, total revenues increased $371,377 or 123% to $673,728 as compared to $302,351 for the same period in 2008. The increase in revenue for the nine months ended is also due to the launch of aVinci products in Walgreen's stores throughout the United States during the second and third quarters of 2009.

Two customers accounted for a total of 88% of aVinci's revenues for the three months ended September 30, 2009 (individually 75%, and 13%) compared to four customers accounting for 94% of the revenue for the same period in 2008 (individually 47%, 19%, 15 percent, and 13%). Two customers accounted for a total of 79% of aVinci's revenues for the nine months ended September 30, 2009 (individually 58%, and 21%) compared to four customers accounting for 93% of aVinci's revenue for the same period in 2008 (individually 47%, 20%, 15%, and 11%). No other single customer accounted for more than 10% of aVinci's total revenues for the three and nine months ended September 30, 2009 or the same period in 2008.

Operating Expenses.

Cost of Goods Sold. Our cost of goods sold decreased $48,973, or 21%, to $184,327 for the three months ended September 30, 2009, compared to $233,300 for the same period in 2008. The decrease in cost of goods sold is primarily due to $44,000 in cost related to the sale of equipment to a customer during 2008, and to increased sale of products produced in retail stores during 2009 for which our cost of goods sold are minimal. As we continue to replace product sales that we fulfill in our facility with sales of products fulfilled in store, we expect our costs of good sold to continue to decrease because our customers assume the cost of the raw materials and labor used to produce products from us. For the nine months ended September 30, 2009, cost of goods sold decreased $80,163 or 12% to $586,770 as compared to $666,933 for the same period in 2008. The decrease in cost of goods sold is primarily due to $118,000 in cost related to the sales for equipment sold to a customer during 2008, and a reduction in labor costs of $45,000 associated with product production in our facility during 2009. These decreases were partially offset by increases recognized during the nine months ended September 30, 2009 of $45,000 in expiring license fees, $29,000 in increased retailer fees, and $24,000 in increased postage due to additional sales volume.

For the three and nine months ended September 30, 2009 the majority of cost of goods sold are for costs associated with fulfillment. For the three and nine months ended September 30, 2008, cost of goods sold includes $188,300 and $547,400, respectively, in costs associated with fulfillment; and $45,000 and $119,600, respectively, for the cost of hardware sold to a customer.

Research and Development. Our research and development expense decreased $284,329, or 62%, to $172,663 for the three months ended September 30, 2009, compared to $456,992 for the same period in 2008. The decrease is primarily due to a decrease in the average employee headcount during this period from year to year. Additional research and development resources were needed during the quarter ended September 30, 2008 in preparation for the launching of our products at Costco and Meijer. The decrease in employee headcount accounts for approximately $229,000 of the decrease. Reduced usage of outside resources reduced expenses by approximately $41,000. For the nine months ended September 30, 2009, research and development decreased $833,405, or 58% to $614,117 as compared to $1,447,522, for the same period in 2008. The decease in expenses for the nine month period is also primarily due to the decrease in the average employee headcount from 2008 to 2009 for the same reasons stated above. The decrease in employee headcount accounts for approximately $725,000 of the decrease. Reduced usage of outside resources reduced the nine month research and development expense by $87,000.

Selling and Marketing. Our selling and marketing expense decreased $183,570, or 46%, to $215,284 for the three months ended September 30, 2009 compared to $398,854 for the same period in 2008. For the nine months ended September 30, 2009, selling and marketing decreased $609,187, or 45% to $756,463 compared to $1,365,650, for the same period in 2008. The decreases are primarily due to a decrease in the average employee headcount during these periods from year to year as additional resources were needed in 2008 to help launch our products at various mass retailers. For the three and nine months ended September 30, 2009, the decrease in employee headcount accounts for approximately $114,000 and $384,000, respectively, of the decrease; and the decrease in the use of outside resources accounts for approximately $62,000 and $80,000, respectively, of the decrease from 2008. Finally, for the nine months ended September 30, 2009, marketing expenses decreased by approximately $138,000 as 2008 included increased marketing expense associated with the launch of our products at various mass retailers.

General and Administrative. Our general and administrative expense increased $89,089, or 8%, to $1,176,016 for the three months ended September 30, 2009, compared to $1,086,927 for the same period in 2008. The increase is primarily due to the increase in stock-based compensation expense of $269,000. The majority of this increase was due to the recognition of the remaining option expense for options granted to two former directors due to the acceleration of vesting upon their resignation in July 2009, and additional stock-based compensation resulting from the repricing of the majority of our options in August 2009 (see Note 4 above). General and administrative expenses also increased by approximately $218,000 due to the issuance of stock and warrants for outside services including stock granted to non-employee directors for their past year's service. These increases were offset by decreases in salaries of $155,000 and benefits of $46,000 due to reduced overall headcount and reduced employee benefits. Other general and administrative expenses decreased including reductions in investor related expenses of $55,000 due to increased activity in 2008 following the reverse merger in June 2008, and reduced insurance expense of $49,000 due to the purchase of "run-off" directors and officers' liability insurance after the reverse merger transaction. Finally, legal and accounting fees decreased by $29,000 from 2008 to 2009 due to higher fees in 2008 associated with the reverse merger transaction.

