UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



FORM 10-K



X  ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.



For the fiscal year ended December 31, 2006

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.



For the transition period from _______ to ___________.



Commission file number 0-29651



USA VIDEO INTERACTIVE CORP.

(Exact name of registrant as specified in its charter)

WYOMING

06-1576391



(State or Other Jurisidiction of

(I.R.S. Employer Identification No.)

Incorporation of Organization)

8 West Main Street  Suite 3-13, Niantic, Connecticut

06357



(Address of principal executive offices)

(ZIP Code)

Registrants telephone number, including area code:

(860) 739-8030



Securities registered pursuant to Section 12(b) of the Act

None



Securities registered pursuant to Section 12(g) of the Act:

Common Shares



(Title of Class)



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes         No    X



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes         No    X



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant as required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X      No       .



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   X  .



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in  Rule 12b-2 of the Exchange Act.

Large Accelerated filer



Accelerated Filer



Non-accelerated filer

X



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes         No    X  .



State the aggregate market value of the voting and non-voting equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed fiscal quarter:   $21,073,397



Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date:   159,439,756



Documents Incorporated by Reference: NONE



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TABLE OF CONTENTS



Part 1

Item 1

Business

3

Item 2

Properties

17

Item 3

Legal Proceedings

17

Item 4

Submission of Matters to a Vote of Security Holders

18



Part II

Item 5

Market for Registrations Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities

18

Item 6

Selected Financial Data

19

Item 7

Managements Discussion and Analysis of Financial Condition and

Results of Operation

20

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

23

Item 8

Financial Statements and Supplementary Data

23

Item 9

Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure

23

Item 9A

Controls and Procedures

24



PART III

Item 10

Directors and Executive Officers of the Registrant

24

Item 11

Executive Compensation

26

Item 12

Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters

30

Item 13

Certain Relationships and Related Transactions

30

Item 14

Principal Accountant Fees and Services

32



PART IV

Item 15

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

32











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PART I



Item 1. Business.



Cautionary Statement



Certain statements contained in this Annual Report on Form 10-K ("Report"), including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute "forward-looking statements."  Readers should not place undue reliance on these forward-looking statements.  USA Video's actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including risks described in this Report, including the "Risk Factors" section contained in this Item 1, and the other documents USA Video files with the Securities and Exchange Commission ("SEC").



Introduction



USA Video Interactive Corp. ("USA Video" or the "Company") designs and markets to business customers digital watermarking, streaming video and video-on-demand systems, services and source-to-destination digital media delivery solutions that allow live or recorded digitized and compressed video to be transmitted through Internet, intranet, satellite or wireless connectivity.  The Company's systems, services and delivery solutions include digital watermark solutions and video content production, content encoding, media asset management, media and application hosting, multi-mode content distribution, transaction data capture and reporting, e-commerce, specialized engineering services, and Internet streaming hardware.



Although the Company has generated zero sales for the 2006 year, it continues to explore opportunities that will result in new products for new revenue streams, but there can be no assurances that such efforts will be successful.



The Company's products and services are based on its proprietary rich media delivery infrastructure and software and its Store and Forward Video-on-Demand ("VOD") patent.  These technologies, together with video compression technology, facilitate the delivery of video to an end user in a timely and interactive fashion.



USA Video has developed a number of specific products and services based on these technologies.  These include MediaSentinelTM and SmartMarksTM, a process that watermarks digital video content; StreamHQTM, a collection of source-to-destination media delivery services marketed to businesses; EncodeHQTM, a service that digitizes and compresses analog-source video; hardware server and encoder system applications under the brand name Hurricane MediacasterTM; ZMailTM, a service that delivers web and rich media content to targeted audiences, and mediaClixTM, a service that delivers content similar to ZmailTM but originating from an existing web presence.



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







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Business Environment



The cost of bandwidth and supporting equipment, such as cable modems and other broadband connectivity to homes and businesses, is expected to continue to decrease over the next several years, bringing expanded use of high bandwidth applications for video transmission to the general market.  Meanwhile, compression technologies continue to improve, allowing delivery of higher quality content using existing connectivity.  Also, digital content piracy is increasing at an exponential rate.



Strategic Plan



USA Video believes that the expected substantial increases in bandwidth capacity, accompanying decreases in bandwidth cost, increases in consumer computer and video appliance storage capacity, and the proliferation of fast video file transfer techniques will result in an industry focus on downloading as an alternative to streaming as a content delivery mechanism.  To position the Company to take advantage of this anticipated shift, USA Video has focused its immediate plans on aggressively protecting its technology ownership rights, including pursuing licensing arrangements and other forms of enforcement and pursuing marketing of its patent-pending digital watermarking technology.



USA Video continues to research and develop its patent-pending digital watermarking technology while pursuing marketing of its new releases of MediaSentinelTM and other related products.



USA Video discontinued the sale of select services from its prototype StreamHQTM after customers' satisfaction and proof of concept.  The Company no longer sells its individual functions of StreamHQTM.  USA Video intends to continue to develop and expand its StreamHQTM services business, while pursuing opportunities to sell replicated StreamHQTM systems to corporations and organizations that prefer systems solutions to services solutions.  To this end, USA Video's future plans include:



•

Continuing StreamHQTM functionality development, particularly the automation of processes and client account management, which allows more efficient delivery of services and expansion of the services client base;



•

Scaling the StreamHQTM infrastructure in modular fashion as necessary to support an increasing number and size of ZmailTM and mediaClixTM campaigns;



•

Eventually establishing multiple marketing and distribution channels, particularly in the form of alliances with third parties, including some of the Company's product and service suppliers; and



•

Ultimately expanding and enabling the sales and marketing team, to support increased direct marketing to various markets, including advertising, corporate communications, customer service, entertainment, and education.



Proprietary Technologies



USA Video's proprietary technologies include its (1) VOD patent, and (2) Digital watermarking piracy deterrence technology; and (3) StreamHQTM infrastructure, software, and service delivery processes.



•

USA Video’s VOD Patent (US #5,130,792) (the "Patent") as well as patents it has obtained in other countries explicitly covers the rich media delivery model that is becoming more widely accepted as a means of delivering content for education, training, and entertainment; that is, faster-than-real-time download to computer and set-top box hard drives for subsequent content viewing without quality limitations resulting from insufficient or variable bandwidth.  The impact of this Patent becomes more significant as content owners and those that facilitate content delivery adopt this model.







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•

The objective of USA Videos patent-pending Digital Watermarking technology is to deter digital video piracy once a user has been authorized to view a video.  This is one of the major concerns preventing content owners from committing more of their content to the digital medium.  Digital watermarking helps trace content to incidents of piracy, thus deterring piracy.



•

The ability of StreamHQTM to deliver services to clients with market-specific value propositions stems from its scalable, streaming-enabled web infrastructure, the software functionality that resides on this infrastructure (such as innovative asset management and user transaction data capture and reporting), and the processes developed for delivering media campaigns to clients.  By delivering features unique to individual markets, such as advertising, corporate communications and customer service, StreamHQTM services are differentiated from the generic services delivered by competitors.



Products and Services



USA Videos principal products and services are its proprietary rich media delivery infrastructure and software and the VOD Patent.  These technologies, together with video compression technology, facilitate the delivery of video to end users in a timely and interactive fashion.



USA Video has developed a number of specific products and services based on these technologies.  These include:



•

MediaSentinelTM, digital watermarking technology used to deter piracy of digital content;



•

SmartMarksTM, are invisible, unremovable, forensic “digital watermarks” imbedded in every video frame to protect digital video from piracy;



•

StreamHQTM, a collection of source-to-destination media delivery services marketed to businesses;



•

EncodeHQTM, a service that digitizes and compresses analog-source video; hardware server and encoder system applications under the brand name Hurricane MediacasterTM;



•

ZmailTM, a service that delivers web and rich media content to targeted audiences;



•

mediaClixTM, a service that delivers content similar to ZmailTM, but originating from an existing web presence.



USA Video proposes to grant licenses to use its patented VOD technology on terms comparable to the reasonable royalty provided for by U.S. patent laws.  Upon successfully licensing its patent, USA Video could earn per-use royalties, meaning that each time a licensed event occurs (e.g. each time a consumer receives a VOD transmission) a specified royalty will be paid to the Company.  Upon suitable negotiated terms, USA Video may also consider bulk-fee licensing agreements, either apart from or in addition to per-use royalties.



When USA Videos patent-pending digital watermarking technology matures into an enforceable patent, USA Video intends to pursue a similar strategy that it will use for its VOD technology with regard to the rights related to the digital watermarking technology.



USA Video's future plans include the marketing and selling of its StreamHQTM systems, whereby a customer would purchase an entire system, comprised of hardware assembled by USA Video and software developed and installed by USA Video.  After sale and delivery of the system to a customer, USA Video’s services to the customer would then include updates of software and service and maintenance of hardware, as necessary, for additional compensation.  The services of ZmailTM and mediaClixTM are available to a customer only through the purchase of a StreamHQTM system.







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As a cost cutting measure, USA Video terminated the operation of its StreamHQTM infrastructure, which provided individual functionality of StreamHQTMfor small customers, as this service was no longer cost effective or deemed necessary at this time.



Status of Products and Services



With regard to its international VOD patent rights, USA Video has been closely monitoring advances in this wide-ranging industry over recent years and has commenced taking the necessary steps to translate this progress into a sustainable stream of royalty revenue.  What USA Video originally demonstrated to be technologically feasible in the early 1990s has now become commercially feasible as well, with the continually increasing availability of consumer broadband access and steadily improving data compression technologies.



In view of these developments, USA Video is taking aggressive steps to advance its patent-protected intellectual property rights, which include its patent-pending digital watermarking technology.  These steps include active licensing initiatives and, potentially, litigation when necessary, as a final resort if companies infringing on USA Videos patent rights refuse to negotiate in good faith.  USA Video has retained leading national legal counsel to advance these patent enforcement initiatives.



Although it is currently focused on protecting its technology ownership rights, including licensing arrangements and other forms of enforcement, USA Video will continue to offer its other products and services, which are all functional and available.



USA Video has recognized a rising need for anti piracy applications, which the Company developed under the brand “MediaSentialTM”.  MediaSentialTM utilizes SmartMarksTM which are digitally encoded forensic data invisibly embedded into a video stream.  Currently, research and development is focused on its MediaSentialTM products.  The next release of MediaSentialTM is designed for the motion picture industry.



Customers and Markets



The principal market for the Companys services is the business-to-business sector, rather than the individual consumer sector.  USA Videos patent rights potentially have broad application to the VOD marketplace.  USA Video anticipates that it will conduct licensing negotiations with:



•

companies involved in providing and promoting VOD content, such as film content, video advertisements, online gaming video and subscription video;



•

companies providing network and other physical infrastructure to enable various VOD applications;



•

companies providing VOD-enabling software, including advanced data compression schemes; and



•

companies providing VOD-enabling hardware, including consumer hardware such as digital video recording devices.







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The market for digital watermarking will to some extent overlap the market for VOD, but the two are not identical.  For example, digital watermarking technology may be required by copyright-owning content providers who have concerns about the potential for digital piracy of their material; whereas hardware manufacturers may be less concerned about such issues.  Nevertheless, protocols may develop which will require participants in the video industry to embrace some form of digital watermarking.  USA Video will follow those developments closely, and, if necessary, take steps to promote and protect its digital watermarking technology.



Additionally, companies within the business-to-business sector, rather than the individual consumer, generally possess the greater financial wherewithal and purpose for purchasing StreamHQTM systems.  The Company’s focus is on companies that can benefit from an engaging rich media and web presentation directed at a target audience.  The Company’s customers for these services have included film companies, event promoters, ministries, travel companies, sports entertainment centers and political candidates.



USA Video’s customers for StreamHQTM systems may also be businesses or organizations that are dissatisfied with response rates from traditional email campaigns, or who have in the past been unable to track the response rate to such traditional email campaigns.  Additionally, any business that wishes to increase brand or product awareness in a more cost effective manner than television advertising would be an appropriate candidate for the StreamHQTM services.



Sources and Availability of Raw Materials



USA Video assembles its hardware systems from components manufactured by others.  The Company specifies, procures, assembles, tests and deploys the various system components according to a precisely developed set of procedures.  The Company consults on an as-needed basis, with companies that supply the major materials needed to build its systems.  Systems are programmed and configured to meet a wide variety of individual customer requirements.



USA Video procures the materials and hardware to assemble systems and their components from various companies, as needed, and in sufficient quantities to preclude any danger of significant sourcing problems in the immediate future.  There are no seasonal limitations on the Companys operations.



Competitive Conditions



The streaming media market is new, rapidly evolving and extremely competitive and the Company expects that competition will intensify in the future.  USA Video competes with other companies that provide all or certain aspects of the Companys services, including other streaming media providers, content encoders, video production companies, Internet data management companies, and others, and expects that additional competition in the future will be provided by those types of providers.  The Companys current market share is insignificant.



Other companies may also claim to own intellectual property rights relating to the VOD technology space.  For example, USA Video is aware of another company which claims to own what could potentially be considered competing VOD patent rights.  In this case, however, the U.S. Patent and Trademark Office issued the competitor's first such patent after USA Video's key VOD Patent was issued.  Management believes that USA Videos VOD technology is superior in that USA Videos VOD technology has chronological priority over certain patents rights that have been procured by such company; that is, USA Video owns patent rights that are prior art to the other companys under U.S. patent law.







