**Exhibit
      15.2:**




**FINANCIAL
      STATEMENTS  OF REMOTE DYNAMICS, INC. AND SUBSIDIARY AS OF AND**


**FOR
      THE YEAR ENDED AUGUST 31, 2006 AS PREVIOUSLY FILED WITH THE SEC ON JANUARY
      16,
      2007**










**REMOTE
      DYNAMICS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands, except par value amounts)**




**August
                31,****2006**
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            303
            
            $
            503Accounts
                receivable, net of allowance for doubtful accountsof
                $77 and $197, respectively
            
            
            586
            
            
            2,695Inventories,
                net of reserve for obsolescense of $112 and $313,
                respectively
            
            
            360
            
            
            791Deferred
                product costs - current portion
            
            
            1,121
            
            
            950Lease
                receivables and other current assets, net
            
            
            299
            
            
            632Total
                current assets
            
            
            2,669
            
            
            5,571Property
                and equipment, net of accumulated depreciationand
                amortization of $2,548 and $1,565 respectively
            
            
            2,237
            
            
            3,743Deferred
                product costs - non-current portion
            
            
            1,044
            
            
            1,007Goodwill
            
            
            2,395
            
            
            10,120License
                right, net
            
            
            95
            
            
            580Other
                intangibles, net
            
            
            -
            
            
            271Deferred
                financing fees, net
            
            
            2,353
            
            
            -Lease
                receivables and other assets, net
            
            
            365
            
            
            414Total
                assets
            
            $
            11,158
            
            $
            21,706**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                liabilities:Accounts
                payable
            
            $
            1,090
            
            $
            1,557Deferred
                product revenues - current portion
            
            
            2,033
            
            
            2,038Series
                A convertible notes payable (net of discount of $2,395)
            
            
            1,438
            
            
            -Note
                payable - HFS
            
            
            2,000
            
            
            -Note
                payable - SDS
            
            
            -
            
            
            1,750Accrued
                expenses and other current liabilities
            
            
            1,793
            
            
            2,083Total
                current liabilities
            
            
            8,354
            
            
            7,428Deferred
                product revenues - non-current portion
            
            
            1,786
            
            
            2,112Capital
                leases, less current portion
            
            
            211
            
            
            423Note
                payable - HFS
            
            
            -
            
            
            2,000Series
                A convertible notes payable - non-current (net of discount of
                $1,917)
            
            
            -
            
            
            -Other
                non-current liabilities
            
            
            325
            
            
            300Total
                liabilities
            
            
            10,676
            
            
            12,263Commitments
                and contingenciesRedeemable
                Preferred Stock - Series A (8% cumulative, $1,000 stated
                value,2,000,000
                shares authorized, 5,000 shares issued and outstanding atAugust
                31, 2005
            
            
            -
            
            
            3,542Redeemable
                Preferred Stock - Series B (8% cumulative, $10,000 stated
                value,2,000,000
                shares authorized, 600 shares issued and outstanding atAugust
                31, 2006 (redeemable in liquidation at an aggregate of
                $7,400,000)
            
            
            4,850
            
            
            -Stockholders'
                equity (deficit):Common
                stock, $0.01 par value, 230,000,000 shares authorized,
                10,463,385shares
                issued and 9,533,437 outstanding at August 31, 2006;50,000,0000
                shares authorized, 8,255,785 shares issued and 7,325,937
                outstandingat
                August 31, 2005
            
            
            105
            
            
            83Treasury
                stock, 929,948 shares, at cost
            
            
            (1,860
            )
            
            (1,860
            )Additional
                paid-in capital
            
            
            34,821
            
            
            24,250Accumulated
                deficit
            
            
            (37,434
            )
            
            (16,572
            )Total
                stockholders' equity (deficit)
            
            
            (4,368
            )
            
            5,901Total
                liabilities and stockholders' equity (deficit)
            
            $
            11,158
            
            $
            21,706




See
      accompanying notes to consolidated financial statements.







F-2




**REMOTE
      DYNAMICS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(In
      thousands, except per share amounts)**




**Year
                ended August 31,****2006**
            
            **2005**RevenuesService
            
            $
            3,133
            
            $
            12,914Ratable
                product
            
            
            2,584
            
            
            2,538Product
            
            
            189
            
            
            920Total
                revenues
            
            
            5,906
            
            
            16,372Cost
                of revenuesService
            
            
            2,896
            
            
            5,968Ratable
                product
            
            
            1,320
            
            
            1,362Product
            
            
            265
            
            
            868Total
                cost of revenues
            
            
            4,481
            
            
            8,198Gross
                profit
            
            
            1,425
            
            
            8,174Expenses:General
                and administrative
            
            
            3,763
            
            
            4,863Customer
                service
            
            
            869
            
            
            1,521Sales
                and marketing
            
            
            1,858
            
            
            3,186Engineering
            
            
            811
            
            
            1,319Depreciation
                and amortization
            
            
            1,982
            
            
            2,700Impairment
                loss on license right
            
            
            237
            
            
            201Goodwill
                impairment
            
            
            7,725
            
            
            9,604Legal
                settlement
            
            
            250
            
            
            -Total
                expenses
            
            
            17,495
            
            
            23,394Operating
                loss
            
            
            (16,070
            )
            
            (15,220
            )Interest
                income
            
            
            110
            
            
            253Interest
                expense
            
            
            (2,524
            )
            
            (390
            )Other
                (expense) income
            
            
            329
            
            
            (284
            )Loss
                before reorganization items and income taxes
            
            
            (18,155
            )
            
            (15,641
            )Reorganization
                items:Restructuring
                expenses and losses
            
            
            -
            
            
            (22
            )Net
                loss before income taxes
            
            
            (18,155
            )
            
            (15,663
            )Income
                tax benefit
            
            
            -
            
            
            -Net
                loss
            
            
            (18,155
            )
            
            (15,663
            )Preferred
                stock dividend
            
            
            (500
            )
            
            (368
            )Loss
                on redemption of preferred stock
            
            
            (2,643
            )
            
            -Repricing
                of warrants
            
            
            (69
            )
            
            -Net
                loss attributable to common stockholders
            
            $
            (21,367
            )
            $
            (16,031
            )Net
                loss per common share - basic and diluted
            
            $
            (2.55
            )
            $
            (2.47
            )Weighted
                average number of common shares outstanding:Basic
                and diluted
            
            
            8,378
            
            
            6,498




See
      accompanying notes to consolidated financial statements.







F-3







**REMOTE
      DYNAMICS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)**


**(in
      thousands, except share information)**




**Additional****Common
                Stock**
            
            **Paid-in**
            
            **Treasury
                Stock**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Capital**
            
            **Shares**
            
            **Amount**
            
            **Deficit**
            
            **Total****Stockholders'
                equity at August 31, 2004**
            
            
            7,450,000
            
            $
            75
            
            $
            21,825
            
            
            929,948
            
            $
            (1,860
            )
            $
            (541
            )
            $
            19,499Issuance
                of common stock under planof
                reorganization
            
            
            393,568
            
            
            4
            
            
            1,307
            
            
            
            
            
            
            
            
            
            
            
            1,311Issuance
                of warrants in connection withSeries
                A preferred stock offering
            
            
            
            
            
            
            
            
            1,037
            
            
            
            
            
            
            
            
            
            
            
            1,037Issuance
                of Series A preferred stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (368
            )
            
            (368
            )Repricing
                of warrants
            
            
            
            
            
            
            
            
            85
            
            
            
            
            
            
            
            
            
            
            
            85Exercise
                of warrants
            
            
            337,317
            
            
            3
            
            
            (3
            )
            
            
            
            
            
            
            
            
            
            
            -Issuance
                of restricted stock
            
            
            75,000
            
            
            1
            
            
            (1
            )
            
            
            
            
            
            
            
            
            
            
            -Change
                in deferred stock compensation
            
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15,663
            )
            
            (15,663
            )**Stockholders'
                equity at August 31, 2005**
            
            
            8,255,885
            
            
            83
            
            
            24,250
            
            
            929,948
            
            
            (1,860
            )
            
            (16,572
            )
            
            5,901Issuance
                of warrants in connection withSeries
                B preferred stock offering
            
            
            
            
            
            
            
            
            975
            
            
            
            
            
            
            
            
            
            
            
            975Issuance
                of warrants in connection withdebt
                offering
            
            
            
            
            
            
            
            
            4,846
            
            
            
            
            
            
            
            
            
            
            
            4,846Beneficial
                conversion feature of convertible notes
            
            
            
            
            
            
            
            
            2,421
            
            
            
            
            
            
            
            
            
            
            
            2,421Exchange
                of note payable to SDS for warrants
            
            
            
            
            
            
            
            
            1,750
            
            
            
            
            
            
            
            
            
            
            
            1,750Exercise
                of warrants
            
            
            1,125,000
            
            
            11
            
            
            326
            
            
            
            
            
            
            
            
            
            
            
            337Issuance
                of common stock to placement agent for debt offering
            
            
            1,262,500
            
            
            13
            
            
            278
            
            
            
            
            
            
            
            
            
            
            
            291Issuance
                of restricted stock
            
            
            40,000
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -Forfeiture
                of restricted stock
            
            
            (220,000
            )
            
            (2
            )
            
            3
            
            
            
            
            
            
            
            
            
            
            
            1Vesting
                of restricted stock
            
            
            
            
            
            
            
            
            68
            
            
            
            
            
            
            
            
            
            
            
            68Series
                B preferred stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (500
            )
            
            (500
            )Loss
                on redemption of preferred stock
            
            
            
            
            
            
            
            
            (96
            )
            
            
            
            
            
            
            
            (2,207
            )
            
            (2,303
            )Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (18,155
            )
            
            (18,155
            )**Stockholders'
                deficit at August 31, 2006**
            
            
            10,463,385
            
            $
            105
            
            $
            34,821
            
            
            929,948
            
            $
            (1,860
            )
            $
            (37,434
            )
            $
            (4,368
            )




See
      accompanying notes to consolidated financial statements.










F-4


**REMOTE
        DYNAMICS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (1 of 2)**
 **(in
        thousands)**
  **Year
                  ended August 31,****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (18,155
              )
              $
              (15,663
              )Adjustments
                  to reconcile net loss to cash used inoperating
                  activities:Depreciation
                  and amortization of property and equipment
              
              
              1,462
              
              
              1,460Amortization
                  of license right and other intangibles
              
              
              519
              
              
              1,240Amortization
                  of deferred financing fees
              
              
              784
              
              
              -Amortization
                  of debt discount
              
              
              1,438
              
              
              -Amortization
                  of deferred service revenues
              
              
              (19
              )
              
              21Impairment
                  loss on license right
              
              
              237
              
              
              201Goodwill
                  impairment
              
              
              7,725
              
              
              9,604Legal
                  settlement
              
              
              250
              
              
              -Provision
                  for bad debts
              
              
              130
              
              
              188Loss
                  on assets retired or sold
              
              
              184
              
              
              206Vesting
                  of restricted stock
              
              
              69
              
              
              -Non-cash
                  expense on repricing of warrants
              
              
              -
              
              
              85Gain
                  on sale of patents
              
              
              (500
              )
              
              -Changes
                  in operating assets and liabilities:Decrease
                  in restricted cash
              
              
              -
              
              
              439Decrease
                  (increase) in accounts receivable
              
              
              1,979
              
              
              (29
              )Decrease
                  (increase) in inventories
              
              
              431
              
              
              (117
              )Decrease
                  (increase) in deferred product costs
              
              
              (208
              )
              
              108Decrease
                  in lease receivables and other assets
              
              
              401
              
              
              1,401Decrease
                  in accounts payable
              
              
              (467
              )
              
              (610
              )Decrease
                  in deferred product revenues
              
              
              (331
              )
              
              (1,398
              )Decrease
                  (increase) in accrued expenses and other liabilities
              
              
              (478
              )
              
              914Net
                  cash used in operating activities before reorganization
                  items
              
              
              (4,549
              )
              
              (1,950
              )Decrease
                  in restructuring accruals
              
              
              -
              
              
              (3,072
              )Net
                  cash used in operating activities
              
              
              (4,549
              )
              
              (5,022
              )Cash
                  flows from investing activities:Additions
                  to property and equipment
              
              
              (57
              )
              
              (962
              )Proceeds
                  from sale of assets
              
              
              212
              
              
              -Proceeds
                  from sale of patents
              
              
              500
              
              
              -Net
                  cash provided by (used in) investing activities
              
              
              655
              
              
              (962
              )Cash
                  flows from financing activities:Proceeds
                  from issuance of note payable
              
              
              -
              
              
              1,750Proceeds
                  from sale of Series A preferred stockand
                  warrants, net of offering costs
              
              
              -
              
              
              4,651Proceeds
                  from sale of Series B preferred stockand
                  warrants, net of offering costs
              
              
              443
              
              
              -Interest
                  paid on bridge note
              
              
              36
              
              
              -Proceeds
                  from issuance of debt offering and warrants,net
                  of offering costs
              
              
              4,004
              
              
              -Proceeds
                  from exercise of warrants
              
              
              337
              
              
              -Dividends
                  paid on preferred stock
              
              
              -
              
              
              (368
              )Payments
                  on capital leases and other notes payable
              
              
              (1,126
              )
              
              (858
              )Net
                  cash provided by financing activities
              
              
              3,694
              
              
              5,175Decrease
                  in cash and cash equivalents
              
              
              (200
              )
              
              (809
              )Cash
                  and cash equivalents, beginning of year
              
              
              503
              
              
              1,312Cash
                  and cash equivalents, end of year
              
              $
              303
              
              $
              503
  See
        accompanying notes to consolidated financial statements.
   F-5
  
  **REMOTE
        DYNAMICS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (2 of 2)**
 **(in
        thousands)**
  **Year
                  ended August 31,****2006**
              
              **2005**Supplemental
                  cash flow information:Interest
                  paid
              
              $
              286
              
              $
              288Non-cash
                  investing and financing activities:Discharge
                  of debt and exchange of common stockunder
                  the plan of reorganization
              
              $
              -
              
              $
              1,311Purchases
                  of assets through capital leases and other notes payables
              
              $
              295
              
              $
              571Exchange
                  of bridge note into warrants
              
              $
              1,750
              
              $
              -Financing
                  of Series A original issued discount
              
              $
              750
              
              $
              -Issuance
                  of common stock to placement agent for debt offering
              
              $
              291
              
              $
              -Beneficial
                  conversion feature of convertible notes
              
              $
              2,421
              
              $
              -Issuance
                  of warrants in connection with debt offering
              
              $
              3,329
              
              $
              -Issuance
                  of warrants in connection with debt offering recorded asdeferred
                  financing fees
              
              $
              1,517
              
              $
              -Preferred
                  stock dividends accrued
              
              $
              500
              
              $
              -Issuance
                  of warrants in connection with Series B preferred stock
                  offering
              
              $
              975
              
              $
              -
  See
        accompanying notes to consolidated financial statements.
   F-6
  **REMOTE
      DYNAMICS, INC. AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**






**1.                   BUSINESS
      OVERVIEW, REORGANIZATION AND GOING CONCERN**




**Business
      Overview**





Remote
      Dynamics, Inc., a Delaware Corporation (“we” or the “Company”) was originally
      incorporated on February 3, 1994.  We market, sell and support
      automatic vehicle location (“AVL”) and mobile resource management solutions
      targeting companies that operate private vehicle fleets. The REDIviewTM family of
      solutions is ideal for metro, short-haul fleets within diverse industry vertical
      markets such as field services, distribution, courier, limousine,
      electrical/plumbing, waste management, and government.  Our core
      technology, telematics, combines wireless communications, GPS location
      technology, geospatial solutions and vehicle data integration with an
      easy-to-use web-accessible application that aids in the optimization of remote
      business solutions.  Our state of the art fleet management solution
      contributes to higher customer revenues and improved operator efficiency by
      improving the productivity of mobile workers through real-time position reports,
      route-traveled information, and exception based reporting designed to highlight
      mobile workforce inefficiencies. This in-depth reporting enables our customers
      to correct those inefficiencies and deliver significant savings to the bottom
      line.




Historically,
      much of our revenues have been derived from products sold to the long-haul
      trucking industry, and to member companies of SBC Communications, Inc.
      (“SBC”).  Revenues from these legacy customers have ceased as of
      December 31, 2005.  SBC selected an alternative vendor to supply its
      next generation AVL product, and, as of December 31, 2005, had deactivated
      all
      of its subscriber units.  For us to sustain ongoing business
      operations and ultimately achieve profitability, we must substantially increase
      our sales and penetration into the marketplace with next generation products
      and
      services.




On
      June
      21, 2001, we acquired an exclusive, royalty-free, 99-year license to market,
      sell and operate Minorplanet System PLC’s VMI technology in the United States,
      Canada and Mexico.  VMI is designed to maximize the productivity of a
      mobile workforce as well as reduce vehicle mileage and fuel related
      expenses.  The VMI technology consists of: (i) a data control unit
      (“DCU”) that continually monitors and records a vehicle’s position, speed and
      distance traveled; (ii) a command and control center (“CCC”) which receives and
      stores in a database information downloaded from the DCU’s; and (iii) software
      used for communication, messaging and detailed reporting.  VMI uses
      satellite-based Global Positioning System (“GPS”) location technology to acquire
      a vehicle location on a minute-by-minute basis, and a global system for mobile
      communications (“GSM”) based cellular network to transmit data between the DCU’s
      and the CCC. GSM is a digital technology developed in Europe and has been
      adapted for North America.  GSM is the most widely used digital
      standard in the world.  The VMI application is targeted to small and
      medium sized fleets based in major metropolitan areas.




VMI
      provides minute-by-minute visibility into the activities of a mobile workforce
      via an extensive reporting system that provides real-time and exception-based
      reporting.  Real-time reports provide information regarding a
      vehicle’s location, idling, stop time, speed and distance
      traveled.  With real-time reporting, the customer can determine when
      an employee starts or finishes work, job site arrival times and site visit
      locations.  In addition, exception reports allow the customer to set
      various parameters within which vehicles must operate, and the system will
      report exceptions including speeding, extended stops, unscheduled stops, route
      deviations, visits to barred locations and excessive idling.




We
      commercially launched our current product offering, REDIview, during January
      of
      2005.  REDIview is an Internet and service bureau-based software
      application that provides an extensive array of real-time and accurate mapping,
      trip replay, and vehicle activity reports.  REDIview includes a series
      of exception-based reports designed to highlight inefficiencies in the
      operations of a vehicle fleet.  Utilizing GPRS technology and our
      proven, high-capacity network service center, customers may access their
      information securely through the Internet from any personal computer or certain
      other devices.






