Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2009**

 

**or**

 

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from          to          **

 

**Commission File Number:  000-53620**

 

**NEULION, INC.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Canada**                                                       | ** ** | **None**                              |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **1600 Old  Country Road, Plainview, New York**                  | ** ** | **11803**                             |
| (Address of principal  executive offices)                        |       | (Zip code)                            |

 

**(516)622-8300**

(Registrant’s telephonenumber, including area code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  o No  x

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o       |
|------------------------------------------------|--------|----------------------------|
| Non-accelerated filer o                        |   | Smaller reporting companyx |
| (Do  not check if a smaller reporting company) |   |                       |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

As of August 13, 2009,there were 114,201,121 shares of the registrant’s common shares, no par value,outstanding.

 

 

 

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**NEULION,INC.**

 

**TABLE OFCONTENTS**

 
| ** ** | ** **                                                                                                                                | **Page No.** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------|-------------------|
|       | **Part I.   Financial Information**                                                                                             | ** **        |
| Item 1.    | Financial Statements                                                                                                                      | 3                 |
|       |                                                                                                                                      |              |
|       | Consolidated  Balance Sheets as at June 30, 2009 (Unaudited) and December 31,  2008                                             | 3                 |
|       |                                                                                                                                      |              |
|       | Consolidated  Statements of Operations and Comprehensive Loss for the Three and Six Months  Ended June 30, 2009 and 2008 (Unaudited) | 4                 |
|       |                                                                                                                                      |              |
|       | Consolidated  Statement of Shareholders’ Equity for the Six Months Ended June 30, 2009  (Unaudited)                             | 5                 |
|       |                                                                                                                                      |              |
|       | Consolidated  Statements of Cash Flows for the Three and Six Months Ended June 30,  2009 and 2008 (Unaudited)                        | 6                 |
|       |                                                                                                                                      |              |
|       | Notes  to Consolidated Financial Statements (Unaudited)                                                                                   | 7                 |
|       |                                                                                                                                      |              |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               | 22                |
|       |                                                                                                                                      |              |
| Item  3.   | Quantitative  and Qualitative Disclosures about Market Risk                                                                               | 48                |
|       |                                                                                                                                      |              |
| Item 4.    | Controls and  Procedures                                                                                                                  | 48                |
|       |                                                                                                                                      |              |
|       | **Part II.  Other Information**                                                                                                      | ** **        |
|       |                                                                                                                                      |              |
| Item  2.   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                              | 49                |
|       |                                                                                                                                      |              |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                                                                      | 50                |
|       |                                                                                                                                      |              |
| Item 6.    | Exhibits                                                                                                                                  | 51                |
|       |                                                                                                                                      |              |
| SIGNATURES | 52                                                                                                                                        |

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.         FinancialStatements.**

 

**NEULION,INC.**

 

**CONSOLIDATED BALANCE SHEETS**

[Expressed in U.S. dollars, unless otherwisenoted]

 
| ** **                                                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                  | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                                                                                                                  | ** ** | **[unaudited]**   | ** ** | **[audited]**         | ** ** |
| ** **                                                                                                                  | ** ** | **$**             | ** ** | **$**                 | ** ** |
| **ASSETS**                                                                                                                  |       |              |       |                  |       |
| **Current**                                                                                                                 |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                   |       | 17,733,529        |       | 27,323,021            |       |
| Accounts receivable, net of allowance for doubtfulaccounts of $129,076****and  $290,538, respectively                       |       | 1,816,865         |       | 2,284,242             |       |
| Taxes receivable                                                                                                            |       | 1,008,030         |       | 983,253               |       |
| Other receivables                                                                                                           |       | 664,302           |       | 227,711               |       |
| Inventory                                                                                                                   |       | 291,035           |       | 347,600               |       |
| Prepaid expenses and deposits                                                                                               |       | 1,236,028         |       | 1,830,260             |       |
| Due from related parties *[note 5]*                                                                                         |       | 273,199           |       | 324,059               |       |
| **Total current assets**                                                                                                    |       | 23,022,988        |       | 33,320,146            |       |
| Property, plant and equipment, net                                                                                          |       | 5,595,131         |       | 6,474,989             |       |
| Intangible assets, net                                                                                                      |       | 5,109,336         |       | 5,749,332             |       |
| Goodwill                                                                                                                    |       | 6,846,183         |       | 6,846,183             |       |
| Other assets                                                                                                                |       | 1,177,413         |       | 1,347,032             |       |
| **Total assets**                                                                                                            |       | 41,751,051        |       | 53,737,682            |       |
| ** **                                                                                                                  |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                               |       |              |       |                  |       |
| **Current**                                                                                                                 |       |              |       |                  |       |
| Accounts payable                                                                                                            |       | 2,511,544         |       | 4,465,388             |       |
| Accrued liabilities                                                                                                         |       | 6,756,408         |       | 7,595,116             |       |
| Derivative liability *[notes 2  and 11]*                                                                               |       | 1,397,000         |       | —                |       |
| Due to related parties *[note 5]*                                                                                           |       | 406,589           |       | 56,826                |       |
| Deferred revenue                                                                                                            |       | 3,051,997         |       | 3,091,993             |       |
| **Total current liabilities**                                                                                               |       | 14,123,538        |       | 15,209,323            |       |
| Long-term deferred revenue                                                                                                  |       | 590,234           |       | 638,510               |       |
| Other long-term liabilities                                                                                                 |       | 721,240           |       | 876,271               |       |
| **Total liabilities**                                                                                                       |       | 15,435,012        |       | 16,724,104            |       |
|                                                                                                                        |       |              |       |                  |       |
| Contingencies*[note 7]*                                                                                                     |       |              |       |                  |       |
|                                                                                                                        |       |              |       |                  |       |
| **Shareholders’ equity**                                                                                               |       |              |       |                  |       |
| Share capital                                                                                                               |       | 7,037,290         |       | 6,762,097             |       |
| Common shares (par value: none; authorized: unlimited; issued and  outstanding:  110,517,595 and 110,084,044, respectively) |       |              |       |                  |       |
| Additional paid-in capital *[note 2]*                                                                                       |       | 54,373,484        |       | 56,500,258            |       |
| Promissory notes receivable                                                                                                 |       | (209,250          | )          | (209,250              | )          |
| Accumulated deficit *[note 2]*                                                                                              |       | (34,885,485       | )          | (26,039,527           | )          |
| **Total shareholders’ equity**                                                                                         |       | 26,316,039        |       | 37,013,578            |       |
| **Total  liabilities and shareholders’ equity**                                                                        |       | 41,751,051        |       | 53,737,682            |       |

 

*See accompanying notes*

 

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**NEULION, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE LOSS**

[unaudited]

[Expressed in U.S. dollars, unless otherwisenoted]

 
| ** **                                                                                 | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                 | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                                                                                 | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                 | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                 | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
| **Revenue**                                                                                |       |              |       |              |       |   |   |   |   |
| Services revenue                                                                           |       | 6,038,405         |       | 1,357,581         |       | 12,072,735 |   | 2,232,158 |   |
| Equipment revenue                                                                          |       | 424,033           |       | 1,629,547         |       | 963,730 |   | 2,704,590 |   |
|                                                                                       |       | 6,462,438         |       | 2,987,128         |       | 13,036,465 |   | 4,936,748 |   |
|                                                                                       |       |              |       |              |       |   |   |   |   |
| **Costs and expenses**                                                                     |       |              |       |              |       |   |   |   |   |
| Cost of services revenue, exclusive of depreciation andamortization shown separately below |       | 2,907,965         |       | 468,500           |       | 6,291,844 |   | 752,600 |   |
| Cost of equipment revenue                                                                  |       | 385,516           |       | 1,285,189         |       | 846,121 |   | 2,146,470 |   |
| Selling, general and administrative, includingstock-based compensation *[note 8]*          |       | 6,778,665         |       | 2,024,272         |       | 13,952,006 |   | 3,662,727 |   |
| Depreciation and amortization                                                              |       | 1,037,014         |       | 238,925           |       | 2,051,695 |   | 433,988 |   |
|                                                                                       |       | 11,109,160        |       | 4,016,886         |       | 23,141,666 |   | 6,995,785 |   |
| **Operating loss**                                                                         |       | (4,646,722        | )          | (1,029,758        | )          | (10,105,201 | ) | (2,059,037 | ) |
| ** **                                                                                 |       |              |       |              |       |   |   |   |   |
| **Other income (expense)**                                                                 |       |              |       |              |       |   |   |   |   |
| Unrealized loss on derivative *[notes  2 and 11]*                                          |       | (332,200          | )          | —            |       | (809,050 | ) | — |   |
| Gain on foreign exchange                                                                   |       | 2,991             |       | —            |       | 47,218 |   | — |   |
| Investment income                                                                          |       | 47,801            |       | 923               |       | 145,025 |   | 1,738 |   |
| Equity in loss of affiliate *[note 5]*                                                     |       | —            |       | (521,144          | )          | — |   | (978,826 | ) |
|                                                                                       |       | (281,408)         |       | (520,221          | )          | (616,807 | ) | (977,088 | ) |
| **Net and comprehensive loss for the period**                                              |       | (4,928,130        | )          | (1,549,979        | )          | (10,722,008 | ) | (3,036,125 | ) |
| ** **                                                                                 |       |              |       |              |       |   |   |   |   |
| Net loss per weighted average number of shares  outstanding - basic and diluted *[note 6]* |       | $                 | (0.04      | )                 | $          | (0.04 | ) | $ | (0.10 | ) | $ | (0.07 | ) |
|                                                                                       |       |              |       |              |       |   |   |   |   |
| Weighted average number of shares  outstanding - basic and diluted *[note 6]*              |       | 110,124,504       |       | 42,680,587        |       | 110,107,138 |   | 42,680,587 |   |
|                                                                                            |            |                   |            |                   |            |  |  |  |  |  |  |  |  |

 

*See accompanying notes*

 

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**NEULION, INC.**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

[unaudited]

[Expressed in U.S. dollars, unless otherwisenoted]

 
| ** **                                                                  | ** ** | ** **        | ** ** | ** **          | ** ** | ** **     | ** ** | ** **     | ** ** | ** **      | ** ** | **Total**              | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|----------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | ** **        | ** ** | ** **          | ** ** | **Additional** | ** ** | **Promissory** | ** ** | **Accumulated** | ** ** | **shareholders’** | ** ** |
| ** **                                                                  | ** ** | **Common shares** | ** ** | **paid-in capital** | ** ** | **Notes**      | ** ** | **deficit**    | ** ** | **equity**      | ** ** |
| ** **                                                                  | ** ** | **#**             | ** ** | **$**               | ** ** | **$**          | ** ** | **$**          | ** ** | **$**           | ** ** | **$**                  | ** ** |
| **Balance, December 31, 2008**                                         |       | 110,084,044       |       | 6,762,097           |       | 56,500,258     |       | (209,250       | )          | (26,039,527     | )          | 37,013,578             |       |
| Cumulative effect of change in accounting principle *[notes 2 and 11]* |       | —            |       | —              |       | (2,464,000     | )          | —         |       | 1,876,050       |       | (587,950               | )          |
| Exercise of stock options for common shares                                 |       | 150,000           |       | 82,989              |       | (15,989        | )          | —         |       | —          |       | 67,000                 |       |
| Stock-based compensation                                                    |       |              |       |                |       |           |       |           |       |            |       |                   |       |
| Issuance of common shares on vesting of restricted share units              |       | 32,506            |       | 15,769              |       | —         |       | —         |       | —          |       | 15,769                 |       |
| Release of common shares from escrow for services                           |       | —            |       | 18,277              |       | —         |       | —         |       | —          |       | 18,277                 |       |
| Issuance of common shares under Directors’ Compensation Plan           |       | 251,045           |       | 158,158             |       | —         |       | —         |       | —          |       | 158,158                |       |
| Stock options and warrants                                                  |       | —            |       | —              |       | 353,215        |       | —         |       | —          |       | 353,215                |       |
| Net loss                                                                    |       | —            |       | —              |       | —         |       | —         |       | (10,722,008     | )          | (10,722,008            | )          |
| **Balance,  June 30, 2009**                                            |       | 110,517,595       |       | 7,037,290           |       | 54,373,484     |       | (209,250       | )          | (34,885,485     | )          | 26,316,039             |       |

 

*See accompanying notes*

 

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**NEULION, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

[unaudited]

[Expressed in U.S. dollars, unless otherwisenoted]

 
| ** **                                                                | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|---------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                                                                | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
|                                                                      |       |              |       |              |       |   |   |   |   |
| **OPERATING ACTIVITIES**                                                  |       |              |       |              |       |   |   |   |   |
|                                                                      |       |              |       |              |       |   |   |   |   |
| Net loss                                                                  |       | (4,928,130        | )          | (1,549,979        | )          | (10,722,008 | ) | (3,036,125 | ) |
| Adjustments to reconcile net loss to net cash used inoperating activities |       |              |       |              |       |   |   |   |   |
| Depreciation and amortization                                             |       | 1,037,014         |       | 238,925           |       | 2,051,695 |   | 433,988 |   |
| Equity in loss of affiliate                                               |       | —            |       | 521,144           |       | — |   | 978,826 |   |
| Stock-based compensation                                                  |       | 361,836           |       | —            |       | 615,579 |   | — |   |
| Unrealized loss on derivative *[notes 2 and 11]*                          |       | 332,200           |       | —            |       | 809,050 |   | — |   |
|                                                                      |       |              |       |              |       |   |   |   |   |
| Changes in operating assets and liabilities                               |       |              |       |              |       |   |   |   |   |
| Accounts receivable                                                       |       | 34,508            |       | 438,027           |       | 467,377 |   | 1,568,968 |   |
| Inventory                                                                 |       | 92,185            |       | 24,300            |       | 56,565 |   | (631,000 | ) |
| Prepaid expenses, deposits and other assets                               |       | 667,066           |       | 201,189           |       | 763,851 |   | 333,670 |   |
| Other receivables                                                         |       | (259,876          | )          | —            |       | (436,591 | ) | — |   |
| Taxes receivable                                                          |       | (32,283           | )          | —            |       | (24,777 | ) | — |   |
| Due from related parties                                                  |       | 352,480           |       | 28,779            |       | 50,860 |   | 174,302 |   |
| Accounts payable                                                          |       | (727,787          | )          | (65,227           | )          | (1,953,844 | ) | 333,127 |   |
| Accrued liabilities                                                       |       | (784,017          | )          | 305,246           |       | (908,868 | ) | 534,342 |   |
| Deferred revenue                                                          |       | 49,112            |       | (267,454          | )          | (88,272 | ) | (52,935 | ) |
| Long-term liabilities                                                     |       | (52,392           | )          | —            |       | (155,031 | ) | — |   |
| Due to related parties                                                    |       | 106,182           |       | (161,228          | )          | 349,763 |   | (538,034 | ) |
| **Cash (used in) provided by operating activities**                       |       | (3,751,902        | )          | (286,278          | )          | (9,124,651 | ) | 99,129 |   |
| ** **                                                                |       |              |       |              |       |   |   |   |   |
| **INVESTING ACTIVITIES**                                                  |       |              |       |              |       |   |   |   |   |
| Purchase of property, plant and equipment                                 |       | (149,437          | )          | (55,216           | )          | (531,841 | ) | (1,054,258 | ) |
| **Cash used in investing activities**                                     |       | (149,437          | )          | (55,216           | )          | (531,841 | ) | (1,054,258 | ) |
| ** **                                                                |       |              |       |              |       |   |   |   |   |
| **FINANCING ACTIVITIES**                                                  |       |              |       |              |       |   |   |   |   |
| Capital contributions                                                     |       | —            |       | 250,000           |       | — |   | 850,000 |   |
| Proceeds from exercise of stock options                                   |       | 67,000            |       | —            |       | 67,000 |   | — |   |
| **Cash provided by financing activities**                                 |       | 67,000            |       | 250,000           |       | 67,000 |   | 850,000 |   |
| ** **                                                                |       |              |       |              |       |   |   |   |   |
| **Net decrease in cash and cash equivalents****during the period**        |       | (3,834,339        | )          | (91,494           | )          | (9,589,492 | ) | (105,129 | ) |
| Cash and cash equivalents, beginning of period                            |       | 21,567,868        |       | 594,829           |       | 27,323,021 |   | 608,464 |   |
| **Cash  and cash equivalents, end of period**                             |       | 17,733,529        |       | 503,335           |       | 17,733,529 |   | 503,335 |   |

 

*See accompanying notes*

 

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**NEULION, INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

**1. Nature of Operations**

 

On June 4, 2009, NeuLion, Inc.changed its name to NeuLion USA, Inc. (“NeuLion USA”).  On July 13, 2009, JumpTV Inc. changedits name to NeuLion, Inc. (“NeuLion” or the “Company”).  In conjunction with the name change, thestock symbol was changed from “JTV” to “NLN.” This Quarterly Report on Form 10-Q reflects the name changesdescribed above as they are effective as of the date of filing this report.

