Narrowstep, Inc - Directors, Executives Officers, Promoter and...

Narrowstep, Inc - Recent Material Event

NARROWSTEP INC.

Form 10-KSB
For the Fiscal Year Ended February 29, 2008

TABLE OF CONTENTS


		Page #
PART I

Item 1.	Description of Business	4
Item 1A.	Risk Factors	12
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18

PART II

Item 5.	Market for Common Equity and Related Stockholder Matters	18
Item 6.	Management’s Discussion and Analysis or Plan of Operation	19
Item 7.	Financial Statements	24
Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	24
Item 8A	Controls and Procedures	24
Item 8A(T)	Management’s Annual Report on Internal Control over Financial Reporting	24
Item 8B	Other Information	25

PART III

Item 9.	Directors, Executives Officers, Promoter and Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act	26
Item 10.	Executive Compensation	28
Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	32
Item 12.	Certain Relationships and Related Transactions and Director Independence	34
Item 13.	Exhibits	36
Item 14.	Principal Accountant Fees and Services	38

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. Any and all statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and similar terms and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this report may include, without limitation, statements regarding (i) a projection of revenues, income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure, or other financial items, (ii) the plans and objectives of management for future operations, including plans or objectives relating to our products or services, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission, and (iv) the assumptions underlying or relating to any statement described in subparagraphs (i), (ii), or (iii).

The forward-looking statements are not meant to predict or guarantee actual results, performance, events, or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates, and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation, inability to obtain adequate financing, insufficient cash flows and resulting illiquidity, dependence upon significant customers, inability to expand our business, government regulations, increased competition, changing customer preferences, stock illiquidity, failure to implement our business plans or strategies, and ineffectiveness of our marketing program and our acquisition opportunities. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this report appears under the caption “Management’s Discussion and Analysis or Plan of Operation—Risk Factors” and elsewhere in this report.

Because of the risks and uncertainties related to these factors and the forward-looking statements, readers of this report are cautioned not to place undue reliance on the forward-looking statements. We disclaim any obligation to update these forward-looking statements or to announce publicly the results of any revisions to any of the forward-looking statements contained in this report to reflect any new information or future events or circumstances or otherwise unless required to do so under applicable federal securities laws.

Readers should read this report and the following discussion and analysis in conjunction with the discussion under the caption “Item 1A—Risk Factors” in this report, our financial statements and the related notes thereto in this report, and other documents we file from time to time with the Securities and Exchange Commission.

PART I

Item 1. Description of Business

General

Our company is a pioneer in the field of internet-based video content delivery. Our objective is to provide world class tools to content owners, best of breed tools to the internet television viewer, and to move video around the globe efficiently and effectively utilizing our own content delivery network. Our proprietary operating system, which we have termed the Television Operating System - TelvOS, provides comprehensive delivery of video content and television-like programming to mobile, wireless, internet, broadband and broadcast services. Our system provides a platform to enable owners and users of video content to reach specific audiences by “narrowcasting” – targeting delivery of specific content to interested groups. Narrowcasting provides new business opportunities for content providers to build commercial channels by creating a new model for delivering content. In addition to enabling delivery of content, our company’s platform enables our clients to commercialize video-based content. This can be achieved through directed advertising, sponsorship, pay-per-view, subscription, and/or e-commerce.

Recent Developments

On May 29, 2008, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Onstream Media Corporation, a Florida corporation (“Onstream”), Onstream Merger Corp., a newly formed Delaware corporation and a wholly owned subsidiary of Onstream (“Merger Sub”) and W. Austin Lewis IV, as stockholder representative for our stockholders. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Onstream will acquire our company by means of a merger of Merger Sub with and into our company (the “Merger”), with our company continuing as the surviving corporation and a wholly-owned subsidiary of Onstream after the Merger (the “Surviving Corporation”).

Pursuant to the Merger Agreement, at the effectiveness of the Merger (the “Effective Time”), each outstanding share of our common stock, other than shares held by our stockholders who have perfected their appraisal rights under Delaware law, shares held by Onstream and shares held by any of our subsidiaries (collectively, the “Shares to be Converted”), will be converted into (i) shares of Onstream common stock, par value $0.0001 per share (“Onstream Common Stock”) based on an exchange ratio determined as described below and (ii) one contingent value right (a “Contingent Value Right”) having terms and conditions described below. Onstream Common Stock and Contingent Value Rights issued in respect of our common stock subject to certain restricted stock awards will be subject to any vesting conditions contained in such awards.

The aggregate number of shares of Onstream Common Stock issuable in the Merger in exchange for the Shares to be Converted will be the greater of (i) the sum of (A) two (2) times Annualized Company Revenue (as defined in the Merger Agreement) and (B) the greater of (1) the amount of our cash and cash equivalents immediately prior to the Effective Time and (2) 1,500,000 and (ii) 10,500,000. The exchange ratio will be the amount determined as described in the prior sentence divided by the Shares to be Converted (the “Exchange Ratio”).

The final Exchange Ratio will be determined based on our consolidated revenues for the quarter ended May 31, 2008 (as adjusted pursuant to the terms of the Merger Agreement) and may not be known prior to the Effective Time. Accordingly, the Merger Agreement provides that the Shares to be Converted will receive an aggregate of 10,500,000 shares of Onstream Common Stock (the “Minimum Exchange Ratio”) upon consummation of the Merger. In the event that the final Exchange Ratio exceeds the Minimum Exchange Ratio, former holders of Shares to be Converted will receive additional shares of Onstream Common Stock within 30 days after the final determination of the Exchange Ratio. No assurance can be given that the Exchange Ratio will exceed the Minimum Exchange Ratio.

In the Merger, outstanding shares of our Series A Preferred Stock will be converted into an aggregate of 600,000 shares of Onstream Common Stock.

In connection with the Merger, the Surviving Corporation will assume our obligations under our outstanding warrants. From and after the Merger, except as summarized below, holders of warrants will have the right to exercise their warrants for a number of shares of Onstream Common Stock and at exercise prices appropriately adjusted to give effect to the greater of the Exchange Ratio and the Minimum Exchange Ratio. Holders of warrants to acquire an aggregate of 22,726,400 shares of our Common Stock issued by us in August 2007 (the “2007 Warrants”) will have the right to exercise their 2007 Warrants for cash only for an aggregate of 1,000,000 shares of Onstream Common Stock at an exercise price of $3.50 per share. In the event that any of the warrants are exercised prior to the Final Exercise Date (as defined in the CVR Agreement referenced below), an exercising holder will also be entitled to receive Contingent Value Rights in an amount equal to the number of Contingent Value Rights such holder would have received had its warrants been exercised immediately prior to the Effective Time. In connection with the Merger Agreement, we have entered into an Amendment and Waiver Agreement with holders of a majority of the 2007 Warrants (the “Amendment and Waiver Agreement”) pursuant to which such holders, on behalf of themselves and all other holders of the 2007 Warrants, agreed to amend the terms of the 2007 Warrants as provided above and to waive certain antidilution and other rights.