F-7


REDIview
      incorporates technologies that allow for fast and effective integration into
      legacy applications operated by companies with vehicle fleets and mobile
      workers.  This design allows companies to easily extend their existing
      supply chain management systems to the mobile workforce for transaction
      processing and customer fulfillment.  REDIview was also designed to be
      hardware and network agnostic to provide the maximum flexibility in designing
      solutions that best fit the customer’s specific needs.






Our
      new
      REDIview product line forms the basis of our business plan for fiscal year
      2007
      and beyond and will be the foundation for expected growth in revenues and
      ultimately profitability for us.  In addition, the REDIview product
      line allows us to move to a recurring revenue model for all of its current
      product offerings, an important and necessary change to our revenue model to
      achieve overall sustained revenue growth and cash flow positive operations.
      In
      implementing our new business plan, we are completing a significant cost and
      operational-based restructuring, rightsizing the workforce at all levels,
      including the senior management level.  We are focusing our efforts on
      enhancing the existing REDIview product line.  As a result, in
      addition to significantly reducing projected operational costs, we have
      significantly reduced our projected sales targets and associated cash flows
      from
      our previous business plan which included multiple product offerings sold
      through both a direct sales force and third-party distributors.






**Voluntary
      Bankruptcy Filing and Reorganization**




In
      February, 2004, we and two of our
      wholly-owned subsidiaries, Caren (292) Limited and Minorplanet Systems USA
      Limited, filed voluntary petitions for relief under Chapter 11 of the
      United States Bankruptcy Code in the United States Bankruptcy Court for the
      Northern District of Texas, in order to facilitate the restructuring of our
      debt, trade liabilities, and other obligations. During the bankruptcy, we
      remained in possession of our assets and operated as “debtors-in-possession”
under the jurisdiction of the Bankruptcy Court and in accordance with the
      applicable provisions of Bankruptcy Code, the Federal Rules of Bankruptcy
      Procedure and applicable court orders.





In
      June, 2004, the Bankruptcy Court
      entered an order confirming our Third Amended Joint Plan of Reorganization,
      as
      modified. The Bankruptcy Court set our enterprise value at $25,300,000 for
      purposes of distributions of new common stock under the plan of reorganization.
      We set the effective date of the plan of reorganization as July 2, 2004.
      Caren (292) Limited and Minorplanet Systems USA Limited, as a matter of
      law, were merged with and into Remote Dynamics, Inc., ceasing to exist as
      separate entities as of July 2, 2004. The plan of reorganization was
      substantially consummated on July 8, 2004. On August 25, 2005, the
      Bankruptcy Court signed the final decree and closed our bankruptcy case. In
      connection with our Chapter 11 reorganization, we applied “Fresh Start
      Accounting” which resulted in approximately $19.7 million of excess
      reorganizational value which we recorded as goodwill. Goodwill was subsequently
      determined to be impaired; thus, goodwill was written off by approximately
      $9.6 million during the fiscal year ended August 31, 2005 and an additional
      $7.7 million during fiscal year ended August 31, 2006 to its estimated fair
      value. At August 31, 2006, the remaining carrying value of our goodwill was
      $2.4 million.





In
      July 2004, we changed our name to
“Remote Dynamics, Inc.” in connection with our exit from
      bankruptcy.




**Going
      Concern**




Historically,
      much of our revenues have been derived from products and services sold to the
      long-haul trucking industry, small to medium-sized companies through our Vehicle
      Management InformationTM (“VMI”) product line, and to SBC.  Revenues
      from the long-haul trucking industry and SBC have ceased as of December 31,
      2005. SBC selected an alternative vendor to supply its next generation AVL
      product, and, as of December 31, 2005, had deactivated all of its subscriber
      units.  For us to sustain ongoing business operations and ultimately
      achieve profitability, we must substantially increase our sales and penetration
      into the marketplace with competitive products and services.  We
      believe that the potential market opportunity for automatic vehicle location
      products in the United States, such as our GPRS-based REDIview product, is
      significant and that we will be well positioned with our telematics product
      lines and proven operations support to take advantage of the significant market
      potential.





F-8


At
      August
      31, 2006 we have a significant working capital deficit, have incurred
      significant recurring losses and have used significant cash in operations and
      currently do not expect to achieve profitability during the 2007 fiscal
      year.  Key to achieving profitability is to obtain a REDIview customer
      base that provides monthly recurring revenues and corresponding gross margins
      that exceed operating costs and expenses to support the REDIview customer
      base.  Based on our latest revised pricing structure and cost-based
      reduction in workforce, we currently estimate that to achieve profitability,
      we
      will need to have approximately $600,000 in monthly
      revenues.  However, there can be no assurances that we will achieve
      our REDIview sales targets and failure to do so may have a material adverse
      effect upon our business, financial condition and results of
      operations.





Critical
      success factors in our plans to achieve positive cash flow from operations
      include:





·
            Ability
                to increase sales of the REDIview product line to lessen the amount
                of
                capital resources necessary to fund our operations until such time
                that
                revenues from the REDIview product line are sufficient to fund ongoing
                operations.




·
            Ability
                to further reduce our operating costs in accordance with our latest
                revised business plan.




·
            Ability
                to complete development of additional features and functionality
                for the
                REDIview product line.




·
            Significant
                market acceptance of our product offerings from new customers, including
                our REDIview product line, in the United
                States.




·
            Maintaining
                and expanding our direct sales channel. New salespersons will require
                training and time to become productive. In addition, there is significant
                competition for qualified sales personnel, and we must continue to
                offer
                attractive compensation plans and opportunities to attract qualified
                salespersons.




·
            Expansion
                into new markets not currently served by
                us.




·
            Increasing
                sales production from existing channel
                partners.




·
            Obtaining
                new channel partners to distribute our product
                lines.




·
            Maintenance
                and expansion of indirect distribution channels for our REDIview
                product
                line.




·
            The
                securing and maintenance of adequate third party leasing sources
                for
                customers who purchase our
                products.






There
      can
      be no assurances that any of these success factors will be realized or
      maintained.




We
      currently believe that with the expected proceeds from our November 2006 private
      placement described in Note 14, and assuming the achievement of our revised
      REDIview sales targets and expected operating cost reductions, we have
      sufficient capital to fund our ongoing operations through the remainder of
      our
      2007 fiscal year.  The sufficiency of our cash resources depends to a
      certain extent on general economic, financial, competitive or other factors
      beyond our control. Moreover, despite actions to reduce costs and improve
      profitability, our operating losses and net operating cash outflows will
      continue through at least June 2007. As a result, we may not be able to achieve
      the revenue and gross margin objectives necessary to achieve positive cash
      flow
      or profitability without obtaining additional debt or equity financing. We
      do
      not currently have any arrangements for additional financing and we may not
      be
      able to secure additional debt or equity financing on terms acceptable to us,
      or
      at all, at the time when we need such funding. Further, our ability to secure
      certain types of additional financings is restricted under the terms of our
      existing financing arrangements.  There can be no assurance that we
      will be able to consummate a transaction for additional capital prior to
      substantially depleting our available cash reserves, and our failure to do
      so
      may force us to file for bankruptcy protection and/or cease
      operations.




F-9


**2.                   SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





**Principles
      of Consolidation**





Our
      consolidated financial statements include our accounts and those of our wholly
      owned subsidiary.  Intercompany balances and transactions have been
      eliminated in consolidation.





**Estimates
      Inherent in the Preparation of Financial Statements**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires us to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period.  Actual results could differ from those
      estimates.





**Revenue
      Recognition**





We
      recognize revenue when earned in
      accordance with the applicable accounting literature including:  EITF
      No. 00-21, “Revenue Arrangements With Multiple Deliverables”, Statement of
      Position 97-2, “Software Revenue Recognition”, and Staff Accounting Bulletin No.
      101, “Revenue Recognition in Financial Statements”, as amended by Staff
      Accounting Bulletin No. 104, “Revenue Recognition in Financial
      Statements”.  Revenue is recognized when the following criteria are
      met:  there is persuasive evidence that an arrangement exists,
      delivery has occurred and all obligations under such arrangement have been
      fulfilled, the price is fixed and determinable and collectibility is reasonably
      assured.





Initial
      sale proceeds received under
      multiple-element sales arrangements that require us to deliver products and
      services over a period of time and which are not determined by us to meet
      certain criteria are deferred.  All REDIview and VMI sales proceeds
      related to delivered products are deferred and recognized over the contract
      life
      that typically ranges from one to five years.   Product sales
      proceeds recognized under this method are portrayed in the accompanying
      Consolidated Statement of Operations as “Ratable product revenues.” The related
      deferred revenue is classified as a current and long term liability on the
      Consolidated Balance Sheets under the captions “Deferred product revenues –
current portion” and “Deferred product revenues non-current
      portion.”  If the customer relationship is terminated prior to the end
      of the customer contract term, such deferred sales proceeds are recognized
      as
      revenue in the period of termination.  Under sales arrangements, which
      initially meet the earnings criteria described above, revenues are recognized
      upon shipment of the products or upon customer acceptance of the delivered
      products if terms of the sales arrangement give the customer the right of
      acceptance.





Service
      revenue generally commences
      upon product installation and customer acceptance and is billed and recognized
      during the period such services are provided.





We
      provide lease financing to certain customers of our REDIview and VMI
      products.  Leases under these arrangements are classified as
      sales-type leases or operating leases.  These leases typically have
      terms of one to five years, and all sales type leases are discounted at interest
      rates ranging from 14% to 18% depending on the customer’s credit
      risk.  The net present value of the lease payments for sales-type
      leases is recognized as product revenue and deferred under our revenue
      recognition policy described above.  Income from operating leases is
      recognized ratably over the term of the leases.






**Shipping
      and Handling Fees and Costs**




We
      record
      amounts billed to customers for shipping and handling and related costs incurred
      for shipping and handling as components of “Product revenues” and “Cost of
      product revenues” respectively.




**Deferred
      Product Costs**




We
      defer
      certain product costs (generally consisting of the direct cost of product sold
      and installation costs) for our sales contracts determined to require deferral
      accounting.  The deferred costs are classified as a current and long
      term asset on the balance sheet under the captions “Deferred product costs –
current portion” and “Deferred product costs non-current
      portion”.  Such costs are recognized over the longer of the term of
      the service contract or the estimated life of the customer relationship and
      are
      portrayed in the accompanying Consolidated Statements of Operations as “Ratable
      product costs.”  Such terms range from one to five
      years.  If the customer relationship is terminated prior to the end of
      the estimated customer relationship period, such costs are recognized in the
      period of termination.






F-10


**Financial
      Instruments**




We
      consider all liquid interest-bearing investments with a maturity of ninety
      days
      or less at the date of purchase to be cash equivalents.  Short-term
      investments mature between ninety days and one year from the purchase
      date.




The
      carrying amount of cash and cash equivalents, accounts receivable, notes
      payable, accounts payable and accrued liabilities approximates fair value
      because of their short-term maturity.






**Allowance
      for Doubtful Accounts**




We
      use
      estimates in determining the allowance for doubtful accounts based on historic
      collection experience, current trends and a percentage of the accounts
      receivable aging categories. In determining these percentages we review
      historical write-offs, including comparisons of write-offs to provisions for
      doubtful accounts and as a percentage of revenues and monitor collections
      amounts and statistics.




August
                      31,2006
                  
                  
                  2005Beginning
                      balance
                  
                  $
                  197
                  
                  
                  $
                  162Additions
                  
                  
                  85
                  
                  
                  
                  165Deductions
                  
                  
                  (206
                  )
                  
                  
                  (130
                  )Ending
                      balance
                  
                  $
                  76
                  
                  
                  $
                  197
  **Business
        and Credit Concentrations**




We
      continuously monitor collections and payments from our customers and maintain
      a
      provision for estimated accounts receivable that may eventually become
      uncollectible based upon historical experience and specific customer
      information.  There is no guarantee that we will continue to
      experience the same credit loss history in future periods.  If a
      significant change in the liquidity or financial condition of a large customer
      or group of customers were to occur, it could have a material adverse affect
      on
      the collectibility of our accounts receivable and future operating
      results.





Revenues
      from sales of our REDIview products and services accounted for approximately
      50%
      and 3% of our total revenues during the fiscal years ended August 31, 2006
      and
      2005, respectfully.





SBC
      accounted for approximately 15% and 61%, respectively, of total revenues during
      the same periods.  The SBC contract expired effective December 31,
      2005.  During the fiscal years ended August 31, 2006 and 2005, SBC and
      Geologic Solutions, Inc. (“Geologic”) combined accounted for approximately 15%
      and 73%, respectively, of total revenues.  Geologic terminated its
      contract with us effective August 31, 2005.  Revenues from sales of
      our VMI products and services accounted for approximately 35% and 23% of our
      total revenues during the fiscal years ended August 31, 2006 and 2005,
      respectfully.




**Inventories**




Inventories
      consist primarily of component parts and finished products that are valued
      at
      the lower of cost or market. Cost is determined using the first-in, first-out
      (FIFO) method.  The Company records a write-down for excess and
      obsolete inventory based on usage history and specific identification
      criteria.  There is a risk we will forecast demand for our products
      and market conditions incorrectly and maintain excess
      inventories.  Therefore, there can be no assurance that we will not
      maintain excess inventory and incur inventory lower or cost or market charges
      in
      the future.






F-11




**Property
      and Equipment**




Property
      and equipment, prior to fresh
      start accounting adjustments, were stated at cost and depreciated on a
      straight-line basis over the estimated useful lives of the various classes
      of
      assets, which generally ranged from two to seven years.  After fresh
      start accounting adjustments, the new fair value of property and equipment
      is
      being depreciated on a straight-line basis over the estimated applicable
      remaining useful lives which generally ranged from one to five
      years.  Property and equipment obtained post-bankruptcy is stated at
      cost less accumulated depreciation and is depreciated on a straight-line basis
      over the estimated useful lives of the assets, generally one to five
      years.  Maintenance and repairs costs are expensed as
      incurred.




**Research
      and Development Costs**




We
      expense research and development costs as incurred.  During the fiscal
      years ended August 31, 2006 and 2005, we expensed approximately $410,000 and
      $529,000, respectively, in research and development costs associated with new
      product development.  All research and development costs are reflected
      in “Engineering expenses” in the Consolidated Statements of
      Operations.






**Capitalized
      Software Costs**





In
      accordance
      with Statement of Position 98-1, “Accounting for the Costs of Computer Software
      Developed or Obtained for Internal Use” (“SOP 98-1”) and Statement of Financial
      Accounting Standards No. 86 (“FAS 86”), software development costs that meet
      certain capitalization requirements are capitalized.  Such costs
      consist of software development costs for products to be sold or leased, as
      well
      as the cost of software acquired for internal use.  Additions to
      capitalized software during the fiscal years ended August 31, 2006 and 2005
      were
      approximately $52,000 and $545,000, respectively.  Amortization
      expense on capitalized software during the fiscal years ended August 31, 2006
      and 2005 was $374,000 and $310,000, respectively.




**Valuation
      of Long-Lived Assets**




We
      evaluate the recoverability of our long-lived assets under Statement of
      Financial Accounting Standards No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets” (“ SFAS 144”).  SFAS 144 requires us to
      review for impairment of our long-lived assets, whenever events or changes
      in
      circumstances indicate that the carrying amount of an asset might not be
      recoverable and exceeds its fair value.  Impairment evaluations
      involve our estimates of asset useful lives and future cash
      flows.  When such an event occurs, we estimate the future cash flows
      expected to result from the use of the asset and its eventual
      disposition.  If the undiscounted expected future cash flows are less
      than the carrying amount of the asset and the carrying amount of the asset
      exceeds its fair value, an impairment loss is recognized.  We utilize
      an expected present value technique, in which multiple cash flow scenarios
      that
      reflect the range of possible outcomes and a risk-free rate are used, to
      estimate fair value of the asset.




We
      assess
      the impairment in value to our long-lived assets whenever events or
      circumstances indicate that the carrying value may not be
      recoverable.  Significant factors, which would trigger an impairment
      review, include the following:




·
            significant
                negative industry trends,


·
            significant
                changes in technology,


·
            significant
                underutilization of the asset, and


***·***
            significant
                changes in how the asset is used or is planned to be
                used.





**VMI
      License Right**





In
      June
      of 2001, we received a 99-year exclusive license right to market, sell and
      operate Minorplanet Systems PLC’s (“PLC”) VMI technology in the United States,
      Canada and Mexico.  On June 14, 2004, the Bankruptcy Court approved a
      Compromise and Settlement Agreement (the “Agreement”) by and among us and
      Minorplanet Limited and PLC regarding the license agreement for the VMI
      technology, which allowed us to use, market and sell the VMI technology until
      December 31, 2004.  On January 6, 2005, we entered into an Addendum to
      Compromise and Settlement Agreement (the “Addendum”) with PLC which granted us
      the right to continue to market and sell the VMI product line to our existing
      VMI customers.  Although we have ceased actively marketing and selling
      the VMI product, the Addendum allows us to fulfill VMI product orders from
      existing VMI customers.




F-12


We
      account for the VMI license right in accordance with SFAS No. 144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which
      requires us to review for impairment of our long-lived assets whenever events
      or
      changes in circumstances indicate that the carrying amount of an asset might
      not
      be recoverable and exceeds its fair value.  Thus, we used an expected
      present value technique, in which multiple cash flow scenarios that reflect
      the
      range of possible outcomes and a risk-free rate, to estimate the fair value
      of
      the VMI license right at August 31, 2006.  Accordingly, we recorded an
      impairment loss of $0.2 million during the year ended August 31, 2006 to reflect
      the fair value of the VMI license right based on our revised sales and cash
      flow
      forecasts.  At August 31, 2006, the carrying value of the license
      right was approximately $0.1 million. The new fair value of the VMI license
      right at August 31, 2006 is being amortized over its expected useful life of
      ten
      months.




**Goodwill
      and Other Intangibles**





We
      test
      our goodwill for impairment on an annual basis, or between annual tests if
      it is
      determined that a significant event or change in circumstances warrants such
      testing, in accordance with the provisions of SFAS  No. 142, “Goodwill
      and Other Intangible Assets”, (“SFAS 142”) which requires a comparison of the
      carrying value of goodwill  to the fair value of the reporting
      unit.   If the fair value of the reporting unit is less than the
      carrying value of goodwill, an adjustment to the carrying value of goodwill
      is
      required.




