Summary of NOVINT TECHNOLOGIES INC

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and financial condition of Novint Technologies, Inc. for the fiscal years ending December 31, 2008 and 2007 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Statement Regarding Forward-Looking Information, and Business sections in this report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.

Overview

We were initially incorporated in the State of New Mexico as Novint Technologies, Inc. in April 1999. On February 26, 2002, we changed our state of incorporation to Delaware by merging into Novint Technologies, Inc., a Delaware corporation. We have no subsidiaries and operate our business under Novint Technologies, Inc. We are a haptics technology company (haptics refers to your sense of touch). We develop, market, and sell applications and technologies that allow people to use their sense of touch to interact with computers.

We have derived revenues from 3D touch hardware sales, 3D touch software sales, and the development of professional applications for our customers. We launched our Falcon product in June 2007, and are selling it in our on-line store and in a number of retailers and other websites. We launched an on-line game store in November 2007. We also have completed a number of professional application contracts with customers who desire custom developed software.

Novint focuses many of its efforts to exploit opportunities in the consumer console and PC interactive games market, and is also looking to expand its efforts in other areas of computer touch in funded projects. Using our haptics technology, games and applications will have the crucial missing "third sense", touch, to human computer interaction. Users will be able to directly and intuitively feel the shape, texture, and physical properties of virtual objects using our computer touch software. Our haptic technology and related hardware for consumers is the primary focus of our operations, but we will continue to develop our professional applications. We will devote much of our resources to further developing the video game market and seeking new business relationships with video game developers and publishers and hardware manufacturers. We began selling our haptic product, the Novint Falcon, in June 2007 through our website at www.novint.com. We currently are selling one haptic hardware product which is a haptic game controller device called the Novint Falcon marketed in a bundled package which includes several games. We launched an on-line game store in late 2007, where consumers can purchase and download a variety of game titles. In 2008, we launched a pistol grip attachment for the Falcon. Although our sales of the Novint Falcon and games since product launch have been limited, we anticipate sales of the Novint Falcon, the pistol grip, and games to increase resulting from the release of new software and games in 2009. One of the most significant drivers of revenue for Novint will be games and content. This is true not only in the revenue we get from the games themselves, but largely because this is a criterion we see many of our customers desiring in order to justify the Falcon hardware purchase. For example, if the Novint Falcon has many games available to play on it, a customer can purchase a single piece of hardware and then over time purchase multiple games that give a unique gaming experience, making the initial hardware purchase valuable over a larger amount of time and across a larger number of games. In 2008, we entered into licensing agreements with Valve Software and Electronic Arts among others, and therefore several new AAA level games will soon be supported by the Falcon.

Critical Accounting Policies and Estimates

High-quality financial statements require rigorous application of accounting policies. Our policies are discussed in our financial statements for the year ended December 31, 2008 and are considered by management to be critical for an understanding of our financial statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. We review the accounting policies we use in reporting our financial results on a regular basis. As part of such review, we assess how changes in our business processes and products may affect how we account for transactions. We have not changed our critical accounting policies or practices during 2008. New accounting policies and practices were implemented in 2007 and in 2008 as necessary based on the launch of our haptics product sales in June 2007.

REVENUE AND COST RECOGNITION - We recognize revenue from the sale of software products under the provisions of Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9. SOP 97-2 generally requires that revenue recognized from software arrangements be allocated to each element of the arrangement based on the relative vendor specific objective evidence of fair values of the elements, such as software products, upgrades, enhancements, post contract customer support, installation, or training. Under SOP 97-2, if the determination of vendor specific objective evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence does exist or until all elements of the arrangement are delivered.

SOP 97-2 was amended in December 1998 by SOP 98-9, Modification of SOP 97-2 Software Revenue Recognition with Respect to Certain Transactions. SOP 98-9 clarified what constitutes vendor specific objective evidence of fair value and introduced the concept of the "residual method" for allocating revenue to elements in a multiple element arrangement.

