424B3 1 v061339_424b3.htm
Filed pursuant to Rule 424(b)(3)
Under the Securities Act of 1933
Registration No. 333-139497


ROO Group, Inc.
18,800,016 Shares of
Common Stock

This prospectus relates to the sale by the selling stockholders of 18,800,016 shares of our common stock, including 5,901,639 shares of common stock issuable upon exercise of outstanding warrants. The selling stockholders may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. The selling stockholders may be deemed underwriters of the shares of common stock which they are offering. We will pay the expenses of registering these shares.

Our common stock is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, and is quoted on the OTC Bulletin Board under the symbol RGRP. The closing sale price for our common stock on December 18, 2006 was $3.05 per share.

Investing in our common stock involves substantial risks.
See “Risk Factors,” beginning on page 4.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The information in this Prospectus is not complete and may be changed. This Prospectus is included in the Registration Statement that was filed by ROO Group, Inc. with the Securities and Exchange Commission. The selling stockholders may not sell these securities until the registration statement becomes effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the sale is not permitted.
 
 

 

 
 
Page
 
Prospectus Summary
   
1
 
Risk Factors
   
3
 
Forward Looking Statements
   
10
 
Use of Proceeds
   
10
 
Selling Stockholders
   
11
 
Plan of Distribution
   
19
 
Market for Common Equity and Related Stockholder Matters
   
20
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
22
 
Description of Business
   
33
 
Description of Property
   
43
 
Legal Proceedings
   
44
 
Management
   
45
 
Executive Compensation
   
46
 
Certain Relationships and Related Transactions
   
47
 
Security Ownership of Certain Beneficial Owners and Management
   
49
 
Description of Securities
   
50
 
Indemnification for Securities Act Liabilities
   
51
 
Changes in Independent Registered Public Accountants
   
52
 
Legal Matters
   
52
 
Experts
   
52
 
Available Information
   
52
 
Index to Financial Statements
   
F-1
 

 


PROSPECTUS SUMMARY

The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the "Risk Factors" section, the financial statements and the notes to the financial statements.

ROO Group, Inc.
 
We operate as a digital media company in the business of providing products and solutions that enable the broadcast of topical video content from our customers' Internet websites. We specialize in providing the technology and content required for video to be played on computers via the Internet as well as emerging broadcasting platforms such as set top boxes and wireless devices (i.e., mobile phones and PDAs). Our core activities include the aggregation of video content, media management, traditional and online advertising, hosting, and content delivery.

We have incurred losses since our inception. For the years ended December 31, 2005 and 2004, we generated revenues of $6,619,000 and $3,937,000, respectively, and incurred net losses of $8,957,000 and $4,226,000, respectively. At September 30, 2006, we had a working capital surplus of $1,811,000 and an accumulated deficit of $23,969,000. Our auditors, in their report dated March 27, 2006, have expressed substantial doubt about our ability to continue as going concern. Effective October 3, 2005, we amended our Certificate of Incorporation to effect a one-for-50 reverse split of our issued and outstanding shares of common stock. All numerical references in this registration statement to shares of common stock, stock prices, exercise prices and conversion prices have been adjusted to post-stock split numbers.

Our principal offices are located at 228 East 45th Street 8th Floor New York, NY 10017, and our telephone number is (212) 661-4111. Our website is www.roo.com. We are a Delaware corporation.

Equity Financing

August 2006

On August 18, 2006, we entered into a Common Stock Purchase Agreement pursuant to which we sold an aggregate of 4,420,000 of shares of common stock and 2,210,000 warrants to purchase shares of common stock to 28 accredited investors (the “August 2006 Financing”). The shares of common stock were sold at a price of $1.25 per share or an aggregate of $5,250,000. Each investor was issued warrants to purchase a number of shares of common stock equal to 50% of the number of shares of common stock purchased. The warrants have an exercise price of $2.00 per share and a term of five years. The investors are not affiliates of the Company.

In connection with the August 2006 Financing, we received net proceeds of $5,019,760 after payment of placement agent fees of $460,240, legal fees of $40,000 and escrow agent fees of $5,000. In addition, the Company issued 801,369 warrants to the placement agents on the same terms as the warrants issued to the investors.

Prior to the closing of the offering, there were 13,176,436 share of common stock issued and outstanding. Upon closing of the August 2006 Financing and issuance of an aggregate of 4,420,000 shares to the investors, there were 17,596,436 shares of common stock issued and outstanding. At the date of the closing, the closing price of the Company's common stock as quoted on the OTCBB was $1.75.

The following investors were existing shareholders of the Company prior to participating in the August 2006 Financing: (i) Donald Drapkin, (ii) Gary N. Moss, (iii) LAM Opportunity Fund, LP, (iv) Lewis Opportunity Fund, LP, (v) Mathew Drapkin, (vi) Michael Hamblett, (vii) Mosaic Partners Fund, (viii) Mosaic Partners Fund (US) LP, (ix) SM Investors II, LP, (x) SM Investors Offshore Ltd. (xi) SM Investors, LP, (xii) Sovereign Capital Advisors, LLC, (xiii) Stiassni Capital Partners, LP.

November 2006

On November 14, 2006, we entered into a Securities Purchase Agreement pursuant to which we sold an aggregate of 8,378,377 shares of common stock and warrants to purchase 2,513,513 shares of common stock to 20 accredited investors (the “November 2006 Financing”). The offering closed on November 16, 2006. The shares of common stock were sold at a price of $1.85 per share or an aggregate of $15,499,997. Each investor was issued warrants to purchase a number of shares of common stock equal to 30% of the number of shares of common stock purchased. The warrants have an exercise price of $3.00 per share and a term of five years.

1

 
In connection with the November 2006 Financing, we received net proceeds of $14,501,147 after payment of placement agent fees of $930,000, legal fees and expenses of $63,850, and escrow agent fees of $5,000. In addition, the Company issued 326,757 warrants to the placement agents on the same terms as the warrants issued to the investors.
 
Except as set forth below, none of the investors in the November 2006 are affiliates of the Company. Because Tudor Investment Corporation (“TIC”) provides investment advisory services to (i) BVI Global Portfolio Ltd. (“BVI”) which directly owns 419,815 shares in common stock and 125,945 warrants to purchase common stock, and (ii) Witches Rock Portfolio (“Witches Rock”) which owns, 2,597,374 shares in common stock and 779,212 in warrants to purchase common stock, TIC may be deemed to beneficially own the shares of Common Stock owned by BVI and Witches Rock which in the aggregate represents 14.6 % of the Company’s outstanding common stock. TIC expressly disclaims such beneficial ownership. In addition, because Paul Tudor Jones, II, is the controlling shareholder of TIC and the indirect controlling equity holder of Tudor Proprietary Trading, L.L.C (“TPT”) which owns directly 226,054 shares in common stock and 67,816 warrants to purchase common stock, Mr. Jones may be deemed to beneficially own the shares of Common Stock deemed beneficially owned by TIC and TPT, which in the aggregate represents 15.6% of the Company’s outstanding stock. Mr. Jones expressly disclaims such beneficial ownership.

Further, Ashford Capital Partners, L.P may be considered an affiliate of the Company by virtue of its ownership of 1,548,324 shares of common stock and 464,497 warrants to purchase common stock or 7.58% of the Company’s outstanding common stock. Theodore H. Ashford, President of Ashcap. Corp, the General Partner of Ashford Capital Partners, L.P. has voting and dispositive control over the securities held by Ashford Capital Partners, L.P. In addition, Mr. Ashford as Chairman and CEO of Ashford Capital Management, Inc, the investment advisor to Hank & Co. may be deemed to beneficially own an additional 451,676 shares and 135,503 warrants to purchase common stock owned by Hank & Co. which represents 2.24% of the Company’s outstanding common stock. In addition, Mr. Ashord as member of Anvil Management Co. the General Partner of Anvil Investment Associates, L.P. may be deemed to beneficially own an additional 270,270 shares and 81,081warrants to purchase common stock owned by Anvil Investment or 1.34% of the Company’s outstanding stock.

Upon closing of the November 2006 financing and issuance of an aggregate of 8,378,377 shares to the investors, there were 25,974,813 shares of common stock issued and outstanding. At the date of the closing, the closing price of the Company's common stock as quoted on the OTCBB was $2.72

The following investors were existing shareholders of the Company prior to participating in the November 2006 Financing: (i) Gary N. Moss, (ii) Glacier Partners, LP, (iii) LAM Opportunity Fund, Ltd. and (iv) Lewis Opportunity Fund, LP.
 
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In addition the following investors participated in both the August 2006 Financing and the November 2006 Financing: (i) Gary N. Moss, (iii) LAM Opportunity Fund, Ltd. and (iv) Lewis Opportunity Fund, LP. and acquired the following:
 
 
August 2006 Financing
November 2006 Financing
Name
Shares
Warrants
Shares
Warrants
Gary N. Moss
15,000
7,500
10,979
3,239
Lewis Opportunity Fund, LP
160,000
80,000
206,184
61,855
LAM Opportunity Fund, Ltd.
40,000
20,000
10,032
3,610
 

Common stock outstanding before the offering
   
26,074,813 shares1
 
         
Common stock offered by selling stockholders
   
18,800,016 shares, which includes 5,901,639 shares issuable upon exercise of outstanding warrants.
 
         
Common stock to be outstanding after the offering
   
31,976,452 shares2.
 
         
Use of proceeds
   
We will not receive any proceeds from the sale of the common stock hereunder. We will receive the sale price of any common stock we sell to the selling stockholders upon exercise of warrants. We expect to use the proceeds received from the exercise of warrants, if any, for general working capital purposes. However, the selling stockholders are entitled to exercise the warrants on a cashless basis if one year after their initial issuance, the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event that the selling stockholders exercise the warrants on a cashless basis, we will not receive any proceeds.
 
         
OTCBB Symbol
   
RGRP
 
 
___________________________
1 This number represents the issued and outstanding common stock of the Company upon completion of the November 2006 Financing and issuance of 8,378,377. Upon completion of the August 2006 Financing and issuance of 4,420,000 shares of common stock, there were 17,596,436  shares of common stock outstanding..
2 Assuming exercise of outstanding warrants. 
 
For a complete description of the control persons of each of the investors in our August 2006 Financing and November 2006 Financing is set forth in the Selling Stockholders table on page 11.
 
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RISK FACTORS

This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. Each of the following risks may materially and adversely affect our business, results of operations and financial condition. These risks may cause the market price of our common stock to decline, which may cause you to lose all or a part of the money you paid to buy our common stock

RISKS RELATED TO OUR BUSINESS:

WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE AND WHICH MAY NEGATIVELY IMPACT OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES. 

