10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

Commission file number: 0-29651

USA VIDEO INTERACTIVE CORP.

(Exact name of registrant as specified in its charter)

WYOMING                                                                  06-1576391

(State or Other Jurisdiction of                               (I.R.S. Employer Identification No.)

Incorporation or Organization)

8 West Main Street, Niantic, Connecticut                            06357

           (Address of principal executive offices)                             (ZIP code)

(860) 739-8030

(Registrant's Telephone Number, including Area Code)

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 such shorter period that the registrant was 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 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. (Check one):

Large accelerated filer [   ]

Accelerated filer [   ]

Non-accelerated filer [   ]

Small reporting company [ X ]

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

Yes   [   ]       No [ X ]

At May 15, 2008, there were 172,013,864 shares of the registrant's common stock outstanding.

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

USA VIDEO INTERACTIVE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008

(Unaudited)

(Stated in US Dollars)

USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)
	March 31,	December 31,
	2008	2007
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$         8,510	$         36,700
Prepaid expenses and other current assets	7,994	8,670
Total current assets	16,504	45,370
Property and Equipment - at cost, net	-	-
Intangible assets, net	27,704	28,535
Deferred Tax Assets, net of valuation allowance
of $9,514,000 and $9,440,000, respectively	-	-
Total Assets	$        44,208	$         73,905
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses	$       402,548	$       277,517
Due to related parties	160	160
Total current liabilities	402,708	277,677
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 170,788,863 and
170,108,088, respectively	37,163,984	37,065,407
Accumulated deficit	(37,522,484)	(37,269,179)
Stockholders' deficiency	(358,500)	(203,772)
Total Liabilities and Stockholders' Deficiency	$        44,208	$         73,905

SEE ACCOMPANYING NOTES

USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in US Dollars)
(Unaudited)
Three months ended March 31,	2008	2007
Revenue	$        6,000	$             -
Expenses:
Cost of sales	750	-
Research and development	29,350	39,753
Selling, general and administrative	228,625	267,788
Depreciation and amortization	831	831
Total expenses	259,556	308,372
Loss from operations	(253,556)	(308,372)
Other income (expense)
Interest (expense)	251	111
Gain on settlement of accounts payable	-	-
Gain on sale of equipment	-	-
	251	111
Net loss	$   (253,305)	$   (308,261)
Net loss per share – basic and diluted	$           (.00)	$           (.00)
Weighted-average number of common shares outstanding – basic and diluted	170,440,331	157,997,904

SEE ACCOMPANYING NOTES

USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
(Stated in US Dollars)
(Unaudited)
	Common Stock
			Accumulated	Stockholders’
	Shares	Amount	Deficit	Deficiency
Balance at December 31, 2007	170,108,088	$ 37,065,407	$     (37,269,179)	$        (203,772)
Issuance of common stock upon
exercise of warrants	650,000	57,850	-	57,850
Issuance of common stock upon
exercise of stock options	30,755	3,077	-	3,077
Share based compensation		37,650	-	37,650
Net loss		-	(253,305)	(253,305)
Balance at March 31, 2008	170,788,843	$ 37,163,984	$     (37,522,484)	$        (358,500)

SEE ACCOMPANYING NOTES

USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in US Dollars)
(Unaudited)
Three months ended March 31,	2008	2007
Cash flows from operating activities:
Net loss	$    (253,305)	$    (308,261)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization	831	831
Share based compensation	37,650	29,675
Gain on settlement of accounts payable	-	-
Gain on sale of equipment	-	-
Changes in operating assets and liabilities:
Decrease in prepaid expenses and other current assets	676	2,404
(Decrease) in accounts payable and accrued expenses	125,031	25,196
Net cash used in operating activities	(89,117)	(250,155)
Cash flow from investing activities:
Proceeds from the sale of equipment	-	-
Net cash provided by investing activities	-	-
Cash flows from financing activities:
Proceeds from the issuance of common stock and warrants	60,927	253,400
Net cash provided by financing activities	60,927	253,400
Net (decrease) in cash and cash equivalents	(28,190)	3,245
Cash and cash equivalents at beginning of period	36,700	14,364
Cash and cash equivalents at end of period	$      8,510	$     17,609

SEE ACCOMPANYING NOTES

USA VIDEO INTERACTIVE CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2008

(Unaudited)

(Stated in US Dollars)

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01(a)(5) of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of the management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  The results for the interim periods are not necessarily indicative of the results that may be attained for an entire year or any future periods.  For further information, refer to the Financial Statements and footnotes thereto in the Company’s annual report on Form 10-K for the fiscal year ended December 31 , 2007.