Our revenue recognition policy is as follows:

Project revenue consists of programming services provided to unrelated parties under fixed-price contracts. Revenues from fixed price programming contracts are recognized in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and Accounting Research Bulletin 45, Long-Term Construction-Type Contracts, using the percentage-of-completion method, measured by the percentage of costs incurred to date compared with the total estimated costs for each contract. We account for these measurements in the accompanying balance sheets under costs and estimated earnings in excess of billings on contracts, and billings in excess of costs and estimated earnings on contracts. Provisions for estimated losses on uncompleted contracts are made and recorded in the period in which the loss is identified.

Revenue from product sales relates to the sale of the Falcon haptics interface, which is a human-computer user interface (the "Falcon") and related accessories. The Falcon allows the user to experience the sense of touch when using a computer, while holding its interchangeable handle. The Falcons are manufactured by an unrelated party. Revenue from the product sales is recognized when the products are shipped to the customer and we have earned the right to receive and retain reasonable assured payments for the products sold and delivered. Consequently, if all these revenue from product sales requirements are not met, such sales will be recorded as deferred revenue until such time as all revenue recognition requirements are met.

Emerging Issues Task Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs, require amounts billed to a customer in a sales transaction related to shipping and handling, if any, to be classified and accounted for as revenues earned for the goods provided whereas shipping and handling costs incurred by a company are required to be classified as cost of sales.

Arrangements made with certain customers, including slotting fees and co-operative advertising, are accounted for in accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products). These incentives are recognized as a reduction in revenue or as a selling, general, and administrative expense, respectively, when payment is made to a customer (or at the time we have incurred the obligation, if earlier) unless we receive a benefit over a period of time and we meet certain other criteria, such as retailer performance, recoverability, and enforceability, in which case the incentive is recorded as an asset and is amortized as a reduction of revenue over the term of the arrangement.

EITF 01-14, Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred, requires reimbursements received for out-of-pocket expenses incurred while providing services to be characterized in the statements of operations as revenue. Our out-of-pocket expenses incurred in connection with their project revenues are recognized in revenues based on a computed overhead rate that is included in their project labor costs to derive a project price.

In accordance with EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company recognizes its product sales on a gross basis. We are responsible for fulfillment, including the acceptability of the product ordered. We have risks and rewards of ownership such as the risk of loss for collection, delivery, or returns. Title passes to the customer upon receipt of the product by the customer. In accordance with our agreement with our customer, further obligation is limited to the terms defined in its warranty.

Our customers are provided a one (1) year limited warranty on the Falcon. This warranty guarantees that the products shall be free from defects in material and workmanship. Additionally, we offer our customers of the Falcon a 30 day money back guarantee. We continually evaluate our reserve accounts for both the limited warranty and 30 day money back guarantee based on its historical activities.

IMPAIRMENT - In accordance with Statement of Financial Accounting ("SFAS") 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

SOFTWARE DEVELOPMENT COSTS - We account for our software development costs in accordance with SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. This statement requires that, once technological feasibility of a developing product has been established, all subsequent costs incurred in developing that product to a commercially acceptable level be capitalized and amortized ratably over the estimated life of the product, which is 5 years. We have capitalized software development costs in connection with our haptic software beginning in 2000. Amortization is computed on the straight-line basis over the estimated life (5 years) of the haptics technology.

We follow Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires capitalization of certain costs incurred during the development of internal use software.

STOCK BASED COMPENSATION - We account for stock based compensation in accordance with SFAS 123(R), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases, related to a Employee Stock Purchase Plan based on the estimated fair values. We have used stock option awards in the past and continue to use them as a means of rewarding our employees and directors for their continued commitment and efforts in helping us execute our overall business plans.

Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with SFAS 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity Investments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services, including related amendments and interpretations. The related expense is recognized over the period the services are provided.