The Contingent Value Rights will be issued pursuant to the terms of a Contingent Value Rights Agreement to be entered into among Onstream, Mr. Lewis as the CVR Representative and Interwest Transfer Co., as Rights Agent, in the form attached to the Merger Agreement (the “CVR Agreement”). Pursuant to the terms and subject to the conditions set forth in the CVR Agreement, the Contingent Value Rights will be converted into shares of Onstream Common Stock in the event that our company reaches certain revenue targets for the initial 12-month and subsequent 6-month periods following the Merger; provided, however, that the maximum number of shares of Onstream Common Stock issuable in the Merger, including those pursuant to the Contingent Value Rights and the conversion of our Series A Preferred Stock, will not exceed 20,000,000. The number of shares of Onstream Common Stock issuable upon the conversion of each Contingent Value Right will depend on a number of factors, including our business meeting the revenue targets set forth in the CVR Agreement and the number of warrants, if any, exercised prior to the final determination of the consideration, if any, to be paid pursuant to the CVR Agreement. The conversion of Contingent Value Rights into Onstream Common Stock will occur in two stages, shortly following the final determination of whether the initial 12-month and subsequent 6-month targets have been met.

The Contingent Value Rights will not be transferable by the holders thereof except by operation of law in limited circumstances. We do not expect a market to develop for the Contingent Value Rights. No assurance can be given that the Contingent Value Rights will result in the issuance of additional shares of Onstream Common Stock.

The Merger Agreement contains customary representations and warranties of our company, Onstream and Merger Sub. The Merger Agreement also contains customary covenants, including covenants regarding operation of our business and our subsidiaries prior to the closing of the Merger.

In addition, we have agreed to use our commercially reasonable efforts to operate our business in accordance with a restructuring plan attached as an exhibit to the Merger Agreement (the “Restructuring Plan”), which is designed to significantly reduce or eliminate substantial costs related to our facility leases, selling, general and administrative expenses, public company and headquarters costs, and other professional fees and services. Specifically, the Restructuring Plan is a transitional business plan that we will follow until the close of the Merger. The Restructuring Plan includes a detailed four month cash operating budget for our business beginning June 2008. The budget consists of a breakdown of our cash proceeds from customer receivables, equipment sales and additional investments and a breakdown of various cash operating expenses and other cash payments paid out by us. The Restructuring Plan also lists certain of our employees and contractors that will be terminated prior to the closing of the Merger as well as certain employees that will enter into one-year employment contracts with us effective upon the closing of the Merger. We are responsible for the funding of all salaries and benefits for the terminated employees and consultants, as well as the cost of any severance, termination penalties and fees, from pre-closing cash. The Restructuring Plan further sets forth an approval process that we will follow for travel, telephone, communication and other various operating expense purchases. The Restructuring Plan also requires that we send our weekly reports, such as accounts receivable, payroll and accounts payable, to Onstream for review at least three days prior to payment. Pursuant to the Restructuring Plan, we may not enter into any contracts, hire any new employees or make any purchases greater than $1,000.00 without first obtaining Onstream’s approval. The Restructuring Plan also effects a reorganization of management in that certain of our departments are required to report to the senior manager of the equivalent department at Onstream. The Restructuring Plan also requires that, at the closing of the Merger, our current assets (excluding cash) will exceed our current liabilities, as determined on a basis consistent with our previously issued financial statements. Lastly, the Restructuring Plan states that proceeds from the sale of our equipment (as set forth in the operating budget described above) will be limited to equipment located at our California POP (Point of Presence) located in our internal content delivery network (CDN), which was shut down during April 2008.

In connection with the conditions to closing set forth in the Merger Agreement, we have entered into subscription agreements (the “Subscription Agreements”) with three of our major stockholders, including Mr. Lewis and David C. McCourt, our Chairman and Interim Chief Executive Officer. Under the Subscription Agreements, the three stockholders agreed to purchase immediately prior to the Merger shares of a to-be-established Series A Preferred Stock at a purchase price of $100,000 per stockholder. In connection therewith, each such stockholder is expected to receive 10,000 shares of Series A Preferred Stock. Holders of the Series A Preferred Stock will be entitled to such dividends, if any, as may be declared by our Board of Directors out of funds legally available therefore (no such dividends are expected to be paid under the terms of the Restructuring Plan), will not have any voting rights (except to the extent required by applicable law), will have no right to convert the Series A Preferred Stock into shares of our common stock or any other of our securities and will have no right to force our redemption or repurchase of the Series A Preferred Stock. It is expected that we will file a certificate of designations establishing the terms of the Series A Preferred Stock with the Secretary of State of Delaware shortly prior to the closing of the Merger. The sale of the Series A Preferred Stock pursuant to the Subscription Agreements is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

The Merger is subject to customary closing conditions, including obtaining the approval of our and Onstream’s stockholders. The Merger Agreement may be terminated under certain specified events, including by either Onstream or us if the Effective Time has not occurred on or prior to October 31, 2008. If the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, we may be required to pay a termination fee of $377,000 to Onstream. Both we and Onstream have entered into voting agreements (“Voting Agreements”) pursuant to which several significant stockholders have agreed to vote their shares in favor of the adoption of the Merger Agreement. Pursuant to the Voting Agreements, the holders of approximately 35% of our common stock presently outstanding and approximately 42% of the Onstream Common Stock presently outstanding have agreed to vote their shares in favor of the adoption of the Merger Agreement.

Market Overview

We believe that the market for viewing video content over the internet is rapidly expanding. For example, when Oprah.com began hosting an online, interactive class called “A New Earth,” more than 500,000 simultaneous viewers were tuned in for the first 90-minute episode as reported on Oprah.com. Traditional print sites such as CNNMoney.com have also added broadband video content. In addition, large US networks currently put their most popular television shows on websites for viewers who are unable to tune in at the scheduled time on television. Popular shows, such as “Lost” or “Desperate Housewives,” can all be seen on ABC’s website.

At the same time, rapid improvement has been made in video delivery. Content is now being encoded at various bit rates up to and as high as 2MB in order to deliver an HD like viewing experience. Video now can also be delivered on mobile and wireless networks.