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accompanying condensed 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 $253,305 for the three month period ended March 31, 2008 and, in addition the Company incurred losses of $1,784,193 and $1,249,045 for the years ended December 31, 2007 and 2006, respectively. As of March 31, 2008, the Company had an accumulated deficit of $37,522,484 and a working capital deficit of $386,204. 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 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 issu ance of common stock and warrants to outside investors and 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 Company also has certain lawsuits pending which could result in additional liabilities.  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.

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 has been excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.

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 March 31, 2008 and 2007.

NOTE C – COMMON STOCK

From January 1, 2008 to March 31, 2008, the Company issued 30,755 shares of common stock upon the exercising of stock options with an exercise price of $.10 and received gross proceeds of $3,077.

From January 1, 2008 to March 31, 2008, the Company issued 650,000 shares of common stock upon the exercising of warrants with an exercise price of $.089 per share of common and received gross proceeds of $57,850.

NOTE D - CONTINGENT LIABILITY

The Company's patent infringement litigation against Movielink LLC came to a substantive conclusion on September 8, 2006, when the U.S. Court of Appeals for the Federal Circuit affirmed certain rulings of the U.S. District Court for the District of Delaware granting Movielink summary judgment of non-infringement.  A further procedural determination was entered on September 26, 2007, taxing litigation costs against the Company.

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 cable technology interests including Time Warner, Inc., Charter Communications, Inc., and Comcast Cable Communications LLC, and seeking statutory compensation and a court injunction against further infringement.  In December 2007, the court issued rulings adverse to the Company's interests: a claim construction ruling interpreting certain terms in the patent's claims, and a related summary judgment of non-infringement.  Defendants then filed motions for costs and attorney fees.  The court denied defendants' motions for attorney fees.  The Company's subsidiary filed notice of appeal from the district court's adverse decisions, but there is substantial uncertainty regardi ng the Company's ability to prosecute an appeal and the likelihood of success on appeal.

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.

The Company leases its Canadian and United States office space under a non-cancelable operating lease, expiring in March 2009 and July 2008, respectively. The minimum rental commitment of this lease is approximately $33,200 annually.  Rent expense amounted to $11,004 and $11,782 for the three months ended March 31, 2008 and 2007, respectively.

NOTE E – SHARE  BASED COMPENSATION

Effective January 1, 2006, the Company adopted FAS No. 123 (R) utilizing the modified prospective method. FAS No. 123 (R) requires the recognition of share-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.

During the three month period ended March 31, 2008, the Company granted 500,000 options to an employee of the Company to purchase 500,000 shares at a price of $0.10 to February 2010. The Company charged operations for the fair value of these options, approximately $40,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations.

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:  

Expected dividend yield	- 0 -
Risk-free interest rate	2.50%
Volatility	136%
Expected life (years)	2

A summary of the status of the Company's options and changes for the three months ended March 31, 2008 is presented below:

	Number of Shares	Weighted Average Exercise Price	Remaining   life	Aggregate intrinsic Value
Outstanding at beginning of period	15,240,000	$0.10-$0.155
Granted	500,000	$0.10
Exercised	30,755	$0.10
Cancelled/expired	-0-	$0.00
Outstanding at end of period	15,709,245	$0.10-$0.155	1.1years	$1,732,000
Options exercisable at end of period	15,709,245

As of March 31, 2008 all options are fully vested.

NOTE  F – INCOME TAXES

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.” FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements in accordance with SFAS No. 109. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. Upon the adoption of FIN 48, the Company had no unrecognized tax benefits. During the first quarter of 2007, the Company recognized no adjustments for uncertain tax benefits.

Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carry-forwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence, it is more likely than not such benefits will be realized. The Company’s deferred tax assets were fully reserved at March 31, 2008 and December 31, 2007.

The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general and administrative expenses.  No interest and penalties related to uncertain tax positions were accrued at March 31, 2008.

The tax years 2004 through 2007 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company expects no material changes to unrecognized tax positions within the next twelve months.