We have incurred losses since our inception. For the years ended December 31, 2005 and 2004, we generated revenues of $6,619,000 and $3,937,000, respectively, and incurred net losses of $8,957,000 and $4,226,000, respectively. At September 30, 2006, we had a working capital surplus of $1,811,000 and an accumulated deficit of $23,969,000. Our auditors, in their report dated March 27, 2006, have expressed substantial doubt about our ability to continue as a going concern. There can be no assurance that future operations will be profitable. Our failure to increase our revenues significantly or improve our gross margins will harm our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate, our gross margins fail to improve, or our operating expenses exceed our expectations, our operating results will suffer. The prices we charge for our products and services may decrease, which would reduce our revenues and harm our business. If we are unable to sell our products or services at acceptable prices relative to our costs, or if we fail to develop and introduce on a timely basis new products and services from which we can derive additional revenues, our financial results will suffer.

OUR OPERATING SUBSIDIARIES HAVE LIMITED OPERATING HISTORIES AND THEREFORE WE CANNOT ENSURE THE LONG-TERM SUCCESSFUL OPERATION OF OUR BUSINESS OR THE EXECUTION OF OUR BUSINESS PLAN. 

Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by growing companies in new and rapidly evolving markets, such as the digital media software markets in which we operate. We must meet many challenges including:

 
·
Establishing and maintaining broad market acceptance of our products and services and converting that acceptance into direct and indirect sources of revenue;
     
 
·
Establishing and maintaining adoption of our technology on a wide variety of platforms and devices;
     
 
·
Establishing and maintaining our brand name;
     
 
·
Timely and successfully developing new products, product features and services and increasing the functionality and features of existing products and services;
     
 
·
Developing services and products that result in high degrees of customer satisfaction and high levels of customer usage;
     
 
·
Successfully responding to competition, including competition from emerging technologies and solutions; and
     
 
·
Developing and maintaining strategic relationships to enhance the distribution, features, content and utility of our products and services.

Our business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully address these risks our business will be harmed.

OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR ADVERTISING BUSINESS MODEL.

A significant part of our business model is to generate revenue by providing interactive marketing solutions to advertisers, ad agencies and Web publishers. The profit potential for this business model is unproven. To be successful, both Internet advertising and our solutions will need to achieve broad market acceptance by advertisers, ad agencies and Web publishers. Our ability to generate significant revenue from advertisers will depend, in part, on our ability to contract with Web publishers that have Web sites with adequate available ad space. Further, these Web sites must generate sufficient user traffic with demographic characteristics attractive to our advertisers. The intense competition among Internet advertising sellers has led to the creation of a number of pricing alternatives for Internet advertising. These alternatives make it difficult for us to project future levels of advertising revenue and applicable gross margin that can be sustained by us or the Internet advertising industry in general.

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Intensive marketing and sales efforts may be necessary to educate prospective advertisers regarding the uses and benefits of, and to generate demand for, our products and services. Enterprises may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing direct marketing systems. Acceptance of our new solutions will depend on the continued emergence of Internet commerce, communication and advertising, and demand for its solutions. We cannot assure you that demand for our new solutions will emerge or become sustainable.

OUR RESOURCES MAY NOT BE SUFFICIENT TO MANAGE OUR EXPECTED GROWTH; FAILURE TO PROPERLY MANAGE OUR POTENTIAL GROWTH WOULD BE DETRIMENTAL TO OUR BUSINESS.

We may fail to adequately manage our anticipated future growth. Any growth in our operations will place a significant strain on our administrative, financial and operational resources, and increase demands on our management and on our operational and administrative systems, controls and other resources. We cannot assure you that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistent with our growth strategy. As part of this growth, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employee base, and maintain close coordination among our technical, accounting, finance, marketing, sales and editorial staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing staff and systems. To the extent we acquire other businesses, we will also need to integrate and assimilate new operations, technologies and personnel. If we are unable to manage growth effectively, such as if our sales and marketing efforts exceed our capacity to install, maintain and service our products or if new employees are unable to achieve performance levels, our business, operating results and financial condition could be materially adversely affected.

IF WE DO NOT SUCCESSFULLY DEVELOP NEW PRODUCTS AND SERVICES, OUR BUSINESS WILL BE HARMED. 

Our business and operating results would be harmed if we fail to develop products and services that achieve widespread market acceptance or that fail to generate significant revenue or gross profits to offset our operating and other costs. We may successfully identify, develop and market new product and service opportunities in a timely manner. If we introduce new products and services, they may not attain broad market acceptance or contribute meaningfully to our revenue or profitability. Competitive or technological developments may require us to make substantial, unanticipated investments in new products and technologies, and we may not have sufficient resources to make these investments. Because the markets for our products and services are subject to rapid change, we must develop new product and service offerings quickly. Delays and cost overruns could affect our ability to respond to technological changes, evolving industry standards, competitive developments or customer requirements.

IF USE OF THE INTERNET DOES NOT CONTINUE TO GROW, OR IF THE INTERNET INFRASTRUCTURE CANNOT SUPPORT DEMANDS PLACED ON IT BY SUCH CONTINUED GROWTH, OUR BUSINESS WILL BE HARMED.

The growth of our business depends on the continued growth of the Internet as a medium for media consumption, communications, electronic commerce and advertising, and also on the growth of the wireless data market, including the growth of devices with multimedia capability. Our business will be harmed if Internet usage does not continue to grow, particularly as a source of media information and entertainment and as a vehicle for commerce in goods and services, or if widespread adoption of technology to access data and multimedia content on wireless devices does not occur. If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by such growth, specifically the demands of delivering high-quality media content. If this were to occur, our business and financial condition would be harmed.

5

 
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR PROVIDING THIRD-PARTY PRODUCTS, SERVICES OR CONTENT. 

We have arrangements to offer third-party products, services, content or advertising via distribution on our Web sites. We may be subject to claims concerning these products, services, content or advertising by virtue of our involvement in marketing, branding, broadcasting or providing access to them, even if we do not ourselves host, operate, or provide access to these products, services, content or advertising. While our agreements with these parties often provide that we will be indemnified against such liabilities, such indemnification may not be adequate. It is also possible that if any information provided directly by us contains errors or is otherwise negligently provided to users, third parties could make claims against us. Investigating and defending any of these types of claims is expensive, even if the claims do not result in liability. While to date we have not been subject to material claims, if any potential claims do result in liability, we could be required to pay damages or other penalties, which could harm our business and our operating results.

OUR COMPETITORS MAY BE LARGER AND HAVE GREATER FINANCIAL AND OTHER RESOURCES THAN WE DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US TO COMPETE WITH THEM. 

The market for software and services for media delivery over the Internet is relatively new and constantly changing. We expect that competition will continue to intensify. Increased competition may result in price reductions, reduced margins, loss of customers, and a change in our business and marketing strategies, any of which could harm our business. Current and potential competitors may have longer operating histories, greater name recognition, more employees and significantly greater financial, technical, marketing, public relations and distribution resources than we do. In addition, new competitors with potentially unique or more desirable products or services may enter the market at any time. The competitive environment may require us to make changes in our products, pricing, licensing, services or marketing to maintain and extend our current brand and technology. Price concessions or the emergence of other pricing, licensing and distribution strategies or technology solutions of competitors may reduce our revenue, margins or market share, any of which will harm our business. Other changes we have to make in response to competition could cause us to expend significant financial and other resources, disrupt our operations, strain relationships with partners, or release products and enhancements before they are thoroughly tested, any of which could harm our operating results and stock price.

ANY FAILURE OF OUR NETWORK COULD LEAD TO SIGNIFICANT DISRUPTIONS IN OUR SERVICES BUSINESS, WHICH COULD DAMAGE OUR REPUTATION, REDUCE OUR REVENUES OR OTHERWISE HARM OUR BUSINESS. 

Our business is dependent upon providing our customers with fast, efficient and reliable services. A reduction in the performance, reliability or availability of our Web sites and network infrastructure may harm our ability to distribute our products and services to our clients, as well as our reputation and ability to attract and retain clients, customers, advertisers and content providers. Our systems and operations are susceptible to, and could be damaged or interrupted by outages caused by fire, flood, power loss, telecommunications failure, Internet breakdown, earthquake and similar events. Our systems are also subject to human error, security breaches, power losses, computer viruses, break-ins, "denial of service" attacks, sabotage, intentional acts of vandalism and tampering designed to disrupt our computer systems, Web sites and network communications, and our systems could be subject to greater vulnerability in periods of high employee turnover. A sudden and significant increase in traffic on our Web sites could strain the capacity of the software, hardware and telecommunications systems that we deploy or use. This could lead to slower response times or system failures. Our failure to protect our network against damage from any of these events will harm our business.

6

 
Our operations also depend on receipt of timely feeds from our content providers, and any failure or delay in the transmission or receipt of such feeds could disrupt our operations. We also depend on Web browsers, ISPs and online service providers to provide Internet users access to our websites and the websites of our customers on which we display advertising. Many of these providers have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems.

WE DEPEND ON VARIOUS THIRD PARTIES TO MAINTAIN OUR COMMUNICATIONS HARDWARE AND PERFORM MOST OF OUR COMPUTER HARDWARE OPERATIONS. IF THE THIRD PARTIES' HARDWARE AND OPERATIONS FAIL, OUR BUSINESS WE BE HARMED. 

Substantially all of our communications hardware and most of our computer hardware operations are operated by third parties. If any of these providers’ hardware and operations fail, our reputation and business will suffer. We do not have complete backup systems for these operations. We have a limited disaster recovery plan in the event of damage from fire, floods, hurricanes, earthquakes, power loss, telecommunications failures, break-ins and similar events. Our operations are dependent on our ability to protect our computer systems against these unexpected adverse events. If any of the foregoing occurs, we may experience a complete system shutdown. We have service level agreements in place with some telecommunication providers. A problem with, or failure of, our communications hardware or operations could result in interruptions or increases in response times on the Internet sites of our customers. If we cannot maintain our system in the event of unexpected occurrences, make necessary modifications and/or improvements to the technology, such deficiencies could have a material adverse effect upon our business, financial condition and results of operations.

WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES. IF WE ARE UNABLE TO MAINTAIN THESE LICENSES, OUR OPERATIONS AND FINANCIAL CONDITION WILL BE MATERIALLY ADVERSELY AFFECTED.

