Summary of USA VIDEO INTERACTIVE CORP

Management's Discussion and Analysis of Financial Condition and

Results of Operations

CAUTIONARY STATEMENT

This document includes statements that may constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution readers regarding certain forward-looking statements in this document, press releases, securities filings, and all other documents and communications. All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Quarterly Report on Form 10-Q ("Report") are forward looking. The words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute "forward-looking statements." While we believe in the veracity of all statements made herein, forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business, economic and competitive uncertainties and contingencies and known and unknown risks. As a result of such risks, our actual results could differ materially from those expressed in any forward-looking statements made by, or on behalf of, our company. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate.
Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including risks and uncertainties set forth in our Annual Report on Form 10-K, as well as in other documents we file with the Securities and Exchange Commission ("SEC").

The following information has not been audited. You should read this information in conjunction with the unaudited financial statements and related notes to the financial statements included in this report.

OVERVIEW OF THE COMPANY

We design and market to business customers digital watermarking, streaming video and video-on-demand systems, services and source-to-destination digital media delivery solutions that allow live or recorded digitized and compressed video to be transmitted through Internet, intranet, satellite or wireless connectivity.
Our systems, services and delivery solutions include digital watermark solutions and video content production, content encoding, media asset management, media and application hosting, multi-mode content distribution, transaction data capture and reporting, e-commerce, specialized engineering services, and Internet streaming hardware.

Although we have generated nominal sales for the initial quarter of 2009, we continue to explore opportunities that will result in new products for new revenue streams, but there can be no assurances that such efforts will be successful.

We hold the patent for Store-and-Forward Video-on-Demand (#5,130,792), filed in 1990 and issued by the United States Patent and Trademark Office on July 14, 1992. Our patent is expected to expire in February 2010. It has been cited by at least 145 subsequent patents. We hold similar patents in England, France, Spain, Italy, Germany, Canada, and Japan. We anticipate actively engaging in licensing this patent.

Our Store and Forward Video-on-Demand ("VoD") intellectual property potentially reaches across the VoD market. Our patented technique covers the transmission of video content over networks faster than "real time." VoD is the mechanism by which the delivery of compressed video is managed and, together with compression technology, facilitates the delivery of video to an end user in a timely and interactive fashion.

We have developed a number of specific products and services based on these technologies. These include MediaSentinel™ and SmartMarks™ a process that watermarks digital video content, StreamHQ™, a collection of source-to-destination media delivery services marketed to businesses; EncodeHQ™, a service that digitizes and compresses analog-source video; hardware server and encoder system applications under the brand name Hurricane Mediacaster™; ZMail™, a service that delivers web and rich media content to targeted audiences; mediaClix™, a service that delivers content similar to Zmail but originating from an existing web presence; and MediaSentinel™, a patent-pending digital watermarking technology to deter digital video piracy.

We were incorporated on April 18, 1986, as First Commercial Financial Group Inc.in the Province of Alberta, Canada. In 1989, our name was changed to Micron Metals Canada Corp., which purchased 100% of the outstanding shares of USA Video Inc., a Texas corporation, in order to focus on the digital media business. In 1995, we changed our name to USA Video Interactive Corp. and continued our corporate existence to the State of Wyoming. We have five wholly-owned subsidiaries: USA Video (California) Corp., USA Video Corp., Old Lyme Productions Inc., USA Video Technologies, Inc., and USVO, Inc. Our executive and corporate offices are located in Niantic, Connecticut, and our Canadian offices are located in Vancouver, British Columbia.

BUSINESS OBJECTIVES:

We have established the following near-term business objectives:

Leverage our digital VoD patent for licensing fees and partnerships in the United States and internationally;

Patent and license new technology developed within the corporate research and development program;

Attain industry recognition for the superior architectural, functional, and business differentiators of our MediaSentinel™architecture;

Demonstrate proof of concept on a commercial project with MediaSentinel™ architecture;

Establish StreamHQ™ as the industry standard in the streaming video and rich media marketplace;

Expand StreamHQ™ functionality to provide enhanced support for corporate training and education markets.

CRITICAL ACCOUNTING POLICIES (AND ESTIMATES)

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:

Revenue recognition;

Impairment or disposal of long-lived assets;

Deferred taxes;

Accounting for stock-based compensation; and

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, 2006. 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

Sales

Sales for the six-month period ended June 30, 2009 and June 30, 2008 were $12,000. Sales for the three-month period ended June 30, 2009 and June 30, 2008 were $6,000. Revenues were generated from Software License Agreement from our Smartmark™ Software.