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Phillips, Sarnoff, Verance, KDDI, NextAmp, and other companies large and small are active in the field of digital watermark technologies.  The video streaming market is currently dominated by a small number of larger companies, including Real Networks, Microsoft, Yahoo and several others, some of which offer source-to-destination streaming media solutions.  Most of USA Videos current and potential competitors have longer operating histories, larger customer bases, greater name recognition and significantly greater financial, marketing and other resources than the Company.  In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with online competitors as the use of the Internet and other online services increases.  In addition, new technologies and the expansion of existing technologies are expected to result in additional competition.



USA Video is, and will continue to be dependent on vendors and other providers to supply the hardware, software and co-location resources that comprise the Companys products and services.  Further, USA Video currently competes with, and expects to compete with in the future, providers of some of its technology or system components.  Competition is expected in all areas of business, including pricing, service, product performance, and the Companys ability to keep up with rapidly improving technology, changing market conditions, evolving industry standards and changing customer demands.



Research and Development



Prior to 1999, USA Video conducted seven years of research and development of its proprietary VOD technology. In 1999, USA Video's focus shifted to marketing and sales of its products and services, with research and development directed primarily at supporting sales and development of Wavelet compression technology.  In 2000, the Company devoted substantial resources to development of its StreamHQTM services and began development of its proprietary still and motion Wavelet technology, which has been completed as mathematical processes.  In 2001, the Company redirected the Wavelet development effort toward the invention of a content protection technology that is grounded in similar science as Wavelet compression.  The result is the Companys patent pending digital watermark technology for piracy deterrence.  During 2002, as a result of cost cutting measures necessitated by the state of the market, the Company cut back on its marketing, sales and technical staff.  In 2004, the Company resumed development of its patent pending digital watermark technology.



In fiscal 2004 the Company's research and development expenditures were approximately $276,000.  During fiscal 2006 and 2005, the Companys research and development expenditures were $136,000 and $169,000, respectively.







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Intellectual Property



USA Video's success is dependent, in part, upon its proprietary technology.  The Company generally relies upon patents, trademarks, and trade secret laws to establish and maintain its proprietary rights in its technology products and services.



USA Video applied for a U.S. patent for its VOD technology on February 1, 1990.  Corresponding overseas applications were filed in several countries in 1992.  USA Video was granted the US Patent #5,130,792 in July 1992.  In June 2000, the U.S. Patent Office reinstated the patent, which had expired because of an administrative oversight that led to late payment of fees due in 1995.



In 1999, USA Video was granted patents on its VOD technology in five European countries: England, France, Germany, Italy and Spain.  In 2001 and 2002, USA Video was granted a patent in Canada and Japan, respectively, on its VOD technology.  The technological characteristics of the European Patents are based on the U.S. Patent, covering systems for transmitting video programs to remote locations over a switched telephone network, and are similar in scope to the U.S. Patent claims.



On June 19, 2001, United States Patent Application No. 09/884,787, Method and Apparatus for Digitally Fingerprinting Videos”, was officially filed with the U.S. Patent and Trademark Office.  This patent is for “MediaSentinelTM”.



Employees



As of March 22nd, 2007, the Company employed four people, including its two senior executive officers, one technology and one administrative employee. The Company considers the relationships with its employees to be good.



Competition for technical personnel in the industry that USA Video competes is intense.  The Company's future success will depend, in part, on its continued ability to contract or hire, assimilate, and retain qualified personnel. To date, USA Video believes it has been successful in recruiting qualified contractors or employees, but there is no assurance that the Company will continue to do so in the future.



Risk Factors



Set forth below and elsewhere in this Report are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report.



THE COMPANY'S LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE ITS BUSINESS AND PROSPECTS.



USA Video has a very limited operating history and has made very limited sales of its products and services and was in the development stage through December 31, 1999. USA Video's business and prospects must be considered in light of the risks encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as streaming media.  Some of these risks relate to the Company's ability to:





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•

maintain or develop relationships with suppliers and marketing partners;



•

establish a  customer base;



•

continue to develop and upgrade its technology, products and services;



•

provide superior customer service;



•

respond to competitive developments; and



•

retain and motivate qualified personnel.



THE COMPANY HAS INCURRED SUBSTANTIAL LOSSES; IT EXPECTS TO INCUR LOSSES IN THE FUTURE, AND MAY NEVER ACHIEVE PROFITABILITY.



To date, USA Video has not been profitable, has not generated significant revenue from operations, and has incurred substantial losses.  For the year ended December 31, 2006, USA Video had a net loss of $1,249,045.  As of December 31, 2006, the Company had an accumulated deficit of $35,484,986 and a working capital deficit of $302,280.  The Company intends to continue to expend significant financial and management resources on the development of its proposed products and services, and other aspects of its business.  As a result, the Company expects operating losses and negative cash flows to increase for the foreseeable future.  Consequently, USA Video will need to generate significant revenues to achieve and maintain profitability.  The Company may be unable to do so. If USA Video's revenues grow more slowly than anticipated or if operating expenses increase more than expected, or are not reduced sufficiently, it may never achieve profitability.  Because of factors discussed in this paragraph, USA Video's auditors, in their report on the Company's financial statements, have expressed substantial doubt concerning the Company's ability to continue as a going concern.



IF USA VIDEO IS UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FINANCING IT MAY NOT BE ABLE TO REMAIN IN BUSINESS.



USA Video requires substantial working capital to fund its business.  The Company has had significant operating losses and negative cash flow from operations since inception of its current business and expects to continue to do so for the foreseeable future.  The Company's capital requirements will depend on several factors, including the rate of market acceptance of its products and services, the ability to establish and expand a client base and the growth and effectiveness of its sales and marketing efforts.  USA Video estimates it will require approximately $1 Million to $1.75 Million in financing to meet its working capital needs over the remainder of 2007 and substantial additional financing thereafter.  Further, if capital requirements vary materially from those currently planned, the Company may require additional financing.  The Company has no arrangements or commitments for any financing.  Financing may not be available when needed on terms favorable to the Company, or at all.  If adequate funds are not available or are not available on acceptable terms, the Company may be unable to further develop or enhance its products and services, take advantage of future opportunities or respond to competitive pressures, or ultimately, to continue in business.



THE COMPANY'S OPERATING RESULTS IN FUTURE PERIODS ARE EXPECTED TO BE SUBJECT TO SIGNIFICANT FLUCTUATIONS, WHICH WOULD LIKELY AFFECT THE TRADING PRICE OF ITS COMMON SHARES.



USA Video's quarterly and annual operating results are likely to fluctuate significantly in the future due to a variety of factors, many of which are outside of its control. Some of these factors include:





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its ability to attract and retain customers;



•

the introduction of new video transmission services or products by others;



•

price competition;



•

the continued development of and changes in the streaming media market;



•

its ability to remain competitive in its product and service offerings;



•

its ability to attract new personnel; and



•

U.S. and foreign regulations relating to the Internet.



As a result of the factors listed above, and others, period-to-period comparisons of USA Video's operating results may not be meaningful in predicting its future performance.  It is possible that the Company's operating results will not meet market expectations in some future quarter or quarters, which would likely result in a significant decline in its stock price.



THE STREAMING MEDIA BUSINESS IS HIGHLY COMPETITIVE, AND USA VIDEO'S FAILURE TO COMPETE SUCCESSFULLY WOULD LIMIT ITS ABILITY TO RETAIN AND INCREASE ITS MARKET SHARE.



The streaming media market is new, rapidly evolving and extremely competitive.  The Company expects competition to intensify in the future.  The Company competes with companies that provide all or certain aspects of the Company's services, including other streaming media providers, content encoders, video production companies, Internet data management companies, and others, and expects that additional competition in the future will be provided by those types of providers and others.  The Company's current market share is insignificant.



The video streaming market is currently dominated by a small number of larger companies, including Real Networks, Microsoft, Yahoo and several others, some of which offer source-to-destination streaming media solutions.  Most of USA Video's current and potential competitors have longer operating histories, larger customer bases, greater name recognition and significantly greater financial, marketing and other resources than the Company.  In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with online competitors as the use of the Internet and other online services increases.  In addition, new technologies and the expansion of existing technologies are expected to result in additional competition.



USA Video may not be able to compete successfully against current and future competitors, and any inability to do so could decrease its revenues, contribute to the Company not achieving profitability and adversely affect is ability to establish, maintain and increase its market share.



THE MARKET FOR USA VIDEO'S PRODUCTS AND SERVICES IS RELATIVELY NEW AND IS EVOLVING, AND THE COMPANY'S SUCCESS WILL DEPEND ON ITS ABILITY TO ADAPT TO CHANGING MARKET CONDITIONS.



USA Video's future financial performance will depend in large part on the growth in demand for its streaming media services and products.  This market is new and emerging, is rapidly evolving, is characterized by an increasing number of market entrants and will be subject to frequent and continuing changes in customer preferences and technology.  As is typical in new and evolving markets, demand and market acceptance for the





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Company's products and services is subject to a high level of uncertainty.  Because the market for the Company's products is evolving, it is difficult to assess or predict with any assurance the size or growth rate, if any, of this market.  There can be no assurance that a significant market for the Company's products will develop, or that it will develop at an acceptable rate or that new competitors will not enter the market.  In addition, even if a significant market develops for such products, there can be no assurance that the Company's products will be successful in such market.  If a significant market fails to develop, develops more slowly than expected or attracts new competitors, or if USA Video's products do not achieve market acceptance, the Company's business prospects, financial condition and results of operations will be materially adversely affected.



USA VIDEO IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, WHICH COULD RENDER THE COMPANY'S PRODUCTS AND SERVICES OBSOLETE.



USA Video's future success will depend in part on its ability to offer products and services that incorporate leading technology and address the increasingly sophisticated and varied needs of its current and prospective customers.  The Company's market is characterized by rapidly changing and unproven technology, evolving industry standards, changes in customer needs, emerging competition and frequent new service introductions. Future advances in technology may not be beneficial to or compatible with USA Video's business.  In addition, the Company may not be able to incorporate technological advances into its products and services in a cost-effective and timely basis.  Keeping pace with the technological advances may require substantial expenditures and lead time, particularly with respect to acquiring updated hardware and infrastructure components of its systems.  The Company may require additional financing to fund such acquisitions.  Any such financing may not be available on commercially reasonably terms, if at all, when needed.



USA VIDEO IS DEPENDENT UPON VENDORS AND OTHER THIRD PARTY SERVICE PROVIDERS, AND WILL BE COMPETING WITH SOME OF THESE COMPANIES.



USA Video is, and will continue to be dependent on vendors and other providers to supply the hardware, software and co-location resources that comprise the Company's products and services.  The Company has no long-term or exclusive contracts or arrangements with any of these vendors or providers.  The Company cannot be certain that its current and proposed vendors and service providers will continue to do business with the Company, or that it will be able to establish relationships with new vendors and service providers, if necessary.  If the Company is unable to establish and maintain satisfactory relationships and arrangements with these third parties, the Company's business could be harmed.  In addition, USA Video will be dependent upon its third party vendors and other suppliers to adequately test their products before release, and to provide support for the products after delivery.  The failure of any of these third party providers to do so could have a material adverse effect on USA Video's business.



Further, USA Video currently competes with, and expects to compete with in the future, providers of some of its technology or system components.  USA Video's inability to, at the same time, effectively cooperate and compete with these companies could harm its business.



IF USA VIDEO DOES NOT CONTINUOUSLY IMPROVE ITS TECHNOLOGY IN A TIMELY MANNER, ITS PRODUCTS COULD BE RENDERED OBSOLETE.



The markets for USA Video products and services are characterized by:







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•

rapidly changing technology;



•

evolving industry standards;



•

frequent new product and service introductions; and



•

changing customer demands.



These changes and developments may render the Company's products and technologies obsolete in the future.  As a result, the Company's success depends on its ability to adapt to these changes, particularly to develop or adapt products and services or to acquire new products and services that can compete successfully.  There can be no assurance that USA Video will be successful in these efforts.



USA VIDEO'S SERVICES ARE COMPLEX AND THE COMPANY MAY NOT BE ABLE TO PREVENT DEFECTS THAT COULD DECREASE THEIR MARKET ACCEPTANCE, RESULT IN PRODUCT LIABILITY OR HARM ITS REPUTATION.



USA Video's streaming media products services are complex, and the steps the Company takes to ensure that they are free of errors or defects, particularly when first introduced or when new versions or enhancements are released, may not be successful. USA Video cannot guarantee that current versions or enhanced versions or its products will be free of significant software defects or bugs. Despite the Company's testing, and testing by its third-party vendors and providers, current or future products may contain serious defects.  Serious defects or errors could result in lost revenue or a delay in market acceptance of the Company's products and could seriously harm its business and operating results.  Errors in its products may be caused by defects in third-party hardware or software incorporated into its products.  If so, the Company may be unable to fix these defects without the cooperation of these third-party providers.  Because these defects may not be as significant to these providers as they are to USA Video, the Company may not receive the rapid co-operation that it may require.  Errors, defects or other performance problems with the Company's products could also harm its customers' businesses or result in potential product liability claims.  Even if unsuccessful, a product liability claim brought against USA Video would likely be time-consuming, costly and harmful to its reputation.  Nor can there be any assurance that the Company's product liability insurance coverage will be sufficient to satisfy any successful claim.



ANY LOSS OF THE COMPANY'S PERSONNEL OR INABILITY TO ADD NEW PERSONNEL COULD HARM THE COMPANY'S BUSINESS.