We license technology from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. The loss of, or our inability to maintain, these licenses could result in increased costs or delay sales of our products. We anticipate that we will continue to license technology from third parties in the future. This technology may not continue to be available on commercially reasonable terms, if at all. Although we do not believe that we are substantially dependent on any individual licensed technology, some of the software that we license from third parties could be difficult for us to replace. The loss of any of these technology licenses could result in delays in the license of our products until equivalent technology, if available, is developed or identified, licensed and integrated. The use of additional third-party software would require us to negotiate license agreements with other parties, which could result in higher royalty payments and a loss of product differentiation.

WE DEPEND ON CONTENT LICENSED TO US BY THIRD PARTIES. IF WE ARE UNABLE TO MAINTAIN THESE LICENSES, OUR OPERATIONS AND FINANCIAL CONDITION WILL BE MATERIALLY ADVERSELY AFFECTED.

We rely on content provided by third parties to increase market acceptance of our products and services. If third parties do not develop or offer compelling content to be delivered over the Internet, or grant necessary licenses to us or our customers to distribute or perform such content, our business will be harmed and our products and services may not achieve or sustain broad market acceptance. We rely on third-party content providers to develop and offer content in our formats that can be delivered using our server products. We also rely entirely on third-party content for the programming and content offerings. In some cases, we pay substantial fees to obtain content for these services. We cannot guarantee that third-party content providers will continue to support our technology or offer compelling content in our formats, nor can we guarantee that we will be able to secure licenses to their content or that such licenses will be available at commercially reasonable rates, to encourage and sustain broad market acceptance of our products and services. The failure to do so would materially adversely harm our business operations and financial condition.

7

 
IF WE DO NOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY EXPERIENCE A LOSS OF REVENUE AND OUR OPERATIONS MAY BE MATERIALLY HARMED. 

A portion of our software was acquired from third parties. We have not registered copyrights on any of the software we have developed. We rely upon confidentiality agreements signed by our employees, consultants and third parties to protect our intellectual property. We cannot assure you that we can adequately protect our intellectual property or successfully prosecute potential infringement of our intellectual property rights. Also, we cannot assure you that others will not assert rights in, or ownership of, trademarks and other proprietary rights of ours or that we will be able to successfully resolve these types of conflicts to our satisfaction. Our failure to protect our intellectual property rights may result in a loss of revenue and could materially adversely affect our operations and financial condition.

IF WE ARE UNABLE TO RETAIN THE SERVICES OF ROBERT PETTY OR IF WE ARE UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO CONTINUE OPERATIONS. 

Our success depends to a significant extent upon the continued service of Robert Petty, our Chief Executive Officer and Chairman of our Board of Directors. The loss of the services of Mr. Petty could have a material adverse effect on our growth, revenues, and prospective business. We have entered into an employment agreement with Mr. Petty, the material terms of which are described beginning on page 46 of this Prospectus. We maintain key-man insurance on the life of Mr. Petty in the amount of $1,000,000. If Mr. Petty were to resign, the loss could result in loss of sales, delays in new product development and diversion of management resources, and we could face high costs and substantial difficulty in hiring a qualified successor and could experience a loss in productivity while any such successor obtains the necessary training and experience. In addition, in order to successfully implement and manage our business plan, we are dependent upon, among other things, successfully recruiting qualified personnel who are familiar with the specific issues facing the Internet media industry. In particular, we must hire and retain experienced management personnel to help us continue to grow and manage our business, and skilled software engineers to further our research and development efforts. Competition for qualified personnel is intense. If we do not succeed in attracting new personnel or in retaining and motivating our current personnel, our business could be harmed.

OUR DIRECTORS AND EXECUTIVE OFFICERS CONTROL A SIGNIFICANT PORTION OF OUR OUTSTANDING COMMON STOCK. THEIR INTERESTS MAY CONFLICT WITH OUR OUTSIDE STOCKHOLDERS, WHO MAY BE UNABLE TO INFLUENCE MANAGEMENT AND EXERCISE CONTROL OVER OUR BUSINESS.

As of December 13, 2006, our executive officers and directors beneficially owned approximately 14.11% of our outstanding common stock and have voting control over 63.78% of the outstanding shares of our equity. As a result, our executive officers and directors have significant influence to: elect or defeat the election of our directors, amend or prevent amendment of our articles of incorporation or bylaws, effect or prevent a merger, sale of assets or other corporate transaction, and control the outcome of any other matter submitted to the shareholders for vote. Accordingly, our outside stockholders may be unable to influence management and exercise control over our business.

RISKS RELATED TO OUR SECURITIES:

THERE ARE A LARGE NUMBER OF SHARES THAT ARE AVAILABLE FOR FUTURE SALE; THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.

Pursuant to this registration statement, we are registering the resale of an aggregate of 18,800,016 shares, which shares include 5,901,639 shares issuable upon the exercise of outstanding warrants. Sales of a substantial number of shares of our common stock could cause the price of our securities to fall and could impair our ability to raise capital by selling additional securities.

8

 
Accordingly, the mere filing of the registration statement of which this prospectus is part could have a significant depressive effect on our stock price which could make it difficult both for us to raise funds from other sources and for the public stockholders to sell their shares.

THE ISSUANCE OF PREFERRED STOCK MAY HAVE THE EFFECT OF PREVENTING A CHANGE OF CONTROL AND COULD DILUTE THE VOTING POWER OF OUR COMMON STOCK AND REDUCE THE MARKET PRICE OF OUR COMMON STOCK. 

Our authorized capital stock includes 20,000,000 shares of preferred stock, of which 10,000,000 shares are designated as Series A Preferred Stock. The remaining 10,000,000 shares of authorized preferred stock is blank check preferred stock. Our Board of Directors is authorized to designate such stock with preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions as they deem advisable without shareholder approval. The effect of designating and issuing additional shares of preferred stock upon the rights of our common stockholders cannot be stated until our Board determines the specific rights of such preferred stock. However, the effects might include, among other things, restricting dividends on the common stock, diluting the voting power of the common stock, reducing the market price of the common stock, or impairing the liquidation rights of the common stock, without further action by our shareholders. The designation and issuance of preferred stock could also have the effect of making it more difficult or time consuming for a third party to acquire a majority of our outstanding voting stock or otherwise effect a change of control. Shares of preferred stock may be sold to third parties that indicate that they would support the Board in opposing a hostile takeover bid. Our blank check preferred stock is not intended to be an anti-takeover measure, and we are not aware of any present third party plans to gain control of our company. Although we may consider issuing preferred stock in the future for purposes of raising additional capital or in connection with acquisition transactions, we currently have no binding agreements or commitments with respect to the issuance of any additional shares of preferred stock.

OUR HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED MARKET FOR OUR SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT DIFFICULT FOR YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR INVESTMENT.  

The public market for our common stock has historically been very volatile. Over the last two completed fiscal years and subsequent quarterly periods, the market price for our common stock has ranged from $0.50 to $17.50 (adjusted to reflect a one-for-50 reverse stock split effective October 3, 2005; see “Market for Common Equity and Related Stockholder Matters on page 151 of this Prospectus). Any future market price for our shares is likely to continue to be very volatile. This price volatility may make it more difficult for you to sell shares when you want at prices you find attractive. We do not know of any one particular factor that has caused volatility in our stock price. However, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies. Broad market factors and the investing public’s negative perception of our business may reduce our stock price, regardless of our operating performance. Further, the market for our common stock is limited and we cannot assure you that a larger market will ever be developed or maintained. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price. As a result, this may make it difficult or impossible for you to sell our common stock for a positive return on your investment.

9

 
OUR COMMON STOCK IS SUBJECT TO THE “PENNY STOCK” RULES OF THE SEC AND THE TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.

The Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the definition of a "penny stock," for purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:

 
·
that a broker or dealer approve a person's account for transactions in penny stocks; and
     
 
·
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased

IN ORDER TO APPROVE A PERSON’S ACCOUNT FOR TRANSACTIONS IN PENNY STOCKS, THE BROKER OR DEALER MUST:

 
·
obtain financial information and investment experience objectives of the person; and
     
 
·
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:

 
·
sets forth the basis on which the broker or dealer made the suitability determination; and
     
 
·
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.


Information in this prospectus contains forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," "anticipates," "projects," "expects," "may," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. The following matters constitute cautionary statements identifying important factors with respect to those forward-looking statements, including certain risks and uncertainties that could cause actual results to vary materially from the future results anticipated by those forward-looking statements. A description of key factors that have a direct bearing on our results of operations is provided above under “Risk Factors” beginning on page 2 of this Prospectus.


This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders. We will not receive any proceeds from the sale of shares of common stock in this offering. However, we will receive the exercise price of any common stock we issue to the selling stockholders upon exercise of the warrants. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes. However, the selling stockholders are entitled to exercise the warrants on a cashless basis if one year after the initial issuance, the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event that the selling stockholders exercise the warrants on a cashless basis, then we will not receive any proceeds.

10

 
SELLING STOCKHOLDERS

The following table sets forth the common stock ownership and other information relating to the selling stockholders as of December 13, 2006. Except for Cashmere Family Trust and Highbridge International, LLC, the selling stockholders acquired their securities in our August 2006 and November 2006 financings, the material terms of which are described on page 27 of this Prospectus. Other than as set forth in the following table, the selling stockholders have not held any position or office or had any other material relationship with us or any of our predecessors or affiliates within the past three years.
 
