Item 7.

Management's Discussion and Analysis of Financial Conditions and Results of Operation.

You should read the following discussion and analysis of our financial condition and results of operations together with ''Selected Consolidated Financial Data'' and our consolidated financial statements and related notes appearing elsewhere in this annual report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under ''Risk Factors'' and elsewhere in this annual report on Form 10-K.

Overview

We were a development-stage company from January 1, 1992 to December 31, 1999, during which time we engaged primarily in the development of our end-to-end hardware systems and proprietary Video-on-Demand and Wavelet compression technologies, and had very limited sales. In 2000, we made the first of our end-to-end systems, and invested heavily in further development of our StreamHQ™ streaming media system. Due to current market conditions, management has implemented consolidation procedures to reduce the expense of operations. We have transitioned our wavelet compression technology into a digital watermark technology.

As more fully discussed below we have not been profitable, and our revenues for 2008 were $24,000. We cannot predict our revenue levels for the next 12 months, or thereafter, nor when, or if, our operations will become profitable. We will require additional financing, both for the remainder of fiscal 2009 and thereafter, to continue to operate and expand our business. There is no assurance that such financing will be available on commercially reasonable terms, if at all.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to customer programs and incentives, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, impairment or disposal of long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have identified the policies below as critical to our business operations and to the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout management's discussion and analysis of financial condition and results of operations where such policies affect our reported and expected financial results:

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Revenue recognition;

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Impairment or disposal of long-lived assets;

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Deferred taxes;

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Accounting for stock-based compensation; and

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Commitments and contingencies.

REVENUE RECOGNITION. Revenue is recognized for digital water marking based on a contracted usage schedule on a monthly billing cycle. Software revenue and other services are recognized in accordance with the terms of the specific agreement, which is generally upon delivery and when accepted by customer.
Maintenance, support and service revenue are recognized ratably over the term of the related agreement. In order to recognize revenue, we must not have any continuing obligations and it must also be probable that we will collect the accounts receivable.

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Long-lived assets are reviewed in accordance with Statement of Financial Accounting Standard ("SFAS ") 144.
Impairment or disposal of long-lived assets losses are recognized in the period the impairment or disposal occurs.

DEFERRED TAXES. We record a valuation allowance to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized.

ACCOUNTING FOR STOCK-BASED COMPENSATION. In December 2004, the Financial Accounting Standards Board ''FASB'' issued SFAS No. 123 (revised 2004), ''Share Based Payment'' (''SFAS 123(R)''). SFAS 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. We adopted SFAS 123(R) on January 1, 2007. SFAS 123(R) permits public companies to adopt its requirements using either the modified prospective or modified retrospective transition method. We use the modified prospective transition method, which requires that compensation cost is recognized for all awards granted, modified or settled after the effective date as well as for all awards granted to employees prior to the effective date that remain unvested as of the effective date.

COMMITMENTS AND CONTINGENCIES. We account for commitments and contingencies in accordance with financial accounting standards board Statement No. 5, Accounting for Contingencies. We record a liability for commitments and contingencies when the amount is both probable and reasonably estimable.

Results of Operations

Revenues

Revenues for the year ended December 31, 2008 ("fiscal 2008") was $24,000 and for the year ended December 31, 2007 ("fiscal 2007") was $-0-. All revenue for fiscal 2008 was derived from a license agreement for digital watermarking. We had one customer, which accounted for 100% of the revenue in fiscal 2008.

Expenses

Total operating expenses for fiscal 2008 was $983,051, compared with $1,812,218 for fiscal 2007. For fiscal 2008, cost of sales was $750, as compared with $-0- for fiscal 2007.

Additional expenses included amortization of $3,323 for fiscal 2008 and fiscal 2007 for the amortization of the patents. Non-cash compensation charges for fiscal 2008 were $200,775 and for fiscal 2007 were $741,918, due mostly to issuance of common shares and share purchase warrants to our officers, directors and employees at a price or exercise price below the market price of the common shares at the time of issuance and the issuance of stock options to contractors due to our adoption of FASB 123R effective as of January 1, 2006. Because the rules of the TSX allow that the offering price for privately placed securities of listed companies may be set at the market price when the offering is first announced, rather than upon closing, the sale price of the common shares and the exercise price of the warrants were below the market price of the common shares on the date of issuance. In 2006 fair value of employee stock options for employees are included in non-cash compensation which is included in selling, general, and administrative expenses in the statement of operations.