Since
      our
      launch of the REDIview product line in January of 2005, we have experienced
      significant competition in the marketplace which has eroded our price points
      and
      prevented us from achieving our sales targets with sales cycles for large
      accounts proving to be much longer and complex than originally
      anticipated.  Thus, in response to current market conditions, we
      revised our business plan modifying our pricing structures, our sales and
      marketing approach and added new feature sets to our REDIview product line
      to
      ensure that we remain competitive in the marketplace.  We have
      significantly reduced our future projected cash flows from previous
      projections.  Thus, we performed our annual test for goodwill
      impairment at August 31, 2005 utilizing an income approach, a discounted future
      cash flow analysis and an analysis of market multiples to determine our goodwill
      was impaired by an estimated $9.6 million.  Goodwill was thus written
      off by $9.6 million representing the full amount of the estimated impairment
      during the fiscal year ended August 31, 2005.




Based
      on
      our failure to achieve our forecasted sales targets for the three months ended
      November 30, 2005, we began analyzing and revising our current and long-term
      business plans, materially modifying our existing business plan in late December
      2005.  Our business plan significantly reduced our projected sales
      forecasts and operational costs from the former plan.  As a result,
      and in accordance with SFAS 142, we performed an interim test of our goodwill
      as
      of November 30, 2005 utilizing a discounted future cash flow analysis based
      on
      our new projected sales targets and the estimated impact of our cost saving
      measures.  We determined that goodwill was further impaired by an
      estimated $5.0 million.  Goodwill was thus further written off by $5.0
      million at November 30, 2005 representing the full amount of the estimated
      impairment.




We
      further modified our business plan as of August 31, 2006 significantly reducing
      our projected sales forecasts and operational costs from the former
      plan.  As a result, and in accordance with SFAS 142, we performed an
      annual test of our goodwill as of August 31, 2006 utilizing a discounted future
      cash flow analysis based on our new projected sales targets and the estimated
      impact of our additional cost saving measures.  We determined that
      goodwill was further impaired by an estimated $2.7 million.  Goodwill
      was thus further written off by $2.7 million at August 31, 2006 representing
      the
      full amount of the estimated impairment.  At August 31, 2006, the
      carrying value of our goodwill was $2.4 million.






**Advertising
      Costs**




Advertising
      costs are expensed as incurred.  During the fiscal years ended August
      31, 2006 and 2005, we expensed $53,000 and $203,000, respectively, in
      advertising costs that are reflected in “Sales and marketing expenses” in the
      Consolidated Statements of Operations.






F-13


**Income
      Taxes**




Deferred
      income taxes are calculated using an asset and liability approach wherein
      deferred taxes are provided for the tax effects of basis differences for assets
      and liabilities arising from differing treatments for financial and income
      tax
      reporting purposes. A valuation allowance is recognized if, based on the weight
      of available evidence, it is more likely than not that some portion or all
      of
      the deferred tax asset will not be realized.




**Restricted
      Stock**




On
      July
      2, 2004, in accordance with the plan of reorganization, we adopted the Restated
      2004 Management Incentive Plan (the “Incentive Plan”).  The Incentive
      Plan allows for the issuance of up to 700,000 restricted shares of common stock
      to management.  As of August 31, 2006, 565,000 shares of restricted
      stock had been issued to certain members of the senior management and 220,000
      shares of restricted stock were retired.  These restricted shares are
      accounted for in accordance with variable plan accounting, which requires that
      the fair value of the shares be measured and charged to the income statement
      upon determination that the fulfillment of the performance criteria has been
      met
      or is probable.  We recorded approximately $70,000 of compensation
      expense associated with these restricted shares during the fiscal year ended
      August 31, 2006.  Prior to the adoption of SFAS 123(R), “Share Based
      Payment”, we presented deferred compensation as a separate component of
      stockholders’ equity.  In accordance with the provisions of SFAS
      123(R), we reclassified the balance in deferred compensation to
      additional-paid-in-capital on our balance sheet.




**Stock-Based
      Compensation**




In
      December of 2004, the Financial Accounting Standards Board (“FASB”) issued FAS
      123R, which applies to transactions in which an entity exchanges its equity
      instruments for goods or services and also applies to liabilities an entity
      may
      incur for goods or services that are based on the fair value of those equity
      instruments.  For any unvested portion of previously issued and
      outstanding awards, compensation expense is required to be recorded based on
      the
      previously disclosed FAS 123 methodology and amounts.  Prior periods
      presented are not required to by restated.  We adopted FAS 123R as of
      September 1, 2005 and applied the standard using the modified prospective
      method..  We extinguished our prior stock options upon emergence from
      bankruptcy effective July 2, 2004 and have not issued any new stock options
      beyond that date.  As discussed above, we have issued restricted stock
      to certain members of senior management which have either been issued or retired
      as of August 31, 2006.  Compensation expense totaling $70,000 has been
      recorded during the fiscal year ended August 31, 2006 related to the vesting
      of
      certain restricted shares described above.






**Earnings
      Per Share**




We
      compute earnings per share in accordance SFAS No. 128, “Earnings Per
      Share.”  Net loss per basic share was computed by dividing net loss by
      the weighted average number of shares outstanding during the respective
      periods.  Diluted earnings per share is computed using the “Treasury
      Stock Method.”  The Company’s potentially dilutive
      securities**have been excluded from the weighted average number of
      shares outstanding, since their effect would be anti-dilutive.




The
      securities listed below were not included in the computation of diluted earnings
      per share as the effect from their conversion would have been
      antidilutive:




Year
                        ended August 31,2006
                    
                    
                    2005Restricted
                        stock ( not vested)
                    
                    
                    -
                    
                    
                    
                    525,000Convertible
                        note payable
                    
                    
                    29,399,350
                    
                    
                    
                    689,655Convertible
                        preferred stock
                    
                    
                    3,870,968
                    
                    
                    
                    2,500,000Outstanding
                        warrants to purchase common stock
                    
                    
                    87,991,667
                    
                    
                    
                    3,491,667


**Stock
      Warrants**




Stock
      warrants issued, redeemed and outstanding during the fiscal years ended August
      31, 2006 and 2005 are as follows:




Common
                      Stock
                  
                  
                  Average
                    Exercise
                      Price
                    per
                      shareWarrants
                      outstanding, August 31, 2004
                  
                  
                  -Warrants
                      issued
                  
                  
                  3,491,667
                  
                  
                  $
                  0.57Warrants
                      exercised
                  
                  
                  -
                  
                  
                  
                  -Warrants
                      outstanding, August 31, 2005
                  
                  
                  3,491,667
                  
                  
                  
                  0.57Warrants
                      issued
                  
                  
                  85,625,000
                  
                  
                  
                  0.43Warrants
                      exercised
                  
                  
                  (1,125,000
                  )
                  
                  
                  0.30Warrants
                      outstanding, August 31, 2006
                  
                  
                  87,991,667
                  
                  
                  
                  0.43
  **New
        Accounting Standards**





*Financial
      Accounting Standards No. 155 (“FAS 155”).*  In February 2006, the
      FASB issued FAS 155, “Accounting for Certain Hybrid Financial Instruments,” an
      amendment of Financial Accounting Standards No. 133, “Accounting for Derivative
      Instruments and Hedging Activities” (“FAS 133”) and Financial Accounting
      Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets
      and Extinguishments of Liabilities” (“FAS 140”). With respect to FAS 133, FAS
      155 simplifies accounting for certain hybrid financial instruments by permitting
      fair value remeasurement for any hybrid financial instrument that contains
      an
      embedded derivative that otherwise would require bifurcation and eliminates
      the
      interim guidance in Statement 133 Implementation Issue No. D1, “Application of
      Statement 133 to Beneficial Interests in Securitized Financial Assets,” which
      provided that beneficial interests in securitized financial assets are not
      subject to the provision of FAS 133. With respect to FAS 140, FAS 155 eliminates
      a restriction on the passive derivative instruments that a qualifying
      special-purpose entity may hold. FAS 155 is effective for all financial
      instruments acquired or issued after the beginning of an entity’s first fiscal
      year that begins after September 15, 2006. We do not expect the adoption of
      FAS
      155 to significantly affect our financial condition or results of
      operations.






*FASB
      Interpretation No. 48 (“FIN 48”).*  In July 2006, the FASB issued
      FIN 48, “Accounting for Uncertainty in Income Taxes” which prescribes a
      recognition threshold and measurement process for recording in the financial
      statements uncertain tax positions taken or expected to be taken in a tax
      return. Additionally, FIN 48 provides guidance on derecognition, classification,
      accounting in interim periods and disclosure requirements for uncertain tax
      positions. The accounting provisions of FIN 48 will be effective for us
      beginning October 1, 2007. We are in the process of determining the effect,
      if
      any, the adoption of FIN 48 will have on our financial statements.






*Financial
      Accounting Standards No. 157 (“FAS 157”).*  In September 2006, the
      FASB issued FAS 157, “Fair Value Measurements.” FAS 157 defines fair value,
      established a framework for measuring fair value in generally accepted
      accounting principles (GAAP) and expands disclosures about fair value
      measurements. FAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007. We do not expect the adoption of FAS
      157 to significantly affect our financial condition or results of
      operations.




F-14


**3.                   INVENTORIES**





Inventories
      consist of the following (in thousands):





August
                          31,2006
                        
                        
                        2005Complete
                            systems
                        
                        $
                        201
                        
                        
                        $
                        622Component
                            parts
                        
                        
                        159
                        
                        
                        
                        169$
                        360
                        
                        
                        $
                        791


**4.                   PROPERTY
      AND EQUIPMENT**





Property
      and equipment consist of the following (in thousands):





August
                          31,2006
                        
                        
                        2005Network
                            service center
                        
                        $
                        414
                        
                        
                        $
                        720Machinery
                            and equipment
                        
                        
                        153
                        
                        
                        
                        163Capitalized
                            software costs
                        
                        
                        1,822
                        
                        
                        
                        1,770Leasehold
                            improvements
                        
                        
                        692
                        
                        
                        
                        692Vehicles,
                            computer equipment, and other equipment
                        
                        
                        1,704
                        
                        
                        
                        1,9634,785
                        
                        
                        
                        5,308Less:
                            accumulated depreciation and amortization
                        
                        
                        (2,548
                        )
                        
                        
                        (1,565
                        )$
                        2,237
                        
                        
                        $
                        3,743




Total
      depreciation and amortization expense related to property and equipment
      (excluding capitalized software costs) charged to operations during the year
      ended August 31, 2006 and 2005 was $1,088,000 and $1,153,000,
      respectively.







As
      of
      August 31, 2006 and 2005, the unamortized portion of software costs was
      $1,100,000 and $1,425,000, respectively.  Amortization of such costs
      charged to expense during year ended August 31, 2006 and 2005 was $374,000
      and
      $310,000, respectively.  Such costs are included in “Depreciation and
      amortization” on our Consolidated Statements of Operations.




F-15


**5.           GOODWILL
      AND OTHER INTANGIBLE ASSETS**




Upon
      implementation of fresh start accounting as of June 30, 2004, we recorded
      goodwill and other intangible assets and therefore applied provisions of SFAS
      142 that requires that goodwill not be amortized but reviewed annually (or
      more
      frequently if impairment indicators arise) for impairment.  Intangible
      assets that do not have indefinite lives are amortized over their estimated
      useful lives. Goodwill and other intangible assets consist of the following
      as
      of August 31, 2006 and 2005 (in thousands):





Balance
                      at
                    August
                      31,
                    2005
                  
                  
                  Amortization
                  
                  
                  Impairment
                  
                  
                  Balance
                      at
                    August
                      31,
                    2006
                  
                  
                  Remaining
                    Amortization
                    Period
                    (in
                      months)Goodwill
                  
                  $
                  10,120
                  
                  
                  $
                  -
                  
                  
                  $
                  (7,725
                  )
                  
                  $
                  2,395
                  
                  
                  
                  n/aOther
                      intangibles:Customer
                      relationships
                  
                  
                  271
                  
                  
                  
                  (271
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  n/aVMI
                      License Right
                  
                  
                  580
                  
                  
                  
                  (248
                  )
                  
                  
                  (237
                  )
                  
                  
                  95
                  
                  
                  
                  10
   Balance
                      at
                    August
                      31,
                    2004
                  
                  
                  Amortization
                  
                  
                  Impairment
                  
                  
                  Balance
                      at
                    August
                      31,
                    2004
                  
                  
                  Remaining
                    Amortization
                    Period
                    (in
                      months)Goodwill
                  
                  $
                  19,724
                  
                  
                  $
                  -
                  
                  
                  $
                  (9,604
                  )
                  
                  $
                  10,120
                  
                  
                  
                  n/aOther
                      intangibles:Customer
                      relationships
                  
                  
                  1,220
                  
                  
                  
                  (949
                  )
                  
                  
                  -
                  
                  
                  
                  271
                  
                  
                  
                  4VMI
                      License Right
                  
                  
                  1,207
                  
                  
                  
                  (426
                  )
                  
                  
                  (201
                  )
                  
                  
                  580
                  
                  
                  
                  22
   Total
        amortization expense for the VMI license right and other intangible assets
        for
        the year ended August 31, 2006 and 2005 was approximately $519,000 and
        $1,240,000, respectively.





**6.                   LEASE
      RECEIVABLES AND OTHER ASSETS**





We
      provide lease financing to certain customers of our REDIview and VMI
      products.  Leases under these arrangements are classified as
      sales-type leases or operating leases.  These leases typically have
      terms of one to five years, and all sales type leases are discounted at interest
      rates ranging from 14% to 18% depending on the customer’s credit
      risk.




The
      net present value of the lease
      payments for sales-type leases is recognized as product revenue and deferred
      under the Company’s revenue recognition policy.   The components
      of the net investment in sales-type leases are as follows (in
      thousands):





August
                              31,2006
                          
                          
                          2005Minimum
                              lease payments receivable
                          
                          $
                          501
                          
                          
                          $
                          730Less:
                              Allowance for uncollectibles
                          
                          
                          (65
                          )
                          
                          
                          (98
                          )436
                          
                          
                          
                          632Less:
                              Unearned interest income
                          
                          
                          (80
                          )
                          
                          
                          (128
                          )Net
                              investment in sales-type leases
                          
                          $
                          356
                          
                          
                          $
                          504
   The
        long-term
        portion of the net investment in sales-type leases at August 31, 2006 and
        2005
        was $210,000 and $325,000, respectively.






Total
      minimum
      lease payments receivable on sales-type leases as of August 31, 2006 are as
      follows (in thousands):




Fiscal
                          Year Ending August 31,2007
                      
                      
                      2712008
                      
                      
                      1792009
                      
                      
                      51Total
                          minimum lease payments receivable
                      
                      $
                      501




Income
      from
      operating leases is recognized ratably over the term of the leases. Total future
      minimum rental payments due under operating leases as of August 31, 2006 are
      as
      follows (in thousands):




Fiscal
                          Year Ending August 31,2007
                      
                      $
                      252008
                      
                      
                      22009
                      
                      
                      -Total
                          minimum rental payments
                      
                      $
                      27


**7.                   ACCRUED
      EXPENSES AND OTHER CURRENT LIABILITIES**





Accrued
      expenses and other current liabilities consist of the following (in
      thousands):





August2006
                        
                        
                        2005Reorganization
                          accruals
                        
                        $
                        15
                        
                        
                        $
                        15Capital
                          leases - current portion
                        
                        
                        212
                        
                        
                        
                        584Lawsuit
                          settlement - current portion
                        
                        
                        83
                        
                        
                        
                        -Property,
                          franchise, and other taxes payable
                        
                        
                        97
                        
                        
                        
                        302Accrued
                          warranty costs
                        
                        
                        149
                        
                        
                        
                        210Accrued
                          telecom costs
                        
                        
                        35
                        
                        
                        
                        165Accrued
                          vacation
                        
                        
                        78
                        
                        
                        
                        198Dividends
                          payable
                        
                        
                        500
                        
                        
                        
                        -Legal,
                          accounting, interest and other accruals
                        
                        
                        624
                        
                        
                        
                        609$
                        1,793
                        
                        
                        $
                        2083




**8.                   NOTES
      PAYABLE**





**HFS
      Note Payable**






On
      June 29, 2004, we closed on a
      bankruptcy court-approved exit financing facility with HFS Minorplanet Funding
      LLC (“HFS”) and other accredited investors in the amount of
      $1,575,000.  As part of the facility, we agreed to issue a $1,575,000
      convertible promissory note to HFS with the principal balance being due 36
      months from the date of funding, with an annual interest rate of 12%. HFS was
      required to provide the funding within 21 days of the closing.






On
      July 20, 2004, we amended the exit
      financing by with HFS increasing the amount of the financing from $1,575,000
      to
      $2,000,000.  As a result, we issued a $2,000,000 convertible
      promissory note to HFS with the principal balance being due 36 months from
      the
      date of funding, with an annual interest rate of 12%. Upon issuance of the
      note,
      HFS provided the $2,000,000 funding to us less a commission in the amount of
      $80,000 representing 4% of the loan proceeds. HFS, may at any time demand
      repayment of the accrued interest and unpaid principal on the note, based upon
      a
      fixed conversion price (currently $3.08 per share of common stock), whose
      aggregate value equals the amount of accrued interest and principal being
      repaid.  We paid HFS $240,000 in interest payments on the note during
      each of the twelve months ended August 31, 2006 and August 31, 2005,
      respectively.




On
      November 30, 2006, we entered into a promissory note with HFS in the principal
      amount of $1,000,000 and having a maturity date of December 1, 2007. As of
      the
      date of this report, no amounts have been advanced under this
      note.  Advances are only available under certain limited
      circumstances.  At maturity, (a) the promissory note (and all amounts
      due under the note) automatically convert into our securities of the same kind
      issued by us in our November 2006 private placement (based on a $1,000,000)
      and
      (b) the existing $2,000,000 convertible promissory note issued by us to HFS
      will
      be cancelled.





F-16


**SDS
      Note Payable**




On
      May 31, 2005, we consummated a
      bridge loan and security agreement with SDS in which we issued a promissory
      note
      in the amount of $1.75 million to SDS. The bridge note was secured by our
      assets, bore interest at 8% per annum and was due and payable on September
      30,
      2005.  The bridge note automatically exchanged upon shareholder
      approval into a common stock purchase warrant with a 5-year term to purchase
      1,666,667 shares of common stock at an exercise price of $0.01 per share and
      a
      common stock purchase warrant with a 5-year term to purchase 700,000 shares
      of
      common stock at an exercise price of $1.75 per share. Our stockholders approved
      the exchange of the bridge note into common stock warrants and final documents
      were signed in September 2005.  This exchange was recorded during the
      first quarter of the fiscal year ended August 31, 2006.