                       
Shares of Common
 
                       
 Stock Beneficially
 
                       
 Owned
 
     
 Number of Shares of
   
 Number of Shares
         
 After the Offering (1)
 
     
 Common Stock
   
 Offered
             
     
 Beneficially Owned
   
  Pursuant to this
             
Name 
   
 Prior to the Offering
   
  Prospectus
   
 Number
   
 Percent
 
                           
033 Growth International Fund, Ltd (2)
   
446,706
   
446,706
   
0
   
0
%
                           
033 Growth Partners I, LP (3)
   
831,142
   
831,142
   
0
   
0
%
                           
033 Growth Partners II, LP (4)
   
308,113
   
308,113
   
0
   
0
%
                           
ALB Private Investments, LLC (5)
   
225,000
   
225,000
   
0
   
0
%
                           
Ashford Capital Partners, L.P. (6)
   
2,012,821
   
2,012,821
   
0
   
0
%
                           
Anvil Investment Associates, L.P. (7)
   
351,351
   
351,351
   
0
   
0
%
                           
Brad Reifler (8)
   
11,406
   
11,406
   
0
   
0
%
                           
Cashmere Family Trust (9)
   
120,000
   
100,000
   
20,000
   
<1
%
                           
Charles L. Abry (10)
   
185,000
   
120,000
   
65,000
   
<1
%
                           
Daniel Borok (11)
   
21,099
   
21,099
   
0
   
0
%
                           
Donald G. Drapkin (12)
   
242,000
   
180,000
   
62,000
   
<1
%
                           
Enable Growth Partners LP (13)
   
900,000
   
900,000
   
0
   
0
%
                           
Enable Opportunity Partners LP (14)
   
180,000
   
180,000
   
0
   
0
%
                           
Eric Singer (15)
   
22,487
   
22,487
   
0
   
0
%
                           
Gary N. Moss (16)
   
76,536
   
36,536
   
40,000
   
<1
%
                           
Glacier Partners, LP (17)
   
220,270
   
70,270
   
150,000
   
<1
%
                           
Hank & Co. (18)
   
587,179
   
587,179
   
0
   
0
 
                           
Highbridge International LLC (19)
   
116,667
   
50,000
   
4,054
   
<1
%
                           
Hilary Bergman (20)
   
36,222
   
11,406
   
24,816
   
<1
%
                           
Jack Brimberg (21)
   
186,817
   
88,000
   
98,817
   
<1
%
 
11

 
Jason Adelman (22)
   
77,944
   
12,811
   
65,133
   
<1
%
                           
Jay Tomlinson (23)
   
84,477
   
39,500
   
44,977
   
<1
%
                           
John Kaiser (24)
   
5,066
   
2,500
   
2,566
   
<1
%
                           
Kevin Fisher (25)
   
66,666
   
20,000
   
46,666
   
<1
%
                           
Lacuna Hedge Fund LLP (26)
   
440,931
   
351,351
   
89,580
   
<1
%
                           
LAM Opportunity Fund Ltd (27)
   
78,623
   
73,042
   
5,581
   
<1
%
                           
Lara Casano (28)
   
4,350
   
500
   
3,850
   
<1
%
                           
LBI Group, Inc. (29)
   
175,677
   
175,677
   
0
   
0
%
                           
Lewis Opportunity Fund, LP (30)
   
1,308,680
   
508,039
   
800,641
   
3.08
%
                           
Mathew A. Drapkin (31)
   
122,000
   
60,000
   
62,000
   
<1
%
                           
Merriman Curhan Ford & Co. (32)
   
186,216
   
186,216
   
0
   
0
%
                           
Michael Hamblett (33)
   
152,400
   
150,000
   
2,400
   
<1
%
                           
Mosaic Partners Fund (34)
   
154,237
   
96,000
   
58,237
   
<1
%
                           
Mosaic Partners Fund (US), LP (35)
   
91,913
   
54,000
   
37,913
   
<1
%
                           
Oyster Pond Partners, LP (36)
   
170,794
   
170,794
   
0
   
0
%
                           
Peter R. McMullin (37)
   
45,500
   
22,500
   
23,000
   
<1
%
                           
Phyllis M. Esposito (38)
   
225,000
   
225,000
   
0
   
0
%
                           
Pierce Diversified Strategy Master Fund, LLC, Ena (39)
   
120,000
   
120,000
   
0
   
0
%
                           
Pinnacle Equity Fund, LP(40)
   
342,000
   
342,000
   
0
   
0
%
                           
Pinnacle Opportunity Fund, LP (41)
   
48,000
   
48,000
   
0
   
0
%
                           
Proximity Fund, LP (42)
   
300,000
   
300,000
   
0
   
0
%
                           
Savvian, LLC (43)
   
403,569
   
403,569
   
0
   
0
%
                           
Shannon River Partners II, LP (44)
   
682,254
   
682,254
   
0
   
0
%
                           
Shannon River Partners Ltd. (45)
   
161,200
   
161,200
   
0
   
0
%
                           
Shannon River Partners, LP (46)
   
210,600
   
210,600
   
0
   
0
%
                           
Singer Congressional Fund LP (47)
   
29,680
   
29,680
   
0
   
0
%
                           
Singer Opportunity Fund LP (48)
   
118,720
   
118,720
   
0
   
0
%
 
12

 
SM Investors, LP (49)
   
231,196
   
150,000
   
81,196
   
<1
%
                           
SM Investors II, LP (50)
   
500,074
   
339,300
   
160,774
   
<1
%
                           
SM Investors Offshore, Ltd. (51)
   
173,264
   
110,700
   
62,564
   
<1
%
                           
Sovereign Capital Advisors LLC (52)
   
360,000
   
120,000
   
240,000
   
<1
%
                           
Stiassni Capital Partners, LP (53)
   
1,125,000
   
375,000
   
750,000
   
<1
%
                           
The Beechwood Place LLC (54)
   
90,000
   
90,000
   
0
   
0
%
                           
The Thunen Family Trust (55)
   
225,000
   
225,000
   
0
   
0
%
                           
The Tudor BVI Global Portfolio, Ltd.(56)
   
545,760
   
545,760
   
0
   
0
%
                           
Theodore J. Marolda (57)
   
151,431
   
151,431
   
0
   
0
%
                           
Tudor Proprietary Trading, L.L.C. (58)
   
293,870
   
293,870
   
0
   
0
%
                           
Vision Opportunity Master Fund Ltd (59)
   
300,000
   
300,000
   
0
   
0
%
                           
William A. Lewis IV (60)
   
29,900
   
29,900
   
0
   
0
%
                           
Witches Rock Portfolio Ltd. (61)
   
3,376,586
   
3,376,586
   
0
   
0
%
                           
WTC-CIF Micro Ca-Cap Equity (62) Portfolio
   
277,500
   
277,500
   
0
   
0
%
                           
WTC-CTF Micro Ca-Cap Equity Portfolio (63)
   
1,147,500
   
1,147,500
   
0
   
0
%
                           
Zaykowski Partners, LP (64)
   
150,000
   
150,000
   
0
   
0
%
                           
TOTAL SHARES OFFERED
         
18,800,016
             

 
(1)
Assumes that all shares of common stock registered will be sold and that all shares of common stock underlying warrants will be issued and sold.
 
(2)
Represents: (a) 343,620 shares of common stock purchased in our November 2006 financing; and (b) 103,086 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Lawrence C. Longo has voting control of the securities held by 033 Growth International Fund, Ltd. Michael T. Vigo has dispositive power of the securities held by 033 Growth International Fund, Ltd.
 
(3)
Represents: (a) 639,340 shares of common stock purchased in our November 2006 financing; and (b) 191,802 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Lawrence C. Longo has voting control of the securities held by 033 Growth Partners I, LP. Michael T. Vigo has dispositive power of the securities held by 033 Growth Partners I, LP.
 
(4)
Represents (a) 237,010 shares of common stock purchased in our November 2006 financing; and (b) 71,103 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Lawrence C. Longo has voting control of the securities held by 033 Growth Partners II, LP. Michael T. Vigo has dispositive power of the securities held by 033 Growth Partners II, LP.
 
(5)
Represents: (a) 150,000 shares of common stock purchased in our August 2006 financing; and (b) 75,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Francis A Mlynarczyk, Jr., the Managing Member has voting and dispositive control over the securities held by ALB Private Investments LLC.
 
13

 
 
(6)
Represents: (a) 1,548,324 shares of common stock purchased in our November 2006 financing; and (b) 464,497 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Theodore H. Ashford, President of Ashcap. Corp., the General Partner of Ashford Capital Partners, L.P. has voting and dispositive control over the securities held by Ashford Capital Partners, L.P.
 
(7)
Represents: (a) 270,270 shares of common stock purchased in our November 2006 financing; and (b) 81,081 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Theodore H. Ashford, Member of Anvil Management Co., the General Partner of Anvil Investment Associates, L.P. has voting and dispositive control over the securities held by Anvil Investment Associates, L.P.
 
(8)
Represents shares issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2006. Mr. Reifler is a registered representative of Pali Capital, Inc., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(9)
Includes 100,000 shares issued in settlement of the milestones achieved as provided for in Undercover Media Purchase Agreement
 
(10)
Includes: (a) 80,000 shares of common stock purchased in our August 2006 financing; and (b) 40,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing.
 
(11)
Represents: (a) 16,230 shares of common stock purchased in our November 2006 financing; and (b) 4,869 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing.
 
(12)
Includes: (a) 120,000 shares of common stock purchased in our August 2006 financing; and (b) 60,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing.
 
(13)
Represents: (a) 600,000 shares of common stock purchased in our August 2006 financing; and (b) 300,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Mitch Levine, the Managing Member has voting and dispositive control over the securities held by Enable Growth Partners LP
 
(14)
Represents: (a) 120,000 shares of common stock purchased in our August 2006 financing; and (b) 60,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Mitch Levine, the Managing Member has voting and dispositive control over the securities held by Enable Growth Partners LP
 
(15)
Represents 22,487 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $3.00 per share and an expiration date of November 16, 2011. At the time of our November 2006 financing, Mr. Singer was a registered representative of Pali Captial, Inc., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(16)
Represents: (a) 15,000 shares of common stock purchased in our August 2006 financing; (b) 10,797 shares purchased pursuant in our November 2006 financing; (c) 7,500 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing; and (d) 3,239 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing.
 
(17)
Represents: (a) 54,054 shares of common stock purchased in our November 2006 financing; and (b) 16,216 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Peter Castellanos, Managing Director, has voting and dispositive control over the securities held by Glacier Partners, LP.
 
(18)
Represents: (a) 451,676 shares of common stock purchased in our November 2006 financing; and (b) 135,503 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Theodore H. Ashford, Chairman and CEO of Ashford Capital Management, Inc. the investment advisor to Hank & Co. has voting and dispositive control over the securities held by Hank & Co.
 
(19)
Includes 50,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share with an expiration date of July 28, 2011 and 66,667 shares of common stock issuable upon exercise of warrants held by Smithfield Fiduciary LLC, a wholly owned subsidiary of Highbridge International LLC, with an exercise price of $4.00 per share with an expiration date of December 28, 2010. Highbridge Capital Management, LLC is the trading manager of Highbridge International LLC and Smithfield Fiduciary LLC and has voting control and investment discretion over the securities held by Highbridge International LLC and Smithfield Fiduciary LLC. Glenn Dubin and Henry Swieca control Highbridge Capital Management, LC and have voting control and investment discretion over the securities by Highbridge International LLC and Smithfield Fiduciary LLC. Each of Highbridge Management, LLC, Glenn Dubin and Henry Swieca disclaims beneficial ownership of the securities held by Highbridge International LLC and Smithfield Fiduciary LLC.
 