This transformation has also resulted from the addition of community tools and various other technological capabilities that take advantage of the internet and its community based environment. Video delivery over the internet has created such a unique user experience that it has surpassed traditional television. This has also translated in how marketing and advertisers will spend their budgets. According to Nielsen Online, January 2008 the Top 10 Online Video Brands where, YouTube, Fox Interactive Media, Yahoo!, Nickelodeon, MSN/Windows Live, Disney Online, Turner Entertainment, ESPN, Google and Veoh. YouTube had 2.6 Billion streams with over 66 million unique viewers. Overall online video usage in January 2008, produced 6.0 billion video streams averaging 51.3 streams per viewer. Another interesting statistic is that the time spent viewing per viewer was 124.4 minutes during the month. Not only are more and more users viewing video content online, but we are also seeing a trend that viewers are spending a longer period of time viewing content online. Instead of clicking through page to page, viewers are watching a video clip that can be as short as five minutes to as long as a full movie of 90 minutes. These viewing statistics are very interesting facts for any advertiser and as a result, we are seeing marketing dollars shifting from television to video distributed on the web.

Our company was formed to provide content delivery solutions through an internet-based delivery solution. Our platform allows content owners to manage their content and publish it on the web. We host the video content on our servers and use our internal content delivery network to distribute our customer video on the internet. Our platform also has additional functionality that gives the content owner the ability to monetize their content via subscription or with banner and video advertisements. It is also flexible enough to integrate many of the popular community tools that web sites have been incorporating today.

Since the internet is available globally, unlike most traditional broadcasting mechanisms which are generally limited to geographical regions, targeted audiences can also be aggregated across the world providing a means of grouping a desired audience in sufficient numbers to make directed content economically viable. We believe that the provision of broadband content will be a fast-growth market in media and technology. In addition, other network delivery systems such as wireless and mobile will also provide considerable market opportunities beyond the growth of broadband, providing longevity to our plans and business model. The increasing availability of bandwidth, combined with the significantly cheaper costs of internet transmission as compared with traditional satellite and cable televisions, as well as the potential to reach a greater number of viewers due to its global accessibility, are creating a market for internet-based video content which we believe is attractive to content providers, channel producers, and advertisers.

Products and Services

We provide a range of products and services based on our core technology platform, TelvOS. This is a comprehensive video and audio management and play-out system. It facilitates making video and audio content available as a live stream, distributing images of live events over the network, as highlights, or video on demand, as searchable content from an archive, and as a 24 x 7 stream, like television. A video stream is not downloaded to the viewer’s computer; rather it is made available as a continuously playing service, similar to traditional broadcast television. Additionally, video can be offered for download with integrated digital rights management.

From the TelvOS platform, content can be made available to the internet, broadband services, cable and satellite, mobile networks, wireless systems, and to digital signage, point of sale and point of information displays. All elements can be controlled in real time from a web-based interface. The service can be commercialized using pay-per-view, subscription, content syndication, advertising, sponsorship and e-commerce functions, and can be controlled and changed in real time. It also provides full real time monitoring and statistical feedback to the channel operator.

The Narrowstep family of products and services consists of the following:

TelvOS - Core System

The TelvOS Core System is a complete platform for the management and play-out of rich media over the Internet and other IP networks. The TelvOS Core System includes a content management system to manage, search, and publish rich media assets. Content can be uploaded automatically or manually in any common computer audio, video or streaming format and then managed with full metadata support. Metadata provides detailed descriptions of the content and attaches details such as the length, category and copyright owner. Channel owners can create video sequences for play-out including advertising, station identifications and content trailers, along with the programming content. The content can be made available to viewers as a live, ‘as it happens’ service, as video on demand, via an archive and search function, and as scheduled programming streams in the Narrowstep Player. The TelvOS Core System features control over in which territories the content is made available provides full security and digital rights management control and can include advertising and sponsorship support, along with pay-per-view and subscription payment packages. Once prepared, the content can be made available to mobile, wireless, broadband and broadcast networks. This system enables customers to build and manage video channels over multiple media outlets. The TelvOS Core System provides detailed statistics on all elements of the system’s performance, from the number of unique viewers to the length of time the channel was watched and the number of advertisements delivered.

TelvOS provides clients with a complete suite of content management tools. Content can be uploaded automatically or manually in any common computer audio, video or streaming format and then managed with full metadata support. A statistics function delivers real time intelligence on the number of viewers, data transferred and even the proportion of the data viewed or listened to. In addition, a detailed search engine supports the retrieval of content from the archive. TelvOS also allows clients to determine how and when to make the content available to viewers. Our technology enables clients to control where the content is available, provides full security and digital rights management control and can include advertising and sponsorship support, along with pay-per-view, subscription and microcharging options. Clients can use TelvOS to make video and audio content available as a live stream, to distribute live event coverage, to play highlights, to provide video on demand, to enable viewers to obtain searchable content from an archive, and to provide continuous play video 24 hours per day, similar to broadcast and cable television.

Our system enables clients to fully commercialize broadband video distribution by providing complete control and management of advertising content. With TelvOS AdServer or through our integration with 3^rd party advertising platform provider Atlas Ad Solutions, clients can upload, store and manage advertisements, infomercials and sponsored programs. Advertising campaigns can be constructed in real time by defining the required profile of the target audience and selecting how many views of the advertisement - called ad impressions - are desired by the advertiser.

The Narrowstep Player provides the graphic user interface for viewers to access and control content from TelvOS. During a viewer’s initial connection, the Narrowstep Player automatically runs a bandwidth check to detect the viewer’s connection, device and platform and then provides the content in a format and size, and at a data rate most appropriate for the viewer. The Narrowstep Player then provides the viewer with controls over the video content being displayed, including the ability to select between live content, scheduled content, on demand content and content in the video or audio archive. Where a pay-per-view or subscription model is deployed the Narrowstep Player enables the viewer to pay for the content. Narrowstep Players can be embedded into an existing website or application, thus extending the reach of the channel through third party web site syndication.

Player 2.7

Player 2.7 is the newest version of the Narrowstep Player. Player 2.7 offers the benefit of Microsoft’s Windows Media high-quality streaming and digital rights management while providing play-out on various operating systems and browsers including Mac, Safari, and Firefox using Microsoft’s Silverlight technology. Additionally, Player 2.7 offers a rich, graphical user interface with community tools for viewers including rating engines, send-to-a friend, and user play-list and sharing capabilities. Any number of our monetization tools may be easily integrated with Player 2.7 so that content owners are able to monetize their content using video-on-demand, pay-per-view, subscription, advertising, sponsorship and/or e-commerce models.

AdServer and Atlas Ad Solutions

We currently run two ad-serving platforms to enable the commercialization of broadband video distribution by providing complete control and management of advertising content. Our legacy platform, AdServer, allows clients to upload, store and manage advertisements, infomercials and sponsored programs. Advertising campaigns can be constructed in real time by defining the required profile of the target audience and selecting how many views of the advertisement, called “ad impressions”, are desired by the advertiser as well as bidding terms. Advertisements are then automatically played out matching the viewer profile to the available campaigns while maximizing the advertising revenue for the channel. Our newly integrated Atlas Ad Solutions provides an enterprise-class advertising platform allowing for superior campaign management, including features such as automated companion video/banner ad playout, advanced configurations, and reporting capabilities which are industry renown and verified. Our Atlas integrated platform is ideal not only for content owners who leverage their own advertising sales force in conjunction with the automated advertising inventory of a third-party ad network, it is also an easy solution for those content providers who want to deliver banner and video advertising using just a third-party ad network alone.