NOTE  G – SUBSEQUENT EVENTS

From April 1, 2008 to May 15, 2008, the Company issued 1,225,000 shares of common stock upon the exercise of warrants with exercise prices of $0.087 per share.

Item 2.

Management's Discussion and Analysis of Financial Condition and

Results of Operations

CAUTIONARY STATEMENT

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

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

OVERVIEW OF THE COMPANY

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

Although we have generated nominal sales for the initial quarter of 2008, we continue to explore opportunities that will result in new products for new revenue streams, but there can be no assurances that such efforts will be successful.

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

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

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

In September 2005 we entered into a formal sales and marketing agreement with First Serve International, LLC ("First Serve"), pursuant to which we will jointly market the MediaSentinel™ Workstation to companies throughout Asia (including Bollywood in India), Europe, and the United States.  In support of these efforts, we will collaborate with sales support, marketing and educational programs and materials that make clear the benefits of watermarking to potential customers.  Through these efforts, we intend to attract new business and break ground on enforcement of copyright holders. In September 2006, the agreement was assigned to Ethnic Communications, LLC.

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

BUSINESS OBJECTIVES:

We have established the following near-term business objectives:

1.

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

2.

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

3.

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

4.

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

5.

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

6.

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

CRITICAL ACCOUNTING POLICIES (AND ESTIMATES)

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate these estimates, including those related to customer programs and incentives, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, impairment or disposal of long-lived assets, contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form th e basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

We have identified the policies below as critical to our business operations and to the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout management’s discussion and analysis of financial condition and results of operations where such policies affect our reported and expected financial results:

—

Revenue recognition;

—

Impairment or disposal of long-lived assets;

—

Deferred taxes;

—

Accounting for stock-based compensation; and

—

Commitments and contingencies.

REVENUE RECOGNITION.  Revenue is recognized for digital water marking based on a contracted usage schedule on a monthly billing cycle.  Software revenue and other services are recognized in accordance with the terms of the specific agreement, which is generally upon delivery and when accepted by customer.  Maintenance, support and service revenue are recognized ratably over the term of the related agreement.  In order to recognize revenue, we must not have any continuing obligations and it must also be probable that we will collect the accounts receivable.

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.  Long-lived assets are reviewed in accordance with Statement of Financial Accounting Standard (“SFAS”) 144.  Impairment or disposal of long-lived assets losses are recognized in the period the impairment or disposal occurs.   

DEFERRED TAXES.  We record a valuation allowance to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized.   

ACCOUNTING FOR STOCK-BASED COMPENSATION.     In December 2004, the Financial Accounting Standards Board ‘‘FASB’’ issued SFAS No. 123 (revised 2004), ‘‘Share Based Payment’’ (‘‘SFAS 123(R)’’). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. We adopted SFAS 123(R) on January 1, 2006. SFAS 123(R) permits public companies to adopt its requirements using either the modified prospective or modified retrospective transition method. We use the modified prospective transition method, which requires that compensation cost is recognized for all awards granted, modified or settled after the effective date as well as for all awards granted to e mployees prior to the effective date that remain unvested as of the effective date.

COMMITMENTS AND CONTINGENCIES.     We account for commitments and contingencies in accordance with financial accounting standards board Statement No. 5, Accounting for Contingencies. We record a liability for commitments and contingencies when the amount is both probable and reasonably estimable.

RESULTS OF OPERATIONS

Sales

Sales for the three-month period ended March 31, 2008 and March 31, 2007 were $6,000 and $ -0-, respectively.  Revenues were generated from Software License Agreement from our Smartmark™ Software.  

Cost of Sales

The cost of sales for the three months ended March 31, 2008 and March 31, 2007 were $750 and $ -0-, respectively.  Costs are the royalties on our video watermarking license agreement with Digimarc Corporation.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, consisting of product marketing expenses, consulting fees, office, professional fees and other expenses to execute our business plan and for our day-to-day operations, decreased in the three months ending March 31, 2008.  We have a contract for our Smartmark™ Software and delivered acceptable release to start billing.  Product marketing costs decreased due to management’s decision to direct our efforts toward the current customer.   Administrative expenses have decreased as a result.

Selling, general and administrative expenses for the three months ended March 31, 2008 decreased $39,163 to $228,625 from $267,788 for the three months ended March 31, 2007.  The overall decrease was the result of product marketing costs.  Other costs increased for the three months ended March 31, 2008.  