 

On October 20, 2008, NeuLion USA, aDelaware corporation, completed a merger with a subsidiary of NeuLion, aCanadian corporation (the “Merger”), that was accounted for as a reversetakeover.  As a result of the Merger,NeuLion USA became the legal subsidiary of NeuLion, and NeuLion was required toregister its common shares in the United States under the Securities andExchange Act of 1934, as amended.  On June 8,2009, its Registration Statement on Form 10 became effective.

 

These interim unaudited consolidatedfinancial statements for the three and six months ended June 30, 2009 and2008, and as at June 30, 2009 and December 31, 2008 are issued underthe name of the legal acquirer in the Merger (NeuLion) but are deemed to be acontinuation of the accounting acquirer (NeuLion USA).  These financial statements reflect theassets, liabilities and results of operations of NeuLion USA, the accountingacquirer, and only include the assets, liabilities and results of operations ofNeuLion, the legal acquirer, subsequent to the reverse takeover on October 20,2008 (the “Acquired Business”).

 

The Company’s primary business is workingwith content partners to develop end-to-end solutions for multimedia IPTVservices.

 

**2. Basis of Presentation and Significant AccountingPolicies**

** **

The Company’s accountingpolices are consistent with those presented in our annual consolidatedfinancial statements as at December 31, 2008, except for the adoptioneffective January 1, 2009 of Emerging Issues Task Force Issue No. 07-5,“Determining Whether an Instrument (or an Embedded Feature) is Indexed to anEntity’s Own Stock” (“EITF 07-5”) described below.  These interim unaudited consolidatedfinancial statements do not include all note disclosures required by generallyaccepted accounting principles (“GAAP”) in the U.S. for annual financialstatements and therefore should be read in conjunction with the auditedconsolidated financial statements, including the notes thereto, in the 2008annual financial statements.

 

The preparation of thesefinancial statements is in conformity with U.S. GAAP, which requires managementto make certain estimates that affect the reported amounts in the interimunaudited consolidated financial statements, and the disclosures made in theaccompanying notes. Despite the Company’s intention to establish accurateestimates and use reasonable assumptions, actual results may differ from theseestimates.  All significant intercompanytransactions and accounts have been eliminated on consolidation.

 

Note 12 reconciles the Company’s interimunaudited consolidated financial statements from U.S. GAAP to Canadian GAAP.

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

In the opinion of management, these interimunaudited consolidated financial statements contain all of the adjustments of anormal and recurring nature necessary to present fairly the Company’s financialposition as at June 30, 2009 and December 31, 2008 and the results ofoperations and cash flows for the three and six-month periods ended June 30,2009 and 2008.

 

**Recently Issued Accounting Standards**

 

In May 2009, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 165, “Subsequent Events” (“SFAS No. 165”), whichestablishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.  This statement sets forth thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements.  SFAS No. 165 also requires thedisclosure of the date through which an entity has evaluated subsequent eventsand the basis for that date, that is, whether that date represents the date thefinancial statements were issued or were available to be issued.  Thisstatement is effective for interim or annual reporting periods ending after June 15,2009.  During the three months ended June 30,2009, the Company adopted SFAS No. 165. The adoption of SFAS No. 165 did not have a material impact on ourinterim consolidated financial statements or related footnotes.

 

In April 2009, the FASB issued FSP No. 107-1and APB No. 28-1, “Interim Financial Disclosures about Fair Value ofFinancial Instruments” (“FSP 107-1”), which amends SFAS No. 107,“Disclosures about Fair Value of Financial Instruments,” to require disclosuresabout fair value of financial instruments for interim and annual reportingperiods of publicly traded companies. FSP 107-1 also amends APB Opinion No. 28,“Interim Financial Reporting,” to require those disclosures in summarizedfinancial information at interim reporting periods.  This interpretation is effective for interimreporting periods ending after June 15, 2009. During the three monthsended June 30, 2009, the Company adopted FSP 107-1.  The adoption of FSP 107-1 did not have amaterial impact on our interim consolidated financial statements or relatedfootnotes.

 

Effective January 1, 2009, the Companyadopted EITF 07-5.  One of theconclusions reached under EITF 07-05 was that an equity-linked financialinstrument would not be considered indexed to the entity’s own stock if thestrike price is denominated in a currency other than the issuer’s functionalcurrency.  The conclusion reached underEITF 07-05 clarified the accounting treatment for these and certain other financialinstruments as it related to SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS No. 133”).  EITF 07-5 specifies that a contract thatwould otherwise meet the definition of a derivative under SFAS No. 133,would not be treated as a derivative if it met the following conditions:  (a) indexed to the Company’s own stock;and (b) classified in shareholders’ equity in the Company’s statement offinancial position.

 

As a result, the Company’s outstandingwarrants denominated in Canadian dollars as detailed in note 11 are notconsidered to be indexed to our own stock because the exercise price isdenominated in Canadian dollars and our functional currency is United Statesdollars and therefore have been treated as derivative financial instruments andrecorded at their fair value as a liability. All other outstanding convertible instruments are considered to beindexed to our own stock, because their exercise price is the same as our functionalcurrency, and are included in shareholders’ equity.

 

8

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities — an amendmentof FASB Statement No. 133” (“SFAS No. 161”), which requiredenhanced disclosures about an entity’s derivative and hedging activities andwas intended to improve the transparency of financial reporting.  SFAS No. 161 applies to all derivativeinstruments, including bifurcated derivative instruments and related hedgingitems accounted for under SFAS No. 133 and its relatedinterpretations.  SFAS No. 161amends and expands the disclosure requirements of SFAS No. 133 with theintent to provide users of financial statements with an enhanced understandingof:  (i) how and why an entity usesderivative instruments; (ii) how derivative instruments and related hedgeditems are accounted for under SFAS No. 133 and its relatedinterpretations; and (iii) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance and cashflows.  The provisions of this standarddo not require disclosures for earlier periods presented for comparativepurposes at initial adoption.  SFAS No. 161was effective for fiscal years and interim periods beginning after November 15,2008.  The Company adopted this newstandard effective January 1, 2009.  The required disclosures areincluded in note 11 to these consolidated financial statements.

 

**Advertising**

 

**Advertising costs are expensed as incurred and totaled$300,087**and $480,431for the three and six months ended June 30, 2009,respectively [three and six months ended June 30, 2008 - $7,695 and$49,197, respectively].

** **

**Comparative Information**

** **

**The Company has reclassified certain prior periodinformation to conform with the current period’s presentation.**

** **

**3.  BusinessCombination**

** **

**On October 20, 2008, the Company completed theMerger.  Under the terms of the Merger,NeuLion issued 49,577,427 common shares and 1,840,097 contingent shares *[note 13[ii]]*, which represented approximately the entireissued and outstanding shares of NeuLion prior to closing, to thesecurityholders of NeuLion USA, in exchange for their NeuLion USAsecurities.  The common shares of theCompany are referred to herein as “Shares” or individually as a “Share.”**

 

9

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

*Pro forma*

 

The results of operationsfor NeuLion and NeuLion USA have been included in the Company’s consolidatedstatements of operations since the completion of the Merger on October 20,2008.   The following unaudited pro formafinancial information presents the combined results of the Company and theMerger as if the Merger had occurred at the beginning of 2008:

 
| ** **                                                                                   | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                   | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                                                                                   | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                   | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                   | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                                                   | ** ** | **[unaudited**    | ** ** | **[unaudited**    | ** ** | **[unaudited** | ** ** | **[unaudited** | ** ** |
| ** **                                                                                   | ** ** | **actual]**       | ** ** | **pro forma]**    | ** ** | **actual]** | ** ** | **pro forma]** | ** ** |
|                                                                                         |       |              |       |              |       |   |   |   |   |
| Total revenue                                                                                |       | 6,462,438         |       | 6,589,078         |       | 13,036,465 |   | 12,145,257 |   |
| Cost of services revenue, exclusive of  depreciation and amortization shown separately below |       | (2,907,965        | )          | (4,228,114        | )          | (6,291,844 | ) | (8,195,833 | ) |
| Cost of equipment revenue                                                                    |       | (385,516          | )          | (1,285,189        | )          | (846,121 | ) | (2,146,470 | ) |
| Selling, general and administrative,  including stock-based compensation [i]                 |       | (6,778,665        | )          | (12,246,496       | )          | (13,952,006 | ) | (23,540,484 | ) |
| Impairment of goodwill [ii]                                                                  |       | —            |       | —            |       | — |   | (47,882,317 | ) |
| Impairment of long-lived assets [iii]                                                        |       | —            |       | —            |       | — |   | (173,786 | ) |
| Depreciation and amortization [iv]                                                           |       | (1,037,014        | )          | (897,118          | )          | (2,051,695 | ) | (1,753,840 | ) |
| Operating loss                                                                               |       | (4,646,722        | )          | (12,067,839       | )          | (10,105,201 | ) | (71,457,473 | ) |
| Net loss                                                                                     |       | (4,928,130        | )          | (12,368,106       | )          | (10,722,008 | ) | (71,970,596 | ) |
| Net loss per weighted  average number of shares outstanding – basic and diluted         |       | (0.04             | )          | (0.29             | )          | (0.10 | ) | (1.69 | ) |

 

----

[i]  Inaccordance with SFAS 123R, these amounts include stock-based compensation forthe Company’s stock options, restricted share units, stock appreciation rights,warrants and retention warrants.

[ii] As at March 31, 2008, the AcquiredBusiness’ market capitalization decreased below the carrying value of theCompany.  Management considered this tobe an indicator of impairment and, accordingly, as at March 31, 2008,performed a goodwill impairment test and recorded a non-cash goodwillimpairment charge of $47,882,317.

[iii] The Acquired Business determined thatthe business climate had changed such that the carrying value of the AcquiredBusiness’ long-lived assets may not be fully recoverable.  Accordingly, the Acquired Business’ recordeda non-cash impairment charge of $173,786.

[iv] In determining the pro forma amountsabove, the Company made adjustments to depreciation and amortization as aresult of the revised fair values of tangible and intangible assets performedas a result of the Merger.

 

**4. Economic Dependence and Concentration of CreditRisk**

 

For the six months ended June 30, 2009,one customer accounted for 10% of revenue. For the six months ended June 30, 2008, three customers accountedfor 83% of revenue as follows:  54%, 16%and 13%.  For the three months ended June 30,2009, one customer accounted for 10% of revenue.  For the three months ended June 30,2008, three customers accounted for 85% of revenue as follows: 59%, 15% and11%.

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

As at June 30, 2009, two customersaccounted for 28% of the accounts receivable as follows:  17% and 11%. As at December 31, 2008, one****customeraccounted for 25% of the accounts receivable.

 

The Company is economically dependent uponTransVideo International, Ltd. (“TransVideo”), a related party *[note 5]*, to provide set top boxes (“STBs”) used byCompany’s customers.

 

**5**.Related Party Transactions

 

The Company has entered into certaintransactions and agreements in the normal course of operations with relatedparties.  Significant related partytransactions are as follows:

 

*TransVideo*

 

STB purchases amounted to $193,856 and$589,136****and transcoder licensing fees amountedto $16,000****and $44,000****forthe three and six months ended June 30, 2009, respectively.  STB purchases amounted to $1,206,000****and $2,539,000 and transcoder licensing fees amounted to$30,000 and $45,000 for the three and six months ended June 30, 2008,respectively.  Included in cost ofequipment revenue is the cost of STBs sold of $229,656 and $598,816****for the three and six months ended June 30, 2009,respectively [three and six months ended June 30, 2008 — $1,206,000 and$1,848,000, respectively].

 

*Patstar, Inc. (**“Patstar”)*

 

Rent expense paid by Patstar of $871****and $1,762****is included asa recovery in selling, general and administrative expense for the three and sixmonths ended June 30, 2009, respectively.

 

*KyLinTV, Inc. (**“KyLinTV”)*

 

KyLinTV is an IPTV service provider that iscontrolled by the Chairman of the Board of Directors of the Company.  The Company also provides KyLinTV withadministrative and general corporate support.  On June 1, 2008, the Company entered intoan agreement with KyLinTV to build and deliver the setup and back officeoperation of an IPTV service.  TheCompany also provides KyLinTV with administrative and general corporate support.  For each of the periods presented, theamounts paid for these services provided by the Company for the three and sixmonths ended June 30, 2009 were $150,615****and$301,230, respectively [three and six months ended June 30, 2008 —$383,695 and $769,843, respectively]. During the three and six months ended June 30, 2009, the Companypurchased STBs from KyLinTV in the amount of $96,030****and****$150,120, respectively. During the six months ended June 30, 2008, the Company purchasedequipment from KyLinTV in the amount of $620,000.

 

*New YorkIslanders Hockey Club, LP**(“NewYork Islanders”)*

 

The Company has a professional hockey club asa customer, which is owned by the Chairman of the Board of Directors of theCompany.   The Company provides ITrelated professional services to the New York Islanders.

 

11

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Table of Contents

 

**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

*Renaissance Property Associates, LLC (“Renaissance”)*

 

Renaissance is a real estate managementcompany owned by the Chairman of the Board of Directors of the Company.  In June 2009, the Company signed asublease agreement with Renaissance for office space in Plainview, NewYork.  Rent expense paid by the Companyto Renaissance of $93,419 and $186,837, inclusive of taxes and utilities, is includedin selling, general and administrative expense for the three and six monthsended June 30, 2009, respectively.

 

The Company recognized revenue from relatedparties for the three and six months ended as follows:

 
| ** **                                           | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                                           | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                           | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
|                                                 |       |              |       |              |       |   |   |   |   |
| New York Islanders                                   |       | 151,976           |       | 60,000            |       | 211,976 |   | 120,000 |   |
| Renaissance                                          |       | 30,000            |       | 30,000            |       | 60,000 |   | 60,000 |   |
| The Smile Train, Inc. (“Smile Train”) |       | 54,000            |       | 27,000            |       | 54,000 |   | 66,000 |   |
| Hawaii IPTV, LLC (“Hawaii”)                |       | 15,017            |       | 11,841            |       | 31,488 |   | 21,234 |   |
| KyLinTV                                              |       | 485,915           |       | 129,535           |       | 887,400 |   | 129,535 |   |
|                                                 |       | 736,908           |       | 258,376           |       | 1,244,864 |   | 396,769 |   |

 

 

As at June 30, 2009 and December 31,2008, the amounts due from (to) related parties are as follows:

 
| ** **         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|-------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **         | ** ** | **$**             | ** ** | **$**                 | ** ** |
|               |       |              |       |                  |       |
| New York Islanders |       | 43,084            |       | 29,189                |       |
| Renaissance        |       | —            |       | (1,146                | )          |
| Smile Train        |       | —            |       | 27,000                |       |
| Hawaii             |       | (1,971            | )          | 17,527                |       |
| TransVideo         |       | (404,618          | )          | (55,680               | )          |
| KyLinTV            |       | 228,310           |       | 250,343               |       |
| Patstar            |       | 1,805             |       | —                |       |
|               |       | (133,390          | )          | 267,233               |       |

 

**Investment in affiliate —KyLinTV**

 

The Company records its investment in KyLinTVusing the equity method.

 

From January 1, 2008 through June 30,2009, the Company’s equity interest in the affiliate was 17.1%.  As previously discussed, the Company alsoprovides KyLinTV with administrative and general corporate support.  Management has determined that as a result ofthe 17.1% equity interest combined 

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

with the services that the Company provides KyLinTV, the Companycontinues to have significant influence on the operating activities of KyLinTV;therefore, the Company continues to account for KyLinTV using the equity methodof accounting for investment.

 

The Company’s proportionate share of theequity loss from KyLinTV has been accounted for as a charge on the Company’sconsolidated statements of operations and comprehensive loss.   Dueto KyLinTV’s accumulated losses, the investment has been reduced to zero as at December 31,2008.  No further charges will berecorded as the Company has no obligation to fund the losses of KyLinTV.

 

The results of operations and financialposition of the Company’s equity basis investment in KyLinTV are summarizedbelow for the three and six months ended June 30:

 
| ** **                              | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                              | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
|                                    |       |              |       |              |       |   |   |   |   |
| Condensed income statement information: |       |              |       |              |       |   |   |   |   |
| Net sales                               |       | 2,000,681         |       | 1,450,108         |       | 3,955,764 |   | 2,722,818 |   |
| Net loss                                |       | (1,499,109        | )          | (2,322,292        | )          | (2,979,890 | ) | (4,233,073 | ) |

 

 
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                           | ** ** | **$**             | ** ** | **$**                 | ** ** |
|                                 |       |              |       |                  |       |
| Condensed balance sheet information: |       |              |       |                  |       |
| Current assets                       |       | 1,927,203         |       | 927,427               |       |
| Non-current assets                   |       | 1,634,316         |       | 2,411,319             |       |
| Total assets                         |       | 3,561,519         |       | 3,338,746             |       |
| Current liabilities                  |       | 13,266,573        |       | 10,063,909            |       |
| Non-current liabilities              |       | —            |       | —                |       |
| Equity (deficiency)                  |       | (9,705,054        | )          | (6,725,163            | )          |
| Total liabilities and  equity        |       | 3,561,519         |       | 3,338,746             |       |

 

**6. Loss per Share**

** **

Basic loss per share is computed by dividingnet loss for the period by the weighted average number of Shares outstandingfor the period. Diluted loss per share is computed by dividing net loss for theperiod by the weighted average number of Shares outstanding and, if dilutive,potential Shares using the treasury stock method.