14

 
 
(20)
Includes: (a) 10,000 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011; and (b) 1,406 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $3.00 per share and an expiration date of November 16, 2011. At the time of our August 2006 and November 2006 financings, Ms. Bergman was a registered representative of Pali Capital, Inc., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(21)
Includes: (a) 54,000 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011; and (b) 34,000 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $3.00 per share and an expiration date of November 16, 2011. At the time of our August 2006 and November 2006 financings, Mr. Brimberg was a registered representative of Brimberg & Co., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(22)
Includes: (a) 10,000 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011; and (b) 2,811 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $3.00 per share and an expiration date of November 16, 2011. At the time of our August 2006 and November 2006 financing, Mr. Adelman was a registered representative of Pali Capital, Inc., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(23)
Includes: (a) 24,500 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011; and (b) 15,000 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $3.00 per share and an expiration date of November 16, 2011. At the time of our August 2006 and November 2006 financings, Mr. Tomlinson was a registered representative of Brimberg & Co., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(24)
Includes: (a) 1,500 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011; (b) 1,000 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $3.00 per share and an expiration date of November 16, 2011. At the time of our August 2006 and November 2006 financings, Mr. Kaiser was a registered representative of Brimberg & Co., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(25)
Includes 20,000 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011. At the time of our August 2006 financing, Mr. Fisher was a registered representative of Brimberg & Co., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(26)
Represents: (a) 270,270 shares of common stock purchased in our November 2006 financing; and (b) 81,081 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Decisions regarding voting and disposition of the shares are determined by the majority vote of JK Hullett, Wink, Jones, Rawleigh Ralls, Rich O'lewry and Sandy Kesiah has voting and dispositive control over the securities held by Hank & Co.
 
(27)
Includes: (a) 40,000 shares of common stock purchased in our August 2006 financing; (b)10,032 shares of common stock purchased in our November 2006 financing; (c) 20,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing; and (d) 3,010 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. William A. Lewis has voting and dispositive control over the securities held by LAM Opportunity Fund Ltd.
 
(28)
Includes 500 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011. At the time of our August 2006 financing, Ms. Casano was a registered representative of Pali Capital, Inc., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(29)
Represents: (a) 135,136 shares of common stock purchased in our November 2006 financing; and (b) 40,541 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Steven Fleisig has voting and dispositive control over the securities held by LBI Group, Inc.
 
15

 
 
(30)
Includes: (a) 160,000 shares of common stock purchased pursuant our August 2006 financing; (b)206,184 shares of common stock purchased in our November 2006 financing; (c) 80,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing; and (d) 61,855 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. William A. Lewis has voting and dispositive control over the securities held by Lewis Opportunity Fund, LP.
 
(31)
Includes: (a) 40,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 20,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing.
 
(32)
Represents 186,216 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $3.00 per share and an expiration date of November 16, 2011. Merriman Curhan Ford & Co. is a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services. John Merriman, CEO, John Hiestand, CFO and Christopher Aguilar, General Counsel share voting and dispositive control over the securities held by Merriman Curhan Ford & Co. The securities held by Merriman Curhan Ford & Co. were acquired for investment purposes.
 
(33)
Includes: (a) 100,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 50,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing.
 
(34)
Includes: (a) 64,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 32,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Ajay Sekhand, Portfolio Manager, has voting and dispositive control over the securities held by Mosaic Partners Fund.
 
(35)
Includes: (a) 36,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 18,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Ajay Sekhand, Portfolio Manager, has voting and dispositive control over the securities held by Mosaic Partners Fund (US) LP.
 
(36)
Represents (a) 131,380 shares of common stock purchased in our November 2006 financing; and (b) 39,414 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Ajay Sekhand has voting and dispositive control over the securities held by Merriman Curhan Ford & Co.
 
(37)
Includes: (a) 15,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 7,500 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing.
 
(38)
Represents: (a) 150,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 75,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing.
 
(39)
Represents: (a) 80,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 40,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Mitch Levine, Managing Partner, has voting and dispositive control over the securities held by Pierce Diversified Strategy Master Fund LLC, Ena.
 
(40)
Represents: (a) 228,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 114,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. John Passios, Senior Vice President of Pinnacle Associates, Ltd, the General Partner of Pinnacle Opportunity Fund, LP has voting and dispositive control over the securities held by Pinnacle Equity Fund LP
 
(41)
Represents: (a) 32,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 16,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. John Passios, Senior Vice President of Pinnacle Associates, Ltd, the General Partner of Pinnacle Opportunity Fund, LP has voting and dispositive control over the securities held by Pinnacle Opportunity Fund, LP.
 
16

 
 
(42)
Represents: (a) 200,000 shares of common stock purchased pursuant our August 2006 financing; and (b) 100,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Geoff and Steve Crosby share voting and dispositive control over the securities held by Proximity Fund, LP.
 
(43)
Represents: 403,569 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011. Savvian LLC, is a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services. Todd J. Carter, President and CEO, and Daniel H Veatch, CFO have voting and dispositive control over the securities held by Savvian LLC. The securities held by Savvian LLC were acquired for investment purposes.
 
(44)
Represents: (a) 524,811 shares of common stock purchased in our November 2006 financing; (b) 157,443 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Spencer Waxman holds voting and dispositive control over the securities held by Shannon River Partners II, LP.
 
(45)
Represents: (a) 124,000 shares of common stock purchased in our November 2006 financing; (b) 37,200 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Spencer Waxman holds voting and dispositive control over the securities held by Shannon River Partners Ltd.
 
(46)
Represents: (a) 162,000 shares of common stock purchased in our November 2006 financing; (b) 48,600 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Spencer Waxman holds voting and dispositive control over the securities held by Shannon River Partners LP.
 
(47)
Represents 29,680 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011. Eric Singer has voting and dispositive control over the securities held by Singer Congressional Fund LP. At the time of our August 2006 financing, Mr. Singer was a registered representative of Pali Capital, Inc., a registered broker-dealer. The securities held by Singer Congressional Fund LP were acquired for investment purposes.
 
(48)
Represents: 118,720 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011. Eric Singer has voting and dispositive control over the securities held by Singer Congressional Fund LP. At the time of our August 2006 financing, Mr. Singer was a registered representative of Pali Capital, Inc., a registered broker-dealer. The securities held by Singer Opportunity Fund LP were acquired for investment purposes.
 
(49)
Includes: (a) 100,000 shares of common stock purchased in our August 2006 financing; and (b) 50,000 shares of common stock purchased in our August 2006 financing. Salvatore Muoio, the Managing Member of S. Muoio & Co. LLC, the General Partner of SM Investors, LP has voting and dispositive control over the securities held by SM Investors, LP.
 
(50)
Includes: (a) 226,200 shares of common stock purchased in our August 2006 financing; and (b) 113,100 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Salvatore Muoio, the Managing Member of S. Muoio & Co. LLC, the General Partner of SM Investors II, LP has voting and dispositive control over the securities held by SM Investors, LP.
 
(51)
Includes: (a) 73,800 shares of common stock purchased in our August 2006 financing; and (b) 36,900 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Salvatore Muoio, the Managing Member of S. Muoio & Co. LLC, the Investment Advisor to SM Investors Offshore, Ltd., has voting and dispositive control over the securities held by SM Investors Offshore, Ltd.
 
(52)
Includes: (a) 80,000 shares of common stock purchased in our August 2006 financing; and (b) 40,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Stanley Francis Tara, Manager, has voting and dispositive control over the securities held by Sovereign Capital Advisors, LLC.
 
(53)
Includes: (a) 250,000 shares of common stock purchased in our August 2006 financing; and (b) 125,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Nicholas C. Stiassni President/Manager of Stiassni Capital LLC, the General Partner of Stiassni Capital Partners, LP, has voting and dispositive control over the securities held by Stiassni Capital Partners, LP.
 
(54)
Represents: (a) 60,000 shares of common stock purchased in our August 2006 financing; and (b) 30,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Thomas Passios has voting and dispositive control over the securities held by the Beechwood Place LLC.
 
17

 
 
(55)
Represents: (a) 150,000 shares of common stock purchased in our August 2006 financing; and (b) 75,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Garret G. Thunen, Trust and Carol Thunen, trustees have voting and dispositive control over the securities held by the Thunen Family Trust.
 
(56)
Represents: (a) 419,815 shares of common stock purchased in our November 2006 financing; (b) 125,945 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Paul Tudor Jones II and Tudor Investment Corporation share voting and dispositive control over the securities held by The Tudor BVI Global Portfolio, Ltd.
 
(57)
Represents (a) 100,000 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per share and an expiration date of August 18, 2011; (b) 51,431 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $3.00 per share and an expiration date of November 16, 2011. At the time of our August 2006 and November 16, 2011 financings, Mr. Marolda was a registered representative of Brimberg & Co., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(58)
Represents (a) 226,054 shares of common stock purchased in our November 2006 financing; and (b) 67,816 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Paul Tudor Jones II has voting and dispositive control over the securities held by Tudor Proprietary Trading, LLC.
 
(59)
Represents: (a) 200,000 shares of common stock purchased in our August 2006 financing; and (b) 100,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Adam Bedowitz has voting and dispositive control over the securities held by the Vision Opportunity Master Fund, Ltd.
 
(60)
Represents (a) 18,900 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $1.25 per shares and an expiration date of August 18, 2011; (b) 11,000 shares of common stock issuable upon exercise of placement agent warrants with an exercise price of $3.00 per share and an expiration date of November 16, 2011. At the time of our August 2006 and November 16, 2011 financings, Mr. Lewis was a registered representative of Brimberg & Co., a registered broker-dealer. The placement agent warrants were received as compensation for placement agent services.
 
(61)
Represents (a) 2,597,374 shares of common stock purchased in our November 2006 financing; and (b) 779,212 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased in our November 2006 financing. Paul Adam Bedowitz has voting and dispositive control over the securities held by Witches Rock Portfolio Ltd.
 
(62)
Represents: (a) 185,000 shares of common stock purchased in our August 2006 financing; and (b) 92,500 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Wellington Management Company, LLP (“Wellington”) is an investment adviser registered under the Investment Advisers Act of 1940, as amended. Wellington, in such capacity, may be deemed to have voting and dispositive control over the securities held by the selling stockholder.
 
(63)
Represents: (a) 765,000 shares of common stock purchased in our August 2006 financing; and (b) 382,500 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Wellington Management Company, LLP (“Wellington”) is an investment adviser registered under the Investment Advisers Act of 1940, as amended. Wellington, in such capacity, may be deemed to have voting and dispositive control over the securities held by the selling stockholder.
 