USA Video's future success depends significantly on the continued services and performance of its senior management.  The Company's performance also depends on its ability to retain and motivate its other key personnel.  The loss of the services of any member of USA Video's senior management team or other key employees could cause significant disruption in the Company's business.  USA Video has no long-term employment agreements with senior management and does not currently maintain any "key person" life insurance. The Company's future success also depends on its ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, operations, sales and marketing and customer service personnel.  Competition for such personnel is intense, and USA Video may not successfully attract, assimilate or retain sufficiently qualified personnel.  The failure to retain and attract the necessary personnel could impede the Company's future success.







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14



USA VIDEO DOES NOT CURRENTLY HAVE ANY PAYING CUSTOMERS.



USA Videos sales were zero in 2006 and it does not currently have any paying customers.  One customer accounted for 100% of USA Video's revenue for the year ended December 31, 2005.  The Company expects a small number of customers will continue to account for a substantial portion of its revenue for the foreseeable future.  USA Video's inability to increase the number of its customers could limit the Company's ability to maintain or increase its market share, or could cause revenue to drop quickly and unexpectedly.



USA VIDEO'S BUSINESS MAY SUFFER IF IT CANNOT PROTECT ITS INTELLECTUAL PROPERTY.



USA Video seeks to protect its proprietary rights through a combination of patents, trade secret and trademark laws, confidentiality procedures and contractual provisions with employees and third parties.  Despite its efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or obtain and use information that it considers as proprietary.  Litigation may be necessary to enforce USA Video's intellectual property rights, to protect its trade secrets and to determine the validity and scope of the proprietary rights of others.  Any litigation could result in substantial costs and diversion of management and other resources with no assurance of success and could seriously harm USA Video's business and operating results.



THERE IS NO ASSURANCE THAT USA VIDEOS PATENTS WONT BE CHALLENGED, INVALIDATED OR CIRCUMVENTED



There can be no assurance that USA Video's current or future patents, if any, will not be challenged, invalidated, or circumvented, or that any rights granted thereunder will provide competitive advantages to the Company.  In addition, there can be no assurance that patents will be issued from pending applications, or that claims allowed on any future patents will be sufficiently broad to protect USA Video's technology.  In addition, the laws of some foreign countries may not permit the protection of USA Video's proprietary rights to the same extent as do the laws of the United States.  USA Video intends to enforce its proprietary rights through the use of licensing agreements and, when necessary, litigation.  Although USA Video believes the protection afforded by its patents, patent applications, and trademarks has value, the rapidly changing technology in the video transmission industry makes the Company's future success dependent primarily on the innovative skills, technological expertise, and management abilities of its employees rather than on patent and trademark protection.



USA VIDEO'S PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, CAUSING IT TO INCUR SIGNIFICANT COSTS OR PREVENT IT FROM LICENSING ITS PRODUCTS.



Other companies, including USA Video's competitors, may have or obtain patents or other proprietary rights that would prevent, limit or interfere with the Company's ability to make, use or license its products.  The Company cannot be certain that its products do not and will not infringe patents or other proprietary rights of others.  USA Video may be subject to legal proceedings, including claims of alleged infringement by it of the intellectual property rights of third parties.  If a successful claim of infringement is brought against USA Video and it fails to or is unable to license the infringed technology on commercially reasonable terms, the Company's business and operating results could be significantly harmed.  Companies in the technology market are increasingly bringing suits alleging infringement of their proprietary rights, particularly patent rights.  Although USA Video is not currently subject to any litigation or claims, any future claims, whether or not valid, could result in substantial costs and diversion of resources with no assurance of success.  Intellectual property litigation or claims could force USA Video to do one or more of the following:







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15



•

cease selling, incorporating or using products or services that incorporate the challenged intellectual property;



•

obtain a license from the holder of the infringed intellectual property right, which license may not be available on commercially reasonable terms, or at all; or



•

redesign its products or services.



If USA Video is forced to take any of these actions, its business could be substantially harmed.



USA VIDEO'S SUCCESS DEPENDS ON THE CONTINUED GROWTH IN DEMAND FOR E-BUSINESS APPLICATIONS.



USA Video's primary business strategy involves the development of products and services that enable users to transmit video over the Internet.  As a result, its future sales and any future profits will be substantially dependent upon the widespread acceptance and use of the Internet as an effective medium of business by consumers and businesses.  To be successful, consumers and businesses that historically have used traditional means of commerce to transact business must continue to accept and utilize the Internet as a medium for conducting business and exchanging information.  Consumers and businesses may reject the Internet as a viable commercial medium for a number of reasons, including potentially inadequate network infrastructure, slow development of enabling technologies, insufficient commercial support and privacy concerns.  In addition, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity or increased government regulation could cause the Internet to lose its viability as a commercial medium.  If the demand for e-business applications does not grow or grows more slowly than expected, demand for USA Video's products and services would be reduced and its revenue would suffer.



GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS AND RISKS TO DOING BUSINESS ON THE INTERNET.



USA Video is not currently subject to direct regulation by any governmental agency, other than regulations applicable to businesses generally, export control laws and laws or regulations directly applicable to electronic commerce.  However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet covering issues such as: user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services.



Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online.  The adoption of additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for the Company's products and services and increase its cost of doing business.



The applicability to the Internet of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, export or import matters, obscenity and personal privacy is uncertain.  The vast majority of such laws were adopted prior to the advent of the Internet and related technologies.  As a result, they do not contemplate or address the unique issues of the Internet and related technologies.  Changes to such laws intended to address these issues, including some recently proposed changes, could create uncertainty in the Internet marketplace.  Such uncertainty could reduce demand for the Company's products and services or increase the cost of doing business due to increased costs of litigation or increased service delivery costs.







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16



THE COMPANY'S SHARE PRICE HAS BEEN AND COULD BE HIGHLY VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.



The trading price of the Company's common shares has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in response to a number of factors including: variations in quarterly operating results; new products or services offered by the Company or its competitors; conditions or trends in the  Internet and online commerce industries; changes in the economic performance and/or market valuations of other Internet and online service companies; and other events or factors, many of which are beyond the Company's control.  In addition, the stock market in general, and the market for Internet-related and technology companies in particular, has experienced extreme price and volume fluctuations, including large price drops in 2003, 2002 and 2001, that have often been unrelated or disproportionate to the operating performance of such companies.  These broad market and industry factors may materially adversely affect the market price of the Company's common shares, regardless of the Company's actual operating performance.  In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against such companies.  Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources.



ANTI-TAKEOVER PROVISIONS IN USA VIDEO'S CHARTER DOCUMENTS COULD PREVENT OR DELAY A CHANGE IN CONTROL OF THE COMPANY.



USA Video's Articles of Continuance and bylaws contain anti-takeover provisions that could discourage, delay or even prevent an acquisition of the Company at a premium price or at all.  Any of these provisions might prevent the market price of the USA Video common shares from increasing in response to takeover attempts, and could prevent the Company's shareholders from realizing a premium over the then-prevailing market price for the common shares.



USA VIDEO INTENDS TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH MAY DILUTE THE INTERESTS OF CURRENT SHAREHOLDERS OR CARRY RIGHTS OR PREFERENCES SENIOR TO THE COMMON SHARES.



USA Video intends to issue additional equity securities in order to raise working capital.  Accordingly, existing shareholders may experience additional dilution of their percentage ownership interest in the Company.  In addition, the new equity securities may have rights, preferences or privileges senior to those of existing holders of the Company's common shares.



LIMITED LIABILITY OF EXECUTIVE OFFICERS AND DIRECTORS MAY DISCOURAGE SHAREHOLDERS FROM BRINGING A LAWSUIT AGAINST THEM.



USA Video's bylaws contain provisions that limit the liability of directors for monetary damages and provide for indemnification of officers and directors.  These provisions may discourage shareholders from bringing a lawsuit against officers and directors for breaches of fiduciary duty and may also reduce the likelihood of derivative litigation against officers and directors even though such action, if successful, might otherwise have benefited the shareholders.  In addition, a shareholder's investment in USA Video may be adversely affected to the extent that costs of settlement and damage awards against officers or directors are paid by USA Video pursuant to the indemnification provisions of the bylaws.







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17



REQUIREMENTS OF THE SEC WITH REGARD TO LOW-PRICED "PENNY STOCKS" MAY ADVERSELY AFFECT THE ABILITY OF SHAREHOLDERS TO SELL THEIR SHARES IN THE SECONDARY MARKET.



"Penny stocks" are low-priced, and usually highly speculative, stock selling at less than $5.00 per share.  USA Video's securities are subject to Rule 15g-9 under the Securities Exchange Act of 1934, which imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and "accredited investors" (generally, an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse).  For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale.  The rule also requires the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market.  The broker-dealer must also disclose the commissions payable for the transaction, current quotations for the stock, and, if applicable, the fact that it is the sole market maker in the stock.  Consequently, the rule may adversely affect the ability of broker-dealers to sell USA Video's securities and may adversely affect the ability of shareholders to sell their shares in the secondary market.



USA VIDEO DOES NOT ANTICIPATE PAYING DIVIDENDS TO SHAREHOLDERS IN THE FORESEEABLE FUTURE.



USA Video has not paid dividends on its common shares and intends, for the foreseeable future, to invest any earnings in the further development of its business. Accordingly, shareholders should not expect to receive any dividends on their shares.



Item 2.  Properties.



USA Video headquarters and executive offices are located in Niantic, Connecticut consisting of 1,100 square feet with a two year lease that expires July of 2008.  The annual base rent is $13,200.



USA Video also leases 800 square feet of office space located in Vancouver, British Columbia, with a five year lease that expires March 2009.  The annual base rent is $20,000.



Item 3.  Legal Proceedings.



On April 10, 2003, the Company announced that a subsidiary had filed a lawsuit in U.S. District Court for the District of Delaware against Movielink LLC.  The Company alleged that Movielink infringed on the Companys patented online video delivery system. On January 28, 2005, that court issued an opinion and order granting summary judgment in favor of Movielink, based on the courts conclusion that the record contained insufficient evidence that the Movielink system initiates connections (a requirement for infringement of the Companys patent) in light of the Courts construction of the term initiates, and on May 27, 2005, denied the Company's motion for reconsideration. The Company appealed the district court's adverse rulings to the U.S. Court of Appeals for the Federal Circuit, and on September 8, 2006, the appellate court affirmed the rulings of the court below, effectively ending the substantive litigation between the Company and Movielink. On September 16, 2006, Movielink filed in district court a Bill of Costs seeking $20,525 in litigation costs allegedly taxable to the Company; the Company subsequently filed objections with the court asserting that only $107 of the costs sought by Movielink is permissible under applicable provisions of law. The court has not determined the amount of costs finally taxable to the Company, and consequently a contingent liability exists, which is estimated to be in a range approximately between $107 and $20,525.







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18



On September 13, 2006, USA Video Technology Corp., a wholly-owned subsidiary of the Company, filed suit in the U.S. District Court for the Eastern District of Texas, alleging that its U.S. Patent No. 5,130,792 is infringed by Time Warner, Inc. (NYSE: TWX), Cox Communications, Inc., Charter Communications, Inc. (NasdaqNM: CHTR), Comcast Cable Communications LLC (NasdaqNM: CMCSA), Comcast of Richardson, LP, Comcast of Plano, LP, and Comcast of Dallas, LP, and seeking statutory compensation and a court injunction against further infringement. The defendant companies cited in the lawsuit operate digital cable systems in which they provide allegedly infringing video-on-demand services to their subscribers. The defendant companies subsequently filed lawsuits in the U.S. District Court for the District of Delaware, primarily seeking declaratory judgments that the first-filed allegations of patent infringement against them are without merit, and also seeking damages, etc., related to the filing of the lawsuits. At present, proceedings in both courts are ongoing. Consequently, a contingent liability exists to the extent that the outcome of these proceedings is uncertain.



The Company is party to a default judgment entered against one of the Companys subsidiaries.  During the year ended December 31, 1995, a claim was made to the Company for the total amount payable under the terms of the lease with the Companys subsidiaries for office space in Dallas Texas through 2002.  The Companys management is of the opinion that the amount payable under the terms of this judgment is not estimable or determinable at this time and may be substantially mitigated by the landlord renting the property to another party.  The range of possible loss is from $-0- to approximately $500,000.



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



No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report.



PART II



Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.



There is a limited public market for the common shares of the Company.  The common shares trade on the TSX Venture Exchange (the TSX) under the trading symbol "US", and on the NASD OTC Bulletin Board under the symbol "USVO".



The following table shows the high and low sales prices (in Canadian dollars) of the common shares as reported by the TSX for the periods indicated.



|                    | TSX (Symbol US)
|------------------- | -----------------
|Period              | High
(Cdn $)     
|First Quarter 2005  | 0.55             
|Second Quarter 2005 | 0.13             
|Third Quarter 2005  | 0.125            
|Fourth Quarter 2005 | 0.12             
|First Quarter 2006  | 0.14             
|Second Quarter 2006 | 0.14             
|Third Quarter 2006  | 0.09             
|Fourth Quarter 2006 | 0.175            







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19



The following table shows the high and low prices of the common shares on the NASD OTC Bulletin Board. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:



|OTC Bulletin Board(Symbol USVO)
|---------------------------------
|Period                           
|First Quarter 2005               
|Second Quarter 2005              
|Third Quarter 2005               
|Fourth Quarter 2005              
|First Quarter 2006               
|Second Quarter 2006              
|Third Quarter 2006               
|Fourth Quarter 2006              



As of March 22nd, 2007, there were 159,439,756 common shares outstanding, held by 1,585 shareholders of record.