Product marketing expenses for the three months ended March 31, 2008, decreased to $26,241 from $87,889 for the comparable period in 2007.  The decrease was due to management’s decision to direct our efforts towards our current customer.

Professional expenses for the three months ended March 31, 2008, increased to $59,714 from $49,294 for the comparable period of 2007.  The increased costs in the first quarter of 2008 were due to the patent infringement lawsuit.

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

Research and Development Expenses

Research and development expenses consisted primarily of contractors, compensation, hardware, software, licensing fees, and new product applications for our proprietary MediaSentinel™.  Research and development expenses decreased to $29,350 for the three months ended March 31, 2008, from $39,753 for the comparable period in 2007. The decrease was the result of a concentration in one application of research and development efforts for MediaSentinel™.

Non-Cash Compensation Charges

Non-cash compensation charges for the three months ended March 31, 2008 were $37,650, compared to $29,675 for the comparable period in 2007.  The amount for the three months ended March 31, 2008 was due to the issuance of stock options to an employee.  

Net Losses

To date, we have not achieved profitability and, we expect to incur substantial net losses for at least the remainder of 2008.  Our net loss for the three months ended March 31, 2008 was $253,305, compared with a net loss of $308,261 for the three months ended March 31, 2007.  The decrease in losses is directly related to the decrease in marketing costs.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2008, we had a cash position of $8,510, compared to $36,700 at December 31, 2007.  We anticipate capital requirements of $500,000 for the continued development of our MediaSentinel™ products, $500,000 for commercialization of our MediaSentinel™ products and $500,000 for costs associated with the infringement lawsuit.

We will require additional financing to fund current operations through fiscal 2008.  We have historically satisfied our capital needs primarily by issuing equity securities.  We will require an additional $1.25 million to $1.75 million to finance operations through fiscal 2008 and we intend to seek such financing through sales of our equity securities.  Subsequent to the three months ended March 31, 2008, we raised an aggregate of $106,575 through the exercise of warrants.  

Assuming the aforementioned $1.25 million to $1.75 million in financing is obtained, we believe that continuing operations for the longer term will be supported through anticipated licensing revenues and through additional sales of our securities.  We have no binding commitments or arrangements for additional financing, and there is no assurance that we will be able to obtain any additional financing on terms acceptable to us, if at all.

OFF-BALANCE SHEET ARRANGEMENTS

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We believe our exposure to overall foreign currency risk is not material.  We do not manage or maintain market risk sensitive instruments for trading or other purposes and are not exposed to the effects of interest rate fluctuations as we do not carry any long-term debt.

We report our operations in US dollars and our currency exposure, although considered by us as immaterial, is primarily between 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 us will be denominated in US dollars.  As we increase our marketing efforts, the related expenses will be primarily in US dollars.  In addition, 90% of our bank deposits are in US dollars.

Item 4.

Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and 15d-15(e), as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

While we believe our disclosure controls and procedures and our internal control over financial reporting have improved, no system of controls can prevent errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur. Controls can also be circumvented by individual acts of some p eople, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Subject to the limitations above, management believes that the consolidated financial statements and other financial information contained in this report, fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented.

Based on the evaluation of the effectiveness of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective at a reasonable assurance level. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

Our patent infringement litigation against Movielink LLC came to a substantive conclusion on September 8, 2006, when the U.S. Court of Appeals for the Federal Circuit affirmed certain rulings of the U.S. District Court for the District of Delaware granting Movielink summary judgment of non-infringement.  A further procedural determination was entered on September 26, 2007, taxing litigation costs against us.

On September 13, 2006, USA Video Technology Corp., our wholly-owned subsidiary, filed suit in the U.S. District Court for the Eastern District of Texas, alleging that our U.S. Patent No. 5,130,792 is infringed by cable technology interests including Time Warner, Inc., Charter Communications, Inc., and Comcast Cable Communications LLC, and seeking statutory compensation and a court injunction against further infringement.  In December 2007, the court issued rulings adverse to our interests: a claim construction ruling interpreting certain terms in the patent's claims, and a related summary judgment of non-infringement.  Defendants then filed motions for costs and attorney fees.  The court denied defendants' motions for attorney fees.  Our subsidiary filed notice of appeal from the district court's adverse decisions, but there is substantial uncertainty regarding our ability to prosecute an ap peal and the likelihood of success on appeal.