PayGate

PayGate is an interface between the TelvOS platform and payment gateways, such as PayPal and Cybersource. Any item on the platform, such as an on-demand video or a channel can have a payment rule attached to it which requires the viewer to pay before they can view or access the content. PayGate supports single and recurring transactions for pay per view and subscription business models. All transactions are captured and reported for each channel. Sensitive payment details are not stored, but are forwarded to a payment service provider (PSP) for processing.

NCoder

NCoder is an encoding hardware solution that provides direct encoding capability for video content and attaches to a client’s edit machine or network. Video files are placed in an upload file folder on the nCoder by the client and the files are compressed into all the selected formats, sizes and data rates required and then uploaded into the client’s TelvOS account. The nCoder is offered in 2 tiers, nCoder and nCoder Pro. The nCoder Pro includes faster encoding up to real time feeds in multiple data formats.

DownloadServer

DownloadServer is a product integrated within TelvOS to offer secure downloads of any rich media. Multiple files or file formats can be bundled into a download pack and secured with Microsoft digital rights management (DRM). Channel owners can configure the license terms of the DRM of the download pack and payment rules such as pay per download and subscription access.

We also provide a full range of services complementary to our technology platform, including:

Channel and Player Set Up. We use our core technology to establish internet channels and customized players for clients according to their specifications which then operate under a license arrangement. Player customization can be ongoing work through the life of the channel, because an Internet TV channel, like any website, is constantly being updated and improved.

Production Services. We provide a full range of production services for our clients, focusing on high quality content encoding, ingestion into TelvOS, metadata entry, support for live streaming, and pre-production and production services.

Portal Development. We offer custom website development to build video-optimized sites that are designed to engage a viewer community and monetize video libraries and streaming. Our video portal solution offers everything from the full-video player solution to integrated media, enhanced monetization tools, search engine optimization, RSS, and web community functionality including chat, discussion boards, voting, viral marketing, upload, to a fully outsourced, managed portal solution complete with business planning, marketing, and sponsorship activities.

Customer Service & Support: For our Internet TV channels, we provide 24x7 email and phone support as it pertains to the TelvOS System.

Our Content Delivery Network (CDN)

Our platform is generally deployed under an application service provider model. Clients and partners are provided with logins and we control the applications and the platform they run on. Our platform and all of our products are operated on our servers; under certain circumstances, we will install a copy of the server within a client’s network. This is most likely to happen with internet service providers and telecom partners.

Our technology has been designed and engineered to be scalable and replicable. When a client uploads a file to any Narrowstep server, this file is replicated to every server on the network, unless otherwise configured. Our network is currently capable of handling approximately 5,000 simultaneous users.

We operate our core technology platform on top of our content delivery network or “CDN”, which is hosted by some of the world’s leading internet service providers. We have points of presence or “POP” locations with each of Teleglobe and Interoute in London and Interoute in New York.

Sales and Marketing

To date, we have sold and marketed our services largely through direct approaches to potential clients. More recently, many sales leads have been generated by word of mouth, via our web site and by attending and presenting at various industry trade shows. As of February 29, 2008, we had six full-time sales and marketing employees.

We have also established partnering or reseller arrangements with third parties under which we have agreed to pay our partners a portion of the revenues they generate in reselling our products. Under these arrangements partners are entitled to receive commissions of between 10% and 30% for work resulting from introductions and are expected to continue to provide related supporting services. We believe these arrangements will enable us to enter specialized and more diverse geographical markets than we might otherwise be able to penetrate using solely our own sales efforts. We intend to continue to update our support arrangements, training and promotional materials to provide additional support for our partners.

We plan to concentrate primarily on the following marketing techniques in the coming year:


	•	Direct sales - by our in-house sales team;

	•	Channel sales - building a network of resellers for our products;

	•	Public relations - attracting increased media coverage for our business;

	•	Trade shows - exhibiting at key trade shows in Europe and the United States; and

	•	Marketing materials - updating our literature, website and general marketing materials to more effectively promote our business, products and services.

Clients

Many of our customers are producers, owners of content or have rights to content. Many of these customers use our solutions to address a specific niche in the marketplace. Some examples of these niche areas are faith based channels, travel channels, and extreme sports. We also have customers that are cable operators that have also launched channels on the web and are using our services to broadcast and manage their content. In addition, we provide production services for various content owners or companies that have rights to film a sporting event.

Competition

The internet video distribution market is highly competitive and subject to changing technology and market dynamics. We believe the principal competitive factors in our market include:


	•	ability to provide a complete solution;

	•	content management capabilities;

	•	enabling clients to monetize content;

	•	quality of video stream; and

	•	service reliability.

We believe we compete effectively in all of these areas. TelvOS enables us to provide clients with a user friendly complete end-to-end content management and delivery system whereas many of our competitors specialize on only one particular part of the video delivery process. For example, certain of our competitors focus on player design and build but do not provide tools for the direct control of content delivery. Others focus on advertising and syndication without addressing clients’ need to manage digital rights, content registration, and content delivery. In addition to TelvOS, we provide a number of complementary services, including channel and player set up and customization, production services and consulting services. These service offerings allow us to offer complete turn-key solutions to our clients.

We focus primarily on providing clients with the ability to manage and stream long form video content (longer than 30 minute streams) compared to many of our competitors who provide short form streaming tools. Although existing technology can be used to provide both long form and short form streaming capability, the ability to provide high quality long form content depends primarily on the reliability of the network used to stream the content and the availability of sufficient bandwidth. Unlike many of our competitors, who contract with third parties aggregators, such as Akamai, to carry their video content through shared networks, we contract directly with network owners to provide dedicated network availability for the channels we host. In addition, to boost service reliability we have established a number of points of presence (POPs) on the internet. These POPs enable us to route content more directly, thereby enhancing the quality and reliability of our channels.

Many of our competitors have significantly longer operating histories, significantly greater financial, marketing and other resources, and significantly greater name recognition than us. In addition, costs of entry are low and as a result new entrants may enter the market in the future with a commercial advantage that would undermine our business model. We do not own any patented technology that precludes or inhibits others from entering our market. As a result, new entrants pose a threat to our business and we may face further competition in the future from companies who do not currently offer competitive services or products.

Intellectual Property Rights

Our success is dependent in part upon our proprietary TelvOS system. To date, we have not filed for any patents or registered copyrights relating to any of our intellectual property rights.

We currently rely on a combination of trade secret, nondisclosure and other contractual agreements, as well as existing copyright and trademark laws to protect our intellectual property. We require all personnel and outside contractors to execute agreements to keep secret and confidential our proprietary technology and we have a policy of not providing third parties with any secret or proprietary information regarding our technology. Since our technology is centrally controlled by us, no third parties have access to the systems or source code. We cannot assure stockholders, however, that these arrangements will be adequate to deter misappropriation of our proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.