 

For the three and six months ended June 30,2009 and 2008, the Company had potential Shares which, due to the lossesincurred, were considered anti-dilutive equity instruments. Accordingly, theeffect of the convertible instruments detailed below for each of the periodshas not been reflected in computing diluted loss per share for the three andsix months ended June 30, 2009 and 2008.

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

The following table summarizes the potentialShares that were outstanding as at June 30, 2009 and 2008 but were notincluded in the computation of diluted loss per share as their effect wouldhave been anti-dilutive.

 
| ** **                               | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2009**          | ** ** | **2008**          | ** ** |
| ** **                               | ** ** | **#**             | ** ** | **#**             | ** ** |
|                                     |       |              |       |              |       |
| Stock options                            |       | 8,433,270         |       | 5,559,044         |       |
| Restricted share plan units              |       | 26,716            |       | —            |       |
| Stock appreciation rights                |       | 1,690,000         |       | —            |       |
| Warrants                                 |       | 16,197,500        |       | —            |       |
| Retention warrants                       |       | 907,005           |       | —            |       |
| **Contingent performance consideration** | ** ** | **3,680,194**     | ** ** | **—**        | ** ** |

 

**7.  Contingencies**

 

During the ordinary course of businessactivities, the Company may be contingently liable for litigation and a partyto claims.  Management believes thatadequate provisions have been made in the accounts where required.  Although the extent of potential costs andlosses, if any is uncertain, management believes that the ultimate resolutionof such contingencies will not have an adverse effect on the consolidatedfinancial position or results of operations of the Company.

 

**8.  Stock Option and Stock-Based CompensationPlans**

 

The following table showsthe breakdown of total stock-based compensation expense included in the interimconsolidated statement of operations:

 
| ** **                   | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                   | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                   | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                   | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                   | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
|                         |       |              |       |              |       |   |   |   |   |
| Stock options and warrants   |       | 143,315           |       | —            |       | 353,215 |   | — |   |
| Restricted share plan units  |       | 9,923             |       | —            |       | 15,769 |   | — |   |
| Stock appreciation rights    |       | 38,375            |       | —            |       | 70,160 |   | — |   |
| Directors’ compensation |       | 158,158           |       | —            |       | 158,158 |   | — |   |
| Escrowed shares              |       | 12,065            |       | —            |       | 18,277 |   | — |   |
|                         |       | 361,836           |       | —            |       | 615,579 |   | — |   |

 

On May 27, 2009, aconsultant of the Company exercised 50,000 stock options with an exercise priceof $0.64 for gross proceeds to the Company of $32,000.

 

On June 27, 2009, aconsultant of the Company exercised 100,000 stock options with an exerciseprice of $0.35 for gross proceeds to the Company of $35,000.

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

On June 30, 2009, theCompany issued 251,045 Shares to certain current and former non-managementdirectors of the Company as compensation pursuant to the Directors’Compensation Plan.

 

**9.  Segmented Information**

 

The Company operates as one reportablesegment: to provide full end-to-end enterprise-level IPTV and otherprofessional services.  Substantially allof the Company’s revenues and long-lived assets are in the United States.

 

**10.  Income Taxes**

 

On January 1, 2007, the Company adoptedthe provisions of Financial Accounting Standards Board Interpretation No. 48,“*Accounting for Uncertainty in Income Taxes*”(“FIN 48”), which clarifies the accounting for uncertainty recognized in incometaxes recognized in a company’s financial statements in accordance with SFAS No. 109,“*Accounting for Income Taxes.*”  The adoption of FIN 48 did not impact ourconsolidated financial conditions, results of operations or cash flows.  There were no accrued interest and penaltiesassociated with uncertain tax positions as of June 30, 2009.

 

As of December 31, 2008, the Company hadunrecognized tax benefits of $28.0 million. Other than additional losses, there has been no significant change inunrecognized tax benefits through June 30, 2009.  Our effective tax rate is zero due to currentyear losses and the benefit of unrecognized tax losses.

 

**11. Derivative Instruments**

 

The Company’s onlyderivative instruments are 11,000,000 warrants, the exercise price for whichare denominated in a currency other than the Company’s functional currency, asfollows:

 

·                  5,500,000 Series A warrants exercisableat Cdn$1.25 and expire on October 20, 2010.

·                  5,500,000 Series B warrants exercisableat Cdn$1.50 and expire on October 20, 2010.

 

These warrants have been recorded at their relative fair values atissuance and will continue to be recorded at fair value at each subsequentbalance sheet date.  Any change in valuebetween reporting periods will be recorded as other income (expense).  These warrants will continue to be reportedas a liability until such time as they are exercised or expire.  The fair value of these warrants is estimatedusing the Black-Scholes-Merton option-pricing model.

 

As of January 1, 2009, the grant datefair value of these warrants in the amount of $2,464,000 was reallocated fromadditional paid-in-capital and a derivative liability was recorded in theamount of $587,950, being the fair value of the warrants on January 1,2009 offset by an adjustment to accumulated deficit of $1,876,050.

 

As of June 30, 2009 and March 31,2009, the fair value of the warrants was determined to be $1,397,000 and$1,064,800, respectively; accordingly, the Company recorded $332,200 and$809,050 in other expense for the three and six months ended June 30,2009, respectively, related to the change in the fair value of thesewarrants.  There is no cash flow impactfor these derivates until the warrants are 

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

exercised.  If these warrants areexercised, the Company will receive the proceeds from the exercise at thecurrent exchange rate at the time of exercise.

 

**12.Reconciliation of U.S. GAAP to Canadian GAAP**

 

The consolidated financialstatements of the Company are prepared in U.S. dollars in accordance with U.S. GAAP.The following adjustments and disclosures would be required in order to presentthese consolidated financial statements in accordance with Canadian GAAP:

 

**Income Statement Items using Canadian GAAP**

** **
| ** **                                                                    | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                    | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                                                                    | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                    | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                    | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
|                                                                          |       |              |       |              |       |   |   |   |   |
| NET LOSS USING UNITED STATES GAAP                                             |       | (4,928,130        | )          | (1,549,979        | )          | (10,722,008 | ) | (3,036,125 | ) |
| Add:                                                                          |       |              |       |              |       |   |   |   |   |
| Adjustment for stock based compensation on  SARs [i]                          |       | 35,925            |       | —            |       | 67,710 |   | — |   |
| Adjustment for unrealized loss on  derivative [ii]                            |       | 332,200           |       | —            |       | 809,050 |   | — |   |
| NET LOSS USING CANADIAN GAAP                                                  |       | (4,560,005        | )          | (1,549,979        | )          | (9,845,248 | ) | (3,036,125 | ) |
|                                                                          |       |              |       |              |       |   |   |   |   |
| NET  AND COMPREHENSIVE LOSS PER SHARE USING CANADIAN GAAP - basic and diluted |       | $                 | (0.04      | )                 | $          | (0.04 | ) | $ | (0.09 | ) | $ | (0.07 | ) |
|                                                                               |            |                   |            |                   |            |  |  |  |  |  |  |  |  |

 

**Balance Sheet Items using Canadian GAAP**

 
| ** **                                    | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **U.S.**               | ** ** | **Canadian**               | ** ** | **U.S.** | ** ** | **Canadian** | ** ** |
| ** **                                    | ** ** | **GAAP**               | ** ** | **GAAP**                   | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
| ** **                                    | ** ** | **$**                  | ** ** | **$**                      | ** ** | **$** | ** ** | **$** | ** ** |
|                                          |       |                   |       |                       |       |   |   |   |   |
| Accrued liabilities [i]                       |       | 6,756,408              |       | 6,492,099                  |       | 7,595,116 |   | 7,579,517 |   |
| Derivative liability [ii]                     |       | 1,397,000              |       | —                     |       | — |   | — |   |
| Total current liabilities [i] and [ii]        |       | 14,123,538             |       | 12,642,229                 |       | 15,209,323 |   | 15,192,724 |   |
| Total liabilities [i] and [ii]                |       | 15,435,012             |       | 13,953,703                 |       | 16,724,104 |   | 16,707,505 |   |
| Accumulated deficit [i] and [ii]              |       | (34,885,485            | )          | (34,517,360                | )          | (26,039,527 | ) | (26,022,928 | ) |
| Total shareholders’  equity [i] and [ii] |       | 26,316,039             |       | 26,684,164                 |       | 37,013,578 |   | 37,030,177 |   |

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

 

**Cash Flows Items using Canadian GAAP**

** **
| ** **                          | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|-------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                          | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                          | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                          | ** ** | **2009**          | ** ** | **2009**          | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                          | ** ** | **U.S.**          | ** ** | **Canadian**      | ** ** | **U.S.** | ** ** | **Canadian** | ** ** |
| ** **                          | ** ** | **GAAP**          | ** ** | **GAAP**          | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
| ** **                          | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
|                                |       |              |       |              |       |   |   |   |   |
| Net loss [i] and [ii]               |       | (4,928,130        | )          | (4,560,005        | )          | (10,722,008 | ) | (9,845,248 | ) |
| Stock-based compensation [i]        |       | 361,836           |       | 325,911           |       | 615,579 |   | 547,869 |   |
| Unrealized loss on  derivative [ii] |       | 332,200           |       | —            |       | 809,050 |   | — |   |

 

**There were no material differences in cash flow items usingCanadian GAAP for the three and six months ended June 30, 2008.**

** **

**Areas of material difference between Canadian GAAP and U.S.GAAP and their impact on the consolidated financial statements are as follows:**

** **

**[i]   StockAppreciation Rights (“SARs”)**

** **

**·**                  Under U.S. GAAP, the Companyrecognizes a liability and compensation expense for the fair value of the SARson each reporting date.

** **

**·**                  Under Canadian GAAP, theCompany recognizes a liability and compensation expense for the “in the money”value of the SARs on each reporting date.

** **

**[ii]   DerivativeLiability**

** **

·                  CICAHandbook Section 3861, *Financial Instruments —Disclosure and Presentation*, establishes standards for presentationof financial instruments and non-financial derivatives, and identifies theinformation that should be disclosed about them.  The revisions change the accounting forcertain financial instruments that have liability and equity characteristics.

 

**·**                  Under U.S. GAAP, theCompany recognizes a derivative liability on the consolidated balance sheetsfor the fair value of all convertible instruments with an exercise pricedenominated in a currency other than the Company’s functional currency.  The Company fair values this liability oneach reporting date with the corresponding entry to unrealized gain (loss) onderivative on the consolidated statement of operations.

** **

**·**                  Under Canadian GAAP, theCompany fair values these convertible instruments on the grant date andincludes them within additional paid in capital on the consolidated balancesheets.  The Company does not recognizeany changes in fair value.

** **

In addition, recent Canadian GAAP accountingpronouncements that may impact the Company’s disclosurerequirements are as follows:

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

***CICA Handbook Section 1535— Capital Disclosures***

** **

**The Company manages the following accounts in regards tocapital management:**

** **
| ** **                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                    | ** ** | **$**             | ** ** | **$**                 | ** ** |
|                          |       |              |       |                  |       |
| **Shareholders’ equity** |       |              |       |                  |       |
| Share capital                 |       | 7,037,290         |       | 6,762,097             |       |
| Additional paid in capital    |       | 54,373,484        |       | 56,500,258            |       |
| Promissory note receivable    |       | (209,250          | )          | (209,250              | )          |
| Accumulated deficit           |       | (34,885,485       | )          | (26,039,527           | )          |
|                          |       | 26,316,039        |       | 37,013,578            |       |

 

**(Thefigures in the table above are presented in accordance with U.S. GAAP.)**

 

The Company’s outstandingshare capital is comprised of Shares.  AtJune 30, 2009, an unlimited number of Shares were authorized and110,517,595 (December 2008 - 110,084,044) Shares were issued andoutstanding. Approximately 60%****of the Sharesare held by insiders, and the remaining Shares are widely held.  Further information on the Company’soutstanding share capital is provided in note 8 of these consolidated financialstatements.

 

At June 30, 2009, atotal of 8,433,270****stock options,26,716****restricted share units, 16,197,500****warrants, 907,005****retentionwarrants and 1,690,000****SARs wereoutstanding, which convertible securities cumulatively representedapproximately 25% of the Company’s issued and outstanding share capital.Pursuant to guidelines set by the Company’s respective equity plans:

 

·                  Themaximum number of Shares available for issuance upon exercise of stock optionsis limited to the greater of 12.5% of the issued and outstanding Shares and4,000,000;

 

·                  Themaximum number of Shares that may be issued pursuant to awards of restrictedshare units is 1,000,000;

 

·                  Themaximum number of Shares available for issuance pursuant to the exercise ofretention warrants is limited to 2,500,000; and

 

·                  Themaximum number of Shares available for issuance pursuant to the exercise ofSARs is limited to the greater of 5% of the issued and outstanding Shares and4,150,000.

 

The Company is in compliance with theseguidelines.

 

**The Company’s objective in managing capital is to ensure asufficient liquidity position to finance its revenue growth, general andadministrative expenses, working capital and capital expenditures.**

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

**In order to maintain or adjust its capital structure, theCompany may issue new shares and/or purchase shares for cancellation pursuantto normal course issuer bids.**

** **

**To finance its activities, the Company has relied onrevenue growth and capital contributions.**

** **

**The Company’s policy is to maintain a minimal level ofdebt.  At this time the Company has notutilized debt facilities as part of its capital management program nor has itpaid dividends to its shareholders.**

** **

**The capital management objectives for the period ended June 30,2009 remained the same as those of the previous fiscal period.**

** **

**The Company is not subject to any externally imposedcapital requirements.**

** **

***CICA Handbook Sections3862 and 3863 — Financial Instruments — Disclosures and Presentation***

** **

The Company’s financial instruments arecomprised of cash and cash equivalents, accounts receivable, other receivables,accounts payable, other accrued liabilities and amounts due to/from relatedparty.

 

The fair value of a financial instrument isdefined as the amount at which the instrument could be exchanged in a current transactionbetween willing parties.

 

The fair value of assets and liabilities wereas follows:

 
| ** **                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                  | ** ** | **$**             | ** ** | **$**                 | ** ** |
|                        |       |              |       |                  |       |
| Financial Assets            |       |              |       |                  |       |
| Held-for-Trading            |       |              |       |                  |       |
| Cash and cash equivalents   |       | 17,733,529        |       | 27,323,021            |       |
| Loans and Receivables       |       |              |       |                  |       |
| Accounts receivable         |       | 1,816,865         |       | 2,284,242             |       |
| Other receivables           |       | 664,302           |       | 227,711               |       |
| Due from related parties    |       | 273,199           |       | 324,059               |       |
|                        |       |              |       |                  |       |
| Financial Liabilities       |       |              |       |                  |       |
| Other Financial Liabilities |       |              |       |                  |       |
| Accounts payable            |       | 2,511,544         |       | 4,465,388             |       |
| Accrued liabilities         |       | 6,756,408         |       | 7,595,116             |       |
| Due  to related parties     |       | 406,589           |       | 56,826                |       |

 

All fair values denoted above approximate their carrying values due totheir short term nature and/or variable interest rates.

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

Risk management is primarily theresponsibility of the Company’s corporate finance function.  Significant risks are regularly monitored andactions are taken, when appropriate, according to the Company’s approvedpolicies, established for that purpose. In addition, as required, these risks are reviewed with the Company’sBoard of Directors.

 

Foreign Exchange Risk

 

The Company is exposed to foreign exchangerisk as a result of transactions in currencies other than its functionalcurrency of the United States dollar. The majority of the Company’s revenues are transacted in U.S. dollars,whereas the majority of expenses are transacted in U.S. or Canadiandollars.  The Company does not use derivativeinstruments to hedge against foreign exchange risk.

 

Interest Rate Risk

 

The Company is exposed to interest rate riskon its invested cash and cash equivalents and its short-term investments.  The interest rates on these instruments arebased on the banks’ applicable prime rate and therefore are subject to changewith the market.  The Company does notuse derivative financial instruments to reduce its interest rate risk.

 

Credit Risk

 

The Company sells its services to a varietyof customers under various payment terms and therefore is exposed to creditrisk.  The Company has adopted policiesand procedures designed to limit this risk. The maximum exposure to credit risk at the reporting date is thecarrying value of receivables.  TheCompany establishes an allowance for doubtful accounts that represents itsestimate of incurred losses in respect of accounts receivable.  The Company believes that the concentrationof credit risk is limited due to the Company’s primary source of revenues todate being subscription revenues, for which monies are received in advanceprincipally through credit cards.