(64)
Includes: (a) 100,000 shares of common stock purchased in our August 2006 financing; and (b) 50,000 shares of common stock issuable upon exercise of warrants with an exercise price of $2.00 per share and an expiration date of August 23, 2011 purchased in our August 2006 financing. Paul Zaykowski has voting and dispositive control over the securities held by the Zaykowski Partners, LP.

18


PLAN OF DISTRIBUTION


 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 
·
an exchange distribution in accordance with the rules of the applicable exchange;

 
·
privately negotiated transactions;

 
·
short sales;

 
·
broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

 
·
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 
·
a combination of any such methods of sale; and

 
·
any other method permitted pursuant to applicable law.

The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.

The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of Common Stock from time to time under this prospectus, or under an amendment or supplement to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.
 
Upon the Company being notified in writing by a Selling Stockholder that any material agreement has been entered into with a broker-dealer for the sale of Common Stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required disclosing (i) the name of each such Selling Stockholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such shares of Common Stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealers, where applicable, (v) if applicable, that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified in writing by a Selling Stockholder that a donee or pledgee intends to sell more than 500 shares of Common Stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities laws.

19

 
The Selling Stockholders also may transfer the shares of Common Stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this Prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this Prospectus (as supplemented or amended to reflect such transaction).

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the Selling Stockholder. Each Selling Stockholder has represented and warranted to the Company that it acquired the securities subject to this registration statement in the ordinary course of such Selling Stockholder’s business and, at the time of its purchase of such securities such Selling Stockholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities.

The Company has advised each Selling Stockholder that it may not use shares registered on this Registration Statement to cover short sales of Common Stock made prior to the date on which this Registration Statement shall have been declared effective by the Commission. If the Selling Stockholders use this prospectus for any sale of the Common Stock, they will be subject to the prospectus delivery requirements of the Securities Act unless an exemption therefrom is available. The Selling Stockholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, to the extent applicable, Regulation M, as applicable to such Selling Stockholders in connection with resales of their respective shares under this Registration Statement.

In connection with sales of the shares of Common Stock or otherwise, the Selling Stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of Common Stock in the course of hedging in positions they assume. The Selling Stockholders may also sell shares of Common Stock short and deliver shares of Common Stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The Selling Stockholders may also loan or pledge shares of Common Stock to broker-dealers that in turn may sell such shares.

The Company is required to pay all fees and expenses incident to the registration of the shares, but we will not receive any proceeds from the sale of the Common Stock. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this Prospectus.
 


Our common stock is currently quoted on the OTC Bulletin Board under the symbol “RGRP.” For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

   
Fiscal 2006
 
Fiscal 2005
 
Fiscal 2004
 
Quarter Ended (1)
 
High
 
Low
 
High (2)
 
Low (2)
 
High (2)
 
Low (2)
 
March 31
 
$
3.65
 
$
2.35
 
$
4.00
 
$
2.50
 
$
12.50
 
$
3.50
 
June 30
 
$
3.76
 
$
1.95
 
$
3.00
 
$
2.00
 
$
17.50
 
$
3.50
 
September 30
 
$
3.43
 
$
1.35
 
$
2.50
 
$
0.50
 
$
12.00
 
$
3.00
 
December 31
   
---
   
---
 
$
4.20
 
$
0.60
 
$
4.00
 
$
2.50
 

 
(1)
On January 23, 2004, we changed our fiscal year end from July 31 to December 31.
 
(2)
Prices adjusted to reflect a one-for-50 reverse stock split effective October 3, 2005.
 
20

 
As of December 13, 2006, our shares of common stock were held by approximately 288 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. The transfer agent of our common stock is Continental Stock Transfer and Trust Company.


We have not declared any dividends to date. We have no present intention of paying any cash dividends on our common stock in the foreseeable future, as we intend to use earnings, if any, to generate growth. The payment by us of dividends, if any, in the future, rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table shows information with respect to each equity compensation plan under which the Company's common stock is authorized for issuance as of the fiscal year ended December 31, 2005. All common stock share amounts and exercise prices in this section have been adjusted to reflect a one-for-50 reverse split effective October 3, 2005.

 
Plan category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
 
(a)
(b)
(c)
Equity compensation plans approved by security holders
 
-0-
 
-0-
 
-0-
       
Equity compensation plans not approved by security holders
 
1,783,050
 
$2.00
 
716,950
       
Total
1,783,050
$2.00
716,950

On April 1, 2004 our Board of Directors adopted a stock option plan (the “2004 Stock Option Plan”). Pursuant to this plan, which expires on April 1, 2014, incentive stock options or non-qualified options to purchase an aggregate of 1,000,000 shares of common stock may be issued, as adjusted. The plan may be administered by our Board of Directors or by a committee to which administration of the plan, or part of the plan, may be delegated by our Board of Directors. Options granted under the plan are not generally transferable by the optionee except by will, the laws of descent and distribution or pursuant to a qualified domestic relations order, and are exercisable during the lifetime of the optionee only by such optionee. Options granted under the plan vest in such increments as is determined by our Board of Directors or designated committee thereof. To the extent that options are vested, they must be exercised within a maximum of three months of the end of the optionee's status as an employee, director or consultant, or within a maximum of 12 months after such optionee's termination or by death or disability, but in no event later than the expiration of the option term. The exercise price of all stock options granted under the plan shall be determined by our Board of Directors or designated committee thereof. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date.

21

 
On August 23, 2005 our Board of Directors of ROO Group, Inc. increased the number of shares which may be issued under the 2004 Stock Option Plan to an aggregate of 2,500,000 shares of common stock.

As of December 31, 2005, the following options have been granted under our 2004 Stock Option Plan:

Options Issued Under 2004 Stock Option Plan
 
Name
 
Quantity
 
Exercise Price
 
Date Granted
 
Vest Date
 
Expiration Date
 
 
                     
Robert Petty
   
120,000
   
2.00
   
August 23,2005
   
August 23, 2005
   
August 23, 2007
 
Robin Smyth
   
60,000
   
2.00
   
August 23,2005
   
August 23, 2005
   
August 23, 2007
 
Robert Petty
   
400,000
   
2.00
   
August 23, 2005
   
Not yet vested
   
August 23, 2007
 
Robin Smyth
   
200,000
   
2.00
   
August 23, 2005
   
Not yet vested
   
August 23, 2007
 
Other Staff
   
99,050
   
2.00
   
August 23, 2005
   
August 23, 2005
   
August 23, 2007
 
Other Staff
   
904,000
   
2.00
   
August 23,2005
   
Not yet vested
   
August 23,2007
 
                                 
Total
   
1,783,050
                         


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


GENERAL

We provide topical video content, including news, business, entertainment, fashion, video games, movies, music, sport and travel video, and associated services for broadcasting video over the Internet to a global base of clients. ROO Media's delivery platform supports worldwide syndication and television-style advertising. During 2001 and 2002, ROO Media focused on developing and refining its products and solutions, and commenced the commercial selling of its solutions in late 2003. ROO Media developed a technology platform specifically designed to provide a cost effective, robust, and scaleable solution to manage and syndicate video content over the Internet. We also provide a range of online and offline advertising solutions to our clients.

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

NET REVENUE

Total net revenue increased by $625,000 from $1,605,000 for the three months ended September 30, 2005 to $2,230,000 for the three months ended September 30, 2006, an increase of 39% and by $1,282,000 from $4,742,000 for the nine months ended September 30, 2005 to $6,024,000 for the nine months ended September 30, 2006, an increase of 27%. The increases are principally from the increasing sales revenue from operations.

EXPENSES

OPERATIONS. Operating expenses increased by $1,158,000 from $980,000 for the three months ended September 30, 2005 to $2,138,000 for the three months ended September 30, 2006, an increase of 118% and increased by $2,862,000 from $3,002,000 for the nine months ended September 30, 2005 to $5,864,000 for the nine months ended September 30, 2006, an increase of 95%. The increases were due to the increasing costs associated with increased revenue generation. These costs include content costs, salaries, web hosting and content delivery.

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RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries and related personnel costs, and consulting fees associated with product development. Research and development expenses increased by $175,000 from $207,000 for the three months ended September 30, 2005 to $382,000 for the three months ended September 30, 2006, an increase of 85%. Research and development expenses increased by $386,000 from $513,000 for the nine months ended September 30, 2005 to $899,000 for the nine months ended September 30, 2006, an increase of 75%. The increases were due primarily to the increase in development activities associated with enhancements to our management platform which was acquired in the acquisition of Videodome Networks, Inc.

SALES AND MARKETING. Sales and marketing expenses consist primarily of expenses for sales and marketing personnel, expenditures for advertising, and promotional activities and expenses to bring our products to market. These expenses increased by $688,000 from $727,000 for the three months ended September 30, 2005 to $1,415,000 for the three months ended September 30, 2006, an increase of 95% and by $1,724,000 from $1,640,000 for the nine months ended September 30, 2005 to $3,364,000 for the nine months ended September 30, 2006, an increase of 105%. These increases were primarily due to an increase in sales and marketing personnel.

We believe that additional sales and marketing personnel and programs are required to remain competitive. Therefore, we expect that our sales and marketing expenses will continue to increase for the foreseeable future.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of expenses for management, finance and administrative personnel, legal, accounting, consulting fees, and facilities costs. These expenses increased by $1,123,000 from $913,000 for the three months ended September 30, 2005 to $2,036,000 for the three months ended September 30, 2006, an increase of 123%. The increase was due to the increase in non-cash costs of $581,000 which consists of stock based compensation expense on stock options of $452,000 and valuation on warrants for consulting services of $129,000 plus $542,000 that is primarily due to an increase in salaries for administrative support related to our increased operations. General and administrative expenses increased by $1,952,000 from $3,554,000 for the nine months ended September 30, 2005 to $5,506,000 for the nine months ended September 30, 2006, an increase of 55%. The increase was due to the increase in non-cash costs of $597,000, which consists of an increase stock based compensation expense on stock options of $1,545,000 less a decrease in preference shares of $886,000 less a decrease in warrants and options to consultants for services of $62,000, plus $1,355,000 that is primarily due to an increase in salaries providing administrative support to the increased activity of operations.