**Series
      A Note Financing**




On
      February 24, 2006, we closed a Note and Warrant Purchase Agreement with certain
      institutional investors pursuant to which we sold $5.75 million of our series
      A
      senior secured convertible notes and original issue discount series A notes
      (“Series A Notes”) in a private placement transaction.   In the
      private placement, we received proceeds of approximately $4.1 million in cash
      (after deducting brokers’ commission but before payment of legal and other
      professional fees, the 15% original issue discount of $750,000 and the tendering
      of 50 shares of their 650 shares Series B preferred convertible stock with
      an
      aggregate face value of $500,000 by our sole series B preferred convertible
      stockholder).




The
      Series A Notes are secured by substantially all of our assets. The Series A
      Notes mature 24 months from issuance and are convertible at the option of the
      holder into our common stock at a fixed conversion price of $0.20 per share
      (which adjusted to $0.016 per share upon the issuance of series B subordinated
      secured convertible notes discussed in Note 14).  Beginning on
      September 1, 2006 and continuing thereafter on the first business day of each
      month, we must pay an amount to each holder of a Series A Note equal to 1/18th
      of the original principal payment of the note; provided, that if on any
      principal payment date the outstanding principal amount of the note is less
      than
      such principal installment amount, then we must pay to the holder of the note
      the lesser amount. We may make such principal installment amounts in cash or
      in
      registered shares of our common stock. If paid in common stock, certain
      conditions must be satisfied, and the number of registered shares to be paid
      to
      the holder must be an amount equal to the principal installment amount divided
      by eighty percent (80%) of the average of the closing bid price for the ten
      (10)
      trading days immediately preceding the principal payment date.




We
      currently are not in compliance with certain of our obligations relating to
      our
      Series A Notes, including our failure to maintain sufficient authorized shares
      to permit conversion of the notes and our failure to register the resale of
      the
      shares of common stock issuable upon conversion of the notes.  As of
      August 31, 2006, we have obtained waivers of compliance of these obligations
      from all of the note holders, other than one holder of $100,000 principal amount
      of the notes.





The
      purchasers of the Series A Notes (and the placement agent in the transaction)
      received the following common stock purchase warrants:





·
            Series A-7
                warrants to purchase 20,625,000 million shares in the aggregate of
                common stock at an initial exercise price of $0.40 per share subject
                to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock equivalents.  The
                exercise price of the series A-7 warrants adjusted to $0.016 per
                share
                upon the issuance of our series B subordinated secured convertible
                notes
                as discussed in Note 14.   The series A-7 warrants are
                exercisable for a seven-year period from the date of
                issuance.  1.9 million of these warrants are exercisable over 5
                years.





F-17


·
            Series B-4
                warrants to purchase 13,750,000 million shares in the aggregate of
                common stock at an initial exercise price of $0.90 per share subject
                to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock equivalents.  The
                exercise price of the series B-4 warrants adjusted to $0.016 per
                share
                upon the issuance of our series B subordinated secured convertible
                notes
                as discussed in Note 14.  The series B-4 warrants are
                exercisable for a four-year period beginning on the date a resale
                registration statement for the shares underlying the warrants is
                declared
                effective by the Securities and Exchange Commission.  1.3
                million of these warrants are exercisable over 5
                years.





·
            Series C-3
                warrants to purchase 27,500,000 million shares in the aggregate of
                common stock at an initial exercise price of $0.21 per share subject
                to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock equivalents.  The
                exercise price of the series C-3 warrants adjusted to $0.016 per
                share
                upon the issuance of our series B subordinated secured convertible
                notes
                as discussed in Note 14. The series C-3 warrants are exercisable
                for a
                three-year period from the date of issuance.  2.5 million of
                these warrants are exercisable over 5
                years.





**·**
            Series
                D-1 warrants (callable only at our option) to purchase 19,250,000
                shares
                in the aggregate of common stock at an exercise price per share equal
                to
                the lesser of: (a) $0.35 and (b) 90% of the average of the 5 day
                volume weighted average price of our common stock on the OTC Bulletin
                Board preceding the call notice, as defined in the
                warrant.





See
      additional discussion of this transaction in Note 10.





The
      following summarizes the Company’s notes payable by maturity dates at August 31,
      2006 (in thousands):





Less
                                                
                                                
                                                CarryingPrincipal
                                                
                                                
                                                Discount
                                                
                                                
                                                AmountFiscal
                                                    year ending August 31,
                                                2007
                                                
                                                $
                                                5,833
                                                
                                                
                                                
                                                (2,395
                                                )
                                                
                                                $
                                                3,4382008
                                                
                                                
                                                1,917
                                                
                                                
                                                
                                                (1,917
                                                )
                                                
                                                
                                                -Total
                                                    notes payable by maturity date
                                                
                                                
                                                $
                                                7,750
                                                
                                                
                                                $
                                                (4,312
                                                )
                                                
                                                $
                                                3,438





**Capital
      Leases  Payable**




We
      lease
      certain vehicles, computer equipment, and other equipment under capital
      leases.  As of August 31, 2006 and 2005, assets under capital leases
      included in “Property and equipment” on our Consolidated Balance Sheets, were
      $1,247,000 and $1,405,000, net of accumulated depreciation of $756,000 and
      $499,000 respectively.




F-18


The
      following is a schedule of our future minimum lease payments under capital
      leases together with the present value of the net minimum lease payments as
      of
      August 31, 2006 (in thousands).




Fiscal
                                      year ending August 31,2007
                                  
                                  $
                                  2322008
                                  
                                  
                                  1982009
                                  
                                  
                                  20Total
                                      minimum lease payments
                                  
                                  
                                  
                                  450Less:
                                      amount representing interest
                                  
                                  
                                  
                                  (27
                                  )Present
                                      value of net minimum lease payments
                                  
                                  
                                  $
                                  423
  **9.           INCOME
        TAXES**




The
      components of the income tax provision are as follows (in
      thousands).




Fiscal
                                  Year Ended August 31,2006
                              
                              
                              2005Current:Federal
                              
                              $
                              -
                              
                              
                              $
                              -State-
                              
                              
                              
                              -Deferred:FederalState
                              
                              
                              -
                              
                              
                              
                              -Income
                                  Tax Expense (Benefit)
                              
                              $
                              -
                              
                              
                              $
                              -


Deferred
      taxes are provided for those items reported in different periods for income
      tax
      and financial reporting purposes.  The net deferred tax asset has been
      fully reserved because of uncertainty regarding our ability to recognize the
      benefit of the asset in future years.  The tax effects of the
      temporary differences that give rise to significant portions of the deferred
      tax
      assets are as follows (in thousands).




F-19


Fiscal
                  Year Ended August 31,2006
              
              2005Deferred
                  tax assets:Deferred
                  revenue
              $
              596
              
              $
              803Allowance
                  for doubtful accounts
              
              48
              
              
              100Other
                  accrued liabilities
              
              27
              
              
              73Inventory
                  reserves
              
              38
              
              
              106Other
                  reserves
              
              104
              
              
              177Other
                  Intangible assets
              
              298
              
              
              418License
                  Intangible
              
              8,392
              
              
              9,116Net
                  operating loss carryforwards
              
              71,200
              
              
              66,669Gross
                  deferred tax assets
              
              80,703
              
              
              77,462Valuation
                  allowance
              
              (80,337
              )
              
              (76,977
              )Net
                  deferred tax assets
              
              366
              
              
              485Deferred
                  tax liabilities:Depreciation
              
              (366
              )
              
              (363
              )Fresh
                  Start Identified Intangibles
              
              -
              
              
              (122
              )Gross
                  deferred tax liabilities
              
              (366
              )
              
              (485
              )Net
                  deferred tax asset
              $
              -
              
              $
              -
  There
      was a
      net increase in the valuation allowance of $3.4 million during the year ended
      August 31, 2006.




The
      provision for
      income taxes is different than the amount computed using the applicable
      statutory federal income tax rate with the difference summarized below (in
      thousands).




Fiscal
                          Year Ended August 31,2006
                        
                        
                        2005Income
                            tax at federal statutory rate
                        
                        $
                        (7,095
                        )
                        
                        $
                        (5,325
                        )Valuation
                            allowance
                        
                        
                        3,360
                        
                        
                        
                        6,109Permanent
                            differences
                        
                        
                        3,554
                        
                        
                        
                        -Other
                        
                        
                        181
                        
                        
                        
                        (784
                        )Provision
                            for income taxes
                        
                        $
                        -
                        
                        
                        $
                        -
   At
        August 31,
        2006, we had net operating loss carryforwards aggregating approximately $209
        million that expire in various years between 2010 and 2026.  The
        utilization of these net operating losses will be limited pursuant to Internal
        Revenue Code Section 382 and may cause some amount of the carryforwards to
        expire unutilized.




**10.                   STOCKHOLDERS’
      EQUITY INSTRUMENTS AND RELATED MATTERS**





**Common
      and Preferred Stock**





As
      of
      August 31, 2005 we had 50,000,000 shares of common stock authorized, par value
      $0.01, and 2,000,000 shares of preferred stock authorized, par value
      $0.01.  We had 8,255,785 common stock shares issued and 7,325,937
      shares outstanding.  We had 5,000 Series A preferred shares issued and
      outstanding as described below.





As
      of
      August 31, 2006 we had 230,000,000 shares of common stock authorized, par value
      $0.01, and 2,000,000 shares of preferred stock authorized, par value
      $0.01.  We had 10,463,385 common stock shares issued and 9,533,437
      shares outstanding.  The Company had 600 Series B preferred shares
      issued and outstanding as described below.





F-20




**Series
      A Convertible Redeemable Preferred Stock**




On
      October 1, 2004, we closed the sale of 5,000 shares of Series A convertible
      preferred stock (“Series A convertible preferred stock “), with each preferred
      share having a face value of $1,000, for a total purchase price of
      $5,000,000.  Net cash proceeds received by us were $4,651,000 after
      payment of expenses.  The Series A convertible preferred stock was
      convertible into shares of our common stock at a conversion price of $2.00
      per
      share. We sold the Series A Preferred Stock to SDS Capital Group SPC, Ltd
      (“SDS”) pursuant to that certain Securities Purchase Agreement , dated October
      1, 2004, by and between us and SDS. The Series A Preferred Stock was issued
      to
      SDS pursuant to the exemption from the registration requirements of the
      Securities Act of 1933 as amended, provided by Regulation D promulgated there
      under.




On
      May
      31, 2005, we consummated a bridge loan and security agreement with SDS in which
      we issued a promissory note in the amount of $1.75 million to SDS (the “Bridge
      Note”). The Bridge Note was secured by our assets, accrued interest at 8% per
      annum and was due and payable on September 30, 2005.  The Bridge Note
      automatically exchanged into a common stock purchase warrant with a 5-year
      term
      to purchase 1,666,667 shares of common stock at an exercise price of $0.01
      per
      share and a common stock purchase warrant with  a 5-year term to
      purchase 700,000 shares of common stock at an exercise price of $1.75 per share
      (the “Bridge Warrants”) upon approval of our stockholders. Our stockholders
      approved the exchange of the Bridge Note into the Bridge Warrants at our August
      31, 2005 annual stockholders meeting. On September 2, 2005,  the
      Bridge Note was extinguished and exchanged for the Bridge Warrants.




As
      discussed below the Series A convertible preferred stock was converted into
      Series B convertible preferred stock in September 2005.




**Series
      B Convertible Redeemable Preferred Stock**




On
      September 2, 2005, we closed the sale of $6.5 million of preferred stock and
      common stock purchase warrants in a private placement transaction with SDS
      previously entered into on May 31, 2005.  In consideration for the
      issuance of the Series B convertible preferred stock, SDS paid us $750,000
      and
      returned to us all of the outstanding Series A convertible preferred stock
      with
      a face value of $5 million which was held by SDS.  We incurred an
      early redemption penalty of $750,000 related to the Series A convertible
      preferred stock.  Net cash proceeds received by us were approximately
      $443,000 after deduction of brokers’ commissions, accrued interest on the bridge
      note and other expenses.  The Series B convertible preferred stock is
      convertible into common stock at an original conversion price of $1.55 per
      share. SDS also received a common stock purchase warrant with a 5-year term
      to
      purchase 2 million shares at an exercise price of $1.75 per share. We used
      the
      net proceeds from the financing transaction to fund our business
      plan.  We are obligated to register the common stock issuable upon
      conversion of the Series B convertible preferred stock or exercise of the common
      stock purchase warrants for public resale under the Securities and Exchange
      Act
      of 1933.




On
      December 16, 2005, in consideration of our reducing the exercise price on
      certain warrants held by SDS from $0.67 to $0.30 per share, SDS exercised the
      warrants for the purchase of 1,125,000 shares of our common stock resulting
      in
      the receipt by us of cash proceeds in the amount of $337,500.  This
      repricing resulted in an increase in the net loss attributable to common
      shareholders of approximately $69,000.




The
      terms
      of the Series B convertible preferred stock are set forth in the Certificate
      of
      Designation, Preferences and Rights, the most significant of which are as
      follows:




***Ranking****.*  The
      Series B convertible preferred stock ranks senior to our common stock with
      respect to payment of dividends and amounts upon any liquidation, dissolution
      or
      winding up of the company.




***Dividends***.  Dividends
      accrue from the date of issuance of the Series B convertible preferred stock
      through August 31, 2008, and will be cumulative from such
      date.  Holders of shares of Series B convertible preferred stock will
      be entitled to receive cumulative dividends in an amount equal to 8% per year
      until September 1, 2006 and 3% per year thereafter, payable at the election
      of
      the holder of our Series B convertible preferred stock in cash or additional
      shares of Series B convertible preferred stock.




F-21


***Conversion****.*  Each
      holder of Series B convertible preferred stock has the right to convert its
      shares of Series B convertible preferred stock into shares of our common stock
      at an original conversion price of $1.55 per share of common
      stock.  The conversion price shall be adjusted in the event of stock
      splits, stock dividends and similar distributions and events affecting all
      of
      our common stockholders on a pro rata basis so that the conversion price is
      proportionately increased or decreased to reflect the event.  In
      addition, if there is a change of control (as discussed below), then each holder
      of Series B convertible preferred stock has the right to receive upon
      conversion, in lieu of common stock otherwise issuable, such shares of stock,
      securities or other property as would have been issued or payable in such change
      of control with respect to the number of shares of common stock which would
      have
      been issuable upon conversion had such change of control not taken place
      (subject to appropriate revisions to preserve the economic value of the Series
      B
      preferred shares before the change of control).  We have to provide 10
      days written notice to the holders of its Series B convertible preferred stock
      before we may effect any change of control.  In no event can any
      holder of Series B convertible preferred stock convert shares of Series B
      convertible preferred stock into shares of common stock or dispose of any shares
      of Series B convertible preferred stock to the extent that such conversion
      or
      disposition would result in the holder and its affiliates together beneficially
      owning or having the power to vote more than 9.99% of our outstanding shares
      of
      common stock.




***Redemption
      by Holder***.  The holders of shares of Series B
      convertible preferred stock have the right to cause us to redeem any or all
      of
      its shares at a price equal to 115% of face value (150% of the face value if
      the
      redemption event is a change of control event discussed below), plus accrued
      but
      unpaid dividends in the following events:




·
            Our
                common stock is suspended from trading or is not listed for trading
                on at
                least one of, the New York Stock Exchange, the American Stock Exchange,
                The NASDAQ National Market or The NASDAQ SmallCap Market for an aggregate
                of 10 or more trading days in any twelve-month
                period;




·
            The
                initial registration statement required to be filed by us pursuant
                to the
                registration rights agreement has not been declared effective by
                April 30,
                2006 or such registration statement, after being declared effective,
                cannot be utilized by the holders of Series B convertible preferred
                stock
                for the resale of all of their registerable securities for an aggregate
                of
                more than 15 days in the aggregate;




·
            We
                fail to remove any restrictive legend on any certificate or any shares
                of
                common stock issued to the holders of Series B convertible preferred
                stock
                upon conversion of the Series B convertible preferred stock as and
                when
                required and such failure continues uncured for five business
                days;




·
            We
                provide written notice (or otherwise indicate) to any holder of Series
                B
                convertible preferred stock, or state by way of public announcement
                distributed via a press release, at any time, of our intention not
                to
                issue, or otherwise refuse to issue, shares of common stock to any
                holder
                of Series B convertible preferred stock upon conversion in accordance
                with
                the terms of the certificate of designation for our Series B convertible
                preferred stock;




·
            We
                or any of our subsidiaries make an assignment for the benefit of
                creditors, or applies for or consents to the appointment of a receiver
                or
                trustee for us or for a substantial part of our property or
                business;




·
            Bankruptcy,
                insolvency, reorganization or liquidation proceedings or other proceedings
                for the relief of debtors shall be instituted by or against us or
                any of
                our subsidiaries which shall not be dismissed within 60 days of their
                initiation; or




·
            We:




·
            Sell,
                convey or dispose of all or substantially all of our
                assets;




F-22


·
            Merge
                or consolidate with or into, or engage in any other business combination
                with, any other person or entity, in any case which results in either
                (i)
                the holders of our voting securities immediately prior to such transaction
                holding or having the right to direct the voting of fifty percent
                (50%) or
                less of our total outstanding voting securities of or such other
                surviving
                or acquiring person or entity immediately following such transaction
                or
                (ii) the members of our board of directors comprising fifty percent
                (50%)
                or less of the members of our board of directors or such other surviving
                or acquiring person or entity immediately following such
                transaction;




·
            Either
                (i) fail to pay, when due, or within any applicable grace period,
                any
                payment with respect to any indebtedness in excess of $250,000 due
                to any
                third party, other than payments contested by us in good faith, or
                (ii)
                suffer to exist any other default under any agreement binding us
                which
                default or event of default would or is likely to have a material
                adverse
                effect on our business, operations, properties, prospects or financial
                condition;




·
            Have
                fifty percent (50%) or more of the voting power of our capital stock
                owned
                beneficially by one person, entity or
“group”;




·
            Experience
                any other change of control not otherwise addressed above;
                or




*·*
            Otherwise
                breach any material term under the private placement transaction
                documents, and if such breach is curable, shall fails to cure such
                breach
                within 10 business days after we have been notified thereof in writing
                by
                the holder.




For
      purposes of the Series B
      convertible preferred stock, a change of control means any sale, transfer or
      other disposition of all or substantially all of our assets, the adoption of
      a
      liquidation plan, any merger or consolidation where we are not the surviving
      entity with our capital stock unchanged, any share exchange where all of our
      shares are converted into other securities or property, any sale or issuance
      by
      us granting a person the right to acquire 50% or more of our outstanding common
      stock, any reclassification of our common stock, and the first day on which
      the
      current member of our board of directors cease to represent at least a majority
      of the members of our board of directors then serving.