We are party to a default judgment entered against one of our subsidiaries.  During the year ended December 31, 1995, a claim was made against us for the total amount payable under the terms of a lease with one of our subsidiaries for office space in Dallas, Texas through 2002.  Our 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.

We lease our Canadian and United States office space under a non-cancelable operating lease, expiring in March 2009 and July 2008, respectively. The minimum rental commitment of this lease is approximately $33,200 annually.  Rent expense amounted to $11,004 and $11,782 for the three months ended March 31, 2008 and 2007, respectively.

Item 1A.

Risk Factors

A description of the risks associated with our business, financial condition, and results of operations is set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. These factors continue to be meaningful for your evaluation of our company and we urge you to review and consider the risk factors presented in the Form 10-K. There have been no material changes to these risks presented in the Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.  

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information.  

None.

Item 6.

Exhibits and Reports on Form 8-K

update

(a)

Exhibit(s)

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

(b)

Reports on Form 8-K

(i)

On January 8, 2008 we announced that we had been notified that Goldstein Golub Kessler LLP (“GGK”) resigned as our independent registered public accountant firm since the partners of GGK became partners of McGladrey & Pullen LLP in a limited asset purchase agreement and McGladrey & Pullen LLP is not registered with the Canadian PCAOB.  GGK audited our financial statements for the fiscal years ended December 31, 2006 and 2005, and reviewed our financial statements for the periods ended March 30, 2007, June 30, 2007 and September 30, 2007.  

In connection with the audit of our financial  statements as of and for the fiscal year ended December 31, 2006 and 2005, there were no disagreements with GGK on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedures, which disagreements, if not resolved to the satisfaction of GGK, would have caused  them to make reference in connection with its reports to the subject matter of the disagreements.  

The audit report of GGK on our financial statements as of and for the years ended December 31, 2006 and 2005, did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles, except as follows:  

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.  

We engaged GLO CPAs., LLP. ("GLO") as our independent registered public accountant firm commencing with the audit of our financial statements for the fiscal year ended December 31, 2007.  

Prior to engaging GLO, we consulted with GLO as to its qualifications, experiences and ability to audit our financial statements.  We did not have substantive discussions with GLO regarding the application of accounting principles to a specified transactions, either complete or proposed, or the type of audit opinion that might be rendered on our financial statements and there are no reports nor written or oral advice provided by the new accountants’ used in deciding to retain GLO.  Further, as noted there was no matter that was the subject of a disagreement as described in item 304(a)(1)(iv) of Regulation S-K, promulgated by the Securities and Exchange Commission.  

The decision to engage GLO was approved by the audit committee of our board of directors.

(ii)

On February 21, 2008 we announced that we had signed a memorandum of understanding with PIO TV Pvt. Ltd. based in India (PIO TV) to deploy our SmartMark™ watermarking technology. PIO TV is the first digitally integrated media platform for People of Indian Origin around the world.

Following testing of our MediaSentinel™ digital watermarking platform, PIO TV commits to deploy our SmartMark™ technology to watermark and protect PIO TV’s online content distributed through its www.pioTV.com digital media platform. PIO TV is in the process of uploading 2,000 hours of TV content and 3,000 hours of movie content (approximately 1,000 Bollywood feature films). www.pioTV.com will derive significant entertainment content through a major content partnership with a group of very dynamic individuals, production houses, labels and banners from Bollywood, the world’s biggest entertainment industry.

To thwart piracy, PIO TV is employing our SmartMark™ on special content it places in its Content On Demand and Archives, to track it during distribution and protect the intellectual property of the original content owners. Embedding SmartMarks™ -- invisible forensic information in every frame of video content -- provides proof the courts need to protect intellectual property rights, indicting and convicting the individuals who steal the original material.

Last August, India’s Union Minister for Overseas Indian Affairs, Mr. V Ravi, unveiled www.pioTV.com. The event was attended by representatives of nearly all large national and regional media and widely reported.  Since its launch, PIO TV has become the first platform to live web telecast the Pravasi Bharatiya Divas (Expatriates’ Day) celebrations on January 8 and 9, 2008, from New Delhi to reach as many of the 35 million Indian Diaspora worldwide.  On February 18^th, 2008, PIO TV relayed the live web telecast of Mauritius Prime Minister, Dr. Naveen Raamgoolam, a Person of Indian Origin (PIO), who visited his forefathers’ home State of Bihar in India on that day and received a state-wide felicitation.  The February 18 telecast was particularly emotional for PIOs in Mauritius and those in other parts of the world that hail from the Indian State of Bihar.