For the nine months ended September 30, 2009, general and administrative expenses decreased $801,237, or 22% to $2,868,792 compared to $3,670,029, for the same period in 2008. The decrease is primarily due to a decrease of $375,000 in consulting and outside services. The revised consulting agreement with Amerivon resulted in a decrease to general and administrative expense of approximately $745,000. This decrease was offset by an increase in 2009 of other consulting and outside services. Employee benefits decreased by $199,000 due to a decrease in overall headcount from year to year, and reduced employee benefits. Insurance expense decreased by $127,000 from 2008 to 2009, due to the payment of "run-off" directors and officers liability insurance as described above. Finally, travel expenses decreased by $72,000 from 2008 to 2009 due to the reduction in overall average employee headcount and travel related expenses.

Interest Expense. Our interest expense decreased $5,144, or 50%, to $5,209 for the three months ended September 30, 2009, compared to $10,353 for the same period in 2008. For the nine months ended September 30, 2009, interest expense decreased $118,803, or 87% to $17,662 compared to $136,465, for the same period in 2008. In connection with the Agreement and Plan of Merger, aVinci Media, LC entered into a Loan and Security Agreement and Secured Note with Secure Alliance Holdings ("SAH") on December 6, 2007 in order to ensure adequate funds through the merger closing date. The agreement provided for SAH to loan a total of up to $2.5 million to aVinci Media, LC through the merger closing date. A total of $1 million was received under the Secured Note as of December 31, 2007. An additional $1,500,000 was advanced during the three months ended March 31, 2008. The amounts advanced under the Secured Note were secured by all assets of aVinci Media, LC, accrued interest at 10% per annum and principal and interest were due and payable on December 31, 2008. In connection with the merger on June 6, 2008, the balance of notes payable of $2.5 million and the related accrued interest of approximately $104,000 were eliminated.

Income Tax Expense. For the three and nine months ended September 30, 2009 and 2008, no provisions for income taxes were required. Prior to June 6, 2008, aVinci Media LC was a flow-through entity for income tax purposes and did not incur income tax liabilities.

At September 30, 2009, management has recognized a valuation allowance for the net deferred tax assets related to temporary differences and current operating losses. The valuation allowance was recorded because there is significant uncertainty as the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more-likely-than-not that the net deferred tax assets will not be realized.

Deemed Dividend on Series A Convertible Preferred Stock. Deemed dividends of $105,928 and $688,131 were recorded for the three and nine months ended September 30, 2009, respectively, as a result of a beneficial conversion feature on the Series A convertible preferred shares. The beneficial conversions were calculated as the difference between the proceeds received from the sale of the Series A convertible preferred stock and the fair value of the underlying common stock into which the preferred shares are convertible. These were recorded as preferential dividends, thus increasing the loss applicable to common stockholders.

Deemed Distribution on Series B Redeemable Convertible Preferred Units. aVinci recorded a deemed distribution of $976,000 for the nine months ended September 30, 2008, to reflect the issuance of 1,525,000 common units that were issued in order to induce conversion of the Series B preferred units to common units immediately preceeding the reverse merger. The inducement units were recorded as a deemed distribution, thus increasing the loss applicable to common stockholders.

Distributions on Series B Redeemable Convertible Preferred Units. The Series B redeemable convertible preferred unit holders were entitled to an annual distribution of $0.06 per unit. The distributions on Series B redeemable convertible preferred units decreased $225,773, or 100%, to $0 for the nine months ended September 30, 2009, compared to $225,773 for the same period in 2008. The change is due to the distribution accrual beginning in May 2007, and ending (due to the reverse merger) in June 2008.

Balance Sheet Items.

The following were changes in our balance sheet accounts.

Cash. Cash decreased $1,064,917, or 99%, to $6,136 at September 30, 2009, from $1,071,053 at December 31, 2008. The decrease is due to continued cash operating deficits. We did receive $1,202,627 during the nine months ended September 30, 2009 as a result of the issuance of the Series A convertible preferred shares (see Note 3 above) to help cover the operating deficit.

Accounts receivable. Accounts receivable increased $113,831, or 44%, to $375,423 at September 30, 2009 from $261,592 at December 31, 2008. The increase is primarily due to invoicing Fujicolor $247,500 for an advance against site license fees associated with deployment of our archive software.

Prepaid Expenses. Prepaid expenses decreased $152,740, or 66%, to $80,305 at September 30, 2009 from $233,045 at December 31, 2008. The decrease is due to several factors including recognizing expiring and other music license fees of $66,000, recognizing prepaid directors and officers insurance of $37,000, recognizing prepaid conference fees of $24,000, recognizing prepaid medical benefits of $22,000, recognizing prepaid investor relations expenses of $17,000 and recognizing prepaid rent of $7,000. These decreases were partially offset by an increase in prepaid legal fees of $18,000.

Deferred Costs. Deferred costs decreased $127,100, or 88%, to $16,844 at September 30, 2009, from $143,944 at December 31, 2008. The decrease is due to Qualex cancelling its contract with us in December 2008. As a result of the cancelled contract, Qualex returned equipment to us and we discontinued recognizing the related deferred costs and deferred revenue over the life of the original contract.

Property and Equipment, net. Property and equipment decreased $309,176, or 50%, to $313,509 at September 30, 2009, from $622,685 at December 31, 2008. The decrease is due to depreciation expense of $308,000.

Deferred Revenue. Deferred revenue increased $172,470, or 50%, to $517,044 at September 30, 2009, from $344,574 at December 31, 2008. The increase is a result of increased sales contracts for which all of the criteria for revenue recognition were not yet complete at September 30, 2009. The increase was partially offset due to Qualex cancelling its contract with us when they ceased all operations in December 2008. As a result of the cancelled contract, Qualex returned equipment to us and we discontinued recognizing the related deferred costs and deferred revenue over the life of the original contract.