***Redemption
      by us***.  If, at any time after September 2, 2006 and
      before September 2, 2009, during a period of at least twenty (20) consecutive
      trading days (a) the closing trading price of our common stock is at least
      200%
      of the conversion price then in effect and (b) the trading volume and trading
      price of our common stock result in a product of at least $350,000 on each
      trading day, then we shall have the right to redeem all shares of Series B
      convertible preferred stock then outstanding at price per share equal to 200%
      of
      the sum of the face amount of such share plus all accrued and unpaid dividends
      thereon through the closing date of such redemption.




***Restricted
      Actions***.  So long as any shares of Series B convertible
      preferred stock are outstanding, we are not permitted to take any of the
      following corporate actions (whether by merger, consolidation or otherwise)
      without first obtaining the approval of the majority holders of Series B
      convertible preferred stock:




·
            Alter
                or change the rights, preferences or privileges of the Series B
                convertible preferred stock, or increase the authorized number of
                shares
                of Series B convertible preferred
                stock;




·
            Amend
                our certificate of incorporation or
                bylaws;




·
            Issue
                any shares of Series B convertible preferred stock other than pursuant
                to
                the Securities Purchase Agreement with the selling
                stockholder;




·
            Redeem,
                repurchase or otherwise acquire, or declare or pay any cash dividend
                or
                distribution on, any junior
                securities;




·
            Increase
                the par value of our common stock;




·
            Sell
                all or substantially all of our assets or stock, or consolidate or
                merge
                with another entity;




F-23


·
            Enter
                into or permit to occur any change of control
                transaction;




·
            Sell,
                transfer or encumber technology, other than licenses granted in the
                ordinary course of business;




·
            Liquidate,
                dissolve, recapitalize or
                reorganize;




·
            Authorize,
                reserve, or issue common stock with respect to any plan or agreement
                that
                provides for the issuance of equity securities to our employees,
                officers,
                directors or consultants in excess of 250,000 shares of common
                stock;




·
            Change
                our principal business;




·
            Issue
                shares of our common stock, other than as contemplated by the certificate
                of designation or by the warrants issued to the selling
                stockholder;




·
            Increase
                the number of members of our board of directors to more than 7 members,
                or, if no Series B convertible preferred stock director has been
                elected,
                increase the number of members of our board of directors to more
                than 6
                members;




·
            Alter
                or change the rights, preferences or privileges of any of our capital
                stock so as to affect adversely the Series B convertible preferred
                stock;




·
            Create
                or issue any senior securities or pari passu securities to the Series
                B
                convertible preferred stock;




·
            Except
                for the issuance of debt securities to, or incurrence of indebtedness
                from, a recognized financial institution in an aggregate amount not
                exceeding $5,000,000 and which, in the case of debt securities, are
                not
                convertible securities, issue any debt securities or incur any
                indebtedness that would have any preferences over the Series B convertible
                preferred stock upon our liquidation, or redeem, repurchase, prepay
                or
                otherwise acquire any of our outstanding debt securities or indebtedness,
                except as expressly required by the terms of such securities or
                indebtedness;




·
            Make
                any dilutive issuance;




·
            Enter
                into any agreement, commitment, understanding or other arrangement
                to take
                any of the foregoing actions; or




·
            Cause
                or authorize any of our subsidiaries to engage in any of the foregoing
                actions.







***Voting
      Rights***.  Except as otherwise provided in the certificate
      of designation and as otherwise required by the Delaware General Corporation
      Law, each holder of Series B convertible preferred stock has the right to vote
      on all matters before the common stockholders on an as-converted basis voting
      together with the common stockholders as a single class.  This voting
      right is subject to the limitation that in no event may a holder of shares
      of
      Series B convertible preferred stock (or warrants discussed below) have the
      right to convert shares of Series B convertible preferred stock into shares
      of
      our common stock or to dispose of any shares of Series B convertible preferred
      stock to the extent that such right to effect such conversion or disposition
      would result in the holder and its affiliates together beneficially owning
      or
      having the power to vote more than 9.99% of our outstanding shares of common
      stock.  The holders of a majority of the Series B convertible
      preferred stock also have the right to appoint one representative to our board
      of directors and are entitled to designate one observer to the meetings of
      our
      board of directors and committees.





***Warrants
      Issued to Selling
      Stockholder***.  In connection with the issuance of shares
      of Series B convertible preferred stock to SDS, we also issued to SDS three
      warrants to purchase shares of our common stock.







F-24


With
      respect to the first warrant, the holder has the right to purchase up to
      1,666,667 shares of our common stock at an exercise price equal to $0.01 per
      share.  The first warrant may be exercised at any time until September
      2, 2010.




With
      respect to the second warrant, the holder has the right to purchase up to
      700,000 shares of our common stock at an exercise price equal to $1.75 per
      share.  The second warrant may be exercised at any time until
      September 2, 2010.  The remaining terms of the second warrant are
      identical to the first warrant except the second warrant contains certain
      anti-dilution price protections in the event of a dilutive stock issuance (in
      addition to anti-dilution protections for stock splits and other similar pro
      rata events).




With
      respect to the third warrant, the holder has the right to purchase up to
      2,000,000 shares of our common stock at an exercise price equal to $1.75 per
      share.  The third warrant may be exercised at any time after March 2,
      2006 until September 2, 2010.  The remaining terms of the third
      warrant are identical to the first warrant except (i) the third warrant contains
      a provision which requires us to obtain the consent of the holder of the third
      warrant prior to any issuing any of our securities in a dilutive issuance and
      (ii) cashless exercise of the third warrant is not available until September
      2,
      2006. All three warrants contain a provision that prevents any holder from
      exercising the warrant to the extent that such exercise would result in such
      holder beneficially owning or having the right to vote more than 9.99% of our
      outstanding shares of common stock.




In
      addition to the warrants discussed above, SDS also holds two warrants for a
      total of 2,366,667 common shares which were issued in October 2004 and which
      are
      described more fully in the “Description of Capital Stock” section of our
      registration statement on Form S-3, filed by us with the Commission on November
      24, 2004.




***Registration
      Rights Agreement***.  In connection with the issuance of
      Series B convertible preferred stock and warrants to SDS, we entered into a
      registration rights agreement, dated September 2, 2005, with SDS, whereby we
      granted certain registration rights to SDS.  On or prior to October 2,
      2005, we were obligated to file a registration statement on Form S-3 covering
      10,000,000 shares of common stock that SDS may acquire upon conversion of the
      Series B convertible preferred stock or upon exercise of the
      warrants.  SDS and we subsequently amended the Registration Rights
      Agreement to extend the date by which we were obligated to file a registration
      statement on Form S-3 from October 2, 2005 to February 28, 2006. As per the
      amended registration rights agreement, we could face a liquidated damages claim
      by SDS if (i) the initial registration statement is not declared effective
      by
      the SEC on or prior to April 30, 2006, (ii) after the effectiveness of the
      registration statement, sales of common stock cannot be made by SDS due to
      a
      stop order by the SEC or our need to update the registration statement, or
      (iii)
      our common stock is not listed on NASDAQ, the New York Stock Exchange or the
      American Stock Market.  The liquidated damages for the first 30 days
      equals 3% of the purchase price of the Series B convertible preferred stock
      and
      equal 1.5% for each 30 days thereafter of non-compliance.  In addition
      to the liquidated damages provision discussed above, SDS can require the
      redemption of its shares of Series B convertible preferred stock upon certain
      default events.  SDS subsequently waived prior penalties and agreed to
      allow the registration of such shares to occur with the registration statement
      on Form SB-2 registering shares of the Series A convertible Notes described
      below.  We registered 4,062,500 shares on Form SB-2 filed April 10,
      2006 that went effective April 29, 2006.  We intend to register the
      remaining shares which we are obligated to register under the registration
      rights agreement upon a new SB-2 filing registering the warrant shares in
      connection with the “Note and Warrant Purchase Agreement” below.





SDS
      also
      has the right to piggy-back on to the registration statements filed by us
      registering shares of our common stock (other than Form S-8 and Form S-4
      registration statements filed by us), subject to share cut-backs by the
      underwriters (if an underwritten public offering), provided that at least 25%
      of
      the shares requested for inclusion in the registration statement by SDS must
      be
      included in such underwritten public offering.





We
      are in
      violation of the registration rights agreement; however, SDS waived this right
      on November 24, 2006.





F-25




**Accounting
      for Sale of Series B
      Convertible Redeemable Preferred Stock and Exchange of Note Payable for
      Warrants**





The
      gross
      proceeds from the sale of the 650 shares of Series B convertible preferred
      stock
      was $6,500,000.  The proceeds were used to redeem 5,000 shares of
      Series A convertible preferred stock at a face value of
      $5,000,000.  The premium incurred upon redemption was
      $750,000.  The carrying value on the Series A convertible preferred
      stock was $3,542,000; thus, we recorded a loss on redemption in September,
      2005
      of approximately $2,208,000.  The loss is considered a deemed dividend
      and is reported after net loss and before net loss attributable to common
      stockholders.





Approximately
      $975,000 of the net proceeds were allocated to the associated third warrant
      based on its relative fair value as computed using the Black-Scholes pricing
      model; thus, the Series B convertible preferred stock had an original carrying
      value of $5,254,000, net of transaction costs totaling approximately
      $271,000.  The net cash proceeds received by us after redemption of
      the Series A convertible preferred stock and payment of expenses and interest
      on
      the note payable was $443,000.  As discussed above, the holders of the
      Series B convertible preferred stock have the right to require us to redeem
      any
      or all of its outstanding preferred shares upon a change of control or certain
      other contingent events that could be outside our control. Thus, the Series
      B
      convertible preferred stock is carried outside of permanent equity in the
      mezzanine section of our balance sheet.






On
      December 16, 2005, in consideration of our reducing the exercise price on
      certain warrants held by SDS from $0.67 to $0.30 per share, SDS exercised the
      warrants for the purchase of 1,125,000 shares of our common stock resulting
      in
      the receipt by us of cash proceeds in the amount of $337,500.  This
      repricing resulted in an increase in the net loss attributable to common
      shareholders of approximately $69,000.




On
      December 23, 2005, we consummated the sale and assignment of certain of our
      patents and pending patent applications to Vehicle IP LLC in exchange for the
      payment by Vehicle IP LLC to us of $500,000.




**The
      Series A Note and Warrant Purchase Agreement**




As
      discussed in Note 8, on February 24, 2006, we closed a Note and Warrant Purchase
      Agreement dated February 23, 2006 (the “Purchase Agreement”) with several
      institutional investors as purchasers.  Each of these purchasers was
      an “accredited investor” under the SEC rules.




Under
      the
      terms of the Purchase Agreement, the purchasers have purchased from
      us:




·
            Series
                A Senior Secured Convertible Promissory Notes in the aggregate principal
                amount of $5,000,000, convertible into shares of our common stock
                (the
                “Series A Notes”); and




·
            Original
                Issue Discount Senior Secured Convertible Promissory Notes in the
                aggregate principal amount of $750,000, convertible into shares of
                our
                common stock (the “OID Notes”).  Unless otherwise specified, the
                Series A Notes and the OID Notes are collectively referred to as
                the
                “Notes”).




In
      addition, pursuant to the Purchase Agreement, the following warrants to purchase
      shares of our common stock were issued to each purchaser on February 24,
      2006:




·
            Series A-7
                warrants to purchase shares of our common stock equal to 75% of the
                number
                of shares of our common stock issuable upon conversion of such purchaser’s
                Series A Note (approximately 18.8 million shares in the aggregate)
                at an
                exercise price per share equal to $0.40 (and subsequently reduced
                to
                $0.016) with a term of 7 years following the closing
                date;




·
            Series
                A-7 warrants issued to our placement agents to purchase shares of
                our
                common stock equal to equal to 10% of the number of Series A-7 warrants
                issued (approximately 1.9 million shares in the aggregate) at an
                exercise
                price per share equal to $0.40 (and subsequently reduced to $0.016)
                with a
                term of 5 years following the closing
                date;




·
            Series B-4
                warrants to purchase shares of our common stock equal to 50% of the
                number
                of conversion shares issuable upon the conversion of such purchaser’s
                Series A Note on the date of issuance of the note (approximately
                12.5
                million shares in the aggregate) at an exercise price per share equal
                to
                $0.90 (and subsequently reduced to $0.016) with a term of 4 years
                following the effective date of the registration statement providing
                for
                the resale of the conversion shares and the share of our common stock
                issuable upon exercise of the
                warrants;




·
            Series
                B-4 warrants issued to our placement agents to purchase shares of
                our
                common stock equal to equal to 10% of the number of Series B-4 warrants
                issued (approximately 1.3 million shares in the aggregate) at an
                exercise
                price per share equal to $0.90 (and subsequently reduced to $0.016)
                with a
                term of 5 years following the closing
                date;






F-26




·
            Series C-3
                warrants to purchase a number of shares of our common stock equal
                to 100%
                of the number of conversion shares issuable upon the conversion of
                such
                purchaser’s Series A Note on the date of issuance of this note
                (approximately 25.0 million shares in the aggregate) at an exercise
                price
                per share equal to $0.21 (and subsequently reduced to $0.016) with
                a term
                of 3 years following the closing
                date;




·
            Series
                C-3 warrants issued to our placement agents to purchase shares of
                our
                common stock equal to equal to 10% of the number of Series C-3 warrants
                issued (approximately 2.5 million shares in the aggregate) at an
                exercise
                price per share equal to $0.40 (and subsequently reduced to $0.016)
                with a
                term of 5 years following the closing
                date;




·
            Series D-1
                warrants (callable only at our option) to purchase a number of our
                shares
                of common stock equal to 70% of the number of conversion shares issuable
                upon conversion of such purchaser’s Series A Note (approximately 17.5
                million shares in the aggregate) at an exercise price per share equal
                to
                the lesser of: (a) $0.35 and (b) 90% of the average of the 5 day
                volume weighted average price of our common stock on the OTC Bulletin
                Board preceding the call notice, as defined in this
                warrant;




·
            Series
                D-1 warrants issued to our placement agents to purchase shares of
                our
                common stock equal to equal to 10% of the number of Series D-1 warrants
                issued (approximately 1.8 million shares in the aggregate) at an
                exercise
                price per share equal to the lesser of: (a) $0.35 and (b) 90% of
                the average of the 5 day volume weighted average price of our common
                stock
                on the OTC Bulletin Board preceding the call notice, as defined in
                this
                warrant;




·
            10%
                Placement Agent Warrant issued to our placement agents to purchase
                shares
                of our common stock equal to equal to 10% of the number of shares
                of
                common stock issuable to the note holders upon conversion of theirs
                notes
                (approximately 2.5 million shares in the aggregate) at an exercise
                price
                per share equal to $0.20 with a term of 5 years following the
                closing.




The
      issuance and purchase of the notes and warrants was effected in accordance
      with
      and in reliance upon the exemption from securities registration afforded by
      Regulation D promulgated under the Securities Act of 1933, and upon such other
      exemption from the registration requirements of this statute as may be available
      with respect to the investments made pursuant to the Purchase
      Agreement.




A
      portion
      of the purchase price in the amount of $500,000 received under the Purchase
      Agreement was delivered by SDS Capital Group SPC, Ltd. by exchanging 50 shares
      of our Series B convertible preferred stock held by this entity with an
      aggregate face value of $500,000.




*Certain
      Covenants*




Under
      the
      terms of the Purchase Agreement, our most significant obligations include that
      we will:




·
            Cause
                our common stock to continue to be registered under the Securities
                Exchange Act of 1934, continue the listing or trading of our common
                stock
                on the OTC Bulletin Board and to take all actions required to allow
                the
                purchasers to effect resales under
                Rule 144;




·
            (If
                we stop filing our periodic reports with the Securities and Exchange
                Commission) furnish annual and quarterly reports to the purchasers
                as long
                as they own or are obligated to purchase these
                securities;






F-27




·
            Use
                the net proceeds from the sale of the securities for working capital
                and
                general corporate purposes;




·
            Not
                provide any purchaser with any material non-public
                information;




·
            Acknowledge
                that the securities, under certain circumstances, may be pledged
                by the
                purchasers;




·
            Not
                declare or pay dividends or distributions on our common stock as
                long as
                any notes or warrants remain
                outstanding;




·
            As
                long as any notes or warrants remain outstanding, have authorized
                and
                reserved for issuance 120% of the aggregate number of shares of our
                common
                stock needed for the issuance of the conversion shares and the warrant
                shares;




·
            Issue
                irrevocable instructions to our transfer agent to issue certificates
                for
                the conversion shares and the warrant shares with a restrictive legend
                regarding the fact that such shares are not registered and are restricted
                securities;




·
            Not
                sell or dispose of any of our business assets without the prior written
                consent of the holders of a majority of the principal amounts of
                the notes
                outstanding;




·
            Agree
                that any business assets we acquire in the future will become part
                of the
                collateral securing our obligations under the
                notes;




·
            Maintain
                a directors and officers liability insurance policy with coverage
                equal to
                or greater than $3,000,000; and




·
            With
                regard to subsequent financings that, for a period of 1 year following
                the
                closing date; notify the purchasers in writing of the terms and conditions
                of any proposed offer or sale to any third party of any of our common
                stock or securities convertible into our common stock, which notice
                will
                provide each purchaser an option, during the 10 trading days after
                the
                notice, to inform us whether the purchaser will purchase up to its
“pro
                rata” shares of all of the securities being offered in this subsequent
                financing.




·
            In
                this context “pro rata” means the percentage obtained by
                dividing:




·
            The
                principal amount of the notes purchased by the purchaser on the closing
                date, by




·
            The
                total principal amount of all the notes purchased by all of the purchasers
                on the closing date with regard to “permitted financings” that such
                permitted financings, as defined below will not be considered a subsequent
                financing for these purposes; permitted financings
                include:




·
            Securities
                issued other than for cash in connection with a merger or
                acquisition;




·
            Securities
                issued prior to the closing date or issued pursuant to the conversion
                of
                the notes;




·
            Our
                common stock issued pursuant to the
                warrants;




·
            Securities
                issued in connection with strategic licensing or partnering
                agreements;




·
            Our
                common stock issued pursuant to our stock option plans or our employee
                stock purchase plans;




·
            Any
                warrants issued to the placement agent for the
                offering;




·
            Our
                common stock issued in connection with consulting or advisory
                services;




·
            The
                payment of any principal in shares of our common stock pursuant to
                the
                notes;




·
            As
                long as the notes remain outstanding, allow the purchasers to exchange
                their notes for any securities issued in a subsequent financing if
                such
                securities are on terms more favorable than the terms governing the
                notes.