To date, the Company has not paid any dividends on its common shares and does not expect to declare or pay any dividends on such common shares in the foreseeable future. Payment of any dividends will depend upon future earnings, if any, the financial condition of the Company, and other factors as deemed relevant by the Company's Board of Directors.

All sales of securities made by USA Video during the year ended December 31, 2006 that were not registered under the Securities Act have been disclosed in USA Video's report on Form 10-Q for the periods ended March 31, 2006, June 30, 2006 and September 30, 2006 or in this Form 10-K.  The sales did not involve the use of an underwriter and no commissions were paid in connection with the sale of any of these securities.

Item 6.  Selected Financial Data.

The following table presents selected historical financial data.  The consolidated statement of operations data for the years ended December 31, 2004, 2005 and 2006, and the balance sheet data as of December 31, 2005 and 2006 are derived from USA Video's consolidated financial statements included elsewhere in this report, which have been audited by Goldstein Golub Kessler LLP independent auditors.  The selected financial data should be read in conjunction with USA Video's consolidated financial statements, including the related notes, and the information in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."



|                         | December 31
|------------------------ | -----------
|Item                     | 2006
$     
|Revenue                  | --         
|Net loss                 | (1,249,045)
|Loss per share           | (0.01)     
|Total assets             | 55,478     
|Long-term obligations    | --         
|Cash dividends per share | --         







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20



Item 7.  Management's Discussion and Analysis of Financial Conditions and Results of Operation.



Overview of the Company



USA Video was a development-stage company from January 1, 1992 to December 31, 1999, during which time it engaged primarily in the development of its end-to-end hardware systems and proprietary Video-on-Demand and Wavelet compression technologies, and had very limited sales. In 2000, the Company made the first of its end-to-end systems, and invested heavily in further development of its StreamHQTM streaming media system.  Due to current market conditions, management has implemented consolidation procedures to reduce the expense of operations.  The Company has transitioned its wavelet compression technology into a digital watermark technology.



As more fully discussed below the Company has not been profitable, and did not have any revenues.  USA Video cannot predict its revenue levels for the next 12 months, or thereafter, nor when, or if, its operations will become profitable.  USA Video will require additional financing, both for the remainder of fiscal 2007 and thereafter, to continue to operate and expand its business.  There is no assurance that such financing will be available on commercially reasonable terms, if at all.



Results of Operations



Revenues



Revenues for the year ended December 31, 2006 ("fiscal 2006") were $-0-, compared with $18,000 for the year ended December 31, 2005 ("fiscal 2005") and revenues of $4,700 for the year ended December 31, 2004 ("fiscal 2004"). All revenues for fiscal 2005 and fiscal 2004 were derived from the provision of engineering services.  The Company had one customer, which accounted for 100% of the revenues in fiscal 2005 and fiscal 2004.



The revenues increased marginally in fiscal 2005 and 2004 due to the Company’s continuing efforts to upgrade and market MediaSentinelTM and related products.



Expenses



Total operating expenses for fiscal 2006 were $1,321,659, compared with $1,215,334 for fiscal 2005 and $1,404,234 for fiscal 2004.  For fiscal 2006, cost of sales was $-0-, as compared with $5,000 for fiscal 2005 and $3,379 for fiscal 2004.



Research and development costs for fiscal 2006 were $135,897, as compared to $168,571 for fiscal 2005 and $276,302 for 2004.  The decrease in fiscal 2006 was due primarily to managements decision to focus on marketing of MediaSentinelTM.



Selling, general and administrative expenses were $1,182,439 for fiscal 2006, as compared to $1,043,440 for fiscal 2005, and $1,124,609 for fiscal 2004. Selling, general and administrative expenses consisted of marketing expenses, consulting fees, office, professional fees, and other expenses to execute the Company's business plan and for day-to-day operations.  The primary components of the increases/decreases from fiscal 2006 to fiscal 2005 were:



•

a $33,619 decrease in fiscal 2006 in marketing expenses, as the Company scaled back general marketing efforts while negotiating a contract with a potential customer in the third and fourth quarter;





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21



•

a decrease of $7,027 from fiscal 2005 for transfer agent, due to a  reduction of exercise of warrants;



•

a $80,037 decrease in professional fees in fiscal 2006 was due to the transition of the patent infringement lawsuit to the court of appeals and additional patent infringement lawsuits were filed with minor costs in 2006.



The year-to-year increases/decreases in fiscal 2005 resulted from the Company's increased efforts to bring products to market. The decreases resulted from the consolidation efforts of management. The primary components of the increases/decreases from fiscal 2005 to fiscal 2004 were:



•

a $35,933 increase in fiscal 2005 in marketing expenses, as the Company revamped marketing objectives and strategies to concentrate on the release of MediaSentinelTM late in the third quarter of fiscal 2004.  The marketing staff continues to identify and assess appropriate market segments, develop business arrangements with prospective partners, create awareness of new products and services, and communicate to the industry and potential customers;



•

an increase of $11,779 from fiscal 2004 for public relations, due to managements decision to contract an outside firm;



•

a $158,272 decrease in professional fees in fiscal 2005 was due to the transition of the patent infringement lawsuit to the court of appeals.



Additional expenses included amortization of $3,323 for fiscal 2006, fiscal 2005 and fiscal 2004 for the amortization of the patents.  Non-cash compensation charges for fiscal 2006 were $477,788, for fiscal 2005 were $216,560 and for fiscal 2004 were $158,960, due mostly to issuance of common shares and share purchase warrants to the Company's officers, directors and employees at a price or exercise price below the market price of the common shares at the time of issuance and the issuance of stock options to contractors due to the Companys adoption of FASB 123R effective as of January 1, 2006.  Because the rules of the TSX allow that the offering price for privately placed securities of listed companies may be set at the market price when the offering is first announced, rather than upon closing, the sale price of the common shares and the exercise price of the warrants were below the market price of the common shares on the date of issuance.  In 2006 fair value of employee stock options for employees are included in noncash compensation which is included  in selling, general, and administrative expenses in the statement of operations.



Other increases in expenses included utilities and telephone, travel and promotion, insurance and rent due to decision to continue development and marketing of MediaSentinelTM.





During the period ended December 31, 2006, the Company settled accounts payable obligations of approximately $64,000 for $2,000, and recorded a gain of $62,000. During the period ended December 31, 2005, the Company settled accounts payable obligations of approximately $288,000 for $45,000, and recorded a gain of $243,000.







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22



Net Losses



To date, the Company has not achieved profitability and expects to incur substantial losses for the foreseeable future.  The Company's net loss for fiscal 2006 was $1,249,045, compared with a net loss of $958,250 for fiscal 2005, and $1,403,838 for fiscal 2004.



Liquidity and Capital Resources



At December 31, 2006, the Company's cash position was $14,364, a decrease of $10,889 from December 31, 2005.  The Company had a working capital deficit of $302,280 and an accumulated deficit of $35,484,986 at December 31, 2006.



The Company's principal source of cash during fiscal 2006 was proceeds of $621,125 received from private placements and $105,000 from exercise stock options. This was offset by $747,014 of cash used in operating activities.



The Company has historically satisfied its capital needs primarily by issuing equity securities to its officers, directors, employees and a small group of investors, and from short-term bridge loans from members of management.  During fiscal 2006, the Company completed three private placements, resulting in gross proceeds to the Company of $621,125.



The first offering completed on April 18, 2006 was a private placement of 4,500,000 units at a price of $0.06 per unit for total proceeds of $270,000.  Each unit consisted of one common share and one share purchase warrant to purchase one additional common share at $0.087 per share, exercisable until April 18, 2008.  The offer and sale of the units were exempt from registration under Rule 506 of Regulation D of the Securities Act.  The Company limited the manner of the offering and provided disclosure regarding the offering and the Company to the investors.  One director of the Company, four employees of the Company and three additional unaffiliated non-accredited investors and six unaffiliated accredited investors purchased the securities.   The Company believes that a portion of these sales were also exempt under Regulation S under the Securities Act, as the sales were made in offshore transactions to non-U.S. persons.



The second offering completed on August 11, 2006 was a private placement of 4,150,000 units at a price of $0.0575 per unit for total proceeds of $238,625.  Each unit consisted of one common share and one share purchase warrant to purchase one additional common share at $0.087 per share, exercisable until August 11, 2008.  The offer and sale of the units were exempt from registration under Rule 506 of Regulation D of the Securities Act.  The Company limited the manner of the offering and provided disclosure regarding the offering and the Company to the investors.  One director/employee of the Company, one employee of the Company and seven additional unaffiliated non-accredited investors and nine unaffiliated accredited investors purchased the securities.   The Company believes that a portion of these sales were also exempt under Regulation S under the Securities Act, as the sales were made in offshore transactions to non-U.S. persons.



The third offering completed on October 8, 2006 was a private placement of 2,500,000 units at a price of $0.045 per unit for total proceeds of $112,500.  Each unit consisted of one common share and one share purchase warrant to purchase one additional common share at $0.089 per share, exercisable until October 8, 2008.  The offer and sale of the units were exempt from registration under Rule 506 of Regulation D of the Securities Act.  The Company limited the manner of the offering and provided disclosure regarding the offering and the Company to the investors.  One director/employee of the Company, one employee of the Company and two additional unaffiliated non-accredited investors and seven unaffiliated accredited investors purchased the securities.   The Company believes that a portion of these sales were also exempt under Regulation S under the Securities Act, as the sales were made in offshore transactions to non-U.S. persons.







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23



The Company also received proceeds of $-0- from the exercise of outstanding warrants and $105,000 from the exercise of stock options in fiscal 2006.



The Company's independent registered public accounting firm, in their report accompanying the Company's audited financial statements at and for the year ended December 31, 2006, have stated that there is substantial doubt about the Company's ability to continue as a going concern.  As of December 31, 2006, the Company had $14,364 in cash. The Company will require an additional $1.0 million to $1.75 million to finance operations for the fiscal 2007 and intends to obtain such financing through sales of its equity securities.  The threat to the Company's ability to continue as a going concern will be removed only when revenues have reached a level that sustains the Company's business operations.



Assuming the aforementioned $1.0 million to $1.75 million in financing is obtained, continuing operations for the longer-term will be supported through anticipated growth in revenues and through additional sales of the Company's securities.  Although longer-term financing requirements may vary depending upon the Company's sales performance, management expects that the Company will require additional financing of $2.0 million to $3.0 million for fiscal 2008.  The Company has no binding commitments or arrangements for additional financing, and there is no assurance that management will be able to obtain any additional financing on terms acceptable to the Company, if at all.



Item 7A.  Quantitative and Qualitative Disclosure About Market Risk.



USA Video believes its exposure to overall foreign currency risk is not material.  USA Video does not manage or maintain market risk sensitive instruments for trading or other purposes and is not exposed to the effects of interest rate fluctuations as it does not carry any long-term debt.



USA Video reports its operations in US dollars and its currency exposure, although considered by USA Video as immaterial, is primarily between the US and Canadian dollars.  Exposure to other currency risks is also not material as international transactions are settled in US dollars.  Any future financing undertaken by USA Video will be denominated in US dollars.  As USA Video increases its marketing efforts, the related expenses will be primarily in US dollars.  In addition, 90% of USA Video's bank deposits are maintained in U.S. dollars.



Item 8.  Financial Statements and Supplementary Data.



The financial statements and supplementary financial information required to be filed under this item are presented on pages F-1 through F-21 of this Report and are incorporated herein by reference.



Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.



None







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24



Item 9A.  Controls and Procedures



Evaluation of Disclosure Controls and Procedures



As of December 31, 2006, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures.  Disclosure controls and procedures are the controls and other procedures that the Company designed to ensure that it records, processes, summarizes and reports in a timely manner the information it must disclose in reports that it files with or submits to the SEC.  The Companys Chief Executive Officer and Chief Financial Officer participated in this evaluation.  Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that, as of the date of their evaluation, the Companys disclosure controls and procedures were effective.



There have been no changes in the Companys internal control over financial reporting that occurred during the Companys fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



PART III



Item 10.  Directors and Executive Officers of the Registrant.



The following table sets forth the name, age, position, and period of service in his present position of each director and executive officer of USA Video:



|Name                | Age | Position                                        | Period of Service
|------------------- | --- | ----------------------------------------------- | -----------------
|Edwin Molina        | 51  | Director, Chief Executive Officer and President | Since 1998       
|Anton J. Drescher   | 50  | Director, Chief Financial Officer and Secretary | Since 1994       
|Maurice Loverso (1) | 46  | Director                                        | Since 2003       
|Rowland Perkins (1) | 53  | Director                                        | Since 2005       



(1)

Member of the Audit Committee



Anton Drescher, Edwin Molina, Maurice Loverso, and Rowland Perkins were elected directors of USA Video in June 2006.



Executive Officers and Directors of the Company:



Edwin Molina - President, Chief Executive Officer and Director



Mr. Molina served as a Senior Administrator with USA Video from June 1992 to June 30, 1998, when he was appointed President, Chief Executive Officer and a director.  Mr. Molina was also a Senior Administrator with Adnet USA LLC, a private California company involved in Internet advertising, from May 1996 to June 1998.







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25



Anton J. Drescher - Chief Financial Officer, Secretary and Director



Mr. Drescher has been Chief Financial Officer of USA Video since December 1994.  During the past 5 years to present, Mr. Drescher has provided administrative and consulting services in his capacity as President and a Director of Harbour Pacific Capital Corp. since 1998 and Westpoint Management Consultants Ltd. of Vancouver, British Columbia, Canada since 1978.  Mr. Drescher also currently serves as a director and/or officer of the following TSX listed companies: International Tower Hill Mines Ltd. since October 1991, Dorato Resources Inc. since December 1998; and Landmark Minerals Inc. since February 2003.  Mr. Drescher obtained a Diploma in Financial Management from the British Columbia Institute of Technology in June 1974.  He also obtained his Certified Management Accountant's designation in October 1981.