Government Regulation

Few existing laws or regulations specifically apply to the internet, other than laws and regulations generally applicable to businesses. Certain U.S. export controls and import controls of other countries may apply to our products. Many laws and regulations, however, are pending and may be adopted in the United States, individual states and local jurisdictions and other countries with respect to the internet. These laws may relate to many areas that impact our business, including content issues (such as obscenity, indecency and defamation), copyright and other intellectual property rights, digital rights management, encryption, caching of content by server products, personal privacy, taxation, e-mail, sweepstakes, promotions, network and information security and the convergence of traditional communication services with internet communications, including the future availability of broadband transmission capability and wireless networks. These types of regulations are likely to differ between countries and other political and geographic divisions. It is likely that other countries and political organizations will impose or favor more and different regulation than that which has been proposed in the United States, thus furthering the complexity of regulation. In addition, state and local governments may impose regulations in addition to, inconsistent with, or stricter than federal regulations. The adoption of such laws or regulations, and uncertainties associated with their validity, interpretation, applicability and enforcement, may affect the available distribution channels for and costs associated with our services, and may affect the growth of the internet. Although we are able to control the distribution of content on a territorial basis, such laws or regulations may harm our business. Our services may also become subject to investigation and regulation of foreign data protection and e-commerce authorities, including those in the European Union. Such activities could result in additional costs for us in order to comply with such regulation.

Many laws governing issues such as property ownership, copyright, patent and other intellectual property issues, digital rights management, taxation, gambling, security, illegal or obscene content, retransmission of media, and personal privacy and data protection apply to the internet. However, the vast majority of such laws were adopted before the advent of the internet and related technologies and their applicability to the internet continues to evolve.

In addition to potential legislation from local, state, federal and foreign governments, labor guild agreements and other laws and regulations that impose fees, royalties or unanticipated payments regarding the distribution of media over the internet may directly or indirectly affect our business. While we and our customers may be directly affected by such agreements, we are not a party to such agreements and have little ability to influence the degree such agreements favor or disfavor internet distribution or our business models. Changes to or the interpretation of these laws and the entry into such industry agreements could:


	•	limit the growth of the internet;

	•	create uncertainty in the marketplace that could reduce demand for our services;

	•	increase our cost of doing business;

	•	expose us to increased litigation risk, substantial defense costs and significant liabilities associated with content available on our websites or distributed or accessed through our services, with our provision of services, and with the features or performance of our websites;

	•	lead to increased development costs or otherwise harm our business; or

	•	decrease the rate of growth of our user base and limit our ability to effectively communicate with and market to our user base.

The U.S. Digital Millennium Copyright Act (DMCA) includes statutory licenses for the performance of sound recordings and for the making of recordings to facilitate transmissions. Under these statutory licenses, we and third party channel owners may be required to pay licensing fees for digital sound recordings we deliver in original and archived programming and through retransmissions of radio broadcasts. The DMCA does not specify the rate and terms of the licenses, which are determined by arbitration proceedings, known as CARP proceedings, supervised by the U.S. Copyright Office. Past CARP proceedings have resulted in proposed rates for statutory webcasting that were significantly in excess of rates requested by webcasters. CARP proceedings relating to music subscription and non-subscription services offering music programming that qualify for various licenses under U.S. copyright law are pending. We cannot predict the outcome of these CARP proceedings and may elect instead to directly license music content for our subscription and/or non-subscription services, either alone or in concert with other affected companies. Such licenses may only apply to music performed in the United States, and the availability of corresponding licenses for international performances is unclear. Therefore, our ability to find rights holders and negotiate appropriate licenses is uncertain. We and third party channel owners may be affected by these rates, which may negatively impact our revenues. Depending on the rates and terms adopted for the statutory licenses, our business could be harmed both by increasing our own cost of doing business, as well as by increasing the cost of doing business for third party channel owners. We anticipate future CARPs relating to music subscription delivery services, which may also adversely affect the online distribution of music.

The Child Online Protection Act and the Child Online Privacy Protection Act impose civil and criminal penalties on persons distributing material harmful to minors (e.g., obscene material) over the internet to persons under the age of 17, or collecting personal information from children under the age of 13. We do not knowingly distribute harmful materials to minors or collect personal information from children under the age of 13. The manner in which these Acts may be interpreted and enforced cannot be fully determined, and future legislation similar to these Acts could subject us to potential liability if we were deemed to be non-compliant with such rules and regulations, which in turn could harm our business.

There are a large number of legislative proposals before the United States Congress and various state legislatures regarding intellectual property, digital rights management, copy protection requirements, privacy, email marketing and security issues related to our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could materially and adversely affect our business.

Employees

As of February 29, 2008, we had a total of 45 employees of whom 18 were in operations, six in sales & marketing, nine in administration, and 12 in research & development. To date, we have been successful in recruiting and hiring individuals with the desired skills and experience.

None of our employees are represented by labor unions and we have never experienced a work stoppage. We believe our employee relations are good.

Item 1A. Risk Factors

The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.

Risks Relating to Our Business

We have a brief operating history which makes it difficult to evaluate our business and predict our success.

Our company was incorporated as a start-up business on May 9, 2002. As a result, we have a brief operating history upon which to evaluate our business and prospects. Our historical results of operations are limited, so they may not give an accurate indication of our future results of operations or prospects. We are in an early stage of operations and we face risks and uncertainties relating to our ability to successfully implement our business strategy. Our prospects must be considered in light of these risks and the expenses and difficulties frequently encountered in new and rapidly evolving businesses, such as internet-based video content. These difficulties can include:


	•	commercializing new technology;

	•	educating the market;

	•	finding early adopters;

	•	getting large customers to try the product;

	•	increasing system capacity;

	•	developing and enhancing software products with limited resources;


	•	hiring and maintaining key employees with the correct skills;

	•	the time and effort needed to market the company and products;

	•	building infrastructure to support future growth;

	•	setting up and working effective channels of distribution; and

	•	capital raising to fund operations through to break even.

We may not be successful in meeting the challenges we face. If we are unable to do so, our business will not be successful and the value of our common stock will decline.

The Merger Agreement and related transactions, regardless of whether they are ultimately consummated, have presented and will continue to present our company with certain risks and uncertainties, and impose on us and our business and operations certain restrictions and required actions. In addition, as we are currently operating our business in accordance with the Restructuring Plan, in the event the Merger Agreement is not consummated, we may not be able to continue as a going concern.