 

There is no significant credit risk relatedto the Company’s cash and cash equivalents and short-term investments. Creditrisk is managed through conducting financial and other assessments of theseinvestments on an ongoing basis.

 

The following table sets out details of theage of accounts receivable that are outstanding and related allowance fordoubtful accounts:

 
| ** **                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                            | ** ** | **$**             | ** ** | **$**                 | ** ** |
|                                  |       |              |       |                  |       |
| Current                               |       | 1,380,478         |       | 1,697,271             |       |
| 31-60 days                            |       | 132,668           |       | 287,070               |       |
| 61-90 days                            |       | 105,888           |       | 105,525               |       |
| Over 90 days                          |       | 326,907           |       | 484,914               |       |
| Less: Allowance for doubtful accounts |       | (129,076          | )          | (290,538              | )          |
| Total accounts  receivable, net       |       | 1,816,865         |       | 2,284,242             |       |

 

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**NEULION, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressed in U.S. dollars, unless otherwisenoted]**

**Information as at June 30, 2009 and forthe three and six months ended**

**June 30, 2009 and 2008 is unaudited**

 

The carrying amount ofaccounts receivable is reduced through the use of an allowance account and theamount of the loss is recognized in the consolidated statements of operationsand comprehensive loss.  When areceivable balance is considered uncollectible, it is written off against theallowance for accounts receivable. Subsequent recoveries of amounts previouslywritten off are credited against operating expenses in the consolidatedstatements of operations and comprehensive loss.

 

***Recent AccountingPronouncements***

 

In February 2008, theCICA issued new Handbook Section 3064, *Goodwilland Intangible Assets*, which replaces Section 3062, *Goodwill and Other Intangible Assets*, and Section 3450,*Research and Development Costs*.  The new standard addresses when an internallydeveloped intangible asset meets the criteria for recognition as an asset.  The section also issued amendments to Section 1000,*Financial Statement Concepts*.  These changes are effective for fiscal yearsbeginning on or after October 1, 2008, with earlier adoption permitted,and have been adopted by the Company effective January 1, 2009.  The objectives of the changes are to reinforcea principle-based approach to the recognition of costs as assets and to clarifythe application of the concept of matching revenues and expenses in Section 1000.  Collectively, these changes bring Canadianpractice closer to International Financial Reporting Standards (“IFRS”) byeliminating the practice of recognizing as assets a variety of start-up,pre-production and similar costs that do not meet the definition andrecognition criteria of an asset.  Therewas no material effect on the Company’s interim consolidated financialstatements as a result of adopting CICA Handbook Section 3064.

 

In February 2008, theCICA Accounting Standards Board confirmed that the changeover to IFRS fromCanadian GAAP will be required for publicly accountable enterprises, effectivefor the interim and annual financial statements relating to fiscal yearsbeginning on or after January 1, 2011. The Company became an SEC issuer effective June 8, 2009 and expectsto continue to use U.S. GAAP until the date that IFRS is implemented in theUnited States, which is currently estimated to occur no sooner than 2014.

 

**13.Subsequent Events**

 

We evaluated subsequent events through August 13,2009 when the financial statements were issued.

 

[i]****On June 4, 2009, NeuLion, Inc. changedits name to NeuLion USA, Inc.  On July 13,2009, JumpTV Inc. changed its name to NeuLion, Inc.  In conjunction with the name change, thestock symbol was changed from “JTV” to “NLN.”

 

[ii] On July 31, 2009, the Companydetermined that its wholly owned subsidiary, Cycling TV Limited, had not metcertain revenue milestones as detailed in the purchase agreement between thetwo parties dated July 31, 2007.  Assuch, the Company intends to cancel 1,840,097 Shares held in escrow pursuant tosuch agreement.  Additionally, theCompany intends to cancel another 1,840,097 Shares held in escrow for NeuLionUSA shareholders pursuant to the merger agreement between the two parties datedJune 26, 2008, which Shares were to be issued if Cycling TV Limited hadachieved its revenue milestones.

 

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**Item 2.        Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*On June 4, 2009, NeuLion, Inc.changed its name to NeuLion USA, Inc. (“NeuLion USA”).  On July 13, 2009, JumpTV Inc. changedits name to NeuLion, Inc. (the “Company” or “NeuLion”).  In conjunction with the name change, thestock symbol was changed from “JTV” to “NLN.” This MD&A reflects the name changes described above as they areeffective as of the date of filing.*

 

The following Management’sDiscussion & Analysis (“MD&A”) of NeuLion’s financial conditionand results of operations, prepared as of August 13,****2009,should be read in conjunction with the Company’s unaudited consolidatedfinancial statements and accompanying notes for the three and six months ended June 30,2009 and 2008, which have been prepared in accordance with United Statesgenerally accepted accounting principles (“U.S. GAAP”).  For additional information and details,readers are referred to the Company’s Annual Audited Financial Statements,Annual Information Form (“AIF”) and MD&A for 2008 which can be foundon www.sedar.com and its Form 10 filed on http://www.sec.gov/edgar.shtml.  All dollar amounts are in U.S. dollars (“US$”or “$”) unless stated otherwise.

 

On October 20, 2008, NeuLion USA, aDelaware corporation, completed a merger with a subsidiary of NeuLion, aCanadian corporation (the “Merger”), that was accounted for as a reversetakeover.  As a result of the Merger,NeuLion USA became the legal subsidiary of NeuLion, and NeuLion was required toregister its common shares in the United States under Section 12 of theSecurities Exchange Act of 1934, as amended. On June 8, 2009, its Registration Statement on Form 10 becameeffective.

 

Our MD&A is intended toenable readers to gain an understanding of NeuLion’s current results andfinancial position.  To do so, we provideinformation and analysis comparing the results of operations and financialposition for the current three and six-month periods to those of the precedingcomparable three and six-month periods. We also provide analysis and commentary that we believe is required toassess the Company’s future prospects. Accordingly, certain sections of this report contain forward-lookingstatements that are based on current plans and expectations.  These forward-looking statements are affectedby risks and uncertainties that are discussed in the AIF and Form 10, andcould have a material impact on future prospects.  Readers are cautioned that actual resultscould vary.

 

**Cautions regardingforward-looking statements**

 

ThisMD&A contains certain forward-looking statements, which reflectmanagement’s expectations regarding the Company’s growth, results ofoperations, performance and business prospects and opportunities.

 

Statementsabout the Company’s future plans and intentions, results, levels of activity,performance, goals or achievements or other future events constituteforward-looking statements.  Whereverpossible, words such as “may,” “will,” “should,” “could,” “expect,” “plan,”“intend,” “anticipate,” “believe,” “estimate,” “predict,” or “potential” or thenegative or other variations of these words, or similar words or phrases, havebeen used to identify these forward-looking statements.  These statements reflect management’s currentbeliefs and are based on information currently available to management as atthe date hereof.

 

Forward-lookingstatements involve significant risk, uncertainties and assumptions.  Many factors could cause actual results,performance or achievements to differ materially from the results discussed or 

 

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implied in the forward-lookingstatements.  These factors should beconsidered carefully and readers should not place undue reliance on theforward-looking statements.  Although theforward-looking statements contained in this MD&A are based upon whatmanagement believes to be reasonable assumptions, the Company cannot assurereaders that actual results will be consistent with these forward-lookingstatements.  These forward-lookingstatements are made as of the date of this MD&A, and the Company assumes noobligation to update or revise them to reflect new events or circumstances,except as required by law.  Many factorscould cause the actual results, performance or achievements of the Company tobe materially different from any future results, performance or achievementsthat may be expressed or implied by such forward-looking statements, including:general economic and market segment conditions, competitor activity, productcapability and acceptance, international risk and currency exchange rates andtechnology changes.  More detailedassessment of the risks that could cause actual results to materially differfrom current expectations is contained in the “Risk Factors” section of the AIFand Form 10.

 

**MERGER AND REVERSE TAKE-OVER**

 

On October 20, 2008, the Companycompleted the Merger with NeuLion USA, an end-to-end IPTV service provider oflive and on-demand sports, international and religious programming over theInternet to a computer and/or through a set top box (“STB”) to atelevision.  Under the terms of theMerger, NeuLion issued 49,577,427 common shares directly, as well as 1,840,097common shares subject to a performance escrow relating to a prior acquisition,which represented approximately the entire issued and outstanding common sharesof NeuLion prior to closing, to the securityholders of NeuLion USA in exchangefor their NeuLion USA securities.  Thecommon shares of NeuLion are referred to herein as “Shares,” or each individuallyas a “Share.”  Pursuant to the Merger,the Company also issued 5,000,000 warrants, fully vested and exercisable fortwo years at US$0.63, and 2,700,000 employee stock options, vesting in equalmonthly amounts over 48 months and exercisable for five years at US$0.60, toemployees of NeuLion USA who became employees of the Company.

 

On October 20, 2008, AvantaLion LLC, anentity controlled by Charles B. Wang, our Chairman and the spouse of Nancy Li,our CEO and the founder and CEO of NeuLion USA, purchased 10,000,000 units fromNeuLion’s treasury at a price of Cdn$1.00 per unit. Each unit (a “Unit”)consists of one Share, one-half of one Share purchase warrant exercisable atCdn$1.25 and one-half of one Share purchase warrant exercisable at Cdn$1.50.The warrants partially comprising the Units are exercisable for a period of twoyears from the date of issuance. G. Scott Paterson, our Vice Chairman, alsopurchased 1,000,000 Units on the same terms. The aggregate gross proceeds fromthe sale of Units (the “Private Placement”) were Cdn$11.0 million or US$9.2million.

 

In accordance with Statement of FinancialAccounting Standards No. 141 (“SFAS No. 141”), “*BusinessCombinations”*, the Company has determined that NeuLion USA was theaccounting acquirer and accordingly has accounted for the Merger as a reversetakeover.  Therefore, the financialstatements and this MD&A for the three and six months ended June 30,2009 and 2008 reflect the assets, liabilities and results of operations ofNeuLion USA, the accounting acquirer, and only include the assets, liabilitiesand results of operations of NeuLion, the legal acquirer, subsequent to thereverse takeover on October 20, 2008 (the “Acquired Business”).  This MD&A is issued under the name of thelegal acquirer (NeuLion), but is deemed to be a continuation of the accountingacquirer (NeuLion USA).

 

**OVERVIEW**

 

The Company is an IPTVservice and technology provider that builds and manages private networks forcompanies interested in reaching specific target audiences. The Companyprovides an “end-to-end”

 

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IPTV service of live and on-demand sports, international televisioncontent and family programming. “IPTV” refers to the distribution over an IPnetwork of streamed audio, video and other multimedia content, similar totelevision programming content, using industry standard streaming protocols.

 

This end-to-end enterprisetechnology solution enables the distribution of IPTV content to subscribers andpay-per-view customers for viewing on multiple platforms, includingInternet-connected browser-based devices such as personal computers, laptopsand mobile devices and standard television sets through Internet-connectedSTBs.

 

The Company’s business modelhas evolved from its inception in December 2003 as a professional servicesprovider to becoming an end-to-end provider of the following IPTV services:

 

·                  contentmanagement — encoding of various digital and analog TV and video formats,

·                  subscribermanagement — managing subscriber access and control of subscriber accounts,

·                  digitalrights management — preserving the integrity of the content and protecting itfrom unauthorized access,

·                  billingservices — enabling customers to view subscription accounts, providingpay-per-view transactional billing, payment processing and advertisinginsertion, and

·                  delivery— delivering streamed audio, video and other multimedia content anywhere,anytime through the Company’s IPTV service and infrastructure

 

This evolution commenced in2006 and is the one of the reasons for the increase in revenue, cost of salesand expenses over the past 3 years.

 

Through the acquisition ofthe Acquired Business on October 20, 2008, the Company has expanded itsportfolio of content from professional sports (the National Hockey League(“NHL”) and the National Football League (“NFL”)), international content(Chinese programming through KyLinTV) and faith based programming (Sky Angel)to include college sports, cycling events, soccer events and additionalinternational channels.

 

The Company’s success isdependent upon several factors, including securing contractual relationships,maintaining technological advantage in a rapidly changing industry and efficientlyoperating the distribution network.

 

**Revenue**

 

The Company earns revenue intwo areas: services revenue and equipment revenue.  Services revenue includes subscriptionrevenue, eCommerce revenue and technology services revenue.  Equipment revenue includes the sale of STBsand related shipping.  These aredescribed in detail in the Operations section.

 

***Customer relationships***

 

The Company has two types ofrelationships — business-to-consumer (“B2C”) and business-to-business (“B2B”).

 

The B2C relationships aremore individual consumer oriented.  TheCompany has signed distribution agreements with individual channel or contentproviders in exchange for royalty payments to such providers.  The Company then markets the content on one(or more) of the targeted websites that the company has developed which arefocused on a specific diaspora community (e.g. Talfazat, LLC for the 

 

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Middle East community; TV-Desi, Inc. for the South Asiancommunity), as well as on the general Company website for purchase by an enduser.   The Company often aggregates thecontent into bundles or packages of similar interest.  The Company incurs marketing expenses inpromoting the availability of the content. The Company expects to have this group of customer relationships migrateto a B2B relationship over time through partnerships and/or affiliates (partiallyor wholly owned) that group the content into similar interests.

 

The B2B relationships havebeen the focus of the Company in the past and are expected to be the focus inthe future.  A B2B relationship isfocused on providing an end-to-end solution to a customer to enable that customerto provide IPTV to its end users.  Thistype of relationship is different than above in that the B2B customer typicallyaggregates the content, negotiates the licensing rights and markets directlythe availability of the content.  Thiscustomer avails itself of the full services of the Company in delivery to itsend users.  This type of relationship istypical in the professional and sports properties and the Sky Angel agreements.

 

**Products**

 

*Sports Programming*

 

The Company offers live andon-demand sports content.  The Companyhas content and distribution agreements with leading professional andcollegiate sports properties.  Amongstprofessional sports leagues, the Company counts the NFL, the NHL, the AmericanHockey League, and Universal Sports as clients.  The Company also owns IPTV rights todistribute in North America live streaming of South American FédérationInternationale de Football Association World Cup Qualifier games in 2009.  The Company also operates a portfolio ofsports-oriented web sites, including Jumptv.com, Sportsya.com, Cycling.tv andCollegeSportsDirect.com.  On thecollegiate landscape, the Company is the premier partner for NationalCollegiate Athletic Association colleges and universities, with agreements inplace with approximately 170 colleges, universities or related sites.

 

*Ethnic/International and Specialty Programming*

 

The Company also offers whatis referred to in the industry as “ethnic television,” which the Companydefines as television directed at a specific diaspora community, as determinedby a shared nationality, language or culture, and generally excludingcommunities for which English is the primary language.  The Company has license agreements directlywith television broadcasters (referred to as “channel partners”) representingapproximately 150 channels in 35 countries that give the Company rights tostream, predominantly on an exclusive world-wide basis and generally for aninitial four-year term, the channel partners’ live linear television feeds overthe public Internet.

 

**Distribution Methods**

 

The Company distributescontent through two primary distribution methods:

 

·                  Internet-connectedbrowser-based devices such as personal computers, laptops and mobile devices;and

 

·                  Standardtelevision through the Company’s Internet-connected STBs.

 

Both of the Company’sdistribution methods take advantage of an open IPTV network, the publicInternet.  As a result, content deliveredby the Company is available globally and is potentially unlimited in breadth.

 

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***Industry and Business Trends***

 

There have been no significant changes inindustry and business trends from the Company’s 2008 annual MD&A.

 

***Overall Performance — Overview***

 

The Company uses the term “organic” to referto the period-over-period changes in its revenues and expenses, excluding therevenues and expenses of the Acquired Business. This permits readers to better compare current year and prior yearrevenues and expenses, and to understand changes that have occurred, withoutregard to the effect of the Merger.

 

***Three months ending June 30, 2009***

 

Revenue for the three monthsended June 30, 2009 was $6.5****million, up117% from $3.0 million for the three months ended June 30, 2008.  The revenue growth of $3.5 million was due toan increase in services revenue of $4.6 million, offset by a decrease in ourequipment revenue of $1.1 million.   Inpart, the revenue growth is due to the acquisition of the Acquired Business,which contributed $3.3 million of the growth. The organic increase (excluding the results of the Acquired Business) inservices revenue is consistent with the increasing scope of operations.  As the number of subscribers increases, thereis a cumulative effect of increasing subscriber revenue on a quarter overquarter basis.  The decrease in equipmentrevenue is a result of the uneven nature of this revenue stream — customersoften place large single orders made to meet minimum order requirements, tomanage the lead time between ordering and shipping and to minimize the relatedshipping costs.  The lead time on neworders is approximately 12 weeks from placing an order to receipt ofgoods.  The purchase by customers of STBsis a leading indicator of future subscriptions. On a pro forma basis, as described in note 3 of the financialstatements, revenue decreased from $6.6 million to $6.5****milliondue to a decline in revenue in the Acquired Business of $0.4 million, offset byorganic growth of $0.3 million.