Maurice Loverso  Director



Mr. Loverso has been an independent director of USA Video since May  2003.  He has been President of 3336298 Canada Inc. since 1996, providing financial consultation services to small capital public and private companies and has been a director of Group Intercapital Inc. since 1996, assisting a small cap venture capital firm with financial advice. Previously, from 1992 to 1995, he served as President of Almic Industries, a manufacturer of bathroom vanities and accessories and provided financial consultant services to USA Video from 1992 to 1994. From 1998 to 1999, he was a director of QR Canada Capital Inc., a public company listed for trading on the TSX.



Rowland Perkins  Director



Mr. Perkins was appointed as an independent director of USA Video as of January 10, 2005.  He has been President and a director of eBackup Inc., of Calgary, Alberta, since 2001.  He was previously Alberta Regional Manager of Securitinet Storage Solutions from 1999 to 2001, Vice-President of Simul Corp. from 1997 to 1999 and President of Franchise Network from 1994 to 1997.  Mr. Perkins currently serves as a director of the following TSX listed companies:   Dorato Resources Inc. since January 2005, International Tower Hill Mines Ltd. since 1998 and Waymar Resources Ltd. since June 2005.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended ("Section 16"), requires that reports of beneficial ownership of capital stock and changes in such ownership be filed with the SEC by Section 16 "reporting persons," including directors, certain officers, and holders of more than 10% of the outstanding common shares.  The Company is required to disclose in this Annual Report on Form 10-K each reporting person whom it knows to have failed to file any required reports under Section 16 on a timely basis during the fiscal year ended December 31, 2006.



To the Company's knowledge, based solely on a review of copies of Forms 3, 4 and 5 furnished to it and written representations that no other reports were required, during the fiscal year ended December 31, 2006, the Company's officers, directors and 10% shareholders complied with all Section 16(a) filing requirements applicable to them except for Edwin Molina and Rowland Perkins, who did not file timely Form 4s.







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26



Code of Ethics



The Company has adopted a Code of Ethics and Corporate Disclosure Policy that applies to the directors, officers and employees and Corporate Governance Guidelines that applies to the directors and officers of the Company.  A copy of the Code of Ethics, Corporate Disclosure Policy and Corporate Governance Guidelines are posted on the Companys website at http://www.usvo.com.  These documents are also available in print to any shareholder who requests a copy by sending a written request to our corporate secretary at #507, 837 West Hastings Street, Vancouver, British Columbia, V6C 3N6.



Audit Committee



The Audit Committee assists the Companys Board of Directors in its oversight of the quality and integrity of the accounting, audit and reporting practices of the Company.  The Audit Committees role includes discussing with management the Companys processes to manage business and financial risk and for compliance with significant applicable legal, ethical and regulatory requirements.  The Audit Committee is responsible for the appointment, replacement, compensation and oversight of the independent auditor engaged to prepare or issue audit reports on the financial statements of the Company.  The Audit Committee relies on the expertise and knowledge of management and the independent auditor in carrying out its oversight responsibilities.



The Audit Committee of the Board of Directors consists of Maurice Loverso and Rowland Perkins.  Rowland Perkins serves as Chairman.  The Board of Directors had determined that each Audit Committee member has sufficient knowledge in financial and accounting matters to serve on the Committee and that each member is an audit committee financial expert as defined by SEC rules.



Item 11. Executive Compensation.



The following table sets forth compensation awarded to, earned by or paid to USA Video's Chief Executive Officer (CEO), and to other persons serving as executive officers of the Company as of December 31, 2006, whose salary and bonus for such year exceeded $100,000 (collectively, the "Named Executive Officers") for the last three completed fiscal years.



|                            |                                          |                                  |             |                                      | Long Term Compensation   
|--------------------------- | ---------------------------------------- | -------------------------------- | ----------- | ------------------------------------ | -------------------------
|                            | Summary Compensation
Annual Compensation | Awards                           | Payouts    
|Name and Principal
Position | Year                                     | Salary                           | Bonus       | Other
Annual
Compen-
sation          | Restricted
Stock
Award(s)
|                            |                                          | $                                | $           | $                                    | $                        
|Molina,
Edwin

CEO          | 2006
2005
2004                           | 102,000
75,600
49,600            | -0-
-0-
-0- | (1-3)153,475
(4-5)20,550
(6)11,625   | -0-
-0-
-0-              
|Drescher, Anton

CFO        | 2006
2005
2004                           | (10)60,432
(10)57,529
(10)46,870 | -0-
-0-
-0- | (11)127,800
(12)1,000
(13-14) 14,625 | -0-
-0-
-0-              
|Loverso,
Maurice

Director  | 2006
2005
2004                           | -0-
-0-
-0-                      | -0-
-0-
-0- | (17)14,500
-0-
-0-                   | -0-
-0-
-0-              
|Perkins,
Rowland

Director  | 2006
2005
2004                           | -0-
-0-
-0-                      | -0-
-0-
-0- | (20)6,460
-0-
-0-                    | -0-
-0-
-0-              







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27



(1)

In April 2006, Mr. Molina purchased 475,000 units (each comprised of one common share and one warrant to acquire one common share at $0.06 per share) at $0.087 per unit.  This compensation resulted from the difference between the $0.06 purchase price and the $0.087 warrant exercise price and the fair market price of $0.09 of the common shares on the date of issuance of the units.

(2)

In August 2006, Mr. Molina purchased 800,000 units (each comprised of one common share and one warrant to acquire one common share at $0.0575 per share) at $0.089 per unit.  This compensation resulted from the difference between the $0.0575 purchase price and the $0.089 warrant exercise price and the fair market price of $0.07 of the common shares on the date of issuance of the units.

(3)

In December 2006, Mr. Molina was granted a stock option to purchase up to 2,000,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before December 4th, 2008.  This compensation resulted from the total fair value of the stock option.

(4)

In July 2005, Mr. Molina purchased 250,000 units (each comprised of one common share and one warrant to acquire one common share at $0.055 per share) at $0.08 per unit.  This compensation resulted from the difference between the $0.055 purchase price and the $0.08 warrant exercise price and the fair market price of $0.09 of the common shares on the date of issuance of the units.

(5)

In September 2005, Mr. Molina purchased 300,000 units (each comprised of one common share and one warrant to acquire one common share at $0.065 per share) at $0.084 per unit.  This compensation resulted from the difference between the $0.065 purchase price and the $0.084 warrant exercise price and the fair market price of $0.09 of the common shares on the date of issuance of the units.

(6)

In January 2004, Mr. Molina purchased 25,000 units (each comprised of one common share and one warrant to acquire one common share at $0.20 per share) at $0.255 per unit.  This compensation resulted from the difference between the $0.20 purchase price and the $0.255 warrant exercise price and the fair market price of $0.46 of the common shares on the date of issuance of the units.

(7)

In July 2005, Mr. Molina was granted a stock option to purchase up to 1,000,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before July 11th, 2007.

(8)

In December 2005, Mr. Molina was granted a stock option to purchase up to 2,000,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before December 23rd, 2007.

(9)

In December 2004, Mr. Molina was granted a stock option to purchase up to 2,000,000 shares of common stock at an exercise price of $0.25 per share, exercisable on or before December 3rd, 2006.  On June 15th, 2005, the exercise price of this stock option was reduced to $0.10 per share.

(10)

Represents consulting fees paid to Mr. Drescher through Harbour Pacific Capital Corp., a consulting firm wholly-owned by him, for his services as an executive officer of the Company.

(11)

In December 2006, Mr. Drescher was granted a stock option to purchase up to 2,000,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before December 4th, 2008.  This compensation resulted from the total fair value of the stock option.

(12)

In January 2005, Mr. Drescher purchased 50,000 units (each comprised of one common share and one warrant to acquire one common share at $0.10 per share) at $0.13 per unit.  This compensation resulted from the difference between the $0.10 purchase price and the $0.13 warrant exercise price and the fair market price of $0.12 of the common shares on the date of issuance of the units.

(13)

In January 2004, Mr. Drescher purchased 25,000 units (each comprised of one common share and one warrant to acquire one common share at $0.20 per share) at $0.255 per unit.  This compensation resulted from the difference between the $0.20 purchase price and the $0.255 warrant exercise price and the fair market price of $0.46 of the common shares on the date of issuance of the units.





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28



(14)

In November 2004, Mr. Drescher purchased 40,000 units (each comprised of one common share and one warrant to acquire one common share at $0.15 per share) at $0.195 per unit.  This compensation resulted from the difference between the $0.15 purchase price and the $0.195 warrant exercise price and the fair market price of $0.21 of the common shares on the date of issuance of the units.

(15)

In December 2005, Mr. Drescher was granted a stock option to purchase up to 1,000,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before December 23rd, 2007.

(16)

In December 2004, Mr. Drescher was granted a stock option to purchase up to 2,000,000 shares of common stock at an exercise price of $0.25 per share, exercisable on or before December 3rd, 2006.  On June 15th, 2005, the exercise price of this stock option was reduced to $0.10 per share.

(17)

In December 2006, Mr. Loverso was granted a stock option to purchase up to 250,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before December 4th, 2008.  This compensation resulted from the total fair value of the stock option.

(18)

In December 2005, Mr. Loverso was granted a stock option to purchase up to 50,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before December 23rd, 2007.

(19)

In December 2004, Mr. Loverso was granted a stock option to purchase up to 250,000 shares of common stock at an exercise price of $0.25 per share, exercisable on or before December 3rd, 2006.  On June 15th, 2005, the exercise price of this stock option was reduced to $0.10 per share.

(20)

In December 2006, Mr. Perkins was granted a stock option to purchase up to 100,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before December 29th, 2008.  This compensation resulted from the total fair value of the stock option.

(21)

In January 2005, Mr. Perkins was granted a stock option to purchase up to 150,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before January 10th, 2007.

(22)

In December 2005, Mr. Perkins was granted a stock option to purchase up to 50,000 shares of common stock at an exercise price of $0.10 per share, exercisable on or before December 23rd, 2007.

The following table sets forth certain information concerning grants of stock options to the Named Executive Officers during the year ended December 31, 2006.





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29



|OPTION/SAR GRANTS IN LAST FISCAL YEAR
|-------------------------------------
|                                     
|                                     
|Molina, Edwin                        
|Drescher, Anton                      
|Loverso, Maurice                     
|Perkins, Rowland                     



(1)

In January 2006 a consultant exercised a portion of his stock option to purchase 50,000 common shares

(2)

In April 2006 a consultant exercised a portion of his stock option to purchase 50,000 common shares

(3)

In May 2006 a stock option was granted to consultants to purchase up to 965,000 common shares on or before May 23, 2008, at an exercise price of $0.10 per share.

(4)

In October 2006 a stock option was granted to a consultant to purchase up to 1,000,000 common shares on or before October 16, 2008, at an exercise price of $0.10 per share.

(5)

In November 2006 a director, an employee and consultants exercised a portion of their stock options to purchase 550,000 common shares

(6)

A total of 5,450,000 stock options were granted to directors, employees and consultants in December 2006. A total of 5,000,000 stock options to employees and consultants expire on December 4, 2008, 350,000 stock options to employees and consultants expire on December 18, 2008 and 100,000 stock options to a director expires on December 29, 2008.  On December 7th, 18th and 29th 2006, the dates the options were originally granted, the market prices were $0.10, $0.10 and $0.11 per share, respectively.  In December 2006, an employee and a director exercised a portion of their stock options to purchase 400,000 common shares.



The following table sets forth certain information concerning exercises of stock options by the Named Executive Officers during the year ended December 31, 2006 and stock options held at year end.



|Aggregated Option / SAR Exercises in Last Fiscal Year and FY-End Option / SAR Values
|------------------------------------------------------------------------------------
|                                                                                    
|Name                                                                                
|Molina, Edwin                                                                       
|Drescher, Anton                                                                     
|Loverso, Maurice                                                                    
|Perkins, Rowland                                                                    



(1)

On December 29, 2006, the average of the high and low bid prices of the common shares on the OTC BB was $0.11.







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30



Compensation of Directors



Directors receive no compensation for their service as such.



Employment Contracts



USA Video does not have an employment contract with Mr. Molina and the other Named Executive Officer.  The Company has no obligation to provide any compensation to Mr. Molina or any other Named Executive Officer in the event of his resignation, retirement or termination, or a change in control of the Company, or a change in any Named Executive Officers' responsibilities following a change in control.



USA Video may in the future create retirement, pension, profit sharing and medical reimbursement plans covering its Executive Officers and Directors.



Item 12.  Security Ownership of Certain Beneficial Owners and Management.



The following table sets forth as of March 22nd, 2006, the number of outstanding common shares of USA Video beneficially owned by (i) each person known to USA Video to beneficially own more than 5% of its outstanding common shares, (ii) each director, (iii) each Named Executive Officer, and (iv) all officers and directors as a group.



|Name                                                           | Shares Owned | Percentage of Class
|-------------------------------------------------------------- | ------------ | -------------------
|Edwin Molina (1)                                               | 12,942,624   | 7.64%              
|Anton J. Drescher (2)                                          | 10,496,885   | 6.20%              
|Maurice Loverso (3)                                            | 300,000      | 0.18%              
|Rowland Perkins (4)                                            | 212,500      | 0.13%              
|All Executive Officers and Directors as a Group (four persons) | 23,952,009   | 14.15%             



(1)

Includes 1,650,000 common shares underlying warrants and 4,850,000 common shares underlying stock options that are currently exercisable by Mr. Molina.  Mr. Molina's address is 8 West Main Street, Niantic, Connecticut.