REDEMPTION PREMIUM ON CONVERTIBLE NOTE. On May 19, 2005, we applied $200,000 of the $600,000 gross proceeds from a loan from Mr. Petty to redeem $143,000 principal amount of the Company's outstanding $3,000,000 principal amount of callable secured convertible notes. The difference between the amount paid and the principal amount redeemed of $57,000 was expensed as a redemption premium on the callable secured convertible notes. On August 23, 2005 the Company repaid all outstanding amounts due pursuant to the callable secured convertible notes. As part of the payment to the noteholders $744,000 was paid as a redemption premium. The total amount of redemption premium paid for the nine months ended September 30, 2005 was $801,000.

INTEREST INCOME. Interest income increased by $17,000 from $0 for the three months ended September 30, 2005 to $17,000 for the three months ended September 30, 2006 and by $68,000 from $4,000 for the nine months ended September 30, 2005 to $72,000 for the nine months ended September 30, 2006. This increase was primarily due to an increase in our cash and cash equivalents.
 
 INTEREST EXPENSE, RELATED PARTY. Interest expense, related party, includes interest charges on our indebtedness to Robert Petty, our Chairman and Chief Executive Officer. The expense decreased from $32,000 for the three months ended September 30, 2005 to $0 for the three months ended September 30, 2006 and decreased from $62,000 for the nine months ended September 30, 2005 to $0 for the nine months ended September 30, 2006. The outstanding balance from loans from Mr. Petty as of December 31, 2005 was $0.

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INTEREST EXPENSE, OTHER. Interest expense, other, decreased by $10,000 from $31,000 for the three months ended September 30, 2005 to $21,000 for the three months ended September 30, 2006 and decreased by $121,000 from $163,000 for the nine months ended September 30, 2005 to $42,000 for the nine months ended September 30, 2006. Interest expense, other, primarily included the interest payable to callable secured convertible note holders in 2005. On August 23, 2005 we repaid all outstanding amounts due pursuant to the callable secured convertible notes.

NET LOSS BEFORE INCOME TAXES. As a result of the factors described above, we reported a net loss before income taxes of $3,745,000 for the three months ended September 30, 2006, compared to $2,489,000 for the three months ended September 30, 2005, an increase of $1,256,000 or 50% and we reported a net loss before income taxes of $9,579,000 for the nine months ended September 30, 2006, compared to $5,952,000 for the nine months ended September 30, 2005, an increase of $3,627,000 or 61%.


YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
 
REVENUE. Total revenues increased by $2,682,000 from $3,937,000 for the year ended December 31, 2004 to $6,619,000 for the year ended December 31, 2005, an increase of 68%. The increase is principally from inclusion of revenues of acquisitions not included for the full prior year financial results and the increasing sales revenue from operations.
 
EXPENSES
 
OPERATIONS. Operations expenses increased by $1,924,000 from $2,541,000 for the year ended December 31, 2004 to $4,465,000 for the year ended December 31, 2005, an increase of 76%. The increase over the periods reflects the inclusion of operating expenses of acquisitions not fully included in the prior year results and the increasing costs associated with increased revenue generation. These expenses are primarily the costs directly associated with the generation of revenues. They include content costs, photography and production costs and printing of finished materials.
 
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries and related personnel costs and consulting fees associated with product development. Research and development expenses increased by $279,000 from $322,000 for the year ended December 31, 2004 to $601,000 for the year ended December 31, 2005, an increase of 87%. The increase in research and development expenses was primarily due to the increase in development activities associated with enhancements to our management platform which was acquired in the acquisition of Videodome.com Networks, Inc.
 
SALES AND MARKETING. Sales and marketing expenses consist primarily of expenses for advertising, sales and marketing personnel, expenditures for advertising, and promotional activities and expenses to bring our products and services to market. These expenses increased by $1,376,000 from $841,000 for the year ended December 31, 2004 to $2,217,000 for the year ended December 31, 2005, an increase of 164%. This increase was primarily due to the inclusion of the sales and marketing expenses of acquisitions not included for the full prior year financial results and increased costs in the sales and marketing of our products.
 
We believe that additional sales and marketing personnel and programs are required to remain competitive. Therefore, we expect that our sales and marketing expenses will continue to increase for the foreseeable future.
 
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of expenses for management, finance and administrative personnel, legal, accounting, consulting fees, and facilities costs. These expenses increased by $2,944,000 from $2,407,000 for the year ended December 31, 2004 to $5,351,000 for the year ended December 31, 2005, an increase of 122%. This increase was primarily due to providing administrative support to the increased activity of operations and non cash costs associated with the issuance of stock and options valued at $1,911,000 of which $750,000 were to our directors and executive officers, Robert Petty and Robin Smyth, as performance bonuses and $1,161,000 were to companies for consulting services.
 
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NON CASH COST OF CAPITAL. During the years ended December 31, 2005 and 2004, non cash cost of capital included options issued for capital raising services which were valued using the Black-Scholes method totaling $ -0- and $512,000, respectively.
 
REDEMPTION PREMIUM ON CONVERTIBLE NOTE. On May 19, 2005, we applied $200,000 of the $600,000 gross proceeds from a loan from Mr. Petty (see "May 2005 Loan From Robert Petty" below under "Liquidity and Capital Resources") to redeem $143,000 principal amount of the Company's outstanding $3,000,000 principal amount of callable secured convertible notes. The difference between the amount paid and the principal amount redeemed of $57,000 was expensed as a redemption premium on the callable secured convertible notes. On August 23, 2005 the Company repaid all outstanding amounts due pursuant to the callable secured convertible notes. As part of the payment to the noteholders $744,000 was paid as a redemption premium. The total amount of redemption premium paid for the year ended December 31, 2005 was $801,000.
 
INTEREST INCOME. Interest Income increased by $6,000 from $1,000 for the year ended December 31, 2004 to $7,000 for the year ended December 31, 2005, an increase of 600%.
 
INTEREST EXPENSE, RELATED PARTY. Interest expense, related party, includes interest charges on our indebtedness to Robert Petty, our Chairman and Chief Executive Officer. The expense increased by $30,000 from $51,000 for the year ended December 31, 2004 to $81,000 for the year ended December 31, 2005, an increase of 59%. The increase is due to the increase in the principal amount of loan outstanding. The outstanding balance from loans from Mr. Petty as of December 31, 2005 was $0.
 
INTEREST EXPENSE, OTHER. Interest expense, other, includes the interest payable to callable secured convertible note holders. The expense increased by $118,000 from $70,000 for the year ended December 31, 2004 to $188,000 for the year ended December 31, 2005, an increase of 169%. The increase is primarily due to the increase in interest on the callable secured convertible notes outstanding for approximately four months in the year ended December 31, 2004 and eight months in the year ended December 31, 2005. On August 23, 2005 we repaid all outstanding amounts due pursuant to the callable secured convertible notes.
 
FINANCING FEES CONVERTIBLE NOTES. Financing fees - convertible notes is the amount the Company computed as the value of the beneficial conversion feature on the callable secured convertible notes. It also includes the discount for the value of warrants issued in connection with the callable secured convertible notes together with the placement fees payable on the drawdown of the callable secured convertible notes. The expense decreased by $315,000 from $1,074,000 for the year ended December 31, 2004 to $759,000 for the year ended December 31, 2005, a decrease of 29%. The decrease is primarily due to the decrease in the amount expensed as the value of the beneficial conversion feature on the callable secured convertible notes from $1,054,000 to $351,000, or a decrease of $703,000, for the years ended December 31, 2004 and 2005, respectively, offset by the increase in the discount for the value of the warrants and the placement fees from $20,000 to $408,000, or an increase of $388,000, for the years ended December 31, 2004 and 2005, respectively.
 
NET LOSS BEFORE INCOME TAXES. Net loss before income taxes was $8,765,000 for the year ended December 31, 2005, compared to a net loss of $4,162,000 for the year ended December 31, 2004, an increase of $4,603,000 or 111%. The increase in our net loss is due to the increase in activities to develop products for revenue generation, sales and marketing expenses in generating revenue and the increase in administrative expenses to support these activities, which are described above. The increase also includes the costs associated with the repayment of the callable secured convertible notes.



As of September 30, 2006, we had working capital of approximately $1,811,000 with a cash balance of $2,269,000. Management believes that there will be an increase in overall expenses to expand the Company’s operations on a global basis during 2006. Although revenues are expected to increase, it is unclear whether additional cash resources will be required during the next twelve months. On November 14, 2006, the Company entered into a common stock purchase agreement pursuant to which the Company sold an aggregate of $15,500,000 of shares of common stock and warrants to accredited investors (See Note 7 Subsequent Events in financial statements). We may undertake additional debt or equity financings if needed to better enable us to grow and meet our future operating and capital requirements. However, we cannot guarantee that any additional equity or debt financing will be available in sufficient amounts or on acceptable terms when needed. If such financing is not available in sufficient amounts or on acceptable terms, our results of operations and financial condition may be adversely affected. In addition, equity financing may result in dilution to existing stockholders and may involve securities that have rights, preferences, or privileges that are senior to our common stock, and any debt financing obtained must be repaid regardless of whether or not we generate profits or cash flows from our business activities.

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Net cash used in operating activities was $7,260,000 for the nine months ended September 30, 2006, compared to $3,609,000 for the nine months ended September 30, 2005, an increase of $3,651,000 or 101%. The increase in net cash used in operating activities is primarily the result of our increased expenses with our expanded operations.

Net cash used in investing activities was $852,000 for the nine months ended September 30, 2006, compared to net cash used in investing activities for the nine months ended September 30, 2005 of $443,000, an increase of $409,000 or 92%. The net cash used in investing activities increased primarily due to the investment in ROO Media Europe of approximately $90,000, the capitalization of software of $432,000 offset by the decrease in investment in VideoDome of $80,000. On January 27, 2006 ROO Media Corporation purchased 24% of ROO Media Europe Limited for $90,000. ROO Media Europe is now a wholly owned subsidiary of ROO Media Corporation.

Net cash provided by financing activities was $5,115,000 for the nine months ended September 30, 2006 compared to net cash provided by financing activities of $4,489,000 for the nine months ended September 30, 2005, a decrease in net cash provided by financing activities of $626,000 or 14%.
 
Below is a description of significant financings we have completed to date.

MAY 2005 LOAN FROM ROBERT PETTY

On May 18, 2005, we entered into a Note Purchase Agreement with Robert Petty, our Chairman and Chief Executive Officer. Mr. Petty loaned us $600,000 pursuant to the Note Purchase Agreement. In connection with this, we paid transaction fees totaling $92,500, which includes a $60,000 placement agent fee in connection with the sale by Mr. Petty of $600,000 principal amount of secured convertible promissory notes (described below) and $32,500 in legal fees in connection with the transaction. As evidence of the $600,000 loan and a prior existing loans from Mr. Petty totaling $500,000, we issued Mr. Petty a promissory note in the principal amount of $1,100,000. The principal sum of $1,100,000 plus interest at the rate of 10% per annum calculated beginning September 1, 2005 was re-paid by December 31, 2005. Our obligations under the promissory note were secured by a security interest in all of our assets.