 

Our net loss for the threemonths ended June 30, 2009 was $4.9****million, or aloss of $0.04 per basic and diluted share, compared with a net loss of $1.5million or a loss of $0.04****per basic anddiluted share for the three months ended June 30, 2008.  The increase in net loss of $3.4****million was due to the following:

 

·                  Increase in organic loss of $0.6 million(excluding non-cash expenses)

·                  Net loss in the Acquired Business of $1.8****million (excluding non-cash expenses)

·                  Increased non-cash expenses of $1.0****million (detailed below in the Net Loss to EBITDAreconciliation)

 

On a pro forma basis (as ifthe merger had occurred on January 1, 2008), our net loss for the threemonths ended June 30, 2008 was $12.4****million or aloss of $0.29****per basic and diluted share.   The decrease in net loss of $7.5****million was due to the following:

 

·                  Increase in organic loss of $0.6 million(excluding non-cash expenses)

·                  Reduction in net loss in the AcquiredBusiness of $7.6 million (excluding non-cash expenses)

·                  Reduction in non-cash expenses of $0.5million

 

Our non-GAAP Adjusted EBITDAloss was $3.2 million for the three months ended June 30, 2009 comparedwith a non-GAAP Adjusted EBITDA loss of $0.8****millionfrom the three months ended 

 

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June 30, 2008.  The increase is non-GAAP Adjusted EBITDA lossis due to the cash impact of the items noted above.  On a pro forma basis, our non-GAAP AdjustedEBITDA loss decreased from a loss of $10.4****million to aloss of $3.2****million for the three monthsended June 30, 2009.  This decreaseis due to cost reductions in most areas of the Acquired Business offset by theincreased organic costs.

 

The Company reports Non-GAAPAdjusted EBITDA loss because it is a key measure used by management to evaluatethe results of the Company and make strategic decisions about the Company.  Non-GAAP Adjusted EBITDA loss represents netloss before interest, income taxes, depreciation and amortization, stock-basedcompensation, impairment of long-lived assets, unrealized loss on derivatives,equity in loss of affiliate, investment income and foreign exchange gain.   This measure does not have any standardizedmeaning prescribed by GAAP and therefore is unlikely to be comparable to thecalculation of similar measures used by other companies, and should not beviewed as an alternative to measures of financial performance or changes incash flows calculated in accordance with GAAP.

 

The reconciliation from netloss to non-GAAP Adjusted EBITDA loss is as follows:

 
| ** **                                   | ** ** | **Three  months ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | ** **                            | ** ** | ** ** | ** ** | **Pro  forma** | ** ** |
| ** **                                   | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** |
|                                         |       |                                  |       |   |   |   |   |
| Net  loss for the period                     |       | (4,928,130                            | )          | (1,549,979 | ) | (12,368,106 | ) |
|                                         |       |                                  |       |   |   |   |   |
| Add  back:                                   |       |                                  |       |   |   |   |   |
| Depreciation  and amortization               |       | 1,037,014                             |       | 238,925 |   | 897,118 |   |
| Stock-based  compensation                    |       | 361,836                               |       | — |   | 747,283 |   |
| Unrealized  loss on derivative               |       | 332,200                               |       | — |   | — |   |
| Equity  in loss of affiliate                 |       | —                                |       | 521,144 |   | 521,144 |   |
| Investment  income and foreign exchange gain |       | (50,792                               | )          | (923 | ) | (220,877 | ) |
|                                         |       |                                  |       |   |   |   |   |
| Non-GAAP  Adjusted EBITDA loss               |       | (3,247,872                            | )          | (790,833 | ) | (10,423,438 | ) |

 

***Six months ending June 30,2009***

 

Revenue for the six monthsended June 30, 2009 was $13.0****million, up165% from $4.9 million for the six months ended June 30, 2008.  The revenue growth of $8.1 million wasprimarily due to an increase in services revenue of $9.9 million and was offsetby a decrease in our equipment revenue of $1.8 million.   In part, the revenue growth is due to theacquisition of the Acquired Business, which contributed $6.9 million of thegrowth.  The organic increase (excludingthe results of the Acquired Business) in services revenue is consistent withthe increasing scope of operations.  Asthe number of subscribers increases, there is a cumulative effect of increasingsubscriber revenue on a quarter over quarter basis.  The decrease in equipment revenue is a resultof the uneven nature of this revenue stream — customers often place largesingle orders made to meet minimum order requirements, to manage the lead timebetween ordering and shipping and to minimize the related shipping costs.  The lead time on new orders is approximately12 weeks from order to receipt.  Thepurchase by customers of STBs is a leading indicator of futuresubscriptions.  On a pro forma basis, asdescribed in note 3 of the financial statements, revenue increased from $12.1million to $13.0****million due to organic growth.

 

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Our net loss for the sixmonths ended June 30, 2009 was $10.7****million, or aloss of $0.10 per basic and diluted share, compared with a net loss of $3.0million or a loss of $0.07****per basic anddiluted share for the six months ended June 30, 2008.  The increase in net loss of $7.7****million was due to the following:

 

·                  Increase in organic loss of $1.9****million (excluding non-cash expenses)

·                  Net loss in the Acquired Business of $3.7million (excluding non-cash expenses)

·                  Increased non-cash expenses of $2.1 million(detailed below in the Net Loss to EBITDA reconciliation)

 

On a pro forma basis (as ifthe merger had occurred on January 1, 2008), our net loss for the sixmonths ended June 30, 2008 was $72.0****million or aloss of $1.69****per basic and diluted share.   The decrease in net loss of $61.3****million was due to the following:

 

·                  Increase in organic loss of $1.9****million (excluding non-cash expenses)

·                  Elimination of impairment of goodwill andlong-lived assets of $48.1 million

·                  Reduction in net loss in the AcquiredBusiness of $14.3****million (excluding non-cashexpenses)

·                  Reduction in non-cash expenses of $0.8****million

 

Our non-GAAP Adjusted EBITDAloss was $7.4****million for the six months ended June 30,2009 compared with a non-GAAP Adjusted EBITDA loss of $1.6****millionfrom the six months ended June 30, 2008. The increase is non-GAAP Adjusted EBITDA loss is due to the cash impactof the items noted above.  On a pro formabasis, our non-GAAP Adjusted EBITDA loss decreased from a loss of $20.2****million to a loss of $7.4****millionfor the six months ended June 30, 2009. This decrease is due to cost reductions in most areas of the AcquiredBusiness offset by the increased organic costs as noted above.  The reconciliation from net loss to non-GAAPAdjusted EBITDA loss is as follows:

 
| ** **                                   | ** ** | **Six  months ended June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------|------------|
| ** **                                   | ** ** | ** **                          | ** ** | ** ** | ** ** | **Pro  forma** | ** ** |
| ** **                                   | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **$**                               | ** ** | **$** | ** ** | **$** | ** ** |
|                                         |       |                                |       |   |   |   |   |
| Net  loss for the period                     |       | (10,722,008                         | )          | (3,036,125 | ) | (71,970,596 | ) |
|                                         |       |                                |       |   |   |   |   |
| Add  back:                                   |       |                                |       |   |   |   |   |
| Impairment  of goodwill                      |       | —                              |       | — |   | 47,882,317 |   |
| Impairment  of long-lived assets             |       | —                              |       | — |   | 173,786 |   |
| Depreciation  and amortization               |       | 2,051,695                           |       | 433,988 |   | 1,753,840 |   |
| Stock-based  compensation                    |       | 615,579                             |       | — |   | 1,540,219 |   |
| Unrealized  loss on derivative               |       | 809,050                             |       | — |   | — |   |
| Equity  in loss of affiliate                 |       | —                              |       | 978,826 |   | 978,826 |   |
| Investment  income and foreign exchange gain |       | (192,243                            | )          | (1,738 | ) | (555,703 | ) |
|                                         |       |                                |       |   |   |   |   |
| Non-GAAP  Adjusted EBITDA loss               |       | (7,437,927                          | )          | (1,625,049 | ) | (20,197,311 | ) |

 

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**OPERATIONS**

 

***Revenue***

 

The Company earns revenue in four broad categories:

 

·                  Subscriberrevenue, which is recognized over the period of service or usage.

 

·                  eCommercerevenue, which is recognized as the service is performed.

 

·                  Technologyservices revenue, which consists of the set up and transcoder revenue and isrecognized over the life of the contract.

 

·                  Equipmentrevenue, which is recognized when title of the STB passes to the customer.

 

Services revenue includessubscriber revenue, ecommerce revenue and technology services revenue.  While our revenues have been growing due tothe organic growth in our existing business and the Merger, we are uncertain asto how our revenues will be impacted by the current downturn in the globaleconomy.

 

***Cost and Expenses***

 

***Cost of Services Revenue***

 

Cost of services revenueprimarily consists of:

 

·                  Costof Subscriber revenue, which consists of three primary components:

·                  Royaltypayments

·                  Networkoperating costs

·                  Bandwidthusage fees

 

·                  Costof eCommerce revenue, which consists of:

·                  Merchandising,donor and ticket sales, which has no associated cost — revenue is booked on anet basis

·                  Costof Advertising revenue is subject to revenue shares with the content provider

 

·                  Costof Technology services revenue, which consists of:

·                  Thirdparty transcoder software purchased

·                  Maintenancecosts for transcoders

 

***Cost of Equipment Revenue***

 

Equipment revenue consistsof the sale of STBs to content partners and/or end users to enable the end userto receive the content over the Internet and display the signal on atelevision.   Cost of equipment revenue primarilyconsists of purchases from TransVideo International, Ltd. (“Transvideo”) of theproducts and parts for resale to customers. Shipping revenue and costs are included in equipment revenue and cost ofequipment revenue, respectively.

 

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***Selling, General andAdministrative Expenses***

 

Selling, general andadministrative (“SG&A”) costs include:

 

·                  *Wages and benefits* — represents compensation for the Company’sfull-time and part-time employees as well as fees for consultants who are usedby the Company from time to time.

 

·                  *Stock-based compensation* — we estimate the fair value of our options,warrants and stock appreciation rights (“Convertible Securities”) for financialaccounting purposes using the Black-Scholes-Merton model, which requires anumber of subjective assumptions, including the expected life of theConvertible Securities, risk-free interest rate, dividend rate, forfeiture rateand future volatility of the price of our Shares.  We expense the estimated fair value over thevesting period of the Convertible Securities. The vesting period is normally over a four year period, vesting in anequal amount each month; however, the Board of Directors has the discretion togrant options with different vesting periods.

 

·                  *Marketing —*represents**expenses forboth global and local marketing programs that focus on various target sportsproperties and ethnic communities.  Theseinitiatives include both on-line and off-line marketing expenditures.  These expenditures also include search enginemarketing and search engine optimization.

 

·                  *Professional fees* — represents legal, recruiting andaccounting fees.

 

·                  *Other SG&A expenses****—***representsexpenses for travel expenses, rent, office supplies, corporate IT services,credit card processing fees and other general operating expenses.

 

***Equity Losses of Affiliate***

 

From January 1, 2008 through June 30,2009, the Company’s equity interest in KyLinTV was 17.1%.  KyLinTV is an IPTV service provider that iscontrolled by the Chairman of the Board of Directors of the Company.  The Company also provides KyLinTV withadministrative and general corporate support. Management has determined that as a result of the 17.1% equity interestcombined with the services that the Company provides KyLinTV, the Companycontinues to have significant influence on the operating activities of KyLinTV,therefore the Company continues to account for KyLinTV using the equity methodof accounting for investment.

 

The Company’s proportionate share of theequity loss from KyLinTV has been accounted for as a charge on the Company’sconsolidated statements of operations and comprehensive loss.   Dueto KyLinTV’s accumulated losses, the investment has been reduced to zero as at December 31,2008.  No further charges will berecorded as the Company has no obligation to fund the losses of KyLinTV.

 

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**SELECTED INTERIM INFORMATION**

 

Theselected interim consolidated financial information set out below for the eightmost recently completed quarters has been derived from the Company’s unauditedinterim consolidated financial statements and accompanying notes posted on www.sedar.com.  Readers should read the following informationin conjunction with those statements and related notes.

 
| ** **                        | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **Q2**     | ** ** | **Q1**     | ** ** | **Q4**     | ** ** | **Q3** | ** ** | **Q2** | ** ** | **Q1** | ** ** | **Q4** | ** ** | **Q3** | ** ** |
| ** **                        | ** ** | **$**      | ** ** | **$**      | ** ** | **$**      | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| **Income  Statement Data:**       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Revenue                           |       | 6,462,438  |       | 6,574,026  |       | 5,807,550  |       | 2,699,041 |   | 2,987,128 |   | 1,949,620 |   | 5,284,485 |   | 1,280,839 |   |
| Cost of revenue                   |       | 3,293,481  |       | 3,844,483  |       | 3,205,272  |       | 1,534,807 |   | 1,753,689 |   | 1,145,381 |   | 3,822,315 |   | 845,732 |   |
| Net loss for the period           |       | (4,928,130 | )          | (5,793,878 | )          | (7,223,468 | )          | (1,377,667 | ) | (1,549,979 | ) | (1,486,146 | ) | (164,690 | ) | (1,263,525 | ) |
| Basic and diluted loss  per share |       | (0.04      | )          | (0.05      | )          | (0.13      | )          | (0.03 | ) | (0.04 | ) | (0.03 | ) | 0.00 |   | (0.03 | ) |

 

The selected interiminformation for the periods from Q3 2007 to Q3 2008 represents income statementdata for NeuLion USA, excluding the Acquired Business.  For the periods from Q4 2008 (subsequent to October 20,2008) to Q2 2009, the selected interim information represents income statementdata including the Acquired Business.

 

The increase in revenue andthe decrease in net loss quarter over quarter that occurred in Q4 2007 wasprimarily the result of the sale of STBs. The sale of STBs quarter of quarter is very uneven in nature.  Customers often place large orders to meetminimum order requirements to manage the lead time between ordering andshipping and to minimize the shipping costs. The lead time on new orders is approximately 12 weeks from order toreceipt.  We sell our STBs to customers(who in turn sell or give them to new users) and also sell directly tousers.  The demand for STBs is driven bynew subscribers and the level of inventory carried by our customers.  Initial orders by new customers and new userswill impact the trend of STB revenues. The Company expects STB revenue to have a much slower growth rate thanservices revenue.  Services revenue isrecurring (monthly) revenue whereas STB revenue is earned on new customersand/or subscribers.

 

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**RESULTS OF OPERATIONS**

 

### ***Comparison of Three MonthsEnded June 30, 2009 to Three Months Ended June 30, 2008***

### ** **

### **Ourinterim consolidated financial statements for our three months ended June 30,2009 and 2008 have been prepared in accordance with U.S. GAAP.  Included in note 12**of the financialstatementsis thereconciliation between our consolidated financial statements prepared inaccordance with U.S. GAAP and Canadian GAAP.

 
| ** **                                                                                   | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **$**      | ** ** | **$**      | ** ** | **%**      | ** ** |
| **Revenue**                                                                                  |       |       |       |       |       |       |       |
| Services  revenue                                                                            |       | 6,038,405  |       | 1,357,581  |       | 345        | %          |
| Equipment  revenue                                                                           |       | 424,033    |       | 1,629,547  |       | -74        | %          |
| Total  Revenue                                                                               |       | 6,462,438  |       | 2,987,128  |       | 116        | %          |
|                                                                                         |       |       |       |       |       |       |       |
| **Costs and expenses**                                                                       |       |       |       |       |       |       |       |
| Cost  of service revenue, exclusive of depreciation and amortization shown  separately below |       | 2,907,965  |       | 468,500    |       | 521        | %          |
| Cost  of equipment revenue                                                                   |       | 385,516    |       | 1,285,189  |       | -70        | %          |
| Selling,  general and administrative, including stock-based compensation                     |       | 6,778,665  |       | 2,024,272  |       | 235        | %          |
| Depreciation  and amortization                                                               |       | 1,037,014  |       | 238,925    |       | 334        | %          |
|                                                                                         |       | 11,109,160 |       | 4,016,886  |       | 177        | %          |
| **Operating loss**                                                                           |       | (4,646,722 | )          | (1,029,758 | )          | 351        | %          |
|                                                                                         |       |       |       |       |       |       |       |
| **Other income (expense)**                                                                   |       |       |       |       |       |       |       |
| Unrealized  loss on derivative                                                               |       | (332,200   | )          | —     |       | —     |       |
| Gain  on foreign exchange                                                                    |       | 2,991      |       | —     |       | —     |       |
| Investment  income                                                                           |       | 47,801     |       | 923        |       | 5079       | %          |
| Equity  loss in affiliate                                                                    |       | —     |       | (521,144   | )          | -100       | %          |
|                                                                                         |       | (281,408   | )          | (520,221   | )          | -46        | %          |
| **Net and comprehensive loss for the period**                                                |       | (4,928,130 | )          | (1,549,979 | )          | 218        | %          |

 

***Revenue***

 

*Services Revenue*

 

Services revenue includesrevenue from subscribers, eCommerce and technology services.  Services revenue increased from $1.4 millionfor the three months ended June 30, 2008 to $6.0****millionfor the three months ended June 30, 2009. The increase is a combination of the organic growth in services revenueand the effect of the Merger on October 20, 2008. The organic growth inour services revenue was $1.3****million.  The Acquired Business comprised $3.3****million of total services revenue for the quarter.