(2)

Includes 50,000 common shares underlying warrants and 2,850,000 common shares underlying stock options that are currently exercisable by Mr. Drescher.  Mr. Drescher's address is 8 West Main Street, Niantic, Connecticut.



(3)

Includes 300,000 common shares underlying stock options that are currently exercisable by Mr. Loverso.  Mr. Loversos address is 8 West Main Street, Niantic, Connecticut.



(4)

Includes 150,000 common shares underlying stock options that are currently exercisable by Mr. Perkins.  Mr. Perkins address is 8 West Main Street, Niantic, Connecticut.



Item 13.  Certain Relationships and Related Transactions.



In 2006, the Company paid consulting fees of $60,432 to Harbour Pacific Capital Corp., a company controlled by Anton J. Drescher, in consideration of Mr. Drescher's services as an executive officer of the Company.







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31



In April 2006, USA Video completed a private placement of 4,500,000 units (each unit consisting of one common share and one warrant to purchase an additional common share at $0.087 per share) at a price of $0.06 per unit, of which 3,825,000 units were sold to outside investors and 675,000 units were sold to officers, directors, and employees of the Company. Because the rules of the TSX require that the offering price for privately placed securities of listed companies be set when the offering is first announced rather than upon closing, the sale price of the units and the exercise price of the warrants were below the market price of $0.09 of the common shares on the date of issuance. Units were sold to the following officers and directors of the Company, in the amounts indicated: Edwin Molina (475,000 units) and Anton J. Drescher (-0- units).   The Company will charge operations for any differential between the fair value and the purchase price of the common stock and for any differential between the fair value of the common stock underlying the warrants and the exercise price of the warrants.



In August 2006, USA Video completed a private placement of 4,150,000 units (each unit consisting of one common share and one warrant to purchase an additional common share at a price of $0.087 per share) at a price of $0.0575 per unit, of which 3,100,000 units were sold to outside investors and 1,050,000 units were sold to officers, directors and employees of the Company.  Because the rules of the TSX require that the offering price for privately placed securities of listed companies be set when the offering is first announced rather than upon closing, the sale price of the units and the exercise price of the warrants were below the market price of $0.07 of the common shares on the date of issuance. Units were sold to the following officers and directors of the Company, in the amounts indicated: Edwin Molina (800,000 units) and Anton J. Drescher (-0- units).  The Company will charge operations for any differential between the fair value and the purchase price of the common stock and for any differential between the fair value of the common stock underlying the warrants and the exercise price of the warrants.



In October 2006, USA Video completed a private placement of 2,500,000 units (each unit consisting of one common share and one warrant to purchase an additional common share at a price of $0.089 per share) at a price of $0.045 per unit, of which 1,900,000 units were sold to outside investors and 600,000 units were sold to officers, directors and employees of the Company.  Because the rules of the TSX require that the offering price for privately placed securities of listed companies be set when the offering is first announced rather than upon closing, the sale price of the units and the exercise price of the warrants were below the market price of $0.06 of the common shares on the date of issuance. Units were sold to the following officers and directors of the Company, in the amounts indicated: Edwin Molina (-0-units) and Anton J. Drescher (-0- units).  The Company will charge operations for any differential between the fair value and the purchase price of the common stock and for any differential between the fair value of the common stock underlying the warrants and the exercise price of the warrants.







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32



Item 14.  Principle Accountant Fees and Services



Audit and Non-Audit Fees



The following table presents fees for the professional audit services rendered by Goldstein Golub Kessler LLP for the audit of the Company's annual financial statements for the years ended December 31, 2006 and 2005 and fees billed for other services rendered by Goldstein Golub Kessler LLP during those periods.



|Year ended December 31 | 2006      | 2005     
|---------------------- | --------- | ---------
|Audit fees             | $ 37,500  | $ 35,500 
|Audit-related fees (1) | -0-       | -0-      
|Tax fees (2)           | -0-       | -0-      
|All other fees (3)     | -0-       | -0-      
|Total                  | $  37,500 | $  35,500



(1)

Audit-related fees consist of assurance and related services that are reasonably related to the performance of the audit of the Company's financial statements. The category includes fees related to the performance of audits and attest services not required by statute or regulation, audits of the Company's benefit plans, due diligence related to acquisitions, agreed-upon procedures, and accounting consultations regarding the application of generally accepted accounting principals to proposed transactions.



(2)

Tax fees consist of the aggregate fees billed for professional service rendered by Goldstein Golub Kessler LLP for tax compliance, tax advice, and tax planning (domestic and international).



(3)

Other fees consist primarily of the aggregate fees billed for professional services rendered by Goldstein Golub Kessler LLP related to a business continuity engagement.



The Audit Committee reviews all audit and non-audit related fees at least annually.  The Audit Committee pre-approved all audit and non-audit related services in fiscal 2006.  The Audit Committee had concluded that the provision of the non-audit services listed above is compatible with maintaining the independence of Goldstein Golub Kessler LLP.



Through September 30, 2005, Goldstein Golub Kessler LLP (the Firm) had a continuing relationship with American Express Tax and Business Services Inc. (TBS) from which it leased auditing staff who were full time, permanent employees of TBS and through which its partners provided non-audit services. Subsequent to September 30, 2005 this relationship ceased and the Firm established a similar relationship with RSM McGladrey, Inc.  The Firm has no full time employees, and, therefore, none of the audit services performed were provided by permanent, full-time employees of the Firm. The Firm manages and supervises the audit and audit staff and is exclusively responsible for the opinion rendered in connection with its examination.



PART IV



Item 15.  Exhibits, Financial Statements to Shareholders and Reports on Form 8-K.



(a)(1)

Financial Statements Independent Auditors' Reports Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements







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33



(a)(2)

All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto included in this Report.



(b)

Reports on Form 8-K



During the last quarter of the fiscal year covered by this Report, the Company filed the filing reports on Form 8-K:



(i)

On November 17th, 2006, the Company announced that that one of the six major Hollywood studio divisions has chosen the Registrant’s MediaEscortTM anti-piracy product to protect their video content being distributed over the Internet.  Details about the signed software license agreement, and the identity of the studio, will be disclosed in a later announcement.



(c)

Exhibits



3.1

Articles of Continuance (Wyoming) filed February 16, 1995 (incorporated by reference from Exhibit 3.1 to the registrant's Form 10).



3.2

Articles of Amendment (Alberta) filed January 3, 1995 (incorporated by reference from Exhibit 3.2 to the registrant's Form 10).



3.3

Articles of Amendment (Alberta) filed June 28, 1993 (incorporated by reference from Exhibit 3.3 to the registrant's Form 10).



3.4

Articles of Amendment (Alberta) filed April 6, 1992 (incorporated by reference from Exhibit 3.3 to the registrant's Form 10).



3.5

Articles of Amendment (Alberta) filed September 1, 1989 (incorporated by reference from Exhibit 3.5 to the registrant's Form 10).



3.6

Articles of Incorporation (Alberta) filed April 18, 1986 (incorporated by reference from Exhibit 3.6 to the registrant's Form 10).



3.7

Bylaws (incorporated by reference from Exhibit 3.7 to the registrant's Form 10).



4.3

Share Option Plan (incorporated by reference from Exhibit 4.3 to the registrant's Form 10).



10.4

Alliance Partner Agreement dated November 11, 1999, between Exodus Communications, Inc. and registrant (incorporated by reference from Exhibit 10.4 to the registrant's Form 10).



21.

Subsidiaries of the Registrant:



Name

State of Incorporation



USA Video (California) Corporation

Nevada

USA Video Corporation

Texas

Old Lyme Video Productions Inc.

Wyoming

USA Video Technology Corporation

Wyoming

USVO, Inc.

Connecticut









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34



31.1

Certification of the Chief Executive Officer Pursuant To Rule 13a-14 Or 15d-14 of the Securities Exchange Act Of 1934,as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



31.2

Certification of the Chief Financial Officer Pursuant To Rule 13a-14 Or 15d-14 of the Securities Exchange Act of 1934,as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002









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35



SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



USA VIDEO INTERACTIVE CORP.





By:  /s/Edwin Molina



Date: March 26th, 2007

Edwin Molina

Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Signature

Title

Date



/s/ Edwin Molina

Chief Executive Officer, Director

March 26th, 2007

-----------------------

Edwin Molina





/s/ Anton J. Drescher

Chief Financial Officer, (principal

March 26th, 2007

-----------------------

financial officer and principal

Anton J. Drescher

accounting officer), Director





/s/ Maurice Loverso

Director

March 26th, 2007

-----------------------

Maurice Loverso







/s/ Rowland Perkins

Director

March 26th, 2007

-----------------------

Rowland Perkins









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USA VIDEO INTERACTIVE CORP.

AND SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2006





---





F-2



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

F-3





Consolidated Financial Statements:



Balance Sheets

F-4

Statements of Operations

F-5

Statements of Stockholders' Equity (Deficiency)

F-6

Statements of Cash Flows

F-7

Notes to ConsolidatedFinancial Statements

F-8 - F-22









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F-3



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors

USA Video Interactive Corp.



We have audited the accompanying consolidated balance sheets of USA Video Interactive Corp. and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended December 31, 2006.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.



In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of USA Video Interactive Corp. and Subsidiaries as of December 31, 2006 and 2005 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.



As disclosed in Note 2, the Company changed its method of accounting for stock-based compensation, effective January  1, 2006.



The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has not generated significant revenue from operations and has a net working capital deficiency and a stockholders deficiency that raise substantial doubt about its ability to continue as a going concern.  Management's plan in regard to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



GOLDSTEIN GOLUB KESSLER LLP

New York, New York



March 14, 2007



Comments by Auditors for Canadian Readers on U.S.  Canada Reporting Differences



In Canada, reporting standards for auditors do not require the addition of an explanatory paragraph (following the opinion paragraph) or a reservation of opinion when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Companys ability to continue as a going concern.  Such doubt is accounted for and disclosed in accordance with United States generally accepted accounting principles.



Our report to the Board of Directors dated March 14, 2007, is expressed in accordance with the standards of the Public Company Accounting Oversight Accounting Board (United States), which requires an explanatory paragraph in the auditors report.



GOLDSTEIN GOLUB KESSLER LLP

New York, New York



March 14, 2007







See Notes to Consolidated Financial Statements







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F-4





|USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES                                      
|----------------------------------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                                                       
|December 31,                                                                      
|                                                                                  
|ASSETS                                                                            
|Current Assets:                                                                   
|Cash and cash equivalents                                                         
|Prepaid expenses and other current assets                                         
|Total current assets                                                              
|                                                                                  
|Property and Equipment - at net                                                   
|                                                                                  
|Intangible assets, net                                                            
|                                                                                  
|Prepaid rent                                                                      
|                                                                                  
|Deferred Tax Assets, net of valuation allowance of $9,086,000 and                 
|$8,824,000, respectively                                                          
|Total Assets                                                                      
|                                                                                  
|LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                          
|Current Liabilities:                                                              
|Accounts payable and accrued expenses                                             
|Due to related parties                                                            
|Total current liabilities                                                         
|                                                                                  
|Commitments and Contingencies                                                     
|                                                                                  
|Stockholders' Deficiency:                                                         
|Preferred stock - no par value; authorized 250,000,000 shares, none issued        
|Common stock and additional paid-in capital - no par value; authorized 250,000,000
|shares, issued and outstanding 157,273,088 and 145,073,088 shares, respectively   
|                                                                                  
|Accumulated deficit                                                               
|Stockholders' deficiency                                                          
|Total Liabilities and Stockholders' Deficiency                                    





See Notes to Consolidated Financial Statements







---

F-5





|USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES                                                                             
|-------------------------------------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                    
|Year ended December 31,                                                                                                  
|                                                                                                                         
|Revenue                                                                                                                  
|                                                                                                                         
|Expenses:                                                                                                                
|Cost of sales                                                                                                            
|Research and development                                                                                                 
|Selling, general and administrative (includes noncash
compensation charges of approximately 478,000,
217,000 and 159,000)
|Depreciation and amortization                                                                                            
|Total expenses                                                                                                           
|Loss from operations                                                                                                     
|                                                                                                                         
|Other income (expense), net:                                                                                             
|Interest income (expense) (net of interest income                                                                        
|of $-0-, $208 and $102, respectively)                                                                                    
|Gain on settlement of accounts payable                                                                                   
|Gain on sale of equipment                                                                                                
|                                                                                                                         
|                                                                                                                         
|Net loss                                                                                                                 
|                                                                                                                         
|Net loss per share - basic and diluted                                                                                   
|Weighted-average number of common shares outstanding -                                                                   
|basic and diluted                                                                                                        