Product marketing costs decreased due to management's decision to direct our efforts toward the current customer in additional divisions. Professional fees decreased due to the court's adverse ruling in the patent infringement litigation. Administrative expenses have decreased as a result.

During the period ended December 31, 2008 and 2007, we wrote off accounts payable obligations of approximately $43,000 and $28,000 and recorded a gain of $43,000 and $28,000, respectively.

Fiscal 2008 versus fiscal 2007

Research and development expenses consisted primarily of contractors, compensation, hardware, software, licensing fees, and new product applications for our proprietary MediaSentinel™. Research and development expenses decreased to $80,150 for fiscal 2008, from $197,452 for the comparable period in fiscal 2007.

Selling, general and administrative expenses were $898,828 for fiscal 2008, as compared to $1,611,443 for fiscal 2007. Selling, general and administrative expenses consisted of marketing expenses, consulting fees, noncash compensation, office, professional fees, and other expenses to execute our business plan and for day-to-day operations. The primary components of the increases/decreases from fiscal 2008 to fiscal 2007 were:

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a $60,689 increase in fiscal 2008 in marketing expenses was due to management's decision to direct our efforts toward the current customer in additional divisions;

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a $108,780 decrease in professional fees in fiscal 2008 was due to the court's adverse ruling in the patent infringement litigation; and

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a $15,505 decrease in fiscal 2008 in public relations was due to management decision to perform public relations in house, previously a contracted outside service function.

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a $541,144 decrease in fiscal 2008 in non-cash compensation charges due to a lower amount of options and private placements.

Impairment Loss on Long-Lived Assets are the result of the Company's inability to raise revenues in accordance with the corporate business plan, the Company continued operating at a loss for the year ended December 31, 2008. As a result, the Company commenced an impairment review of its long-lived assets in accordance with Statement of Financial Accounting Standard ("SFAS") 144 "Accounting of the Impairment or Disposal of Long-Lived Assets". As a result of this impairment review, we recorded an impairment loss of approximately $25,000 during the three month period ended December 31, 2008, to reduce the carrying value of these assets to its estimated fair value.

Net Losses

To date, we have not achieved profitability and expect to incur substantial losses for the foreseeable future. Our

net loss for fiscal 2008 was $915,918, compared with a net loss of $1,784,193 for fiscal 2007.

Liquidity and Capital Resources

At December 31, 2008, our cash position was $65, a decrease of $36,635 from December 31, 2007. We had a working capital deficit of $421,078 and an accumulated deficit of $38,185,097 at December 31, 2008.

Our principal source of cash during fiscal 2008 was proceeds of $282,000 received from the issuance of common stock and common stock warrants, $188,010 received from exercised warrants and $27,827 from exercised stock options. This was offset by $534,472 of cash used in operating activities.

We have historically satisfied our capital needs primarily by issuing equity securities to our officers, directors, employees and a small group of investors, and from short-term bridge loans from members of management. During fiscal 2008, officers, directors, employees and a small group of investors exercised warrants and stock options, resulting in gross proceeds to us of $497,837.

Our independent registered public accounting firm, in their report accompanying our audited financial statements at and for the year ended December 31, 2008, have stated that there is substantial doubt about our ability to continue as a going concern. As of December 31, 2008, we had $65 in cash. We will require an additional $1.25 million to $1.75 million to finance operations for the fiscal 2009 and we intend to obtain such financing through sales of our equity securities. The threat to our ability to continue as a going concern will be removed only when revenues have reached a level that sustains our business operations.

Assuming the aforementioned $1.25 million to $1.75 million in financing is obtained, continuing operations for the longer-term will be supported through anticipated growth in revenues and through additional sales of our securities.
Although longer-term financing requirements may vary depending upon our sales performance, management expects that we will require additional financing of $2.0 million to $3.0 million for fiscal 2010. We have no binding commitments or arrangements for additional financing, and there is no assurance that management will be able to obtain any additional financing on terms acceptable to us, if at all.

Off-Balance Sheet Arrangements

As of fiscal 2008 we have no off-balance sheet arrangements.

Item 7A.