 

Subscriber revenue increasedfrom $1.1****million for the three months ended June 30,2008 to $4.2****million for the three monthsended June 30, 2009.  The increaseis a combination of the growth in subscribers and the effect of the Merger on October 20,2008. The organic growth in our subscriber 

 

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revenue was $1.0 million.  The organic increase was a result of $0.4million in revenue generated from 21 new customers.  The increase in revenue is due to therecurring revenue effect of adding new users, while still retaining existingusers.   The Acquired Business comprised$2.1****million of total subscriber revenuefor the period.

 

eCommerce revenue increasedfrom zero for the three months ended June 30, 2008 to $0.8****million for the three months ended June 30, 2009.  The Acquired Business comprised all ofeCommerce revenue for the period.

 

Technology services revenueincreased from $0.3****million forthe three months ended June 30, 2008 to $1.0****millionfor the three months ended June 30, 2009. The increase is a combination of the growth in technology servicesrevenue and the effect of the Merger on October 20, 2008. The organicgrowth in our technology services revenue was $0.3****million.   As new customers begin streaming video ordevelop their user interface, we earn technology services revenue.  This revenue is recognized over the life ofthe contractual relationship.  TheAcquired Business comprised $0.4****million oftotal technology services revenue for the period.

 

### ***Equipment Revenue***

### ** **

Equipment revenue decreasedfrom $1.6****million for the three months ended June 30,2008 to $0.5****million for the three monthsended June 30, 2009.  The decreasein equipment revenue is a result of the uneven nature of the revenue stream;customers often place large single orders to meet minimum order requirements tomanage the lead time between ordering and shipping and to minimize the relatedshipping costs.  The lead time on neworders is approximately 12 weeks from order to receipt.  The timing of specific orders is notconsistent period over period.  We sellour STBs to customers, who in turn sell or give them to new users, and alsosell directly to users.  The demand forSTBs is driven by new subscribers and the level of inventory carried by ourcustomers.  Our customers do no have the rightof return on purchased STBs.  Initialorders by new customers and new users will impact the trend of STBrevenues.  The Company expects STBrevenue to have a much slower growth rate than services revenue.  Services revenue is recurring (monthly) revenuewhereas STB revenue is earned on new customers and/or subscribers.

 

### ***Cost andExpenses***

 

*Cost of Services Revenue*

 

Cost of services revenueincreased from $0.5****million or 36%of service revenue for the three months ended June 30, 2008 to $2.9****million or 48% of service revenue for the three monthsended June 30, 2009.  This increasewas a combination of the costs associated with increased revenue and the effectof the Merger on October 20, 2008. The Acquired Business comprised $1.9****million oftotal costs of services revenue for the period.

 

Organic cost of servicesrevenue increased from $0.5 million or 36% for the three months ended June 30,2008 to $1.0****million or 37% for the threemonths ended June 30, 2009.  Theincrease was a result of increased revenue and higher costs for bandwidth dueto higher usage by existing subscribers and the costs associated with newcustomers.  Subscriber revenue, acomponent of services revenue, increased as a percentage of total servicesrevenue and has higher costs associated with it than other types of servicesrevenue.  Management expects to maintaincost of services revenue at between 50% and 60% of services revenue, includingthe Acquired Business, based on the mix of service revenue and as economies ofscale are realized.

 

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### ***Cost of Equipment Revenue***

 

Cost of equipment revenuedecreased from $1.3****million forthe three months ended June 30, 2008 to $0.4****millionfor the three months ended June 30, 2009 on lower revenue.  Cost of equipment revenue is directlyvariable with changes in revenue.  Costof equipment revenue as a percentage of equipment revenue increased from 81%for the three months ended June 30, 2008 to 91% for the three months endedJune 30, 2009.

 

### ***Selling, General andAdministrative Costs***

### ** **

Selling, general andadministrative costs increased from $2.0****million forthe three months ended June 30, 2008 to $6.8****million****for the three months ended June 30, 2009.  The Acquired Business accounted for $3.6****million of the total increase of $4.8 million in selling,general and administrative costs for the period.  The individual variances are due to the following:

 

·                  Wages and benefits increased from $1.3****million for the three months ended June 30, 2008to $4.8****million****for the three months ended June 30, 2009.    TheAcquired Business accounted for $2.1****million of the total increase of $3.5 million inwages and benefits for the period. The organic increase of $1.4****million was primarily related to the increase in employeesto support the increased revenue and the Merger with the AcquiredBusiness.  In conjunction with theMerger, the Company added senior management and provided market levelcompensation for the CEO.

 

·                  Stock-based compensation expense increasedfrom zero for the three months ended June 30, 2008 to $0.4****million****forthe three months ended June 30, 2009. This increase was due to the assumption of convertible instruments inconjunction with the Merger and the Company granting convertible instruments toemployees subsequent to the Merger.

 

·                  Marketing*expenses increased from a nominal amount for thethree months ended June 30, 2008 to $*0.3****million*****for the three months ended June 30, 2009. *The Acquired Business accounted for $0.2****million of the totalincrease of $0.3 million in marketing expenses for the period.  The Acquired Business is more of abusiness-to-consumer focused business and incurs higher marketing expensesincluding search engine marketing and search engine optimization on theInternet.

 

·                  Professional fees*decreased from $*0.4million*****forthe three months ended June 30, 2008 to $*0.3****million*****for the three months ended June 30, 2009. *The decrease was primarily related to audit fees forthe fiscal years 2005 to 2007 incurred during the three months ended June 30,2008 and no corresponding cost in 2009.

 

·                  OtherSG&A expenses *increased from $*0.3*****million for the three monthsended June 30, 2008 to $*1.0 million*****for the three months ended June 30, 2009.  The increase was related to increased expensesin all categories associated with expanded operations to support the growth inrevenue*.

 

### ***Equity Losses of Affiliate***

 

Equity losses of KyLinTVdecreased from $0.5****million forthe three months ended June 30, 2008 to zero for the three months ended June 30, 2009.  The decrease is as a result of the cumulativelosses exceeding the full value of the Company’s investment in 2008.  Due to KyLinTV’s accumulated losses, 

 

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the investment has been reduced to zero.  The Company still owns its equity position inthe affiliate, however the Company is not required to fund any additionallosses, and as such no further charges will be incurred.

 

### ***Depreciation andAmortization***

 

Depreciation andamortization increased from $0.2****million forthe three months ended June 30, 2008 to $1.0****million for the three months ended June 30,2009.   The increase was due toamortization on assets acquired in the Merger ($0.3****million) andthe increased capital assets required to support the increased revenue.

 

### ***Unrealized Loss onDerivative***

### ** **

Unrealized loss onderivative increased from zero for the three months ended June 30, 2008 to$0.3****millionfor the three months ended June 30, 2009.  The increase was due to the adoption of Emerging Issues Task Force(“EITF”) Issue No. 07-5, “*Determining Whether anInstrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock*”,effective January 1, 2009, which required the Company to fair value allconvertible instruments denominated in a currency other than the Company’sfunctional currency.  On January 1,2009, the grant date fair value of warrants denominated in Canadian dollars of$2.5 million was reallocated from additional paid in capital and a derivativeliability was recorded in the amount of $0.6 million with an adjustment toopening accumulated deficit of $1.9 million. The difference between the fair value at June 30, 2009 of $1.4****million and March 31, 2009 of $1.1****millionresulted in an unrealized loss on derivative of $0.3****million.

 

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### ***Comparison of Six MonthsEnded June 30, 2009 to Six Months Ended June 30, 2008***

### ** **

### **Ourinterim consolidated financial statements for our six months ended June 30,2009 and 2008 have been prepared in accordance with U.S. GAAP.  Included in note 12**of the financialstatementsis thereconciliation between our consolidated financial statements prepared inaccordance with U.S. GAAP and Canadian GAAP.

 
| ** **                                                                                   | ** ** | **2009**    | ** ** | **2008**   | ** ** | **Change** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **$**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| **Revenue**                                                                                  |       |        |       |       |       |       |       |
| Services  revenue                                                                            |       | 12,072,735  |       | 2,232,158  |       | 441        | %          |
| Equipment  revenue                                                                           |       | 963,730     |       | 2,704,590  |       | -64        | %          |
| Total  Revenue                                                                               |       | 13,036,465  |       | 4,936,748  |       | 164        | %          |
|                                                                                         |       |        |       |       |       |       |       |
| **Costs and expenses**                                                                       |       |        |       |       |       |       |       |
| Cost  of service revenue, exclusive of depreciation and amortization shown  separately below |       | 6,291,844   |       | 752,600    |       | 736        | %          |
| Cost  of equipment revenue                                                                   |       | 846,121     |       | 2,146,470  |       | -61        | %          |
| Selling,  general and administrative, including stock-based compensation                     |       | 13,952,006  |       | 3,662,727  |       | 281        | %          |
| Depreciation  and amortization                                                               |       | 2,051,695   |       | 433,988    |       | 373        | %          |
|                                                                                         |       | 23,141,666  |       | 6,995,785  |       | 231        | %          |
| **Operating loss**                                                                           |       | (10,105,201 | )          | (2,059,037 | )          | 391        | %          |
|                                                                                         |       |        |       |       |       |       |       |
| **Other income (expense)**                                                                   |       |        |       |       |       |       |       |
| Unrealized  loss on derivative                                                               |       | (809,050    | )          | —     |       | —     |       |
| Gain  on foreign exchange                                                                    |       | 47,218      |       | —     |       | —     |       |
| Investment  income                                                                           |       | 145,025     |       | 1,738      |       | 8244       | %          |
| Equity  loss in affiliate                                                                    |       | —      |       | (978,826   | )          | -100       | %          |
|                                                                                         |       | (616,807    | )          | (977,088   | )          | -37        | %          |
| **Net and comprehensive loss for the period**                                                |       | (10,722,008 | )          | (3,036,125 | )          | 253        | %          |

 

### ***Revenue***

 

*Services Revenue*

 

Services revenue includesrevenue from subscribers, eCommerce and technology services.  Services revenue increased from $2.2 millionfor the six months ended June 30, 2008 to $12.1****millionfor the six months ended June 30, 2009. The increase is a combination of the organic growth in services revenueand the effect of the Merger on October 20, 2008. The organic growth inour services revenue was $3.0****million.  The Acquired Business comprised $6.9****million of total services revenue for the quarter.

 

Subscriber revenue increasedfrom $1.7****million for the six months ended June 30,2008 to $8.5****million for the six months ended June 30,2009.  The increase is a combination ofthe growth in subscribers and the effect of the Merger on October 20,2008. The organic growth in our subscriber revenue was $2.3****million.  Included in the organic increase was $0.6million in revenue generated from 22 new customers.  The Acquired Business comprised $4.5****million of total subscriber revenue for the period.

 

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eCommerce revenue increasedfrom zero for the six months ended June 30, 2008 to $1.7 million for thesix months ended June 30, 2009.  TheAcquired Business comprised all of eCommerce revenue for the period.

 

Technology services revenueincreased from $0.5****million forthe six months ended June 30, 2008 to $1.9****millionfor the six months ended June 30, 2009. The increase is a combination of the growth in technology servicesrevenue and the effect of the Merger on October 20, 2008. The organicgrowth in our technology services revenue was $0.7****million.   As new customers begin streaming video ordevelop their user interface, we earn technology services revenue.  This revenue is recognized over the life ofthe contractual relationship.  TheAcquired Business comprised $0.7****million oftotal technology services revenue for the period.

 

### ***Equipment Revenue***

### ** **

Equipment revenue decreasedfrom $2.7****million for the six months ended June 30,2008 to $0.9****million for the six months ended June 30,2009.  The decrease in equipment revenueis a result of the uneven nature of the revenue stream; customers often placelarge single orders to meet minimum order requirements to manage the lead timebetween ordering and shipping and to minimize the related shipping costs.  The lead time on new orders is approximately12 weeks from order to receipt.  Thetiming of specific orders is not consistent period over period.  We well our STBs to customers, who in turnsell or give them to new users, and also sell directly to users.  The demand for STBs is driven by new subscribersand the level of inventory carried by our customers.  Our customers do no have the right of returnon purchased STBs.  Initial orders by newcustomers and new users will impact the trend of STB revenues.  The Company expects STB revenue to have a muchslower growth rate than services revenue. Services revenue is recurring (monthly) revenue whereas STB revenue isonly on new customers and/or subscribers.

 

### ***Cost andExpenses***

### ** **

*Cost of Services Revenue*

 

Cost of services revenueincreased from $0.8****million or 36%of service revenue for the six months ended June 30, 2008 to $6.3****million or 52% of service revenue for the six months ended June 30,2009.  This increase was a combination ofthe costs associated with increased revenue and the effect of the Merger on October 20,2008.  The Acquired Business comprised$4.1****million of total costs of servicesrevenue for the period.

 

Organic cost of servicesrevenue increased from $0.8****million or 36%for the six months ended June 30, 2008 to $2.2****millionor 42% for the six months ended June 30, 2009.  The increase was a result of increasedrevenue and higher costs for bandwidth due to higher usage by existingsubscribers and the costs associated with new customers.  Subscriber revenue, a component of servicesrevenue, increased as a percentage of total services revenue and has highercosts associated with it than other types of services revenue.  Management expects to maintain cost ofservices revenue at between 50% and 60% of services revenue, including theAcquired Business, based on the mix of service revenue and as economies ofscale are realized.

 

### ***Cost of Equipment Revenue***

### ** **

Cost of equipment revenuedecreased from $2.1****million forthe six months ended June 30, 2008 to $0.8****millionfor the six months ended June 30, 2009 on lower revenue.  Cost of equipment revenue is 

 

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directly variable with changes inrevenue.  Cost of equipment revenue as apercentage of equipment revenue increased from 78% for the six months ended June 30,2008 to 89% for the six months ended June 30, 2009 due to an increase inthe proportion of revenue which was sold on a cost recovery basis (shipping andreplacement parts).

 

### ***Selling, General andAdministrative Costs***

### ** **

Selling, general andadministrative costs increased from $3.6****million forthe six months ended June 30, 2008 to $13.9****million****for the six months ended June 30, 2009.  The Acquired Business accounted for $7.3****million of the total $10.3 million increase in selling,general and administrative costs for the period.  The individual variances are due to the following:

 

·                  Wages and benefits increased from $2.8****million for the six months ended June 30, 2008to $10.0****million****for the six months ended June 30, 2009.    TheAcquired Business accounted for $4.5****million of the total increase of $7.2 million inwages and benefits for the period. The organic increase of $2.7****million was primarily related to the increase in employeesto support the increased revenue and the Merger with the AcquiredBusiness.  In conjunction with theMerger, the Company added senior management and provided market levelcompensation for the CEO.

 

·                  Stock-based compensation expense increasedfrom zero for the six months ended June 30, 2008 to $0.6****million****forthe six months ended June 30, 2009. This increase was due to the assumption of convertible instruments inconjunction with the Merger and the Company granting convertible instruments toemployees subsequent to the Merger.

 

·                  Marketing*expenses increased from a nominal amount for thesix months ended June 30, 2008 to $*0.5****million*****for the six months ended June 30, 2009. *The Acquired Business accounted for $0.3****million of the totalincrease of $0.5 million in marketing expenses for the period.  The Acquired Business is more of abusiness-to-consumer focused business and incurs higher marketing expensesincluding search engine marketing and search engine optimization on theInternet.

 

·                  Professional fees*increased from $*0.5million*****forthe six months ended June 30, 2008 to $*0.6****million*****for the six months ended June 30, 2009. *The increase was primarily related to fees incurredin connection with public company reporting compliance.

 

·                  OtherSG&A expenses *increased from $*0.3*****million for the six months ended June 30,2008 to $*2.2 million*****for the six months ended June 30,2009.  The increase was related toincreased expenses in all categories associated with expanded operations tosupport the growth in revenue*.

 

### ***Equity Losses of Affiliate***

 

Equity losses of KyLinTVdecreased from $1.0****million forthe six months ended June 30, 2008 to zero for the six months ended June 30, 2009.  The decrease is as a result of the cumulativelosses exceeding the full value of the Company’s investment in 2008.  Due to KyLinTV’s accumulated losses, theinvestment has been reduced to zero.  TheCompany still owns its equity position in the affiliate, however the Company isnot required to fund any additional losses, and as such no further charges willbe incurred.

 

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### ***Depreciation andAmortization***

 

Depreciation andamortization increased from $0.4****million forthe six months ended June 30, 2008 to $2.1****million for the six months ended June 30,2009.   The increase was due toamortization on assets acquired in the Merger ($0.6****million) andthe increased capital assets required to support the increased revenue.