See Notes to Consolidated Financial Statements



---

F-6



|USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES                
|------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
|                                                            



|                                                        | Common Stock and           |              | Stockholders'
|------------------------------------------------------- | -------------------------- | ------------ | -------------
|                                                        | Additional Paid-in Capital | Accumulated  | Equity       
|                                                        | Shares                     | Amount       | Deficit      
|                                                        |                            |              |              
|Balance at January 1, 2004                              | 115,971,088                | 31,336,751   | (31,873,853) 
|Issuance of common stock and common warrants            |                            |              |              
|for cash                                                | 1,250,000                  | 212,500      | -            
|Issuance of common stock upon exercise of warrants      | 13,214,000                 | 1,102,107    | -            
|Noncash compensation charges                            | -                          | 158,960      | -            
|Net loss                                                | -                          | -            | (1,403,838)  
|                                                        |                            |              |              
|                                                        |                            |              |              
|Balance at December 31, 2004                            | 130,435,088                | 32,810,318   | (33,277,691) 
|Issuance of common stock and common                     |                            |              |              
|stock warrants for cash                                 | 12,875,000                 | 825,375      | -            
|Issuance of common stock upon exercise of warrants      | 1,613,000                  | 120,898      | -            
|Issuance of common stock upon exercise of stock options | 150,000                    | 37,500       | -            
|Noncash compensation charges                            | -                          | 216,560      | -            
|Net loss                                                | -                          | -            | (958,250)    
|                                                        |                            |              |              
|                                                        |                            |              |              
|Balance at December 31, 2005                            | 145,073,088                | 34,010,651   | (34,235,941) 
|Issuance of common stock and common                     |                            |              |              
|stock warrants for cash                                 | 11,150,000                 | 621,125      | -            
|Issuance of common stock upon exercise of stock options | 1,050,000                  | 105,000      | -            
|Noncash compensation charges                            | -                          | 477,788      | -            
|Net loss                                                | -                          | -            | (1,249,045)  
|                                                        |                            |              |              
|Balance at December 31, 2006                            | 157,273,088                | $ 35,214,564 | $(35,484,986)



See Notes to Consolidated Financial Statements



---

F-7



|USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES                    
|----------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                           
|Year ended December 31,                                         
|Cash flows from operating activities:                           
|Net loss                                                        
|Adjustments to reconcile net loss to net cash used in operating 
|activities:                                                     
|Depreciation and amortization                                   
|Gain on sale of equipment                                       
|Gain on settlement of accounts payable                          
|Noncash compensation charge                                     
|Changes in operating assets and liabilities:                    
|Decrease in accounts receivable                                 
|Decrease (increase) in prepaid expenses and other current assets
|Decrease (increase) in prepaid rent                             
|Increase (decrease) in accounts payable and accrued expenses    
|Decrease in due to related parties                              
|Net cash used in operating activities                           
|Cash flows from investing activities:                           
|Proceeds from equipment sales                                   
|Net cash provided by investing activities                       
|                                                                
|Cash flows from financing activity - proceeds from the          
|issuance of common stock and warrants and exercise of options   
|Net cash provided by financing activities                       
|Net increase (decrease) in cash and cash equivalents            
|Cash and cash equivalents at beginning of year                  
|Cash and cash equivalents at end of year                        
|Supplemental disclosures of cash flow information:              
|Cash paid during the year for interest                          



See Notes to Consolidated Financial Statements



---

F-8



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1.
BUSINESS:                                   | USA Video Interactive Corp. (the "Company") is a designer of high-tech Internet streaming video-on-demand systems, services and solutions.  At December 31, 2006 and for the three-year period then ended, substantially all of the Company's assets and substantially all its operations are located and conducted in the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: | The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As shown in the financial statements, the Company has incurred losses of $1,249,045, $958,250 and $1,403,838 for the years ended December 31, 2006, 2005 and 2004, respectively.  In addition, the Company has a working capital deficiency of approximately $302,000 and a stockholders deficiency of approximately $270,000 at December 31, 2006. These conditions raise doubt about the Company's ability to continue as a going concern.  The Company's ability to continue as a going concern is dependent upon its ability to generate sufficient revenue and cash flow to meet its obligations as they come due, which management believes it will be able to do.  To date, the Company has funded operations primarily through the issuance of common stock and warrants to outside investors and to the Company's management.  The Company believes that its operations will generate additional funds and that additional funding from outside investors and the Company's management will continue to be available to the Company when needed.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary in the event the Company cannot continue as a going concern.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All intercompany accounts and transactions have been eliminated.

The Company maintains cash in bank deposit accounts which, at times, may exceed federally insured limits.  The Company has not experienced any losses on these accounts.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Deferred rent represents payments made to a landlord at the inception of the lease.  The amount was used for current rent payments.



---

F-9



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | Property and equipment is stated at cost.  Maintenance and repairs are expensed as incurred.  When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations.  Depreciation is computed on the straight-line method over the estimated useful lives of the assets.

Intangible assets consist of patents and patents pending owned by the Company for the Store and Forward Video System.  The patents and patents pending are recorded at cost and are being amortized on a straight-line basis over 17 years.

At each balance sheet date, the Company evaluates the impairment of intangible assets.  The factors used in evaluating the period of amortization include:  (i) current operating results, (ii) projected future operating results, and (iii) other material factors that affect the continuity of the business and economic life of the asset.

Revenue from hardware product sales is recognized when the product has been shipped and the collection of payment is reasonably assured.  Revenue recognized from these sales is net of applicable provisions for refunds, discounts and allowances.  Engineering services sales are recognized upon the service having been provided.

Revenue from software sales is recognized when the product has been delivered. Revenue from multiple element contracts (hardware, software and engineering) is allocated to the various elements based on fair value.  If objective evidence of fair value is not available, revenue from these contracts is deferred until the earlier of when objective evidence of fair value does exist or all elements of the contract have been delivered.  Discounts will be applied to each element on a proportionate basis.  No portion of the revenue will be recognized if the portion of the revenue allocable to delivered elements is subject to forfeiture, refund or other concession.

Research and development costs are expensed as incurred.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (R) (revised 2004), Share-Based Payment which revised Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. This statement supersedes Opinion No. 25, Accounting for Stock Issued to Employees. The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the statement of operations. The revised statement has been implemented by the Company effective January 1, 2006.

The implementation of FAS No. 123 (R) has resulted in charges of $434,000 for the year ended December 31, 2006.

For the 2005 and 2004 fiscal year the Company accounted for its employee incentive stock option plans using the intrinsic value method in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Had the Company determined compensation expenses based on the fair value at the grant dates for those awards consistent with the method of SFAS 123, the Companys net (loss) per share would have increased to the following pro forma amounts:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

F-10



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | Year ended December 31                                                                                                                                               |            | 2005          | 2004        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | ------------- | ------------
| | Net loss
As reported                                                                                                                                                 |            | $ (958,250)   | $(1,403,838)
| | Add:  Stock
compensation expense
included in reported net
loss                                                                                                       |            | 41,000        | 53,250      
| | Deduct:  Total stock based
compensation expense
determined under fair value
based method for all awards                                                              |            | (350,750)     | (867,143)   
| | Pro forma                                                                                                                                                            |            | $ (1,268,000) | $(2,217,731)
| | Loss per common share
Basic and diluted:
As reported                                                                                                                 |            | $ (.01)       | $ (.01)     
| | Pro forma                                                                                                                                                            |            | $ (.01)       | $ (.02)     
| | The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
| | Year ended December 31                                                                                                                                               | 2006       | 2005          | 2004        
| | Expected dividend yield                                                                                                                                              | - 0 -      | - 0 -         | - 0 -       
| | Risk-free interest rate                                                                                                                                              | 4.58-4.97% | 3.23%         | 3.04%       
| | Volatility                                                                                                                                                           | 117-127%   | 144%          | 144%        
| | Expected life (years)                                                                                                                                                | 2          | 2             | 2           
| |                                                                                                                                                                     





---

F-11



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | Effective January 1, 2006, the Company adopted FAS No. 123 (R) utilizing the modified prospective method. FAS No. 123 (R) requires the recognition of stock-based compensation expense in the financial statements.

Under the modified prospective method, the provisions of FAS No. 123 (R) apply to all awards granted or modified on or  after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of FAS 123, Accounting for Stock Based Compensation, is  in net earnings in the periods after the date of adoption. Stock based compensation consists primarily of stock options. Stock options are granted to employees at exercise prices equal to the fair market value of the Companys stock at the dates of grant. Stock options generally vest over three years and have a term of seven years. Compensation expense for stock options is recognized on a straight line basis over the period of the award.

The fair value for options issued was estimated at the date of grant using a Black-Scholes option-pricing model. The risk free rate was derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor was determined based on our historical stock prices. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Companys employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Income taxes are accounted for under the liability method.  Under this method, deferred tax assets and liabilities are recorded based on the temporary differences between the financial statement and the tax bases of assets and liabilities and for operating loss carry forwards measured using the enacted tax rates in effect for the year in which the differences are expected to reverse.  The Company periodically evaluates the reliability of its net deferred tax assets and records a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at current exchange rates, and revenue and expenses are translated at average rates of exchange prevailing during the period.  The aggregate effect of translation adjustments is immaterial at December 31, 2006 and 2005.

Basic loss per common share ("EPS") is computed as net loss divided by the weighted-average number of common shares outstanding during the period. Diluted EPS includes the impact of common stock potentially issuable upon the exercise of options and warrants.  Potential common stock amounts of approximately 36,679,000, 26,824,000 and 10,407,000 for the years ended December 31, 2006, 2005 and 2004, respectively, have been excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

F-12



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|                                               | In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the impact of FIN No. 48 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial statements.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.
MAJOR CUSTOMERS:                            | During the year ended December 31, 2005 one customer accounted for 100% of total revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.
PREPAID  EXPENSES AND OTHER CURRENT ASSETS: | Prepaid expenses and other current assets consist of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                               | December 31,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                               | Prepaid Rent                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                               | Taxes Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                               | Other (none in excess of 5% of current assets)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



---

F-13



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 5.
INTANGIBLE ASSETS:                                                | Intangible assets consist of the following:
| | -------------------------------------------------------------------- | -------------------------------------------
| |                                                                      | Gross Carrying
Amount                      
| | Patents and patents pending                                          | $56,488                                    
| | Aggregate Amortization Expense:
For the year ended December 31, 2006 |                                            
| | Estimated Amortization Expense:
For the year ending December 31,     |                                            
| | 2007                                                                 |                                            
| | 2008                                                                 |                                            
| | 2009                                                                 |                                            
| | 2010                                                                 |                                            
| | 2011                                                                 |                                            



|6.
PROPERTY AND EQUIPMENT: | Property and equipment, at cost, consists of the following:
|-------------------------- | -----------------------------------------------------------



| | December 31,                  | 2006          | 2005         | Estimated
Useful Life
| | ----------------------------- | ------------- | ------------ | ---------------------
| | Office Equipment              | $   16,069    | $  16,069    | 5 years              
| | Less accumulated depreciation | 16,069        | 16,069       |                      
| |                               | $       - 0 - | $      - 0 - |                      



|                        | Depreciation and amortization expense amounted to $-0-, $-0- and $-0- for the years ended December 31, 2006, 2005 and 2004, respectively.                                                                                                                                                                                           
|----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7.
ACCOUNTS
PAYABLE AND | Accounts payable and accrued expenses consist of the following:                                                                                                                                                                                                                                                                     
|ACCRUED                 | December 31,                                                                                                                                                                                                                                                                                                                        
|EXPENSES                | Accounts payable                                                                                                                                                                                                                                                                                                                    
|                        | Accrued professional fees                                                                                                                                                                                                                                                                                                           
|                        | Accrued payroll and related tax withholdings                                                                                                                                                                                                                                                                                        
|                        | Amounts due for purchased computer equipment                                                                                                                                                                                                                                                                                        
|                        |                                                                                                                                                                                                                                                                                                                                     
|                        | During the period ended December 31, 2006, the Company settled accounts payable obligations of approximately $64,000 for $2,000, and recorded a gain of $62,000. During the period ended December 31, 2005, the Company settled accounts payable obligations of approximately $288,000 for $45,000, and recorded a gain of $243,000.



---

F-14



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 8.
COMMITMENTS AND CONTINGENCIES:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | On April 10, 2003, the Company announced that a subsidiary had filed a lawsuit in U.S. District Court for the District of Delaware against Movielink LLC.  The Company alleged that Movielink infringed on the Companys patented online video delivery system. On January 28, 2005, that court issued an opinion and order granting summary judgment in favor of Movielink, based on the courts conclusion that the record contained insufficient evidence that the Movielink system initiates connections (a requirement for infringement of the Companys patent) in light of the Courts construction of the term initiates, and on May 27, 2005, denied the Company's motion for reconsideration. The Company appealed the district court's adverse rulings to the U. S. Court of Appeals for the Federal Circuit, and on September 8, 2006, the appellate court affirmed the rulings of the court below, effectively ending the substantive litigation between the Company and Movielink. On September 16, 2006, Movielink filed in district court a Bill of Costs seeking $20,525 in litigation costs allegedly taxable to the Company; the Company subsequently filed objections with the court asserting that only $107 of the costs sought by Movielink is permissible under applicable provisions of law. The court has not determined the amount of costs finally taxable to the Company, and consequently a contingent liability exists, which is estimated to be in a range approximately between $107 and $20,525.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On September 13, 2006, USA Video Technology Corp., a wholly-owned subsidiary of the Company, filed suit in the U.S. District Court for the Eastern District of Texas, alleging that its U.S. Patent No. 5,130,792 is infringed by Time Warner, Inc. (NYSE: TWX), Cox Communications, Inc., Charter Communications, Inc. (NasdaqNM: CHTR), Comcast Cable Communications LLC (NasdaqNM: CMCSA), Comcast of Richardson, LP, Comcast of Plano, LP, and Comcast of Dallas, LP, and seeking statutory compensation and a court injunction against further infringement. The defendant companies cited in the lawsuit operate digital cable systems in which they provide allegedly infringing video-on-demand services to their subscribers. The defendant companies subsequently filed lawsuits in the U.S. District Court for the District of Delaware, primarily seeking declaratory judgments that the first-filed allegations of patent infringement against them are without merit, and also seeking damages, etc., related to the filing of the lawsuits. At present, proceedings in both courts are ongoing. Consequently, a potential liability exists to the extent that the outcome of these proceedings is uncertain.