Pursuant to the Merger Agreement, we have agreed to operate our business in accordance with the Restructuring Plan. The Restructuring Plan requires that we take certain material actions prior to the effectiveness of the Merger, including termination of a number of our employees including most members of senior management, elimination of certain agreements and other arrangements and significant curtailment of our operations and expenses both to eliminate potential duplication with Onstream and in anticipation of becoming a subsidiary of Onstream. Our compliance with the Restructuring Plan will effectively eliminate our ability to operate as a stand-alone business. In the event that the Merger is not consummated, it would be difficult, time-consuming and capital intensive to create the infrastructure necessary to operate our business on a stand-alone basis. In addition, as described in the below risk factor, even if we comply with the Restructuring Plan, the Merger may not be consummated. For a more complete discussion regarding the Merger and the Restructuring Plan, see “Item 1. Description of Business—General —Recent Developments.”

We cannot assure you that the Merger Agreement and related transactions will be consummated within the expected timeframe or at all and if the Merger is not consummated it is unlikely that our company will be able to continue as a going concern.

The consummation of the Merger is subject to certain closing conditions, including:


	•	the approval of our shareholders;

	•	the approval of Onstream’s shareholders,

	•	the declaration by the Securities and Exchange Commission of the effectiveness of a registration statement registering the offer and sale of Onstream common stock to be issued to our shareholders in the Merger;

	•	the accuracy of our representations and warranties and our compliance with covenants, each as contained in the Merger Agreement, and

	•	the failure of a “material adverse effect” with respect to our business to occur between the date of the Merger Agreement and the time of closing.

We cannot assure you that such closing conditions will be satisfied and that the Merger will be consummated in a timely manner or at all. The failure to consummate the Merger would likely have a material adverse effect on our business, results of operation and financial condition. Moreover, in the event of such failure it is unlikely that we would be able to continue as a going concern. We would need to raise a significant amount of capital to attempt to operate on a stand-alone basis and we can provide no assurances that we would be able to raise such capital on terms acceptable to us or at all.

We have a history of losses, are not currently profitable and anticipate future losses.

Our operating losses have exceeded our revenue in each quarter since inception. We had an accumulated deficit of approximately $34.2 million as of February 29, 2008 and $19.5 million for the fiscal year ended February 28, 2007. Although our revenues have grown significantly since 2002, this growth may not be sustainable or indicative of future results of operations. Although we are now operating our business pursuant to the Restructuring Plan, which is intended to reduce costs and operating losses, we cannot be certain when we will operate profitably, if ever. See “Risk Factors—Risks Relating to Our Business— The Merger Agreement and related transactions, regardless of whether they are ultimately consummated, have presented and will continue to present our company with certain risks and uncertainties, and impose on us and our business and operations certain restrictions and required actions. In addition, as we are currently operating our business in accordance with the Restructuring Plan, in the event the Merger Agreement is not consummated, we may not be able to continue as a going concern.”

In the event that the Merger Agreement is terminated, we will need to obtain additional capital in the future, and if we are unable to do so on acceptable terms, or at the appropriate time, we may not be able to continue to develop and market our products and services, or even to continue as a going concern.

We do not currently generate revenues sufficient to operate our business and do not believe we will do so in the foreseeable future. As a result, we must rely on our ability to raise capital from outside sources in order to continue operations in the long term. We will seek to raise additional capital through various financing alternatives, including equity or possibly debt financings or corporate partnering arrangements. However, we may not be able to raise additional needed capital on terms that are acceptable to us, or at all. If we do not receive an adequate amount of additional financing in the future, we may not have sufficient funds to further develop and market our products and services, or even to continue as a going concern.

We have received an opinion from our independent registered public accounting firm expressing doubt regarding our ability to continue as a going concern.

Our independent registered public accounting firm noted in their report accompanying our financial statements for the fiscal year ended February 29, 2008 that we have reported significant losses from operations and require additional financing to fund future operations and stated that those conditions raised substantial doubt about our ability to continue as a going concern. We cannot assure you that our plans to address these matters will be successful. This doubt about our ability to continue as a going concern could adversely affect our ability to obtain additional financing at favorable terms, if at all, as such an opinion may cause investors to lose faith in our long-term prospects. If we cannot successfully continue as a going concern, our stockholders may lose their entire investment in us.

If the internet-based video content market does not grow, we will not be successful.

The market for our products and services is new and rapidly evolving. As a company in the internet-based video content delivery field, our business model is based on an expectation that demand for internet-based video content will increase significantly and compete with more traditional methods of television broadcasting. There can be no assurance that there is a substantial market for the services we offer. If this market does not grow, we will not be able to achieve meaningful revenues and our business will fail.

If high-speed internet access with video viewing capability is not successfully adopted globally, there will be little demand for our products and services.

The success of our business is dependent upon extensive use of the internet. The video content we deliver is best viewed over a high-speed internet connection. We believe increased internet use may depend on the availability of greater bandwidth or data transmission speeds or on other technological improvements, and we are largely dependent on third party companies to provide or facilitate these improvements. If networks cannot offer high-speed services because of congestion or other reasons, or if high-speed internet access fails to gain wide market acceptance, we believe there will be little demand for our products and services and our revenues may be insufficient to achieve and maintain profitability. The deployment of corporate firewalls may also restrict the growth and availability of streaming media services and adversely affect our business model by limiting access to the content broadcast through our service. Changes in content delivery methods and emergence of new internet access devices such as TV set-top boxes could dramatically change the market for streaming media products and services if new delivery methods or devices do not use streaming media or if they provide a more efficient method for transferring data than streaming media.

We face substantial competition and if we are unable to compete effectively, the demand for, or the prices of, our products and services may decline.

We face numerous competitors both in the internet-based distribution market, and in the more traditional broadcasting arena. Many of these companies have substantially longer operating histories, significantly greater financial, marketing, manufacturing and technical expertise, and greater resources and name recognition than we do. If we fail to attain commercial acceptance of our products and services and to be competitive with these companies, we may not ever generate meaningful revenues. In addition, new companies may emerge at any time with products or services that are superior, or that the marketplace perceives are superior, to ours. There are relatively few barriers preventing companies from competing with us. We do not own any patented technology that precludes or inhibits others from entering our market. We may not be able to compete effectively with any potential future competitors and the demand for, and prices of, our products and services may decline.

If we are unable to continue development of one or more of our products, our entire business strategy may be unsuccessful.

Our overall business strategy is dependent upon providing effective solutions to our customers. We are continuing the development and improvement of the products and services we believe will be necessary for our future growth. We anticipate that enhancements to our existing products will continue to take the majority of the time of our Chief Technology Officer and support from a number of developers on an ongoing basis. Development of any product, however, can be more expensive and time-consuming than originally planned, and face unexpected delays or problems. Any delays in development could cause significant additional expense, result in operating losses and lost corporate opportunities, and create significant marketing opportunities for our competition. Because we are continuing to develop and improve a number of products, all of which are integral to our complete solution, the possibility of a problem is much greater than if we were developing only one product. Problems or delays in the continued development and deployment of any of our products could defeat our business strategy and substantially harm our prospects for future revenues.