RECENT ACCOUNTING PRONOUNCEMENTS

The Company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective is not anticipated to have a material effect on the financial position or results of operations of the Company.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133," (SFAS "161") as amended and interpreted, which requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format provides a more complete picture of the location in an entity's financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted. At December 31, 2008, we did not have any derivative instruments or hedging activities. Management is aware of the requirements of SFAS 161 and will disclose when appropriate.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS 162 will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. SFAS 162 will be effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board ("PCAOB") amendments to AU Section
411. Management does not expect the adoption of SFAS 162 will have a material impact on its financial condition or results of operation.

In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60." SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008. Management does not expect the adoption of SFAS 163 will have a material impact on its financial condition or results of operation.

Results of Operations

YEAR ENDED DECEMBER 31, 2008 COMPARED TO THE YEAR ENDED DECEMBER 31, 2007.

REVENUES. During the year ended December 31, 2008, we had revenues of $435,475 as compared to revenues of $415,047 during the year ended December 31, 2007, an increase of approximately 5%. During the year ended December 31, 2008, our revenues were derived from the development of professional applications for customers totaling $138,225, and the sale of our haptics technology products totaling $297,250. Our haptics game controller device was launched in June 2007, and our on-line game store was launched in November 2007. Our sales of our haptics technology products increased 26% from 2007, while our revenues from the development of professional applications decreased 23% as we redirected our resources to the sales of our haptics technology products. We will continue to provide development of professional applications and in 2009 we expect to grow this part of our business similarly to how we have in the past. Much of our focus will remain on the video game business, but we expect to place more emphasis on professional applications in our Advanced Products Group, than we had from 2006 to 2008.

COST OF GOODS SOLD AND GROSS PROFIT (LOSS). Cost of goods sold, which consists of the cost of the haptics technology products sold, materials purchased for resale to customers, the direct labor incurred for delivering on projects, warehousing and freight costs, and inventory write-downs were $811,572 for the year ended December 31, 2008, compared to $484,244 for the year ended December 31, 2007. Our overall gross loss percentage was approximately (86)% for the year ended December 31, 2008, compared to a gross loss percentage of (17)% for the year ended December 31, 2007. For the year ended December 31, 2008, our gross profit from our development of professional applications approximated 35%; an increase of 8% from 2007, as we entered into more contracts that were based on cost plus terms. Our gross loss experienced from the sale of our haptics technology product in 2008 was (143)%, an increase of 93% from 2007. Our gross loss experienced from the sales of our haptics technology product continues to be impacted by efforts to drive market penetration-freight costs to meet the demands of product distribution, costs to place product into major retail chains, third-party warehousing costs, and lower pricing for retailers and distributors. Our warehousing costs increased $94,836 from 2007, as the inventory levels increased, and we expanded to a second warehouse. Additionally, in 2008, we had an inventory write-down of approximately $213,000, which resulted from our review of the net realizable value of our inventory. We are currently investigating warehousing alternatives, and reviewing our distribution channels to reduce these costs.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development totaled $1,096,120 for the year ended December 31, 2008 compared to $1,142,986 for the year ended December 31, 2007, a decrease of $46,866 or 4%. Our research and development for 2008 decreased only slightly as we continued the development of software applications of our haptics technology, as well as specialized grips for use with the product. We anticipate our research and development expenses to decrease as we adjust the rate of development of new software associated with the haptics technology product to match the release schedule of our games.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled $5,749,393 for the year ended December 31, 2008, compared to $5,266,094 for the year ended December 31, 2007, an increase of $483,299 or 9%. The increase in general and administrative expenses compared to the prior year was primarily related to the growth in the business to support the sales and marketing of the haptics technology, offset by reduction in business and professional fees. Business and professional fees decreased approximately $1,293,000, royalty expense increased approximately $323,000, and payroll and other overhead expenses increase approximately $1,453,400 as new employees, insurance, office space, and other expenses were added to support the business. In 2009, we are reorganizing our infrastructure to significantly reduce our costs, while still continuing to market the product.

DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense totaled $545,029 for the year ended December 31, 2008 compared to $315,999 for the year ended December 31, 2007, an increase of $229,030 or 72%. This has increased as we have increased our investment in fixed assets, intangibles, and capitalized software and hardware.