The Company is party to a default judgment entered against one of the Company's subsidiaries.  During the year ended December 31, 1995, a claim was made against the Company for the total amount payable under the terms of a lease with one of the Company's subsidiaries for office space in Dallas, Texas through  2002.  The Company's management is of the opinion that the amount payable under the terms of this judgment is not estimable or determinable at this time and may be substantially mitigated by the landlords renting the property to another party.  The range of possible loss is from $-0- to approximately $500,000.  Any settlement resulting from the resolution of this contingency will be accounted for in the period of settlement when such amounts are estimable or determinable.



---

F-15



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|9.
STOCK-
HOLDERS'
EQUITY: | On January 12, 2004, the Company issued 400,000 units to investors at a price of $0.200 per unit.  Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.255 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                           | On January 12, 2004, the Company issued 100,000 units to employees at a price of $0.200 per unit.  Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.255 per share.  The Company charged operations for approximately $26,000 representing the differential between the fair value and the purchase price of the common stock and for approximately $20,000 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants.

On November 24, 2004, the Company issued 660,000 units to investors at a price of $0.15 per unit.  Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.195 per share.

On November 24, 2004, the Company issued 90,000 units to employees at a price of $0.15 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.195 per share.  The Company charged operations for approximately $5,000 representing the differential between the fair value and the purchase price of the common stock and for approximately $1,000 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants.
|                           | From January 1, 2004 to December 31, 2004, the Company issued 13,214,000 shares of common stock upon the exercising of warrants with exercise prices ranging from $0.064 to $0.255 per common share.

On February 24, 2005, the Company issued 1,350,000 units to investors at $.100 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.13 per share.

On February 24, 2005, the Company issued 150,000 units to employees at $.100 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.13 per share. The company charged operations for approximately $3,000 representing the differential between the fair value and the purchase price of the common stock and for approximately $-0- representing the differential between the fair value of the underlying common stock and the exercise price of the warrants.

On July 11, 2005, the Company issued 5,100,000 units to investors at $.055 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.08 per share.                                                                                                                                                                                          



---

F-16



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | On July 11, 2005, the Company issued 500,000 units to employees at $.055 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.08 per share. The Company charged operations for approximately $17,500 representing the differential between the fair value and the purchase price of the common stock and for approximately $5,000 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants.

On September 28, 2005, the Company issued 3,675,000 units to investors at $.065 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.084 per share.

On September 28, 2005, the Company issued 500,000 units to employees at $.065 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.084 per share. The Company charged operations for approximately $12,500 representing the differential between the fair value and the purchase price of the common stock and for approximately $3,000 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants.

On December 7, 2005, the Company issued 1,600,000 units to investors at $.060 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.084 per share.

During 2005, the Company issued 1,613,000 shares of common stock upon the exercising of warrants with exercise prices ranging from $.0657 to $.1175 per common share and issued 150,000 shares of common stock upon the exercising of stock options with exercise price of  $.25.

On April 18, 2006, the Company issued 3,825,000 units to investors at $.060 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.087 per share.

On April 18, 2006, the Company issued 675,000 units to employees at $.060 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.087 per share. The Company charged operations for approximately $20,000 representing the differential between the fair value and the purchase price of the common stock and for approximately $2,000 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants.

On August 11, 2006, the Company issued 3,100,000 units to investors at $.0575 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.087 per share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

F-17



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | On August 11, 2006, the Company issued 1,050,000 units to employees at $.0575 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.087 per share. The Company charged operations for approximately $13,000 representing the differential between the fair value and the purchase price of the common stock and for $-0- representing the differential between the fair value of the underlying common stock and the exercise price of the warrants.

On October 8, 2006, the Company issued 1,900,000 units to investors at $.045 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.089 per share.

On October 8, 2006, the Company issued 600,000 units to employees at $.045 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.089 per share. The Company charged operations for approximately $9,000 representing the differential between the fair value and the purchase price of the common stock and for $-0- representing the differential between the fair value of the underlying common stock and the exercise price of the warrants.

During 2006, the Company issued 1,050,000 shares of common stock upon the exercising of stock options with exercise price of  $.10.

In December 2004, the Company issued options to acquire 550,000 shares of common stock at $0.25 per share to consultants.  The Company charged operations for the fair value of these options, approximately $106,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.

In January 2005, the Company granted 150,000 options to a director of the Company to purchase 150,000 shares at a price of $0.29 to January 2007.

In April 2005, the Company granted 300,000 options to a consultant of the Company to purchase 300,000 shares at a price of $0.10 to April 2007.  The Company charged operations for the fair value of these options, approximately $19,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.

In May 2005, the Company granted 1,000,000 options to a consultant of the Company to purchase 1,000,000 shares at a price of $0.10 to May 2007.  The Company charged operations for the fair value of these options, approximately $53,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.

In June 2005, the Company amended previously granted options to purchase an aggregate of 5,000,000 shares of common stock granted to directors, employee and consultants of the Company to reduce the exercise price from $0.25 per share to $0.10 per share. No expense is recognized during the year ended December 31, 2005 since the strike price equals or exceeds the quoted market price.

In July 2005, the Company granted 1,175,000 options to employees and a director of the Company to purchase 1,175,000 shares at a price of $0.10 to July 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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F-18



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | In July 2005, the Company granted 500,000 options to consultants of the Company to purchase 500,000 shares at a price of $0.10 to July 2007.  The Company charged operations for the fair value of these options, approximately $27,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.

In December 2005, the Company granted 3,100,000 options to directors of the Company to purchase 3,100,000 shares at a price of $0.10 to December 2007.

In December 2005, the Company granted 1,710,000 options to consultants of the Company to purchase 1,710,000 shares at a price of $0.10 to December 2007.  The Company charged operations for the fair value of these options, approximately $77,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.

In May 2006, the Company granted 965,000 options to consultants of the Company to purchase 965,000 shares at a price of $0.10 to May 2008.  The Company charged operations for the fair value of these options, approximately $54,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.

In October 2006, the Company granted 1,000,000 options to a consultant of the Company to purchase 1,000,000 shares at a price of $0.10 to October 2008. The Company charged operations for the fair value of these options, approximately $30,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.

In December 2006, the Company granted 150,000 options to consultants of the Company to purchase 150,000 shares at a price of $0.10 to December 2008. The Company charged operations for the fair value of these options, approximately $10,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.

In December 2006, the Company granted 5,300,000 options to directors and  employees of the Company to purchase 5,300,000 shares at a price of $0.10 to December 2008. The Company charged operations for the fair value of these options, approximately $340,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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F-19



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10.
STOCK OPTIONS AND STOCK WARRANTS: | The Company has a stock option plan under which options to purchase shares of common stock may be granted to certain officers, directors and service providers.

In June 2001, the Company adopted a Stock Option Plan (the "2001 Plan"). The 2001 Plan authorizes the issuance of up to 8,400,000 of the Company's common shares, subject to adjustment under certain circumstances.  The 2001 Plan provides for the issuance of both incentive stock options and nonqualified options as those terms are defined in the Internal Revenue Code of 1986, as amended (the "Code").  The Company's 2001 plan will remain in effect until all granted stock options are exercised, expired or canceled.  In February 2006, the Company adopted a new Stock Options Plan (the 2005 Plan).  The 2005 Plan authorizes the issuance of up to 13,900,000 of the Company's common shares, subject to adjustment under certain circumstances. The Company is listed on the TSX Venture Exchange ("TSX") and is subject to a limitation on the number of options a company may have. The 2005 Plan provides for the issuance of both incentive stock options and nonqualified options as those terms are defined in the Internal Revenue Code of 1986, as amended (the "Code").  The Company's previous option plan will remain in effect until all granted stock options are exercised, expired or canceled.
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | A summary of the status of the Company's options and changes during the years is presented below:
| | -------------------------------------------------------------------------------------------------



| | Year  ended December 31                                        | 2006             |                                 | 2005             |                                 | 2004             |                                
| | -------------------------------------------------------------- | ---------------- | ------------------------------- | ---------------- | ------------------------------- | ---------------- | -------------------------------
| |                                                                | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price
| | Outstanding at
beginning of year                               | 12,785,000       | $0.10                           | 5,000,000        | $0.25                           | 25,000           | $0.50                          
| | Granted                                                        | 7,415,000        | $0.10                           | 7,935,000        | $0.10                           | 5,000,000        | $0.25                          
| | Exercised                                                      | 1,050,000        | $0.10                           | 150,000          | $0.25                           | - 0 -            | $0.00                          
| | Cancelled/expired                                              | 6,460,000        | $0.10                           | -0-              | $0.00                           | (25,000)         | $0.50                          
| | Outstanding at
end of year                                     | 12,690,000       | $0.10                           | 12,785,000       | $0.10                           | 5,000,000        | $0.25                          
| | Options exercisable
at year end                                | 12,690,000       |                                 | 12,785,000       |                                 | 5,000,000        |                                
| | Weighted average
fair value of
options granted
during the year |                  | $0.10                           |                  | $0.10                           |                  | $0.19                          



| | The aggregate intrinsic value at December 31, 2006 was $126,900.

There is no future unrecognized compensation since all of the options granted are immediately exercisable and fully vested.

The following table summarizes information about fixed stock options outstanding at December 31, 2006:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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F-20



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |                          | Options Outstanding | Options Exercisable                        
| | ------------------------ | ------------------- | -------------------------------------------
| | Range of Exercise Prices | Number Outstanding  | Weighted Average Remaining Contractual Life
| | $0.10                    | 12,690,000          | 1.40                                       



| | Warrants to purchase shares of common stock are as follows:
| | -----------------------------------------------------------



| | Year ended December 31,          | 2006               | 2005                    | 2004              
| | -------------------------------- | ------------------ | ----------------------- | ------------------
| |                                  | Number of Warrants | Range of Exercise Price | Number of Warrants
| |                                  |                    |                         |                   
| | Outstanding at beginning of year | 14,039,000         | $0.055 - $0.195         | 5,407,000         
| | Issued                           | 11,150,000         | $0.087 - $0.089         | 12,875,000        
| | Exercised                        | -0-                | N/A                     | (1,613,000)       
| | Expired                          | (1,200,000)        | $0.135 - $0.195         | (2,630,000)       
| | Outstanding at end of year       | 23,989,000         | $0.080 - $0.130         | 14,039,000        



| | Warrants issued in 2006 and 2005 have a contractual life of two years from the date of issuance.
| | ------------------------------------------------------------------------------------------------



|11.
INCOME TAXES: | As of December 31, 2005 the Company had deferred tax assets resulting primarily from net operating loss carryforwards of approximately $26,000,000, which are available to offset future taxable income, if any, through 2026.  As utilization of the net operating loss carryforwards is not assured, a 100% valuation allowance has been provided.

The components of the net deferred tax assets are as follows:
|----------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | December 31,                     | 2006            | 2005           
| | -------------------------------- | --------------- | ---------------
| | Net operating loss carryforwards | $ 9,086,000     | $ 8,824,000    
| | Valuation allowance              | (9,086,000)     | (8,824,000)    
| | Net deferred tax assets          | $         - 0 - | $         - 0 -
| |                                  |                 |                
| |                                  |                 |                



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F-21



USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | The reconciliation of the effective income tax rate to the federal statutory rate are as follows:
| | -------------------------------------------------------------------------------------------------



| | Year ended December 31,                            | 2006    | 2005   
| | -------------------------------------------------- | ------- | -------
| | Federal statutory tax rate                         | 34%     | 34%    
| | Valuation allowance on net operating carryforwards | (34)    | (34)   
| | Effective income tax rate                          | - 0 - % | - 0 - %



|12.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED): | The following table summarizes selected quarterly data for the years ended December 31, 2006 and 2005:
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------



| |                           | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter | Full
Year   
| | ------------------------- | ------------- | -------------- | ------------- | -------------- | ------------
| | 2005:                     |               |                |               |                |             
| | Revenue                   | $    18,800   | $       - 0 -  | $      - 0 -  | $       - 0 -  | $    18,800 
| | Expenses                  | (280,507)     | (217,840)      | (233,776)     | (244,927)      | (977,050)   
| | Net Loss                  | (261,707)     | (217,840)      | (233,776)     | (244,927)      | (958,250)   
| |                           |               |                |               |                |             
| | Net loss per common share |               |                |               |                |             
| | Basic and
Diluted         | $    (0.00)   | $    (0.00)    | $    (0.00)   | $    (0.00)    | $    (0.01) 
| | 2006:                     |               |                |               |                |             
| | Revenue                   | $         -0- | $       - 0 -  | $      - 0 -  | $       - 0 -  | $        -0-
| | Expenses                  | (148,054)     | (227,376)      | (245,024)     | (628,591)      | (1,249,045) 
| | Net Loss                  | (148,054)     | (227,376)      | (245,024)     | (628,591)      | (1,249,045) 
| |                           |               |                |               |                |             
| | Net loss per common share |               |                |               |                |             
| | Basic and
Diluted         | $    (0.00)   | $    (0.00)    | $    (0.00)   | $    (0.00)    | $    (0.01)