F-28


Pursuant
      to the terms of the Purchase Agreement, we have agreed to indemnify the
      purchasers and certain of their related parties against all losses resulting
      from any inaccuracy in or breach of our representations, warranties or
      agreements made in the Purchase Agreement.  The purchasers, severally
      but not jointly, have agreed to indemnify us and certain of our related parties
      against all losses resulting from any inaccuracy in or breach of the
      representations, warranties and agreements of the purchaser made in the Purchase
      Agreement.  The maximum aggregate liability of each purchaser for such
      indemnification is limited to the portion of the total purchase price paid
      by
      the purchaser under the Purchase Agreement.  The Purchase Agreement
      and each of the notes, warrants and other documents contemplated thereby are
      governed by New York law.





**Material
      Terms of the Senior Secured Convertible Notes**





We
      issued
      these notes pursuant to the Purchase Agreement, in which we issued, as maker,
      the notes on February 24, 2006, the issuance date, in the principal amount
      of $5,000,000.  As described below, these notes are convertible into
      shares of our common stock and have a maturity date of February 24,
      2008.





Beginning
      on September 1, 2006 and after that on the first business day of each
      month, a principal payment date, we must pay to the holder of the note an amount
      equal to 1/18th
      of the original principal amount of the note, or the principal installment
      amount.  However, if on any principal payment date the outstanding
      principal on the note is less than the principal installment amount, then we
      must pay the holder the lesser amount.  We may make payment in cash or
      in shares of our common stock, provided that a registration statement covering
      the resale of such shares has been declared effective by the SEC.





*Option
      to Pay with Shares in Certain Circumstances*




If
      we
      choose to pay the principal installment amount in shares of our common stock,
      we
      must pay the number of shares in an amount equal to the principal installment
      amount divided by 80% of the average closing bid price for the 10 trading days
      immediately prior to the principal payment date.  We have this option
      only if, among other things, the convertible securities have been duly
      registered on an effective registration statement and trading in our common
      stock has not been suspended on the OTC Bulletin Board or other
      exchange.





Our
      obligations as the maker of these notes are secured by a continuing security
      interest in certain of our assets.





*Events
      of Default*




The
      amounts payable under the notes may be accelerated or increased upon the
      occurrence of an event of default, which includes:




·
            Our
                failure to make the principal installment amount on a designated
                principal
                payment date;




·
            The
                failure of the registration statement to be declared effective by
                the
                Securities and Exchange Commission on or prior to August 25,
                2006;




·
            The
                suspension from listing or failure of our common stock to be listed
                on the
                OTC Bulletin Board or one of the major
                exchanges;




·
            Our
                notice to the holder of our inability to comply or intention not
                to comply
                with proper requests for conversion of the
                notes;




·
            Our
                failure to timely deliver shares of common stock upon conversion,
                to file
                a registration statement, or to make payment of fees under the notes,
                the
                Purchase Agreement or the related registration rights
                agreement;






F-29




·
            The
                lapsing of the effectiveness of the registration statement for a
                period of
                  10 consecutive trading days;




·
            Our
                default in the performance of any material covenant in the notes,
                the
                Purchase Agreement, the registration rights agreement or any other
                ancillary documents;




·
            Our
                making of a false or incorrect representation or warranty in the
                Purchase
                Agreement, the registration rights agreement or any other ancillary
                documents;




·
            Our
                default in any payment of principal or interest on the indebtedness
                represented by the notes, or default in the observance or performance
                of
                any other agreement relating to such indebtedness in excess of
                $100,000;




·
            Our
                application for appointment of a receiver or liquidator or filing
                a
                petition in bankruptcy or other similar relief which is not dismissed
                within 30 days;




·
            The
                filing of a proceeding against us seeking the liquidation, reorganization,
                or dissolution of us or similar relief which is not dismissed within
                30
                days;




·
            Our
                failure to instruct our  transfer agent to remove any legends
                from shares of common stock eligible to be sold under Rule 144 of
                the
                Securities Act of 1933 and to issue such shares to the
                holder;




·
            Our
                failure to pay any amounts due to the holder under the notes, the
                Purchase
                Agreement or the registration rights agreement within three (3) business
                days of the due date;




·
            The
                occurrence of an event of default under any of the other notes
                contemplated by the Purchase Agreement, known as a cross-default
                provision; and




·
            Our
                failure to obtain stockholder approval to increase the authorized
                shares
                of common stock in accordance with the Purchase
                Agreement.




·
            If
                one of these events of default has occurred, the holder
                may:




·
            Declare
                the entire unpaid principal balance of the notes due and it will
                be
                accelerated;




·
            Demand
                that the principal amount of the notes then outstanding be converted
                into
                shares of our common stock at the conversion price discussed in more
                detail below; and/or




·
            Exercise
                any of the holder’s other rights or remedies under the transaction
                documents or applicable law.  We must pay interest on demand on
                the notes upon an event of default from the date of the default until
                the
                date of cure at the lesser of 10% and the maximum per annum legal
                rate.




*Conversion*




The
      notes
      contemplate both a voluntary conversion and a mandatory
      conversion.  Under the voluntary conversion, at the option of the
      holder the notes will be convertible in whole or in part into that number of
      shares of our common stock determined by dividing:  (i) that
      portion of the outstanding balance under the notes as of the date the holder
      chooses to convert; by (ii) the conversion price then in effect (the
      initial conversion price under the notes is $0.20), as it may be adjusted under
      the terms of the notes.  The term mandatory conversion date is the
      date following the effective date of the registration statement on which the
      closing bid price is greater than 250% of the conversion price for a period
      of
      12 consecutive trading days and the average daily trading for such 12
      consecutive trading days exceeds 750,000 shares of common stock.  On
      the mandatory conversion date, we may, upon 5-business days prior notice to
      the
      holder, cause the principal amount of the notes to convert into a number of
      shares of our common stock equal to the quotient of:




·
            The
                principal amount of the notes outstanding on the mandatory conversion
                date; divided by




·
            The
                conversion price in effect on the mandatory conversion date; however,
                in
                order to cause this conversion the following must be
                true:






F-30




·
            The
                registration statement must be effective 30 days immediately prior
                to the
                mandatory conversion date;




·
            Trading
                in our common stock must not have been suspended by the OTC Bulletin
                Board
                or other relevant exchange;




·
            No
                event of default must have occurred and be
                continuing;




·
            This
                mandatory conversion must not violate the note provisions regarding
                the
                ownership cap as described below,
                and




·
            We
                must not be in possession of any material non-public
                information.  The mandatory conversion date will be extended
                during the time of occurrence of a triggering event as described
                below.




If,
      because the registration statement has not been filed or its effectiveness
      has
      been suspended, a holder is unable to trade any of our common stock, the holder
      will have the option, within 10 trading days after the expiration of such
      black-out period, of using the conversion price applicable on such conversion
      date or any conversion price selected by the holder that would have been
      applicable if the conversion date had been at an earlier time during such
      black-out period or within the 10 trading days after that period.




In
      order
      to make the holder whole from any economic loss resulting in our failure timely
      to deliver the conversion securities, we have agreed in such event to pay to
      the
      holder in cash, and as liquidated damages, an amount per trading day for each
      trading day until the shares are delivered, along with interest on such amount
      at a rate of 10% per annum, equal to the greater of:




·
            (a)
                1% of the principal amount of the notes requested to be converted
                for the
                first 5 trading days after the delivery date; and (b) 2% of the
                principal amount of the notes requested to be converted for each
                trading
                day after that; and




·
            $2,000
                per day.




In
      addition, if we fail to deliver certificates representing the convertible
      securities on or before the delivery date and if after that date the holder
      is
      required by its broker to purchase shares of our common stock to deliver in
      satisfaction of a sale by the holder of the convertible securities which the
      holder expected to receive upon proper conversion, or a buy-in, then we
      must:  pay in cash to the holder the amount which such holder had to
      come out of pocket to cover the open market purchase in excess of the price
      at
      which the sell order giving rise to such purchase obligation was
      executed.





*Limitation
      of Beneficial Ownership of Our Shares*





Subject
      to waiver by the holder under certain circumstances upon 61 days notice to
      us,
      the holder may not convert all or any portion of the notes if the number of
      shares of convertible securities, when combined with all other shares of our
      common stock held by the holder:  (i) would result in the holder
      beneficially owning more than 4.9% of all of our common stock then outstanding;
      or (ii) would result in the holder beneficially owning  more than
      9.9% of all of our common stock then outstanding.


*Conversion
      Price Adjustments*




The
      conversion price under the notes is subject to adjustment from time to time
      to
      reflect:




·
            Stock
                splits and combinations;




·
            Certain
                dividends and distributions;




·
            Reclassifications;
                exchanges or substitutions;




·
            Reorganizations,
                mergers, sales of assets;




·
            Issuances
                of additional shares of common stock (on a full-ratchet anti-dilution
                basis); and




·
            Issuances
                of common stock equivalents.






F-31




In
      the
      event of an issuance of additional shares of common stock, or an issuance of
      common stock equivalents, a “full ratchet” adjustment will be made to the
      conversion price.  This means effectively that the conversion price
      will be reduced to the consideration per share paid for the additional shares
      of
      common stock in question.





We
      are
      not obligated to make any adjustments to the conversion price in connection
      with:




·
            Securities
                issued other than for cash in connection with a merger or
                acquisition;




·
            Securities
                issued pursuant to conversion or exercise of securities outstanding
                prior
                to the date of the notes and the
                warrants;




·
            Shares
                of our common stock issuable upon exercise of the
                warrants;




·
            Securities
                issued in connection with strategic license or partnering
                agreements;




·
            Shares
                of our common stock issued in connection with our stock option plans
                or
                employee stock purchase plans;




·
            Warrants
                issued to the placement agent for the
                offering;




·
            Shares
                of our common stock issued in connection with consulting or advisory
                services; and




·
            The
                payment of any principal in shares of our common stock pursuant to
                the
                notes.




*Prepayment*




The
      notes
      require several types of prepayment provisions, which reference the two
      following terms:  major transaction and triggering
      event.  The notes define a major transaction as:




·
            Our
                merger or consolidation with or into another entity involving a change
                of
                control;




·
            Our
                sale or transfer of more than 50% of our assets;
                or




·
            The
                closing of a tender offer for more than 50% of the outstanding shares
                of
                our common stock.




·
            The
                notes include the following in the definition of a triggering
                event:




·
            The
                effectiveness of the registration statement for the common stock
                issued on
                conversion of the notes lapses for any reason or it is unavailable
                for the
                resale of our common stock for a period of 20 consecutive trading
                days;




·
            The
                suspension from listing of our common stock on the OTC Bulletin Board
                or
                any other exchange for a period of 5 trading
                days;




·
            Our
                notice to any holder of our inability or intention not to comply
                with
                requests for conversion;




·
            Our
                failure to comply with a holder’s conversion notice within 10 business
                days of our receipt of it;




·
            Our
                deregistration of our common stock;




·
            Our
                completion of a “going private” transaction as a result of which our
                common stock is no longer registered under the exchange act;
                or




·
            Our
                breach of any of our representations, warranties and covenants made
                in the
                Purchase Agreement, the notes or any ancillary
                documents.




On
      the
      occurrence of an event of default, the holder has the right to require us to
      prepay in cash all or a portion of the notes at a price equal to 120% of the
      principal amount of the notes at the time of the
      request.  Simultaneously with the occurrence of a major transaction,
      the holder has the right to require us to prepay all or a portion  of
      the holder’s notes at a price equal to 100% of the principal amount of the
      notes.







F-32


For
      purposes of the prepayment option upon a triggering event, the term volume
      the
      weighted average price means for any date the daily volume weighted average
      price of our common stock for such date on the OTC Bulletin Board; or the “Pink
      Sheets”, or as determined by an independent appraisal if the stock is not then
      traded on one of the markets.  After a triggering event occurs, the
      holder has the right to require us to prepay all or a portion of the notes
      in
      cash at a price equal to the sum of:





·
            The
                greater of:




·
            125%
                of the principal amount of the notes;
                and




·
            If
                the holder cannot get the benefit of its conversion rights and the
                ability
                to effect the resale of shares of our common stock issuable upon
                conversion, the aggregate principal amount of the notes divided by
                the
                conversion price on:




·
            The
                date the prepayment price is demanded or due;
                or




·
            The
                date the prepayment price is paid in full, whichever is less, multiplied
                by the volume the weighted average price
                on:




·
            The
                date the prepayment price is demanded or otherwise due;
                or




·
            The
                date the prepayment price is paid in full, whichever is greater;
                and




·
            All
                other costs or expenses due in respect of the notes and the other
                transaction documents.




No
      sooner
      than 15 days nor later than 10 days prior to the completion of a major
      transaction we must deliver notice of it to the holder.  At any time
      after receipt of such notice, the holder may require us to prepay the notes
      immediately.  Within 1 business day after the occurrence of a
      triggering event, we must deliver notice of it to the holder.  At any
      time after the earlier of:




·
            The
                holder’s receipt of our notice; or




·
            The
                holder’s becoming aware of a triggering event, the holder may require us
                to prepay all of the notes on a pro rata basis.  We must deliver
                the prepayment price related to a triggering event within 5 business
                days
                after we receive notice of this requirement from the holder; and
                we must
                deliver the prepayment price related to a major transaction immediately
                prior to the consummation of the major transaction.  However, if
                we are unable to prepay all of the notes to be so prepaid, we must
                pay an
                amount to each holder equal to the holder’s pro rata amount of all notes
                being prepaid.




If
      we
      fail to prepay all of the notes submitted for prepayment, we have to pay
      interest on the prepayment price at the rate of 2% per month until paid in
      full.  Until paid in full the holder may, in place of prepayment,
      require us to return to the holder all of the notes submitted for
      prepayment.  We must return the notes and the conversion price of the
      returned notes must be adjusted to the lesser of:




·
            The
                conversion price in effect on the date on which the holder sends
                notice to
                us that it chooses in lieu of prepayment to have the notes returned;
                and




·
            The
                lowest closing bid price during the period beginning on the date
                on which
                we deliver notice of the prepayment option as it related to a major
                transaction or a triggering event and ending on the date on which
                the
                holder delivers notice to us of its choice, in lieu of prepayment,
                to have
                us return to the holder all of the
                notes.




If,
      on
      our receipt of a request for conversion of the notes we are unable to issue
      shares of our common stock registered for resale, either because we does not
      have sufficient authorized shares of our common stock or because we are
      otherwise prohibited by law from doing so, then we must issue as many shares
      of
      our common stock as we are able to in compliance with the holder’s request and,
      with regard to the unconverted portion of the notes, the holder may choose
      to:




·
            Require
                us to prepay that portion of the notes we are unable to convert at
                the
                triggering event prepayment price, or the mandatory prepayment
                price;




·
            If
                we are unable to issue registered shares of common stock because
                we are
                prohibited by law, require us to issue restricted shares of common
                stock;






F-33




·
            Void
                the holder’s notice of request for conversion and force us to return the
                notes that were to be converted; or




·
            Exercise
                its buy-in rights as described.




If
      the
      holder chooses to have its notes prepaid using the mandatory prepayment price,
      we must pay the mandatory prepayment price within 30 days of our receipt of
      the
      holder’s notice in response to our notice to the holder of our inability to
      convert the note, unless we have prior to this delivered notice that the event
      resulting in the mandatory prepayment price has been cured.  If we
      fail to pay the mandatory prepayment price 1 business day after we receive
      notice from the holder of this election, we must pay interest on the unpaid
      amount at the rate of 2% per month until paid in full.





**The
      Original Issue Discount Notes**





The
      original issue discount notes are substantially the same in form and effect
      as
      the Series A Notes.  The occurrence of an event of default under
      the Series A Notes constitutes an event of default under the OID Notes; and
      the occurrence of an event of default under the original issue discount notes
      constitutes an event of default under the Series A notes.  The
      initial conversion price of $0.20 is the same for each of the Series A
      Notes and the original issue discount notes and the original issue discount
      notes are subject to the same adjustment provisions as apply to the
      Series A notes.  The same prepayment provisions apply to both the
      Series A Notes and the OID Notes.  As with the Series A Note
      holders, no holder of OID Notes will have any rights as one of our stockholders
      prior to the conversion of our OID Notes.





**The
      Warrants**




*The
      Series A -7 Warrants and Series A-7 Placement Agent Warrant*




The
      Series A-7 warrants represent seven-year warrants to purchase shares of our
      common stock at the holder’s option equal to 75% of the number of shares of our
      common stock issuable upon conversion of the purchaser’s Series A Note (an
      aggregate of 18,750,000 shares) at an original exercise price per share equal
      to
      $0.40.




The
      Series A-7 placement agent warrants represent five-year warrants to purchase
      shares of our common stock at the holder’s option equal to 10% of the number of
      Series A-7 warrants issued (approximately 1.9 million shares in the aggregate)
      at an original exercise price per share equal to $0.40.




*Warrant
      Exercise*




Warrant
      stock refers to our common stock issuable upon exercise of the Series A-7
      warrant or any of the other warrants.  Payment of the exercise price
      may be made to us by:




·
            Certified
                check;




·
            “Cashless
                exercise,” but here only when there is no registration statement in effect
                for the warrant stock; or




·
            A
                combination of (i) and (ii) above.




A
      cashless exercise is only available beginning one (1) year after the original
      issue date of the Series A-7 warrant and if (i) the per share market value
      of a share of our common stock (either the volume the weighted average price
      or
      the fair market value as determined by an independent appraiser) is greater
      than
      the warrant price; and (ii) a registration statement for the warrant stock
      is not then in effect.  In a cashless exercise, the warrant holder
      merely presents the warrant to us without tendering cash and we issue to it
      a
      number of shares of our common stock equal to the difference between
      (i) the number of shares of our common stock purchasable on exercise of all
      of the warrants so exercised, and (ii) the product
      of:  (a) the warrant price; times (b) the number of shares
      of our common stock purchasable on exercise of all of such warrants; divided
      by:  (iii) the per share market value of one share of our common
      stock.




If
      the
      warrant holder exercises the Series A-7 warrant, we have 3 trading days, or
      the
      delivery date, in which to issue to it certificates for shares of the warrant
      stock; or to deliver to the Depository Trust Company on the warrant holder’s
      account.  If we fail to deliver the certificates on or before the
      delivery date and the warrant holder is required by its broker to purchase
      shares of our common stock on the open market to deliver in satisfaction of
      a
      sale of the warrant holder’s warrant stock, or a warrant buy-in, then we
      must:






F-34




·
            Pay
                cash to the warrant holder in the amount by which:  (a) the
                warrant holder’s total purchase price exceeds:  (b) the
                amount obtained by multiplying:  (x) the number of shares
                of warrant stock we are required to deliver to the warrant holder;
                times
                (y) the price at which the sell order was executed;
                and




·
            Either
                reinstate the portion of the Series A-7 warrant for which exercise
                was not
                honored or deliver to the warrant holder the number of shares of
                our
                common stock that we would have issued if we had timely
                complied.