 

### ***Unrealized Loss onDerivative***

### ** **

Unrealized loss onderivative increased from zero for the six months ended June 30, 2008 to$0.8 million for the six months ended June 30,2009.   The increase was due to theadoption of EITF Issue No. 07-5. The difference between the fair value at June 30, 2009 of $1.4****million and January 1, 2009 of $0.6****million resulted in an unrealized loss on derivative of$0.8****million.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Asof June 30, 2009, our principal sources of liquidity include cash and cashequivalents of $17.7 million and trade accounts receivable of $1.8****million. We do not have a credit facility.

 

AtJune 30, 2009, approximately 80% of our cash and cash equivalents are heldin money market funds and another 8% of our cash and cash equivalents are heldin bank accounts with two of the top five Canadian commercial banks.  The Company believes these financialinstitutions to be secure in the current global economy.  We believe that we will be able to access theremaining balance of bank deposits outside of Canada as these deposits are withlarge reputable banks. We have and will continue to make a series of short-terminvestments in term deposits and commercial paper. Our investment policy is toinvest in low risk short-term investments which are highly graded commercialpaper and term deposits. We have not had a history of any defaults on thiscommercial paper, nor do we expect any in the future given the grade and shortterm to maturity of these investments. All commercial paper on hand at June 30,2009 have been repaid, and subsequently reinvested.  Subsequent to June 30, 2009, the Companytransferred $11 million from their Canadian money market accounts into a lowrisk money market account with a U.S. bank who received an A- rating byStandard & Poor’s and an A2 rating by Moody’s.

 

Basedon our current business plan, internal forecasts and considering the risks thatare present in the current global economy, we believe that cash on hand will besufficient to meet our working capital and operating cash requirements for thenext twelve months. The Company is still in the early stage of business.  From the Company’s inception it has incurredsubstantial net losses.  The Companycontinues to review its operating structure to reduce costs.  Cash from operations could be affected byvarious risks and uncertainties, including, but not limited to, the risksdetailed in or incorporated by reference in our AIF and our Form 10 in thesections titled “Risk Factors”.

 

Duringthe six months ended June 30, 2009, the Company’s cash position decreasedby $9.6 million.  The Company used $7.2****million to fund operations, $0.5****million to purchase fixed assets and $1.9****million in other working capital changes.

 

**WorkingCapital Requirements**

 

Thenet working capital at June 30, 2009 was $8.9****million, a decrease of $9.2 million from the December 31,2008 net working capital of $18.1 million. The decreased working capital isprimarily due to funding operations and the fair value of the derivativeliability on June 30, 2009.

 

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Currentassets at June 30, 2009 were $23.0 million, a decrease of $10.3****million from the December 31, 2008balance of $33.3 million. The change is primarily due to a decrease in our cashand cash equivalents of $9.6****millionand a decrease in prepaid expenses and deposits of $0.6 million.

 

Currentliabilities at June 30, 2009 were $14.1****million,a decrease of $1.1****million fromthe December 31, 2008 balance of $15.2 million.

 

**Cash Flows**

 

The Company’s business isstill in the early stages, with only a few years of operating history.  As at June 30, 2009, the Company hadcash and cash equivalent balances of $17.7****million.  From the Company’s inception, it has incurrednet losses and has an accumulated deficit of $34.9****million;management expects these losses to continue in the short term.  The Company will require expenditures ofsignificant funds for marketing, building its subscriber management systems,programming and website development, maintaining adequate video streaming anddatabase software, pursuing and maintaining channel distribution agreementswith its channel partners, fees relating to acquiring and maintaining Internetstreaming rights to its content and the construction and maintenance of theCompany’s delivery infrastructure and office facilities.  There can be no assurance that the Companywill ultimately be able to generate sufficient revenue or reduce its costs inthe anticipated time frame to become profitable and have sustainable cashflows.

 

**Summary Balance Sheet Data:**

 
| ** **                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                     | ** ** | **$**             | ** ** | **$**                 | ** ** |
| **Current Assets**             |       |              |       |                  |       |
| Cash  and cash equivalents     |       | 17,733,529        |       | 27,323,021            |       |
| Accounts  receivable, net      |       | 1,816,865         |       | 2,284,242             |       |
| Taxes  receivable              |       | 1,008,030         |       | 983,253               |       |
| Other  receivable              |       | 664,302           |       | 227,711               |       |
| Inventory                      |       | 291,035           |       | 347,600               |       |
| Prepaid  expenses and deposits |       | 1,236,028         |       | 1,830,260             |       |
| Due  from related parties      |       | 273,199           |       | 324,059               |       |
| **Total current assets**       |       | 23,022,988        |       | 33,320,146            |       |
|                           |       |              |       |                  |       |
| **Current Liabilities**        |       |              |       |                  |       |
| Accounts  payable              |       | 2,511,544         |       | 4,465,388             |       |
| Accrued  liabilities           |       | 6,756,408         |       | 7,595,116             |       |
| Derivative  liability          |       | 1,397,000         |       | —                |       |
| Deferred  revenue              |       | 3,051,997         |       | 3,091,993             |       |
| Due  to related parties        |       | 406,589           |       | 56,826                |       |
| **Total current liabilities**  |       | 14,123,538        |       | 15,209,323            |       |
|                           |       |              |       |                  |       |
| **Working capital ratio**      |       | 1.63              |       | 2.19                  |       |

 

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### **ComparativeSummarized Cash Flows**

 
| ** **                                             | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                             | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | **$**                  | ** ** | **$**                | ** ** | **$** | ** ** | **$** | ** ** |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Cash  flows provided by (used in) operating activities |       | (3,751,902             | )          | (286,278             | )          | (9,124,651 | ) | 99,129 |   |
| Cash  flows used in investing activities               |       | (149,437               | )          | (55,216              | )          | (531,841 | ) | (1,054,258 | ) |
| Cash  flows provided by financing activities           |       | 67,000                 |       | 250,000              |       | 67,000 |   | 850,000 |   |

 

### ***Operating Activities***

 

Cash usedin operating activities for the six months ended June 30, 2009 was $9.1million.  Changes in net cash used in operatingactivities reflect the following:

 

·                  net loss of $10.7****million****for the six months ended; less

 

·                  non-cash items adjusted to net loss in the amount of $3.5****million,****which relatesto stock-based compensation, depreciation and amortization and unrealized losson derivative; and

 

·                  changes in working capital of $1.9****million.

 

### ***Investing Activities***

 

Cash usedin investing activities for the six months ended June 30, 2009 was $0.5****million.  These fundswere used to purchase fixed assets.

 

### ***Financing Activities***

 

Cashprovided by financing activities was $0.1 million****forthe six months ended June 30, 2009. The funds were received from stock option exercises.

 

In the near future, theCompany expects that it will continue to use its cash resources to fund workingcapital requirements.  The Companybelieves existing cash, cash equivalents and short-term investments will besufficient to satisfy normal working capital needs and capital expenditures forat least the next twelve months. However, the Company may sell additional equity securities to furtherenhance its liquidity position, and the sale of additional equity securitiescould result in dilution to its shareholders.

 

**Off-BalanceSheet Arrangements**

 

The Company did not have anyoff-balance sheet arrangements as of June 30, 2009.

 

**Financial Instruments**

** **

                TheCompany’s financial instruments are comprised of cash and cash equivalents,accounts receivable, other receivables, taxes receivable, other receivables,deposits, accounts payable, accrued liabilities, amounts due to/from relatedparties, and deferred revenue.

 

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***Fair value of financial instruments***

** **

Fair value of a financial instrument isdefined as the amount for which the instrument could be exchanged in a currenttransaction between willing parties.  Theestimated fair value of our financial instruments approximates their carryingvalue due to the short maturity term of these financial instruments.

 

***Risks associated with financial instruments***

** **

**[i] Currency risk**

** **

The Company’s activities that result inexposure to fluctuations in foreign exchange rates consist of its customerbillings being in U.S. dollars and the majority of expenses being paid inforeign currencies.  The Company does notuse derivative financial instruments to reduce its currency risk.

 

**[ii] Interest raterisk**

** **

The Company is exposed to interest rate riskon its invested cash and cash equivalents and its short-term investments.  The interest rates on these instruments arebased on the bank’s prime rate and therefore are subject to change with themarket.  The Company does not usederivative financial instruments to reduce its interest rate risk.

 

**[iii] Credit risk**

 

The Company sells itsservices to a variety of customers under various payment terms and therefore isexposed to credit risk.  The Company hasadopted policies and procedures designed to limit this risk.  The maximum exposure to credit risk at thereporting date is the carrying value of receivables.  The Company establishes an allowance fordoubtful accounts that represents its estimate of incurred losses in respect ofaccounts receivable.  The Companybelieves that the concentration of credit risk is limited due to the Company’sprimary source of revenues to date, being the sale of STBs, for which 50% ofmonies are received in advance of shipment.

 

**RELATED PARTY TRANSACTIONS**

 

The Company has entered into certaintransactions and agreements in the normal course of operations with relatedparties.  Significant related partytransactions are as follows:

 

*TransVideo*

 

Set top box purchases amounted to $193,856and $589,136****and transcoder licensing feesamounted to $16,000****and $44,000****for the three and six months ended June 30, 2009,respectively.  STB purchases amounted to$1,206,000****and $2,539,000 and transcoderlicensing fees amounted to $30,000 and $45,000 for the three and six monthsended June 30, 2008, respectively. Included in cost of equipment revenue is the cost of STBs sold of$229,656 and $598,816****for the threeand six months ended June 30, 2009, respectively [three and six monthsended June 30, 2008 — $1,206,000 and $1,848,000, respectively].

 

*Patstar, Inc.**(“Patstar”)*

 

Rent expense paid by Patstar of $871****and $1,762****is included asa recovery in selling, general and administrative expense for the three and sixmonths ended June 30, 2009, respectively.

 

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*KyLinTV, Inc.**(“KyLinTV”)*

 

KyLinTV is an IPTV service provider that iscontrolled by the Chairman of the Board of Directors of the Company.  The Company also provides KyLinTV withadministrative and general corporate support. On June 1, 2008, the Company entered into an agreement with KyLinTVto build and deliver the setup and back office operation of an IPTVservice.  The Company also providesKyLinTV with administrative and general corporate support.  For each of the periods presented, theamounts paid for these services provided by the Company for the three and sixmonths ended June 30, 2009 were $150,615****and$301,230, respectively [three and six months ended June 30, 2008 —$383,695 and $769,843, respectively]. During the three and six months ended June 30, 2009, the Companypurchased STBs from KyLinTV in the amount of $96,030****and****$150,120, respectively. During the six months ended June 30, 2008, the Company purchasedequipment from KyLinTV in the amount of $620,000.

 

*New YorkIslanders Hockey Club, LP**(“NewYork Islanders”)*

 

The Company has a professional hockey club asa customer, which is owned by the Chairman of the Board of Directors of theCompany.   The Company provides ITrelated professional services to the New York Islanders.

 

*Renaissance Property Associates, LLC (“Renaissance”)*

 

Renaissance is a real estate managementcompany owned by the Chairman of the Board of Directors of the Company.  In June 2009, the Company signed asublease agreement with Renaissance for office space in Plainview, NewYork.  Rent expense paid by the Companyto Renaissance of $93,419 and $186,837, inclusive of taxes and utilities, isincluded in selling, general and administrative expense for the three and sixmonths ended June 30, 2009, respectively.

 

The Company recognized revenue from relatedparties for the three and six months ended as follows:

 
| ** **                                           | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                                           | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                           | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
|                                                 |       |              |       |              |       |   |   |   |   |
| New York Islanders                                   |       | 151,976           |       | 60,000            |       | 211,976 |   | 120,000 |   |
| Renaissance                                          |       | 30,000            |       | 30,000            |       | 60,000 |   | 60,000 |   |
| The Smile Train, Inc. (“Smile Train”) |       | 54,000            |       | 27,000            |       | 54,000 |   | 66,000 |   |
| Hawaii IPTV, LLC (“Hawaii”)                |       | 15,017            |       | 11,841            |       | 31,488 |   | 21,234 |   |
| KyLinTV                                              |       | 485,915           |       | 129,535           |       | 887,400 |   | 129,535 |   |
|                                                 |       | 736,908           |       | 258,376           |       | 1,244,864 |   | 396,769 |   |

 

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As at June 30, 2009 and December 31,2008, the amounts due from (to) related parties are as follows:

 
| ** **         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|-------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **         | ** ** | **$**             | ** ** | **$**                 | ** ** |
|               |       |              |       |                  |       |
| New York Islanders |       | 43,084            |       | 29,189                |       |
| Renaissance        |       | —            |       | (1,146                | )          |
| Smile Train        |       | —            |       | 27,000                |       |
| Hawaii             |       | (1,971            | )          | 17,527                |       |
| TransVideo         |       | (404,618          | )          | (55,680               | )          |
| KyLinTV            |       | 228,310           |       | 250,343               |       |
| Patstar            |       | 1,805             |       | —                |       |
|               |       | (133,390          | )          | 267,233               |       |

 

**Investment in affiliate —KyLinTV**

 

The Company records its investment in KyLinTVusing the equity method.

 

From January 1, 2008 through June 30,2009, the Company’s equity interest in the affiliate was 17.1%.  As previously discussed, the Company alsoprovides KyLinTV with administrative and general corporate support.  Management has determined that as a result ofthe 17.1% equity interest combined with the services that the Company providesKyLinTV, the Company continues to have significant influence on the operatingactivities of KyLinTV, therefore the Company continues to account for KyLinTVusing the equity method of accounting for investment.

 

The Company’s proportionate share of theequity loss from KyLinTV has been accounted for as a charge on the Company’sconsolidated statements of operations and comprehensive loss.  Dueto KyLinTV’s accumulated losses, the investment has been reduced to zero as at December 31,2008.  No further charges will berecorded as the Company has no obligation to fund the losses of KyLinTV.

 

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The results of operations and financialposition of the Company’s equity basis investment in KyLinTV are summarizedbelow for the three and six months ended June 30:

 
| ** **                              | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                              | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **$**             | ** ** | **$**             | ** ** | **$** | ** ** | **$** | ** ** |
|                                    |       |              |       |              |       |   |   |   |   |
| Condensed income statement information: |       |              |       |              |       |   |   |   |   |
| Net sales                               |       | 2,000,681         |       | 1,450,108         |       | 3,955,764 |   | 2,722,818 |   |
| Net loss                                |       | (1,499,109        | )          | (2,322,292        | )          | (2,979,890 | ) | (4,233,073 | ) |

 
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                           | ** ** | **$**             | ** ** | **$**                 | ** ** |
|                                 |       |              |       |                  |       |
| Condensed balance sheet information: |       |              |       |                  |       |
| Current assets                       |       | 1,927,203         |       | 927,427               |       |
| Non-current assets                   |       | 1,634,316         |       | 2,411,319             |       |
| Total assets                         |       | 3,561,519         |       | 3,338,746             |       |
| Current liabilities                  |       | 13,266,573        |       | 10,063,909            |       |
| Non-current liabilities              |       | —            |       | —                |       |
| Equity (deficiency)                  |       | (9,705,054        | )          | (6,725,163            | )          |
| Total liabilities and  equity        |       | 3,561,519         |       | 3,338,746             |       |

 

**RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS**

 

**U.S. Accounting Pronouncements**

 

In May 2009, the FASB issued SFAS No. 165,“Subsequent Events” (“SFAS 165”), which establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to beissued. This statement sets forth the circumstances under which an entityshould recognize events or transactions occurring after the balance sheet datein its financial statements. SFAS 165 also requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis for thatdate—that is, whether that date represents the date the financial statementswere issued or were available to be issued. This statement is effectivefor interim or annual reporting periods ending after June 15, 2009. Duringthe three months ended June 30, 2009, the Company adopted SFAS 165. Theadoption of SFAS 165 did not have a material impact on our interim consolidatedfinancial statements or related footnotes.

 

In April 2009, the FASB issued FSP No. 107-1and APB No. 28-1, “Interim Financial Disclosures about Fair Value ofFinancial Instruments” (“FSP 107-1”), which amends FASB Statement No. 107,Disclosures about Fair Value of Financial Instruments, to require disclosuresabout fair value of financial instruments for interim and annual reportingperiods of publicly traded companies. FSP 107-1 also amends APB Opinion No. 28,Interim Financial Reporting, to require those disclosures in summarizedfinancial information at interim reporting periods. This interpretation iseffective for interim reporting periods ending after June 15, 2009. Duringthe three months ended June 30, 2009, the Company adopted FSP 107-1. Theadoption of FSP 107-1 did not have a material impact on our interimconsolidated financial statements or related footnotes.