If audio-video player software is not readily available, our products will not gain acceptance.

To view our products, a viewer must have an audio-video player such as Microsoft Media Player. If free distribution of player software does not continue or player software becomes less accessible, the potential market for our products and services will not grow, which in turn would have an adverse effect on our revenues and ability to achieve and maintain profitability.

If we lose one or more of our major clients, our revenues will decline substantially.

For the fiscal year ended February 29, 2008, our four largest clients accounted for approximately 38% of our revenue. For the fiscal year ended February 28, 2007, our four largest clients accounted for approximately 23% of our revenue. If we lose one or more of these clients, our revenues will decline substantially.

If we are unable to obtain and maintain sufficient bandwidth from third-party providers, our business will suffer.

We depend on network operators such as Teleglobe and Interoute to distribute video over the internet. These network operators may choose to compete with us, to enter into relationships with competitors, to change the terms on which they distribute our channels, including to increase their prices, or not to do business with us because of our size and lack of operating history. If we are unable to obtain sufficient bandwidth on terms acceptable to us, the scalability and reliability of our system would be adversely affected.

If content owners do not adopt internet-based delivery as a means for distributing their content, we may not be able to generate significant revenues.

The success of our business model is highly dependent on video content being available for distribution over the internet. Content owners may choose not to make their content available over the internet. If sufficient content is not available we may not generate sufficient revenues and our business may fail.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the price of our stock.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed.

If we lose the services of our chief executive officer, our business may suffer.

We are heavily dependent upon the continued services of David C. McCourt, Chief Executive Officer. The loss could seriously impede our success. We do not carry life insurance on the life of our CEO. In the event that our CEO becomes unavailable for any reason, our business may suffer.

As a start-up business, we may be unable to attract and retain the qualified technical, sales and support staff necessary for our growth and, in the event the Merger Agreement is terminated, it be difficult for us rehire or hire replacements for anyone whose employment with our company will be terminated pursuant to the Restructuring Plan.

Our ability to continue to develop and market our products and services is dependent upon our ability to identify, recruit, retain and motivate qualified personnel. As a start-up business, salaries for our employees are significantly below those of competitors in our industry and most of our existing employees are stockholders or are otherwise incentivized with periodic option grants. The low salaries and lack of assurance of our ability to secure additional funding may affect our efforts to recruit and retain additional personnel necessary to meet our growth targets. In addition, if we continue to issue additional equity in order to finance the business, future stock option grants may be less attractive to potential new hires and may not provide adequate motivation for existing personnel. If we are unable to hire and retain sufficient additional in-house personnel, we will be unable to complete development of our products and services, and our business will suffer. Pursuant to the Restructuring Plan, many of our senior executives will be terminated prior to the closing of the Merger and as such, if the Merger is not consummated, it will be difficult for us to rehire any of these executives or to find a suitable replacement, either temporary or permanent for the aforementioned reasons.

If we are unable to protect our intellectual property or if our intellectual property is found to infringe another’s intellectual property, we may be unable to generate revenues based on our products.

None of our intellectual property is covered by patents. We currently rely on a combination of trade secret, nondisclosure and other contractual agreements, as well as existing copyright and trademark laws to protect our confidential and proprietary information, but this may not be sufficient to prevent third parties from infringing upon or designing around our intellectual property to develop a competing product. We cannot be sure that our technology will not infringe any third party’s intellectual property. In the event that a third party either infringes upon our intellectual property or makes a claim that our products infringe upon its proprietary rights, we may not have sufficient financial or other resources to enforce our rights or to successfully defend against any claim. Any infringement of or by our intellectual property could restrict our ability to generate revenues from our products.

System failures and/or security risks may impair our operations.

The core of our network infrastructure could be vulnerable to unforeseen computer problems. We may experience interruptions in service in the future as a result of the accidental or intentional actions of internet users, current and former employees or others. These risks are heightened by our reliance on a small number of network providers. Unknown security risks may result in liability to our company and also may deter new clients from using our products and services. The security measures we implement may still be circumvented in the future, which could impair our operations and have a material adverse effect on our business.

As a third-party distributor of proprietary video content, we are vulnerable to claims of breach of content rights which may harm our business.

As a third-party deliverer of proprietary video content, we rely on our clients to have the appropriate rights to use and distribute this content. If the rights of the content owners are contravened, knowingly or otherwise, or if a content owner claims their rights are contravened, we could be subject to substantial lawsuits which could be time-consuming and costly to defend and our reputation may be harmed for having delivered the content.

Risks related to conducting business outside of the United States may adversely impact our business.

We market and sell our products and services in Europe, Asia, and the United States. As a result, we are subject to the normal risks of doing business abroad. Risks include unexpected changes in regulatory requirements, export and import restrictions, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, potential adverse tax consequences, exchange rate fluctuations, increased risks of piracy, limits on our ability to enforce our intellectual property rights, discontinuity of our infrastructures, subsidized competition from local nationalized providers and other legal and political risks. Such limitations and interruptions could have a material adverse effect on our business.

The consummation of the Merger, or any additional equity financing, will dilute the ownership interest of our existing stockholders.

In the event that the Merger Agreement is terminated, we will need to raise additional capital in the future to continue development and marketing of our products and services. We anticipate that we may raise capital in the future by selling additional equity or financial instruments which are exchangeable or convertible into equity. The Merger, any future equity, or equity-related financings will dilute the ownership interest of our existing stockholders.

Because our assets are located primarily in the United Kingdom, it may be difficult to proceed with an action, or to enforce a judgment, against us.

Our primary offices and assets are located exclusively in the United Kingdom. As a result, it may be difficult for stockholders located in the United States to pursue an action, or enforce a judgment against us, in the event of any litigation.

Risks Related to Investing in Shares

If there is no active trading market for our stock, you may be unable to sell the shares.

There can be no assurance that an active trading market for our shares will ever develop in the United States, or elsewhere. In the event that no active trading market for the shares develops, it will be extremely difficult for stockholders to dispose of the shares. In the event an active trading market develops, there can be no assurance that the market will be strong enough to absorb all of the shares which may be offered for sale by the stockholders.

Our stock price is highly volatile and can fluctuate in response to many factors, some of which are beyond our control.

The trading price of our shares is highly volatile and could be subject to wide fluctuations in response to factors such as actual or anticipated variations in quarterly operating results, announcements of technological innovations, new sales forecasts, or new products and services by us or our competitors, changes in financial estimates by securities analysts, conditions or trends in internet markets, changes in the market valuations of other business service providers providing similar services or products, announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, additions or departures of key personnel, sales of shares and other events or factors, many of which are beyond our control. Consequently, future announcements concerning us or our competitors, litigation, or public concerns as to the commercial value of one or more of our products or services may cause the market price of our shares to fluctuate substantially for reasons which may be unrelated to operating results. These fluctuations, as well as general economic, political and market conditions, may have a material adverse effect on the market price of our shares. In addition, because our common stock is quoted on the OTC Bulletin Board, price quotations will reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of many companies. These broad market factors may materially adversely affect the market price of the shares, regardless of our operating performance.