*Adjustment
      of Warrant Price*




The
      warrant price of the Series A-7 warrant is subject to adjustment from time
      to
      time to reflect:




·
            Recapitalizations,
                reorganizations, mergers;




·
            Stock
                dividends, subdivisions and
                combinations;




·
            Certain
                other distributions;




·
            Issuances
                of additional shares of common stock (on a full-ratchet anti-dilution
                basis); and




·
            Issuances
                of common stock equivalents.




In
      the
      event of an issuance of additional shares of common stock, or an issuance of
      common stock equivalents, a “full ratchet” adjustment will be made to the
      warrant price.  This means effectively that the warrant price will be
      reduced to the consideration per share for the additional shares of common
      stock
      in question.





*Limitation
      of Beneficial Ownership of Our Shares*





Subject
      to the warrant holder’s right to waive these provisions in certain circumstances
      upon 61 days notice to us, at no time may a warrant holder exercise the warrant
      if the number of shares of our common stock issued pursuant to the exercise
      would exceed, when aggregated with all of the other shares of our common
      stock  held by the warrant holder the number of shares which would
      result in the warrant holder beneficially owning greater
      than:  (i) 4.9% of the then outstanding shares of our common
      stock; or (ii) 9.9% of the then outstanding shares of our common
      stock.





*The
      Call*





We
      are
      entitled under the warrant, at any time following the original issue date of
      the
      warrant, to call up to 100% of the warrant then outstanding by providing the
      warrant holder with a call notice; however, the following must be true in order
      to effect such a call:




·
            The
                per share market value of our common stock must be greater than $1.00
                per
                share for 10 consecutive trading days immediately prior to the date
                of the
                call notice; and the average daily trading volume during this period
                must
                exceed 500,000 shares of our common
                stock;




·
            A
                registration statement under the Securities Act of 1933 which provides
                for
                the resale of the warrant stock and the common stock issuable upon
                the
                conversion of the notes must be effective without lapse for 60 consecutive
                calendar days;




·
            Trading
                in our common stock must not have been suspended by the SEC or any
                relevant securities exchange;




·
            We
                must be in material compliance with the terms of the warrant;
                and




·
            We
                must not be in possession of any material non-public
                information.






F-35





In
      order
      to effect the call, this registration statement must be effective from the
      date
      of delivery of the call notice until the date which is the later
      of:  (i) the date the warrant holder exercises the warrant
      pursuant to the call notice; and (ii) the 20th day after
      the
      warrant holder receives the call notice, or the early termination
      date.  Our rights with respect to the warrant stock subject to the
      call notice will expire on the early termination date if the warrant is not
      exercised prior to the early termination date.  If the warrant is not
      exercised with regard to the called warrant stock, we must remit to the warrant
      holder:  (i) $.001 per share of called warrant stock; and
      (ii) a new warrant representing the number of shares of warrant stock, if
      any, which is not subject to the call notice.





*The
      Series B-4 Warrants and Series B-4 Placement Agent Warrants*




The
      Series B-4 warrants represent rights to purchase shares of our common stock
      equal to 50% of the number of conversion shares issuable upon the conversion
      of
      the purchaser’s Series A note on the date of issuance of that note (an
      aggregate of 12,500,000 shares) at an original exercise price per share equal
      to
      $0.90 for a term of four years following the effective date of the registration
      statement providing for the resale of the conversion shares and the shares
      of
      our common stock issuable upon exercise of this warrant.




The
      Series B-4 placement agent warrants represent five-year warrants to purchase
      shares of our common stock at the holder’s option equal to 10% of the number of
      Series B-4 warrants issued (approximately 1.3 million shares in the aggregate)
      at an original exercise price per share equal to $0.90.




This
      warrant is substantially similar in form and effect to the Series A-7
      warrant, except as set forth in the preceding paragraph and except that in
      order
      to effect a call notice under the Series B-4 warrant, the per share market
      value of our common stock must be greater than $1.26 per share for the 10
      consecutive trading days prior to the call notice and the average daily trading
      volume during this time period must exceed only 250,000 shares of our common
      stock.





*The
      Series C-3 Warrants*





The
      Series C-3 warrants represent rights to purchase shares of our common stock
      equal to 100% of the number of conversion shares issuable upon the conversion
      of
      the purchaser’s Series A note on the date of issuance of that note (an
      aggregate of 25,000,000 shares) at an original exercise price per share equal
      to
      $0.21 on the date of closing of the Purchase Agreement and for a term of three
      years following that closing date.





The
      Series C-3 warrants are substantially similar in form and effect to the
      Series A-7 warrants, except as set forth in the preceding paragraph and
      except that we have no rights to call the Series C-3 warrant under any
      circumstances.





*The
      Series D-1 Warrants and Series D-1 Placement Agent Warrants*





The
      Series D-1 warrants are callable only by us requiring the holders of these
      warrants to purchase shares of our common stock equal to 70% of the number
      of
      conversion shares issuable upon conversion of the purchaser’s Series A note
      on the date of issuance of the note (an aggregate of 17,500,000 shares) at
      an
      exercise price per share equal to the lesser of:  (a) $0.35 and
      (b) 90% of the average of the 5-day volume the weighted average price of
      our common stock immediately preceding the call notice under the Series D-1
      warrants and for a term of 18 months following the date the SEC declares
      effective the registration statement registering for resale the shares of our
      common stock issuable upon the exercise of the Series D-1
      warrants.  The holders have no rights to exercise the D-1
      warrants.





The
      Series D-1 placement agent warrants represent five-year warrants to purchase
      shares of our common stock at the holder’s option equal to 10% of the number of
      Series D-1 warrants issued (approximately 1.8 million shares in the aggregate)
      at an exercise price per share equal to the lesser of:  (a) $0.35
      and (b) 90% of the average of the 5-day volume weighted average price of
      our common stock immediately preceding the exercise notice. The Series D-1
      placement agent warrants are substantially similar in form and effect to the
      series A-7 warrants




F-36


The
      Series D-1 warrants are substantially similar in form and effect to the
      Series A-7 warrants, except as set forth in the preceding paragraph and
      except as set forth as follows:




·
            The
                Series D-1 warrants provide no “cashless exercise” alternative for their
                exercise;




·
            There
                are no adjustments to be made to the warrant price in the event of
                the
                issuance of additional shares of common stock or common stock equivalents;
                and




·
            The
                provisions relating to the call and the call notice for the Series
                D-1
                warrants are different from the parallel provisions of the Series
                A-7
                warrants in that:




·
            In
                order to effect a call notice under the Series D-1 warrants, the
                per share
                market value of our common stock must be greater than $1.53 for the
                10
                consecutive trading days prior to the delivery of the call notice
                and the
                average daily trading volume during this time period must exceed
                $100,000
                per day for 20 trading days out of the 30 prior trading days;
                and




·
            As
                an additional requirement in order for us to issue a call notice,
                at least
                60% of the proceeds from the exercise of the Series D-1 warrants
                must be
                applied to: (w) make a strategic acquisition which has been approved
                by our board of directors; (x) enter into a strategic joint venture;
                (y) effect an acquisition of product inventory to fulfill large
                customer orders in excess of 1,500 mobile units; or (z) move an
                appropriate level of business and operating off-shore to develop
                a more
                efficient cost and production
                structure.




·
            10%
                Placement Agent Warrants




The
      10%
      placement agent warrants represent five-year warrants to purchase shares of
      our
      common stock equal to equal to 10% of the number of shares of common stock
      issuable to the note holders upon conversion of theirs notes (approximately
      2.5
      million shares in the aggregate) at an exercise price per share equal to
      $0.20.





**The
      Registration Rights Agreement**





Pursuant
      to the terms of the Purchase Agreement, we have entered into a Registration
      Rights Agreement with the purchasers dated as of February 23, 2006 (the
“Registration Rights Agreement”).  The primary purpose of this
      Registration Rights Agreement is to obligate us to effect resale registrations
      of the shares of our common stock contemplated to be issued by us pursuant
      to
      the Purchase Agreement.





*Nature
      and Timing of Filings*




On
      or
      prior to April 10, 2006, or the filing date, which is 45 days from the closing
      date under the Purchase Agreement, we agreed pursuant to the Registration Rights
      Agreement to prepare and file with the SEC a “resale” registration statement on
      Form SB-2 providing for the resale on a continuous basis pursuant to Rule 415
      of
      all of the shares of our common stock issuable upon the conversion or repayment
      of the notes. (the “Note Registerable Securities”).  Under this
      registration statement, we are not allowed to permit any securities other than
      the following to be included in this registration
      statement:  (i) the Note Registerable Securities;
      (ii) shares of our common stock issuable upon the exercise of warrants
      issuable to our placement agent for the offering; (iii) shares of our
      common stock acquired by SDS Capital Group SPC, Ltd. pursuant to the conversion
      of our Series B convertible preferred stock and related stock warrants; and
      (iv) 1,000,000 shares of our common stock issued to Saffron Capital
      Management LLC pursuant to our consulting agreement with it.




We
      were
      obligated to use our best efforts to cause this registration statement to be
      declared effective under the securities act on or prior to the effectiveness
      date, which is the earlier of (i) May 25, 2006 or June 26, 2006 if the
      this registration statement receives a full review from the SEC; or
      (ii) within 3 business days of the date on which the SEC informs us
      that:  (a) it will not review the this registration statement; or
      (b) we may request the acceleration of the effectiveness of this
      registration statement and the Company make such a request.  We are
      obligated to keep this registration statement continuously effective until
      the
      date that is the earlier of:




·
            The
                date when all of the registered under this registration statement
                have
                been sold; or




·
            The
                date on which the note registerable securities can be sold without
                restriction under Rule 144(k), or the effectiveness
                period.




F-37


We
      filed
      a registration statement on April 10, 2006 that went effective April 29, 2006
      covering the Note Registerable Securities.




We
      were
      also obligated to file a second registration statement within 15 days of
      obtaining approval of our stockholders to amend the our Certificate of
      Incorporation to increase our authorized shares of common stock.  We
      obtained stockholder approval on May 9, 2006 to increase authorized shares
      or
      our common stock from 50 million shares to 230 million
      shares.  Although we were obligated to file second registration
      statement by May 24, 2006, we have not received all consents from the
      selling stockholders needed to file such registration statement as of July
      17,
      2006. Accordingly, we intend to file a second registration statement on
      Form SB-2 providing for the resale of all of the shares of our common stock
      issuable upon exercise of the warrants issued in connection with the notes
      (the
“Warrant Registerable Securities”) once we receive all consents required from
      the selling stockholders.  This registration statement may not be used
      for the registration of any securities other than:  (i) the
      Warrant Registerable Securities; (ii) the placement agent securities;
      (iii) the SDS Capital Group SPC, Ltd. securities; and (iv) the Saffron
      Capital Management LLC securities.




We
      are
      obligated to use our best efforts to cause this registration statement to be
      declared effective under the Securities Act on or prior to the warrant
      effectiveness date, which means the earlier of:  (i) the 90th day
      following the date this registration statement was filed with the SEC or the
      120th day
      following such filing date if this registration statement receives a full review
      from the SEC; or (ii) within 3 business days of the date on which the SEC
      informs us that:  (a) the SEC will not review this registration
      statement; or (b) we may request the acceleration of the effectiveness of
      this registration statement and we make such a request.  We are
      obligated to keep this registration statement continuously effective until
      the
      date that is the earlier of:  (x) the date when all of the
      Warrant Registerable Securities registered under this registration statement
      have been sold; or (y) the date on which the Warrant Registerable
      Securities can be sold without registration under Rule 144(k), or the warrant
      effectiveness period.




*Registration
      Procedures*




Under
      either registration statement, if at any time an additional registration
      statement is required because the number of shares of our common stock, combined
      with the actual number of shares of our common stock into which the notes are
      convertible and the warrants are exercisable exceeds the number of shares of
      registerable securities remaining under both registration statements, then
      we
      have 20 business days to file this additional registration statement. We would
      then have 90 days after filing to cause this additional registration statement
      to be declared effective by the SEC.  Each of the parties have granted
      customary indemnification rights to the other parties to the registration rights
      agreement.




*Liquidated
      Damages*




We
      are
      subject to the payment of liquidated damages to each holder equal to 1.5% of
      the
      holder’s initial investment in the notes for each month following the “event
      date” associated with each of the following events until such event is
      cured:




·
            if
                the registration statements are not filed by the time periods set
                forth in
                the Registration Rights Agreement;




·
            if
                the registration statements are not declared effective by the time
                periods
                set forth in the Registration Rights
                Agreement;




·
            if
                we fail to file a request for acceleration promptly as provided in
                the
                Registration Rights Agreement;




·
            if
                a registration statement is filed and declared effective by the SEC
                but
                later ceases to be effective (subject to limited black-out period
                exceptions);




·
            if
                we breach certain provisions of the Registration Rights Agreement
                which
                permit us to postpone the effectiveness of a registration statement;
                and




·
            if
                trading in our common stock is suspended or if our common stock is
                delisted from the OTC Bulletin
                Board.




F-38


We
      currently are not in compliance with certain of our obligations relating to
      our
      series A senior secured convertible notes, including our failure to maintain
      sufficient authorized shares to permit conversion of the notes and our failure
      to register the resale of the shares of common stock issuable upon conversion
      of
      the notes.  As of August 31, 2006, we have obtained waivers of
      compliance of these obligations from all of the note holders, other than one
      holder of $100,000 principal amount of the notes.





**Accounting
      for Series A Notes and Warrant Purchase Agreement**





The
      gross
      proceeds from the issuance and the Series A convertible Notes and the OID Notes
      was $5,750,000 which included the tendering of 50 shares of Series B convertible
      preferred stock at a face value of $500,000.  The carrying value of
      this Series B convertible preferred stock was $404,000.  The Series B
      convertible preferred stock had a market value approximately $65,000 and the
      convertible Notes issued had a fair value of $500,000; thus, we recorded a
      loss
      on redemption in February, 2006 of approximately $435,000.  The loss
      is considered a deemed dividend and included in determining net loss
      attributable to common stockholders.





In
      connection with the convertible Notes and OID Notes, we issued warrants to
      the
      Note holders to purchase approximately 56.3 million shares of our common stock
      at exercise prices noted above. The fair value of the warrants was estimated
      to
      be approximately $7.9 million using the Black-Scholes pricing model. The fair
      value of the warrants allocated to the warrants on a relative fair value basis
      was determined to be approximately $3.3 million and was recorded as additional
      paid-in-capital and a debt discount.  The debt discount will be
      amortized to interest expense over the terms of the notes.  During the
      fiscal year ended August 31, 2006, approximately $832,000 of the debt discount
      was amortized to interest expense.





Additionally,
      the Notes and OID Notes were considered to have a beneficial conversion feature
      because they permitted the holders to convert their interest in the Notes and
      OID Notes into shares of our common stock at a deemed effective fair value
      conversion price of $0.08 per share, which on the date of issuance, was lower
      than the price of our common stock of $0.21 per share. The total amount of
      the
      beneficial conversion feature was approximately $3.6 million.  Because
      the beneficial conversion feature cannot exceed the relative fair market value
      of the convertible Notes and OID Notes, we recorded a limited beneficial
      conversion feature of approximately $2.4 million. This amount was recorded
      as an
      additional paid-in-capital and will be amortized to interest expense from the
      date of issuance to the earlier of the maturity of the Notes or to the date
      of
      the conversion.  During the fiscal year ended August 31, 2006,
      approximately $606,000 of the beneficial conversion feature was amortized to
      interest expense.





We
      recorded approximately $750,000 and $870,000 as deferred financing fees
      representing the amount of the original issue discount financed and transaction
      costs, respectively.  We also recorded approximately $1.5 million as
      deferred financing fees for the fair value of the placement agent warrants
      which
      were valued using the Black-Scholes pricing model.  The deferred
      financing fees will be amortized to interest expense from the date of the Notes
      to the earlier of the maturity of the Notes or the date of
      conversion.  During the fiscal year ended August 31, 2006,
      approximately $784,000 of the deferred financing fee was amortized to interest
      expense. The net cash proceeds received by us after deducting broker’s fees but
      before payment of legal and other professional fees was approximately $4.1
      million.





**11.                   COMMITMENTS
      AND CONTINGENCIES**




**Operating
      Lease Commitments**




We
      lease
      certain office facilities and equipment under non-cancelable operating leases,
      with expirations through August 2008.  The future minimum lease
      payments associated with such leases for the fiscal years ending August 31
      are
      as follows (in thousands).





2007
                          
                          $
                          1392008
                          
                          
                          13$
                          152


During
      the year ended August 31, 2006 and 2005, total rent charged to operating
      expenses was approximately $256,000 and $367,000, respectively.




F-39


**Product
      Warranty Guarantees**




We
      provide a limited warranty on all
      REDIview product sales, at no additional cost to the customer that provides
      for
      replacement of defective parts for one year after the product is
      sold.  We provide a limited warranty on all VMI product sales, at no
      additional cost to the customer that provides for replacement of defective
      parts
      during the contract term, typically ranging from one to five years. We have
      established an estimated liability for expected future warranty commitments
      based on a review of historical warranty expenditures associated with these
      products and other similar products.  Changes in our product warranty
      liability, which is included in “Accrued expenses and other current liabilities”
and “Other non-current liabilities” in the accompanying Consolidated Balance
      Sheets, are summarized below (in thousands).




Fiscal
                              Years EndedAugust
                              31,2006
                          
                          
                          2005Warranty
                              product liability at beginning of period
                          
                          $
                          210
                          
                          
                          $
                          375Accruals
                              for product warranties issued
                          
                          
                          117
                          
                          
                          
                          28Product
                              replacements
                          
                          
                          (252
                          )
                          
                          
                          (348
                          )Adjustments
                              to pre-existing warranty estimates
                          
                          
                          74
                          
                          
                          
                          155Warranty
                              product liability at end of period
                          
                          $
                          149
                          
                          
                          $
                          210
  The
        long-term
        portion of the warranty product liability at August 31, 2006 and 2005 was
        approximately $-0- and $50,000, respectively.






**Retirement
      Plan**




The
      Company sponsors a 401(k) Retirement Investment Profit-Sharing Plan (the
“Retirement Plan”) covering substantially all employees.  In order to
      attract and retain employees, during 2000, the Company amended the Retirement
      Plan to include a mandatory employer matching.  Matching contributions
      during the fiscal years ended August 31, 2006 and 2005 were approximately
      $23,000 and $103,000 respectively.