 

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Effective January 1, 2009, the Companyadopted EITF No. 07-5.  One of theconclusions reached under EITF 07-5 was that an equity-linked financialinstrument would not be considered indexed to the entity’s own stock if thestrike price is denominated in a currency other than the issuer’s functionalcurrency. The conclusion reached under EITF 07-5 clarified the accountingtreatment for these and certain other financial instruments as it related toFASB Statement No. 133, “Accounting for Derivative Instruments and HedgingActivities” (“SFAS 133”). EITF 07-5 specifies that a contract that wouldotherwise meet the definition of a derivative under SFAS 133, would not be treatedas a derivative if it met the following conditions: (a) indexed to its ownstock and (b) classified in shareholders’ equity in its statement offinancial position.

 

The Company’s onlyderivative instruments are 11,000,000 warrants, which are denominated in acurrency other than the Company’s functional currency as follows:

 

·                  5,500,000 Series A warrants exercisableat Cdn$1.25 and expire on October 20, 2010.

·                  5,500,000 Series B warrants exercisableat Cdn$1.50 and expire on October 20, 2010.

 

The warrants have been recorded at theirrelative fair values at issuance and will continue to be recorded at fair valueat each subsequent balance sheet date. Any change in value between reportingperiods will be recorded as other income (expense).  The warrants will continue to be reported asa liability until such time as they are exercised or expire. The fair value ofthe warrants is estimated using the Black-Scholes-Merton option-pricing model.

 

As of January 1, 2009, the grant datefair value of the warrants in the amount of $2,464,000 was reallocated fromadditional paid in capital and a derivative liability was recorded in theamount of $587,950 being the fair value of the warrants on January 1, 2009offset by an adjustment to accumulated deficit of $1,876,050.

 

As of June 30, 2009 and March 31,2009, the fair value of the warrants was determined to be $1,397,000 and$1,064,800, respectively; accordingly, the Company recorded $332,200****and****$809,050 inother expense for the three and six months ended June 30, 2009,respectively, related to the change in the fair value of the warrants.  There is no cash flow impact for thesederivates until the warrants are exercised. If the warrants are exercised, the Company will receive the proceedsfrom the exercise at the current exchange rate at the time of exercise.

 

All other outstanding convertible instrumentsare considered to be indexed to our own stock, because their exercise price isthe same as our functional currency, and are included in shareholders’ equity.

 

In March 2008, the FASB issued Statementof Financial Accounting Standards No. 161, “Disclosures about DerivativeInstruments and Hedging Activities—an amendment of FASB Statement No. 133”(“SFAS 161”), which required enhanced disclosures about an entity’s derivative andhedging activities and was intended to improve the transparency of financialreporting.  SFAS 161 applies to allderivative instruments, including bifurcated derivative instruments and relatedhedging items accounted for under SFAS 133 and its relatedinterpretations.  SFAS 161 amends andexpands the disclosure requirements of SFAS 133 with the intent to provideusers of financial statements with an enhanced understanding of:  (i) how and why an entity usesderivative instruments; (ii) how derivative instruments and related hedgeditems are accounted for under SFAS 133 and its related interpretations; and (iii) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance and cash flows. The provisions of this standard do not require disclosures for earlierperiods presented for comparative purposes at initial adoption.  SFAS 161 was effective for fiscal years and 

 

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interim periods beginning after November 15,2008.  The Company adopted this newstandard effective January 1, 2009.  The required disclosures areincluded in note 11 to the consolidated financial statements.

 

**Canadian Accounting Pronouncements**

 

In February 2008, theCICA issued new Handbook Section 3064, *Goodwilland Intangible Assets*, which replaces Section 3062, *Goodwill and Other Intangible Assets*, and Section 3450,*Research and Development Costs*.  The new standard addresses when an internallydeveloped intangible asset meets the criteria for recognition as an asset.  The section also issued amendments to Section 1000,*Financial Statement Concepts*.  These changes are effective for fiscal yearsbeginning on or after October 1, 2008, with earlier adoption permitted,and have been adopted by the Company effective January 1, 2009.  The objectives of the changes are toreinforce a principle-based approach to the recognition of costs as assets andto clarify the application of the concept of matching revenues and expenses in Section 1000.  Collectively, these changes bring Canadianpractice closer to International Financial Reporting Standards (“IFRS”) byeliminating the practice of recognizing as assets a variety of start-up,pre-production and similar costs that do not meet the definition andrecognition criteria of an asset.  Therewas no material effect on the Company’s interim consolidated financial statementsas a result of adopting CICA Handbook Section 3064.

 

In February 2008, the CICA AccountingStandards Board confirmed that the changeover to IFRS from Canadian GAAP willbe required for publicly accountable enterprises, effective for the interim andannual financial statements relating to fiscal years beginning on or after January 1,2011.  The Company became an SEC issuereffective June 8, 2009 and expects to continue to use U.S. GAAP until thedate that IFRS is implemented in the United States, which is currentlyestimated to occur no sooner than 2014.

 

## **OUTSTANDING SHARE DATA**

## ** **

The Company has total sharesoutstanding as at August 13, 2009 of 114,201,121.  In addition, the Company has 27,254,507****outstanding options, SARs, restricted share units, warrantsand retention warrants, which are each exchangeable for one Share uponexercise.

 

## **DISCLOSURE CONTROLS AND CONTROLS OVER FINANCIAL REPORTING**

## ** **

*Evaluation of disclosure controls and procedures:*

 

The Company maintainsappropriate disclosure controls and procedures and internal controls over financialreporting (each as defined in National Instrument 52-109, *Certificationof Disclosure in Issuers’ Annual and Interim Filings*(“NI 52-109”),of the Canadian Securities Administrators) to ensure that information disclosedexternally is complete, reliable and timely. The Company’s Chief ExecutiveOfficer and Chief Financial Officer evaluated, or caused an evaluation undertheir direct supervision of, the design and operating effectiveness of theCompany’s disclosure controls and procedures (“DC&P”) and internal controlsover financial reporting (“ICFR”) as at June 30, 2009, and have concludedthat such DC&P and ICFR were appropriately designed and were operatingeffectively, except as outlined below. See “Limitation on scope of design” below.

 

There were no changes to ourICFR during our last fiscal quarter ended June 30, 2009 that havematerially affected, or are reasonably likely to affect, our ICFR.

 

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*Limitation on scope of design:*

 

We have limited the scope ofdesign of our internal controls and procedures and internal controls overfinancial reporting to exclude controls, policies and procedures of NeuLion USAand its subsidiaries, which were acquired as part of the Merger.  The chart below presents the summaryfinancial information of NeuLion USA.

 

**BalanceSheet Data:**

 
| ** **             | ** ** | **June 30,** | ** ** |
|------------------------|------------|-------------------|------------|
| ** **             | ** ** | **2009**          | ** ** |
| ** **             | ** ** | **$**             | ** ** |
| Current  assets        |       | 3,041,950         |       |
| Long-term  assets      |       | 15,232,265        |       |
| Current  liabilities   |       | 4,752,171         |       |
| Long-term  liabilities |       | 542,080           |       |

 

**IncomeStatement Data:**

 
| ** **               | ** ** | **3 months ended**     | ** ** | **6 months ended**     | ** ** |
|--------------------------|------------|------------------------|------------|------------------------|------------|
| ** **               | ** ** | **June 30, 2009** | ** ** | **June 30, 2009** | ** ** |
| ** **               | ** ** | **$**                  | ** ** | **$**                  | ** ** |
| Total  revenue           |       | 3,231,642              |       | 6,235,903              |       |
| Total  cost of revenue   |       | 1,438,822              |       | 3,156,775              |       |
| Net  loss for the period |       | (2,197,348             | )          | (5,012,228             | )          |

 

The scope limitation is in accordance withsection 3.3(1)(b) of NI 52-109 to which this MD&A relates, whichallows an issuer to limit its design of DC&P and ICFR to exclude controls,policies and procedures of a business that the issuer acquired not more than365 days prior to the end of the fiscal period.

 

**Item 3.**       **Quantitative and Qualitative Disclosures About MarketRisk**

 

Not applicable.

 

**Item 4.**       **Controls and Procedures**

 

The Company’s principal executiveofficer and principal financial officer, with the assistance of other membersof the Company’s management, have evaluated the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)as of the end of the period covered by this quarterly report.  Based upon such evaluation, the Company’sprincipal executive officer and principal financial officer have concluded thatthe Company’s disclosure controls and procedures are effective as of the end ofthe period covered by this quarterly report.

 

During our most recentfiscal quarter, no change in our internal control over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item2. ****Unregistered Sales of EquitySecurities and Use of Proceeds****.**

 

OnJune 30, 2009, the Company issued Shares, without registration under theSecurities Act of 1933, as amended (the “Securities Act”), to certain currentand former non-management directors in payment pursuant to the Company’sDirectors’ Compensation Plan of their semi-annual directors’ fees for thesix-month periods ended December 31, 2008 and June 30, 2009 in thefollowing aggregate amounts:

 
| *Current  directors* |       |        |       |
|----------------------|------------|-------------|------------|
|                 |       |        |       |
| John  R. Anderson    |       | 76,389      |       |
| Gabriel  A. Battista |       | 27,521      |       |
| Shirley  Strum Kenny |       | 46,568      |       |
| David  Kronfeld      |       | 45,775      |       |
| Charles  B. Wang     |       | 40,453      |       |
| **Total**            | ** ** | **236,706** | ** ** |
|                 |       |        |       |
| *Former  directors*  |       |        |       |
|                 |       |        |       |
| Mark  Amin           |       | 6,618       |       |
| Curt  Marvis         |       | 7,721       |       |
| **Total**            | ** ** | **14,339**  | ** ** |

 

Theaggregate value of the 251,045 Shares issued to Dr. Kenny and Messrs. Amin,Anderson, Battista, Kronfeld, Marvis and Wang was $158,158 on the date ofissuance.  The Company sold these Sharespursuant to the exemption from registration set forth in Section 4(2) ofthe Securities Act and Regulation D promulgated there under.  This issuance qualified for exemption fromregistration under the Securities Act because (i) each of the current and formerdirectors was an accredited investor at the time of the sale, (ii) theCompany did not engage in any general solicitation or advertising in connectionwith the sale, and (iii) each of the current and former directors receivedrestricted securities.

 

OnMay 27, 2009, a consultant of the Company residing outside the UnitedStates exercised 50,000 stock options to purchase 50,000 Shares, with anexercise price of $0.64 per option, for gross proceeds to the Company of$32,000.  The Company offered and soldthe Shares in reliance on Regulation S adopted under the Securities Act.

 

OnJune 27, 2009, a consultant of the Company residing outside the UnitedStates exercised 100,000 stock options to purchase 100,000 Shares, with anexercise price of $0.35 per option, for gross proceeds to the Company of$35,000.  The Company offered and soldthe Shares in reliance on Regulation S adopted under the Securities Act.

 

BetweenApril 1, 2009 and June 30, 2009, the Company issued 16,261 Shares totwo former employees and one former consultant as restricted share units vestedpursuant to the Company’s Restricted Share Plan.  Under the Restricted Share Plan, therestricted share units vest in equal monthly increments on the last day of eachmonth and are valued on the date of issuance. The aggregate value attributable to the Shares issued during that periodwas $9,923.  The Company issued theShares to the two former employees residing outside the United States inreliance on Regulation S adopted under the Securities Act.  The Company issued the Shares to the oneformer consultant in the United States in reliance on the exemption fromregistration set forth in Section 4(2) of the Securities Act fortransactions not involving any public offering.

 

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**Item4. ****Submission of Matters to a Voteof Security Holders****.**

 

OnMay 13, 2009, the Company held its annual and special meeting of shareholders.  Seven matters were voted upon at the meeting,as described below.

 

TheCompany is governed by the Canada Business Corporations Act (“CBCA”).  The CBCA and National Instrument 51-102 —Continuous Disclosure Obligations, promulgated under the *SecuritiesAct* (Ontario) and other Canadian provincial securities legislation,require that a proxy only provide that securities be voted “for” or “against”the matters specified in the form of proxy, other than the election ofdirectors and the appointment of auditors. For the election of directors and the appointment of auditors, the proxymust provide that securities be “voted” or “withheld from voting.”

 

Section 141(1) ofthe CBCA permits voting by a show of hands. Section 152(3) of the CBCA, in essence, provides that if lessthan 5% of the shares to be voted at a meeting will be voted against aparticular item of business, the chairperson of a meeting can request that thevoting on those matters be by way of a show of hands in lieu of voting byballot.  As the report of thescrutineers, which was prepared in connection with the meeting, indicated thatless than 5% of the shares to be voted at the Company’s annual and specialmeeting were to be voted against the election of directors and the appointmentof auditors, the chairperson of the meeting proceeded with the vote on thosetwo motions by way of a show of hands.

 

Thefollowing table gives a brief description of the matters voted upon at themeeting, states the number of votes cast for and against the first five motionsas set forth in the ballot report, and states whether the sixth and seventhmotions were approved pursuant to the vote by show of hands.  While they are tabulated, votes withheld,abstentions and broker non-votes are not included in the ballot report.

 
| **Description  of matter**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **For**    | ** ** | **Against** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|
| 1.  To  consider and, if appropriate, to pass, with or without variation a special  resolution authorizing a change of name of the Company from “JumpTV Inc.” to  “NeuLion, Inc.”; all as more specifically set out in the management  information circular dated April 7, 2009 (the “Circular”) relating to  the meeting                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 67,918,879 |       | 12,550      |       |
| 2.  To  consider and, if appropriate, to pass, with or without variation a special  resolution authorizing:  (i) at  any time from the date of the meeting up to and including May 13, 2011,  the Company to apply to the Director under the Canada Business Corporations  Act for a letter of satisfaction for the continuance of the Company out of  the laws of Canada and the domestication of the Company under the laws of the  State of Delaware and Section 388 of the General Corporation Law of the  State of Delaware (the “Domestication”) and (ii) in connection with the  Domestication, the adoption of the Delaware Certificate of Incorporation and  revised by-laws of the Company all as more specifically set out in the  Circular |       | 64,994,913 |       | 74,050      |       |
| 3.  To  consider and, if appropriate, to pass, with or without variation a resolution  ratifying and confirming an amendment to the Company’s amended By-law  No. 1 (the “By-law”) to amend the notice period for meetings of  shareholders to not less than 30 days and not greater than 60 days and to  revise the name of the Company in the By-law to “JumpTV Inc.” all as more  specifically set out in the Circular                                                                                                                                                                                                                                                                                                                                   |       | 64,998,813 |       | 70,150      |       |
| 4.  To  consider and, if appropriate, to pass, with or without variation a resolution  approving certain amendments to the Company’s second amended and restated  stock option plan, 2006 stock appreciation rights plan, as amended, amended  and restated retention warrants plan and amended and restated directors’  compensation plan, all as more specifically set out in the Circular  (excluding 39,341,426 shares held by Charles B. Wang, AvantaLion LLC and  Nancy Li)                                                                                                                                                                                                                                                                                               |       | 21,907,787 |       | 3,819,750   |       |
| 5.  To  consider and, if appropriate, to pass with or without variation a resolution  approving all unallocated stock options under the Company’s second amended  and restated stock option plan, as amended from time to time, all as more  specifically set out in the Circular (excluding 39,341,426 shares held by  Charles B. Wang, AvantaLion LLC and Nancy Li)                                                                                                                                                                                                                                                                                                                                                                                                                |       | 21,816,287 |       | 3,911,250   |       |

 

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| **Description of matter**                                                                                                                                                                                                                                              | ** ** | **Vote by  show of hands** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| 6.   Election of Charles B. Wang, G. Scott Paterson, Nancy Li, Roy E.  Reichbach, John R. Anderson, Gabriel A. Battista, Shirley Strum Kenny and  David Kronfeld as directors (excluding 39,341,426 shares held by Charles B.  Wang, AvantaLion LLC and Nancy Li) |       | Motion  approved           |
| 7.   Appointment of Ernst & Young LLP (U.S.) as auditors of the  Company and authorize the board of directors to fix the remuneration of the  auditors                                                                                                   |       | Motion  approved           |

 

**Item6.  Exhibits.**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                   |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 *           |       | Certification of principal executive officer of the Company, pursuant  to Securities Exchange Act Rule 13a-14(a)                                                                                                                             |
|             |       |                                                                                                                                                                                                                                              |
| 31.2 *           |       | Certification of principal financial officer of the Company, pursuant  to Securities Exchange Act Rule 13a-14(a)                                                                                                                             |
|             |       |                                                                                                                                                                                                                                              |
| 32.1 *           |       | Certifications pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by the  principal executive officer of the Company and the principal financial  officer of the Company |

 

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*Filed herewith

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed in its behalf by the undersigned thereuntoduly authorized.

 

 
|                              | **NEULION, INC.**                     |
|-----------------------------------|---------------------------------------|
|                              |                                  |
|                              |                                  |
| Date:   August 13, 2009 | /s/ Nancy Li                          |
|                              | Name:   Nancy Li                 |
|                              | Title:   Chief Executive Officer |
|                              |                                  |
|                              |                                  |
| Date:   August 13, 2009 | /s/ Arthur J. McCarthy                |
|                              | Name:   Arthur J. McCarthy       |
|                              | Title:   Chief Financial Officer |

 

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