Because we have a limited offering qualification in California, sales of the shares are limited in California.

The offering of our shares in California was approved on the basis of a limited offering qualification where offers/sales can only be made to proposed California investors based on their meeting certain suitability standards. The California Department of Corporations refers to and specified this standard as a “super suitability” standard, which requires any California investor in our common stock to have not less than (i) $250,000 in liquid net worth (a net worth exclusive of home, home furnishings and automobile) plus $65,000 gross annual income, (ii) $500,000 in liquid net worth, (iii) $1,000,000 in net worth (inclusive), or (iv) $200,000 gross annual income.

Because the offering was approved in California on the basis of a limited offering qualification, we were not required to demonstrate compliance with some of the merit regulations of the California Department of Corporations as found in Title 10, California Code of Regulations, Rule 260.140 et seq. In addition, the exemptions for secondary trading in California available under California Corporations Code Section 25104(h) will not be available, although there may be other exemptions to cover private sales in California of a bona fide owner of our common stock for his own account without advertising and without being effected by or through a broker dealer in a public offering. These restrictions will make it more difficult to sell our shares in California.

Certain provisions of our charter and by-laws could discourage potential acquisition proposals or a change in control.

Certain provisions of our Certificate of Incorporation, By-Laws and Delaware law could discourage, delay or prevent a change in control of our company or an acquisition of our company at a price which many stockholders may find attractive. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Our Board of Directors, without further stockholder approval, may issue preferred stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of common stock.

Item 2. Properties

We currently maintain offices in the United Kingdom and the United States. Our facility in London holds our administrative, sales & marketing, customer service & developers which we believe will be adequate to meet our office space needs for the next several years as we currently utilize approximately 70% of the total office space. Our lease for the London facility was signed in November 2007 and is for approximately four years. Our office in New Jersey currently holds many of our senior executives and most of our back office staff. Our lease for our New Jersey facility is on a month-to-month renewable term, expiring July 31, 2008.

Item 3. Legal Proceedings

During the fiscal year ended February 29, 2008, we were not involved in any legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of our fiscal year ended February 29, 2008.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Market Information for Common Equity

Our Common stock has traded on the OTC Bulletin Board under the symbol “NRWS” since August 4, 2005. Prior to that time, there was no public trading market for our common stock. As of February 29, 2008, we had 174 holders of record.

The following table sets for the period indicated, the high and low sales prices of our common stock as reported by the OTC Bulletin Board, on the trading day during the respective period:



Fiscal Year 2008	High		Low

Fourth Quarter ended February 29, 2008	$	0.20	$	0.08
Third Quarter ended November 30, 2007	$	0.60	$	0.02
Second Quarter ended August 31, 2007	$	0.60	$	0.21
First Quarter ended May 31, 2007	$	0.95	$	0.53


Fiscal Year 2007	High		Low

Fourth Quarter ended February 28, 2007	$	1.29	$	0.83
Third Quarter ended November 30, 2006	$	1.04	$	0.75
Second Quarter ended August 31, 2006	$	0.92	$	0.61
First Quarter ended May 31, 2006	$	0.68	$	0.61

* The OTC Bulletin Board first began publishing quotations for our common stock on September 13, 2005.

On June 9, 2008, the closing price of our common stock was $0.06 per share.

Dividend Policy

We paid no cash dividends during the fiscal year ended February 29, 2008 and we expect to continue our current policy of paying no cash dividends to holders of our common stock for the foreseeable future.

Recent Sales of Unregistered Securities

Information required by Item 701 of Regulation S-B has previously been included in a Current Report on Form 8-K, as filed with the SEC on March 2, 2007 and August 8, 2007, respectively.

Item 6. Management’s Discussion and Analysis or Plan of Operations

You should read the following discussion and analysis in conjunction with the consolidated financial statements and the notes included elsewhere in this Annual Report and the section “Risk Factors” in Item 1A, as well as other cautionary statements and risks described elsewhere in this Report, before deciding to purchase, sell or hold our common stock.

Overview

We provide our customers with technology that allows them to transmit video content over the internet to targeted audiences. Our services allow customers to format and manage content, create programming, transmit programming to specific audiences and create and manage subscription, pay-per-view and other revenue generation models. In the past, we have also provided production services to our customers. During the fiscal year ended February 29, 2008, we completed our exit from the production service business. As a result, production services have declined as a percentage of total revenues as our core “narrowcasting” service grew.

We were initially incorporated as a Delaware corporation in May 2002. Our headquarters is in Princeton, New Jersey and we have offices in London. For the fiscal year ended February 29, 2008, approximately 82% of our total revenues were generated from customers in Europe, the Middle East and Africa, 15% was generated from customers in the United States and the remaining 3% was generated from customers in the Asia Pacific region. We expect our revenues from sources in the United States to continue to increase as a percentage of total revenues as we begin to focus more on revenue opportunities there.

How We Generate Revenue

We generate revenue primarily from fees we charge for the use of our technology and related services for narrowcasting and from the sale of production services. Revenues from our narrowcasting activities include fees paid for the establishment and maintenance of channels, encoding and uploading of content, as well as the management of channels on behalf of clients. The fee charged for the establishment of a channel depends on the level of service desired by the customer and typically ranges from $5,000 to $200,000. We also charge a monthly license fee which ranges from $1,000 to $30,000, depending upon the range of features and capabilities being licensed, which covers the use of the TelvOS system, cost of support, maintenance and upgrades. In addition, based on the customer’s contract, we may obtain additional revenues from content hosting (the storage of files on our network on a per gigabyte basis), content delivery (the cost of bandwidth, on a per gigabyte basis, to deliver the content to the end viewer), and, to a lesser extent, revenue sharing arrangements. These revenue sharing arrangements come from monthly or annual subscription fees charged to the viewer for the channel, pay per view events, and in some cases from advertising campaigns that we have provided for the content owner. The majority of our customers sign twelve month contracts which are the basis of our billing arrangements.

Revenues for narrowcasting are recognized in our financial statements as follows: any consulting services or one-time setup fees for a customer channel are recognized once the work is completed and accepted by the customer. The monthly recurring revenue items are the monthly license fee, the monthly usage of bandwidth, and the amount of storage at time of billing. We currently do not use any estimates for recording revenue. The revenue recognized during the month is based on a contractual rate or monthly fee which covers the month invoiced.

Revenues from production services include fees paid for the production, filming, editing and encoding of programs. We charge our clients on a time and expense basis for these services, typically on a project-by-project basis, although occasionally under longer term agreements. Revenues for production services are recognized only when