Cost of Sales

The cost of sales for the six months ended June 30, 2009 was $4,650 as compared to $750 for the comparable period in 2008. For the three-month period ended June 30, 2008, the cost of sales was $4,650 as compared to $-0- for the comparable period in 2008. Costs are the royalties on our video watermarking license agreement.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, consisting of product marketing expenses, consulting fees, office, professional fees and other expenses to execute our business plan and for our day-to-day operations, decreased in the six months ending June 30, 2009. We have a contract for our Smartmark™ Software and delivered acceptable release to start billing. Product marketing costs decreased due to management's decision to direct our efforts toward the current customer in additional divisions and direct marketing to other possible customers. Professional fees decreased due to the court's adverse ruling in the patent infringement litigation Administrative expenses have decreased as a result.

Selling, general and administrative expenses for the three months ended June 30, 2009 decreased by $75,119 to $143,629 from $218,748 for the three months ended June 30, 2008. The decrease was due to management decision to use direct marketing. For the six months ended June 30, 2009 the costs decreased by $192,803 to $254,570 from $447,373 for the comparable period in 2008. The decrease was the result of expenses incurred related to professional fees and product marketing expenses.

Product marketing expense for the three months ended June 30, 2009, decreased to $18,334 from $46,764 for the comparable period in 2008. The increase was due to management decision to use direct marketing. For the six months ended June 30, 2009 these costs decreased to $36,921 from $73,071 for the comparable period in 2008. The decrease was due to management's decision to direct our efforts towards our current customer and direct marketing to other possible customers

Professional expenses for the three months ended June 30, 2008, decreased to $4,386 from $11,357 for the comparable period in 2008. For the six months ended June 30, 2009 these costs decreased to $6,886 from $71,071 for the comparable period in 2008. We incurred decreased costs in 2009 due to the patent infringement lawsuit.

We have arranged for additional staff and consultants to engage in marketing activities in an effort to identify and assess appropriate market segments, develop business arrangements with prospective partners, create awareness of new products and services, and communicate to the industry and potential customers.
Other components of selling, general and administrative expense did not change significantly.

Research and Development Expenses

Research and development expenses consisted primarily of contractor fees, compensation, hardware, software, licensing fees, and new product applications for our proprietary MediaSentinel™. Research and development expenses decreased to $18,000 for the six months ended June 30, 2009, from $51,850 for the comparable period in 2008 and to $9,000 for the three months ended June 30, 2009 from $22,500 for the comparable period in 2008. The decrease was the result of a concentration in one application of research and development efforts for MediaSentinel™.

Non-Cash Compensation Charges

Non-cash compensation charges for the six months ended June 30, 2009 were $21,525, compared to $65,775 for the comparable period in 2008. The amount for the six months ended June 30, 2009 was due to the issuance of stock options to contractors

Net Losses

To date, we have not achieved profitability and, we expect to incur substantial net losses for the remainder of 2009. Our net loss for the six months ended June 30, 2009 was $265,246, compared with a net loss of $489,358 for the six months ended June 30, 2008. The decrease in losses is directly related to the reduction in professional fees, research and development and marketing.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2009, we had a cash position of $525, compared to $65 at December 31, 2008. We anticipate capital requirements of $700,000 for the continued development of our MediaSentinel™ products and 700,000 for commercialization of our MediaSentinel™ products.

We will require additional financing to fund current operations through fiscal 2009. We have historically satisfied our capital needs primarily by issuing equity securities. We will require an additional $0.75 million to $1.25 million to finance operations through fiscal 2009 and we intend to seek such financing through sales of our equity securities. We have not raised any capital in the six months ended June 30, 2009.

Assuming the aforementioned $0.75 million to $1.25 million in financing is obtained, we believe that continuing operations for the longer term will be supported through anticipated licensing revenues and through additional sales of our securities. We have no binding commitments or arrangements for additional financing, and there is no assurance that we will be able to obtain any additional financing on terms acceptable to us, if at all.

OFF-BALANCE SHEET ARRANGEMENTS

We do not maintain any off-balance sheet transactions, arrangements, or obligations that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, or capital resources.

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