**Other
      Purchase Commitments**




As
      of
      August 31, 2006, we had approximately $1,051,000 in primarily inventory-related
      purchase commitments.





**Litigation**





On
      October 13, 2006, we entered into a Memorandum of Understanding with @Road,
      Inc.
      with respect to a settlement of a lawsuit brought by @Road, Inc. on August
      10,
      2005 alleging intentional interference with prospective economic advantage
      against us (@Road, Inc. v. Kierston Dowd, et al., Stanislaus County Superior
      Court).  Under the Memorandum of Understanding, @Road agreed to
      dismiss their lawsuit with prejudice in exchange for a payment from us of the
      sum of $250,000, payable in 24 equal monthly installments
      beginning  January 1, 2007 (subject to acceleration upon certain
      change of control and financing transactions) and accruing interest at the
      rate
      of 8% per annum.  The settlement is subject to the approval of our
      Board of Directors and execution of a final settlement agreement and general
      release.  This amount has been recorded as a liability at August 31,
      2006.





We
      are
      aware of a potential claim involving us and our prior inventory
      vendor.  This claim has not been asserted, but we have discussed the
      possibility of a dispute arising out of disposition of inventory manufactured
      by
      this vendor.  We do not believe we are liable for future inventory
      purchases from this vendor and several months ago expressed our position to
      them.  However, should this vendor be successful in asserting a claim,
      it may have a material adverse affect to our financial position, operating
      results and cash flows.





We
      are
      subject to legal proceedings and claims that arise in the ordinary course of
      business.  We do not believe that any claims other than those
      described above exist where the outcome of such matters would have a material
      adverse affect on our consolidated financial position, operating results or
      cash
      flows.  However, there can be no assurance such legal proceedings will
      not have a material impact on future results.








F-40


**12.           RELATED
      PARTY TRANSACTIONS**




**HFS
      Note Payable**






As
      described in Note 8, on July 20,
      2004, we entered into and consummated the Third Amended Letter Agreement with
      HFS issuing a $2.0 million convertible promissory note to HFS with the principal
      balance being due 36 months from the date of funding, with an annual interest
      rate of 12 percent.  Upon issuance of the Note, HFS provided the $2
      million funding to us less a commission in the amount of $80,000 representing
      four percent (4%) of the loan proceeds.   Accordingly, Stephen
      CuUnjieng, the President of HFS, was appointed to our Board of Directors
      effective July 13, 2004.  Mr. CuUnjieng was employed by us as Director
      of Strategic Finance from January 30, 2004 until December 31, 2004 to assist
      us
      with further fund raising. On January 4, 2006, we appointed Dennis Ackerman
      to
      serve as the HFS-designee member of our Board of Directors.  Mr.
      Ackerman currently serves as a director of HFS Capital Private Equity Fund
      LLC,
      the Managing Member of HFS.  Mr. Ackerman is deemed to beneficially
      own 689,655 shares of common stock issuable upon conversion of the HFS
      note.






**13.           SEGMENT
      REPORTING**




Our
      reportable segments offer different products and/or services.  Each
      segment also requires different technology and marketing
      strategies.  Our two reportable segments are VMI and Network Service
      Center Systems (“NSC Systems”), including our REDIview products and
      services.




VMI
      is
      designed to maximize the productivity of a mobile workforce as well as reduce
      vehicle mileage and fuel related expenses.  The VMI technology
      consists of: (i) a data control unit that continually monitors and records
      a
      vehicle’s position, speed and distance traveled; (ii) a command and control
      center which receives and stores in a database information downloaded from
      the
      DCU’s; and (iii) software used for communication, messaging and detailed
      reporting.  VMI uses the satellite-based global positioning system to
      acquire a vehicle location on a minute-by-minute basis and a global system
      for
      mobile communications based cellular network to transmit data between the DCU’s
      and the CCC.  The VMI application is targeted to small and
      medium-sized fleets in the metro marketplace.




We
      commercially launched our latest product offering, REDIview, during January
      of
      2005.  REDIview is an Internet and service bureau-based software
      application that provides an extensive array of real-time and accurate mapping,
      trip replay, and vehicle activity reports.  REDIview includes a series
      of exception-based reports designed to highlight inefficiencies in the
      operations of a vehicle fleet.  Utilizing GPRS technology and our
      proven, high-capacity network service center, customers may access their
      information securely through the Internet from any personal computer or certain
      other devices.  REDIview incorporates technologies that allow for fast
      and effective integration into legacy applications operated by companies with
      vehicle fleets and mobile workers.  This design allows companies to
      easily extend their existing supply chain management systems to the mobile
      workforce for transaction processing and customer
      fulfillment.  REDIview was also designed to be hardware and network
      agnostic to provide the maximum flexibility in designing solutions that best
      fit
      the customer’s specific needs.




Historically,
      through our NSC Systems
      segment, we provided long-haul trucking companies with a comprehensive package
      of mobile communications and management information services, thereby enabling
      its trucking customers to effectively monitor the operations and improve the
      performance of their fleets.  The initial product application was
      customized and has been sold to and installed in the service vehicle fleets
      of
      the member companies of SBC Communications, Inc., pursuant to the Service
      Vehicle Contract.  SBC selected an alternative vendor to supply its
      next generation AVL product, and, as of December 31, 2005, had deactivated
      all
      of its subscriber units.






F-41


Operating
      expenses are allocated to
      each segment based on management’s estimate of the utilization of financial
      resources by each segment.   Goodwill is allocated solely to the
      NSC Systems segment.  The following tables set forth segment financial
      information (in thousands):






As
                        of and for the Year Ended August 31, 2006NSC
                        Systems
                    
                    
                    VMI
                    
                    
                    ConsolidatedRevenues
                    
                    $
                    3,815
                    
                    
                    $
                    2,091
                    
                    
                    $
                    5,906Operating
                        loss
                    
                    
                    (15,712
                    )
                    
                    
                    (358
                    )
                    
                    
                    (16,070
                    )Interest
                        expense
                    
                    
                    (2,524
                    )
                    
                    
                    -
                    
                    
                    
                    (2,524
                    )Interest
                        income
                    
                    
                    64
                    
                    
                    
                    46
                    
                    
                    
                    110Depreciation
                        and amortization
                    
                    
                    (1,691
                    )
                    
                    
                    (291
                    )
                    
                    
                    (1,982
                    )Goodwill
                        impairment
                    
                    
                    (7,725
                    )
                    
                    
                    -
                    
                    
                    
                    (7,725
                    )Impairment
                        loss on license right
                    
                    
                    -
                    
                    
                    
                    (237
                    )
                    
                    
                    (237
                    )Legal
                        settlement
                    
                    
                    (250
                    )
                    
                    
                    -
                    
                    
                    
                    (250
                    )Net
                        loss
                    
                    
                    (17,810
                    )
                    
                    
                    (345
                    )
                    
                    
                    (18,155
                    )Total
                        assets
                    
                    
                    11,066
                    
                    
                    
                    92
                    
                    
                    
                    11,158Capital
                        expenditures
                    
                    
                    352
                    
                    
                    
                    -
                    
                    
                    
                    352
  
  As
                    of and For the Year Ended August 31, 2005ReorganizationNSC
                    Systems
                
                
                VMI
                
                
                Items
                
                
                ConsolidatedRevenues
                
                $
                12,593
                
                $
                3,779
                
                $
                -
                
                $
                16,372Operating
                    loss
                
                
                (13,928
                )
                
                (1,292
                )
                
                -
                
                
                (15,220
                )Interest
                    expense
                
                
                (390
                )
                
                -
                
                
                -
                
                
                (390
                )Interest
                    income
                
                
                31
                
                
                222
                
                
                -
                
                
                253Depreciation
                    and amortization
                
                
                (2,194
                )
                
                (506
                )
                
                -
                
                
                (2,700
                )Impairment
                    loss on license right
                
                
                -
                
                
                (201
                )
                
                -
                
                
                (201
                )Goodwill
                    impairment
                
                
                (9,604
                )
                
                -
                
                
                -
                
                
                (9,604
                )Net
                    loss
                
                
                (14,435
                )
                
                (1,206
                )
                
                (22
                )
                
                (15,663
                )Total
                    assets
                
                
                19,175
                
                
                2,531
                
                
                
                
                
                21,706Capital
                    expenditures
                
                
                913
                
                
                49
                
                
                
                
                
                962




**14.**
            **SUBSEQUENT
                EVENTS**






*Series
      B Note Financing*




On
      November 30, 2006, we entered into a Note and Warrant Purchase Agreement with
      Bounce Mobile Systems, Inc. (“BMSI”) and other accredited
      investors.  Pursuant to the Note and Warrant Purchase Agreement, we
      will receive up to $1,754,000 in gross proceeds (of which BMSI has committed
      to
      provide $1,200,000) from the sale of up to (i) $1,754,000 principal amount
      of
      our series B subordinated secured convertible promissory notes (“Series B
      Notes’), (ii) $701,600 principal amount of our original issue discount series B
      subordinated secured convertible promissory notes (“Series B OID Notes”), (iii)
      our series E-7 warrants (“E-7 Warrants”) to purchase 82,218,750 shares of our
      common stock and (iv) our series F-4 warrants (“F-4 Warrants”) to purchase
      82,218,750  shares of our common stock.






F-42





·
            The
                Series B Notes and the Series B OID Notes are secured by all of our
                assets, subject to existing liens, are due December 4, 2009 and begin
                amortization of principal (in nine quarterly installments) on August
                1,
                2007.  We may make principal installment payments in cash or in
                registered shares of our common stock. If paid in common stock, certain
                conditions must be satisfied, and the number of registered shares
                to be
                paid to the holder must be an amount equal to the principal installment
                amount divided by the greater of (i) $0.02 and (ii) 90% of the average
                of
                the volume weighted average trading prices of the common stock for
                the ten
                trading days immediately preceding the principal payment.  The
                Series B Notes and Series B OID Notes are convertible into our common
                stock at an initial conversion price of $0.016 per share, subject
                to
                reduction if we fail to achieve specified financial and operating
                milestones and subject to adjustment for stock splits and combinations,
                certain dividends and distributions, reclassification, exchange or
                substitution, reorganization, merger, consolidation or sales of assets;
                issuances of additional shares of common stock, and issuances of
                common
                stock equivalents.





·
            The
                E-7 Warrants have an exercise price of $0.02 per share, subject to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock equivalents.  The
                E-7 Warrants are exercisable for a seven-year period from the date
                of
                issuance.





·
            The
                F-4 Warrants have an exercise price of $0.03 per share, subject to
                adjustment for stock splits and combinations, certain dividends and
                distributions, reclassification, exchange or substitution, reorganization,
                merger, consolidation or sales of assets; issuances of additional
                shares
                of common stock, and issuances of common stock equivalents. The F-4
                Warrants are exercisable for a four-year period beginning on the
                date a
                resale registration statement for the shares underlying the warrants
                is
                declared effective by the Securities and Exchange
                Commission.





The
      private placement is structured to occur in four closings, each providing
      $438,500 in gross proceeds to us.  The first closing occurred on
      December 4, 2005.  The second closing occurred on January 10, 2007
      after we filed a preliminary proxy statement on December 27, 2006 with the
      Securities and Exchange Commission with respect to stockholder approval of
      an
      increase in the number of our authorized shares of common stock to 575,000,000
      and a one-for-fifty reverse stock split of our common
      stock.   The third closing will occur within five business days
      after the date that we file an amendment to our Certificate of Incorporation
      making effective the increase in number of authorized shares and the reverse
      stock split. The fourth closing will occur within five business days after
      the
      date that an initial resale registration statement for the shares underlying
      the
      notes and warrants issued in the private placement is declared effective by
      the
      Securities and Exchange Commission.  Each closing is subject to
      certain other conditions being satisfied, including (i) our representations
      and
      warranties in the agreement being true and correct in all material respects
      as
      of each closing date, (ii) our having performed, satisfied and complied in
      all
      material respects with all covenants, agreements and conditions required by
      the
      agreement to be performed, satisfied or complied with by us at or prior to
      each
      closing date, and (iii) no material adverse effect on the business, operations,
      properties, prospects, or financial condition of us and our subsidiaries having
      occurred.





As
      a
      result of the private placement and pursuant to the terms of "most favored
      nations" rights granted to investors in our February 2006 private placement
      of
      our Series A Notes, we issued to certain of our February 2006 private placement
      investors, in exchange for $1,652,111 principal amount of the Series A Notes,
      an
      additional (i) $1,784,111 principal amount of Series B Notes, (ii) $713,644
      principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase
      83,690,203 shares of our common stock and (iv) F-4 Warrants to purchase
      83,690,203 shares of our common stock.  We will receive no additional
      proceeds from the exchange.





In
      connection with the private placement, we agreed to pay to the placement agent
      for the transaction consideration consisting of (a) a cash sales commission
      of
      $150,480, (b) warrants to purchase 23,021,250 shares of common stock, with
      each
      warrant having an exercise price of $0.016 per share and being exercisable
      for
      ten years, (c) E-7 Warrants to purchase 12,332,813 shares of common stock,
      and
      (d) F-4 Warrants to purchase 12,332,813 shares of common stock. We also agreed
      to pay legal fees in the amount of $35,000 to legal counsel for the investors
      in
      the private placement.




The
      issuance of the Series B Notes triggered anti-dilution adjustments to the
      conversion price of our Series A Notes and the exercise price of the common
      stock purchase warrants issued in connection with the Series A Notes as
      follows:  (a) the conversion price of the Series A Notes changed from
      $0.20 to $0.016 per share, (b) the exercise price of our Series A-7 warrants
      changed from $0.40 to $0.016 per share, (c) the exercise price of our Series
      B-4
      warrants changed from $0.90 to $0.016, and (d) the exercise price of our Series
      C-3 warrants changed from $0.21 to $0.016 per share. In addition, the
      transaction triggered an anti-dilution adjustment to certain warrants issued
      to
      SDS in September 2005 in connection with the Series B preferred stock
      transaction, by changing the exercise price from $1.75 to $0.0966 per share
      and
      increasing the number of shares of common stock for which the warrants can
      be
      exercised from 750,000 to 12,683,191.






*BounceGPS
      Acquisition*






On
      November 30, 2006, we entered into a Share Exchange Agreement with BMSI.Pursuant to the Share
      Exchange Agreement, we agreed to acquire from BMSI 100% of the capital stock
      of
      BounceGPS, Inc., a provider of mobile asset management solutions, in exchange
      for:




·
            5,000
                shares of our newly authorized series C convertible preferred
                stock




·
            A
                Series B Note in the principal amount of
                $660,000




·
            A
                Series B OID Note in the principal amount of
                $264,000




·
            An
                E-7 Warrant to purchase 30,937,500 shares of common
                stock




·
            A
                F-4 Warrant to purchase 30,937,500 shares of common
                stock






As
      part
      of the acquisition of BounceGPS, Inc., we acquired approximately 600 mobile
      subscribers, executive management and marketing expertise.  Total
      assets acquired were approximately $380,000, consisting primarily of inventory
      and other current assets in the amount of $149,000, and $231,000 in fixed and
      other assets.  Total liabilities acquired were approximately $380,000
      consisting of accounts payable and other current liabilities of $103,000 and
      notes payable of $277,000.  We anticipate that cash flows from
      operations from BounceGPS to be minimal.






The
      transactions contemplated by the Share Exchange Agreement closed on December
      4,
      2006.






The
      series C convertible preferred stock issued under the Share Exchange Agreement
      has a face amount of $1,000 per share ($5,000,000 in the aggregate), ranks
      junior to the Company’s series B convertible preferred stock and senior to its
      common stock with respect to payment of dividends and amounts upon any
      liquidation, dissolution or winding up of the Company, and is entitled to
      receive cumulative dividends in an amount equal to 8% per year (payable at
      the
      election of the holder in cash or additional shares).






The
      series C convertible preferred stock issued under the Share Exchange Agreement
      is initially convertible into 51% of the number of our fully diluted shares,
      as
      defined to include, without limitation:






·
            Shares
                of common stock outstanding on the date of issuance of the Series
                C
                Preferred Stock;






·
            Shares
                of common stock issuable upon conversion, exercise or exchange of
                any
                convertible security or purchase right outstanding on the date
                of  issuance (including, without limitation, the series C
                convertible preferred stock, the Company’s series B convertible preferred
                stock, the Series A Notes, the Series B Notes, the Series B OID Notes,
                the
                E-7 Warrants and the F-4 Warrants);




·
            Shares
                of common stock issuable upon conversion, exercise or exchange of
                any
                convertible security or purchase right issued after the issuance
                date of
                the series C convertible preferred stock in conversion, exercise
                or
                exchange of securities outstanding as of the issuance date or as
                a
                dividend, interest payment, liquidated damages, penalty, compromise,
                settlement or other payment of certain securities or  pursuant
                to or in connection with any agreement, indebtedness or other obligation
                of the Company existing as of the issuance date, or with respect
                to any
                amendment, waiver or modification thereto or extension
                thereof;




·
            Shares
                of common stock issued after the issuance date of the series C convertible
                preferred stock as a dividend, interest payment, liquidated damages,
                penalty, compromise, settlement or other payment of certain securities
                or  pursuant to or in connection with any agreement,
                indebtedness or other obligation of the Company existing as of the
                issuance date, or with respect to any amendment, waiver or modification
                thereto or extension thereof; and




·
            Shares
                of common stock authorized for issuance from time to time under the
                Company’s equity incentive plans.






F-43


The
      series C convertible preferred
      stock generally has the right to vote on all matters before the common
      stockholders on an as-converted basis voting together with the common
      stockholders as a single class. In addition, the holders of a majority of the
      Series C Preferred Stock, voting as a separate class, have the right to appoint
      a majority of the members of our Board of Directors (as long as we have not
      exercised our limited rights to redeem series C convertible preferred
      stock).




As
      a
      result of the Share Exchange Agreement and Note and Warrant Purchase Agreement
      transactions, BMSI, as the sole holder of our series C convertible preferred
      stock, currently holds approximately 94.1% of the voting power of our
      outstanding securities and beneficially owns approximately 94.2% of our common
      stock (59.8% calculated on a fully diluted basis).





*Stock
      Issuances*





Subsequent
      to August 31, 2006, we
      issued the following common shares:




·
                      S-8 stock issued for professional fees
                  
                  
                  21,435,724·
                      Series A Notes and OID Notes payments
                  
                  
                  31,742,893·
                      Series B preferred stock conversion into common stock
                  
                  
                  516,12
  
        F-44