SALES AND MARKETING EXPENSE. Sales and marketing expense totaled $484,195 for the year ended December 31, 2008 compared to $1,391,792 for the year ended December 31, 2007, a decrease of $907,597 or 65%. In 2007, we had programs focused on the launch of the Falcon, which occurred in June 2007, and in 2008 expenses continued for website development, trade show expenses and an "Evangelist Program" to encourage early adopters to tell others about the product. We will be reviewing our marketing efforts, as we plan to launch several new games in 2009.

LOSS FROM OPERATIONS. We had a loss from operations of $8,250,834 for the year ended December 31, 2008, compared to a loss from operations of $8,186,068 for the year ended December 31, 2007. Our net losses have increased as a result of the increase in our operating expenses as described above.

NET LOSS. We had a net loss of $9,646,510, or $0.30 per share, for the year ended December 31, 2008, compared to $8,096,497, or $0.27 per share, for the year ended December 31, 2007. There was an increase in the net loss of $1,550,013, which is a result of an increase in the loss from operations of approximately $65,000, a decrease in interest income of approximately $221,000, a net increase in interest expense and debt discount related to convertible debt of approximately $1,267,000, offset by an increase in other income of approximately $3,000.

Liquidity and Capital Resources

As of December 31, 2008, we had a total cash balance of $55,315. Our cash flow from operating activities for the year ended December 31, 2008 resulted in a deficit of $7,230,159 compared with a deficit of $6,857,213 in the same period of the prior year. This increase in the deficit from operating activities of approximately $373,000 was a result of increasing inventory levels and investments in prepaid royalties, offset by an increase in payables and accrued expenses and an overall increase in non-cash reconciling items. Our cash flow from investing activities for the year ended December 31, 2008 resulted in a deficit of $792,893 compared with a deficit of $764,306 in the same period of the prior year; representing a continued investment in games through both licensing and internal development. Our cash flow from financing activities for the year ended December 31, 2008 resulted in a surplus of $5,374,000 primarily from the issuance of convertible notes payable and other notes payable compared to a surplus of $10,070,418 in the same period of the prior year from the net proceeds from the issuance of common stock. Overall, our cash decreased by $2,649,052 during the year ended December 31, 2008.

The annual financial statements for years ended December 31, 2008 and 2007 have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred recurring losses and at December 31, 2008, had an accumulated deficit of $30,391,914. For the year ended December 31, 2008, we sustained a net loss of $9,646,510. These factors, among others, indicate we may be unable to continue as a going concern for a reasonable period of time. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern. Our continuation as a going concern is contingent upon its ability to obtain additional financing, and to generate revenue and cash flow to meet its obligations on a timely basis. We believe there are several factors in continuing as a going concern and meeting our cash needs over the next twelve months. The first is that we have dramatically reduced our expenses both in our direct operational expenses and in staff and payrolls. While we do believe these expense reductions are a significant step towards our goal of continuing as a going concern, we also believe we still have the resources to continue to sell our hardware and software products. Another factor in is that we have put more emphasis on bringing in funded haptics development projects. These projects were historically good projects for our company, in that they brought in revenue and expanded our intellectual property portfolio. We believe we can grow our business in professional applications within our Advanced Products Group, as haptics has uses in a wide variety of fields, and we have a great deal of unique expertise in haptics. We are also going to be releasing new AAA games. These games could drive new Falcon, and we have a reasonable amount of inventory compared to our current monthly expense rate. A final factor in continuing as a going concern, is that we may need to raise additional funding through debt or equity financing during the next twelve months if our Falcon sales do not ramp up quickly enough, if we are unable to get enough funded development contracts, or if we need to bring in that type of financing to grow the business more quickly per our business plan.

Contractual Obligations

We do not have any long-term debt obligations, capital lease obligations, operating lease obligations, or purchase obligations.

Off-Balance Sheet Obligations

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to our investors.