Besides its own bureaus creating exclusive content, www.pioTV.com has forged many other alliances in India, among them with the leading media groups such as Positiv Television and Positiv Radio in northeast India, PBC channel from Punjab State, Shakti, Sanskar, Yo Music, Jhankar TV, 7-Star Health Channel and 25 such television channels from India. Affiliates will provide select visual, text and audio content for PIO TV news, entertainment and features sections from India and around the world. PIO TV will, as possible, provide content to global and Indian broadcasters thereby playing a catalyst role in bringing PIO community achievements and issues to the fore through global media.

(iii)

On February 22, 2008 we announced our delivery of the MediaEscort™ digital watermarking technology product to a major Hollywood customer was completed.  MediaEscort™ was successfully installed in the customer’s video server facility.  

(iv)

On April 2, 2008 we announced that Twentieth Century Fox Home Entertainment had gone “LIVE” with its new copy protection software, MediaEscort™, to protect the Studio’s filmed entertainment content that is streamed via the Internet to its various trade business partners in advance of DVD availability.

(v)

On April 17, 2008 we announced that four production and distribution companies in Bollywood, the world’s largest film and entertainment industry, based in Mumbai, India, would begin using our unique digital watermarking product, MediaSentinel™, to thwart piracy domestically and internationally. The four companies will begin using MediaSentinel™ through PIO TV Pvt. Ltd., India’s only digital integrated media platform company.

(vi)

On April 28, 2008 we announced that we were co-sponsors of the 12th Annual Gilder/Forbes Telecosm Conference, Telecosm 2008: The Exaflood, taking place May 27 - May 29, 2008 at The Sagamore in Lake George, New York. Event hosts George Gilder, Steve Forbes, and Forbes publisher, Rich Karlgaard, will be joined by the world's leading scientists, engineers, technology executives, entrepreneurs and public policy decision makers to promote investment in innovation.

(vii)

On May 2, 2008 we announced that AudioStocks.com, interviewed with Patrick Gregston, our Head of Business Development.  Mr. Gregston provided context and insight to our recent news that Twentieth Century Fox Home Entertainment LLC, a subsidiary of Twentieth Century Fox Film Corporation, a News Corporation company, has gone live with MediaEscort™. MediaEscort™ is being deployed to protect the Studio's filmed entertainment content that is streamed via the Internet to its various trade business partners in advance of DVD availability.

SIGNATURE

Pursuant to the requirements 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.

Dated:  May 15, 2008

By:  /s/  Anton J. Drescher

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

Name: Anton J. Drescher

Title:  Chief Financial Officer

EX-31.1

Exhibit 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

I, Edwin Molina, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of USA Video Interactive Corp;  

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entitles, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of the  date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.  

By: /s/ Edwin Molina

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

Name: Edwin Molina

Title: President and Chief Executive Officer

Date:  May 15, 2008

EX-31.2

Exhibit 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

I, Anton J. Drescher, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of USA Video Interactive Corp;  

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entitles, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of the date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.  

By: /s/ Anton J. Drescher

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

Name: Anton J. Drescher

Title: Secretary and Chief Financial Officer

Date:  May 15, 2008

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of USA Video Interactive Corp. (the “Company”) on Form 10-Q for the period ended March 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edwin Molina, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that:

1.

this report fully complies with the requirements of Sections 13(a) or 15(d) of the 1934 Act, and

2.

the information contained in this report fairly presents, in all material respects, the registrant's financial condition and results of operations of the registrant.  

By: /s/ Edwin Molina

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

Name: Edwin Molina

Title: President and Chief Executive Officer

Date:  May 15, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of USA Video Interactive Corp. (the “Company”) on Form 10-Q for the period ended March 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anton J. Drescher, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that:

1.

this report fully complies with the requirements of Sections 13(a) or  15(d) of the 1934 Act, and

2.

the information contained in this report fairly presents, in all material respects, the registrant's financial condition and results of  operations of the registrant.  

By: /s/ Anton J. Drescher

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

Name: Anton J. Drescher

Title: Secretary and Chief Financial Officer

Date:  May 15, 2008