On May 19, 2005, we applied $200,000 of the $600,000 gross proceeds from Mr. Petty's loan to redeem $142,857 principal amount of outstanding callable secured convertible notes. As consideration for the redemption, the holders of the callable secured convertible notes agreed not to convert any amount due under the callable secured convertible notes at a conversion price less than $0.10 per share for a 60-day period that ended on July 18, 2005.

In connection with the above loan from Mr. Petty, Mr. Petty personally sold an aggregate of $600,000 principal amount of secured convertible promissory notes to certain accredited investors. The secured convertible promissory notes were convertible into common stock held by Mr. Petty at a price of $1.25 per share. Mr. Petty's obligations under the secured convertible promissory notes were secured by the $1,100,000 principal amount promissory note payable by us to Mr. Petty. The secured convertible promissory notes accrued interest at a rate of 8% per annum.

As partial consideration for the loan from Mr. Petty, we entered into a registration rights agreement, pursuant to which we agreed to prepare and file a registration statement providing for the resale of the shares of common stock issuable upon conversion of the secured convertible promissory notes, including shares of common stock that may be issued as interest payments under the secured convertible promissory notes
 
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JULY 2005 FINANCING

On July 18, 2005, we entered into a Securities Purchase Agreement with four accredited investors for the sale of: (i) up to $2,500,000 in callable secured convertible notes; and (ii) warrants to purchase up to 100,000 shares of common stock. On July 19, 2005, the investors provided us $550,000 of gross proceeds from the sale of $550,000 in principal amount of callable secured convertible notes and warrants to purchase 22,000 shares of our common stock.
 
The callable secured convertible notes allowed us to prepay them in full if we paid the investors an amount in cash equal to either: (i) 125% for prepayments occurring within 30 days of the issue date; (ii) 135% for prepayments occurring between 31 and 60 days of the issue date; or (iii) 150% for prepayments occurring after the 60th day following the issue date. As further described below under "August 2005 Equity Financing," on August 23, 2005, we prepaid all outstanding amounts under the $550,000 principal amount callable secured convertible notes and under the other outstanding callable secured convertible notes.

The warrants are exercisable until five years from the date of issuance at a purchase price of $10.00 per share. The investors may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the investors exercise the warrants on a cashless basis, then we will not receive any proceeds. In addition, the exercise price of the warrants will be adjusted in the event we issue common stock at a price below market, with the exception of: (i) any securities issued as of the date of the warrants; (ii) any stock or options which may be granted or exercised under any employee benefit plan; or (iii) any shares of common stock issued in connection with the callable secured convertible notes issued pursuant to the Securities Purchase Agreement.

The exercise price of the warrants may also be adjusted in certain circumstances such as if we pay a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the investors' position. The investors have agreed to restrict their ability to exercise their warrants and receive shares of our common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such exercise does not exceed 4.9% of the then issued and outstanding shares of common stock.

We are required to file a registration statement with the Securities and Exchange Commission, which will include the common stock underlying the warrants, within 30 days from receipt of a written demand from the investors for us to do so. As of the date this report was filed with the Securities and Exchange Commission the warrant holders have not demanded that we register the shares issuable upon exercise of such warrants.

AUGUST 2005 EQUITY FINANCING

On August 23, 2005, we sold 3,833,333 shares of common stock to accredited investors in a private placement pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended. The common stock was sold at a price of $1.50 per share resulting in gross proceeds of $5,750,000. $3,400,000 of the proceeds was used to prepay all of our outstanding callable secured convertible notes. In connection with the sale of the common stock, we were required to effect a 1-for-50 reverse split of our outstanding shares of common stock, which was completed on October 3, 2005.

We agreed to prepare and file a registration statement with the Securities and Exchange Commission registering the resale of the shares of common stock sold in the private placement on or prior to 45 days following the closing date. If the registration statement is not filed within such time or if the registration statement is not declared effective within 120 days following the closing date, we must pay liquidated damages to the investors equal to 2% of the dollar amount of their investment for each calendar month or portion thereof that the registration statement is not filed or declared effective. The company has issued 191,666 shares of common stock as settlement of liquidated damages accrued and accruing through April 30, 2006. The Registration Statement was declared effective by the SEC on April 24, 2006.

Pali Capital, Inc. and Brimberg & Co. acted as placement agents in connection with the August 2005 private placement. In connection with the closing, we paid the placement agents a cash fee of $520,000, calculated as 10% of the gross proceeds up to $3,000,000 and 8% of the gross proceeds in excess of $3,000,000. In addition, we issued the placement agents warrants to purchase 383,332 shares of common stock (10% of the shares of common stock sold in the private placement) with an exercise price of $1.50 per share exercisable for a period of five years. The placement agents have piggyback registration rights with respect to the shares of common stock issuable upon exercise of the placement agent warrants.

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OCTOBER 2005 EQUITY FINANCING

On October 20, 2005, we sold 1,500,000 shares of common stock to accredited investors in a private placement pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended. The shares of common stock were sold at a price of $1.50 per share resulting in gross proceeds of $2,250,000.

We agreed to prepare and file a registration statement with the Securities and Exchange Commission registering the resale of the shares of common stock sold in the private placement on or prior to 30 days following the closing date. If the registration statement is not filed within such time or if the registration statement is not declared effective within 120 days following the closing date, we must pay liquidated damages to the investors equal to 2% of the dollar amount of their investment for each calendar month or portion thereof that the registration statement is not filed or declared effective. The company has issued 45,001 shares of common stock as settlement of liquidated damages accrued and accruing through April 30, 2006. The Registration Statement was declared effective by the SEC on April 24, 2006.

Pali Capital, Inc. and Brimberg & Co. acted as placement agents in connection with this private placement. In connection with the closing, we paid the placement agents a cash fee of $180,000, calculated as 8% of the gross proceeds from the private placement. In addition, we issued the placement agents warrants to purchase 150,000 shares of common stock (10% of the shares of common stock sold in the private placement) with an exercise price of $1.50 per share exercisable for a period of five years. The placement agents have piggyback registration rights with respect to the shares of common stock issuable upon exercise of the placement agent warrants.

DECEMBER 2005 EQUITY FINANCING

On December 28, 2005, we sold 1,701,500 shares of common stock and 680,600 warrants to purchase shares of common stock to accredited investors. The shares of common stock were sold at a price of $3.00 per share, resulting in $5,104,500 of gross proceeds. Each investor was issued warrants to purchase a number of shares of common stock equal to 40% of the number of shares of common stock purchased. The warrants have an exercise price of $4.00 per share and a term of five years.

In connection with this private placement, we agreed with the investors that within 60 days of meeting the listing requirements of The Nasdaq SmallCap Market, we will file an initial listing application for our common stock to be listed on The Nasdaq SmallCap Market and that within 60 days of meeting the listing requirements of The Nasdaq National Market, we will file an initial listing application for our common stock to be listed on The Nasdaq National Market.

We also granted investors a right to participate in subsequent financings until June 28, 2007.

We agreed to prepare and file a registration statement with the Securities and Exchange Commission registering the resale of the shares of common stock sold in the private placement on or prior to 30 days following the closing date. Such registration statement was filed on February 8, 2006. If the registration statement is not declared effective within 120 days following the closing date, we must pay liquidated damages to the investors equal to 2% of the dollar amount of their investment for each calendar month or portion thereof that the registration statement is not declared effective. The Registration Statement was declared effective by the SEC on April 24, 2006.

Pali Capital, Inc. and Brimberg & Co., both registered broker-dealers, acted as placement agents for this private placement. In connection with the closing, we paid the placement agents a cash fee of $408,360, calculated as 8% of the gross proceeds. In addition, we issued the placement agents warrants to purchase 238,700 shares of common stock (10% of the securities sold in the private placement) with an exercise price of $3.00 per share exercisable for a period of five years. The placement agents have piggyback registration rights with respect to the shares of common stock issuable upon exercise of the placement agent warrants.

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AUGUST 2006 FINANCING

On August 18, 2006, we entered into a Common Stock Purchase Agreement pursuant to which we sold an aggregate of 4,420,000 of shares of common stock and 2,210,000 warrants to purchase shares of common stock to 28 accredited investors (the “August 2006 Financing”). The shares of common stock were sold at a price of $1.25 per share or an aggregate of $5,250,000. Each investor was issued warrants to purchase a number of shares of common stock equal to 50% of the number of shares of common stock purchased. The warrants have an exercise price of $2.00 per share and a term of five years.

The Company agreed to prepare and file a registration statement with the Securities and Exchange Commission registering the resale of the shares of common stock sold in the private placement on or prior to 30 days following the closing date. If the registration statement is not filed within such time or if the registration statement is not declared effective within 120 days following the closing date, the Company must pay liquidated damages to the investors equal to 1% of the dollar amount of their investment for each calendar month or portion thereof that the registration statement is not filed or declared effective. The Company failed to fulfill its obligations to timely file the Registration Statement. To date the Company owes approximately $152,858 in liquidated damages to the investors.

Savvian LLC (“Savvian”), Burnham Hill Partners, a division of Pali Capital, Inc. ("Burnham Hill") and Brimberg & Co. financial advisors ("Brimberg"), registered broker-dealers, acted as placement agents for the sale of the Company’s common stock. In connection with the closing, the Company paid the placement agents a cash fee equal to 6% of the gross proceeds. In addition, the Company issued to the placement agents 801,369 warrants to purchase shares of our common stock with an exercise price of $1.25 per share exercisable for a period of five years. In connection with the August 2006 Financing, we received net proceeds of $5,019,760 after payment of placement agent fees of $460,240, legal fees of $40,000 and escrow agent fees of $5,000. None of the investors are affiliates of the Company.

Prior to the closing of the offering, there were 13,176,436 share of common stock issued and outstanding. Upon closing of the August 2006 Financing and issuance of an aggregate of 4,420,000 shares to the investors, there were 17,596,436 shares of common stock issued and outstanding.

NOVEMBER 2006 FINANCING

On November 14, 2006, we entered into a Securities Purchase Agreement pursuant to which we sold an aggregate of 8,378,377 shares of common stock and warrants to purchase 2,513,513 shares of common stock to 20 accredited investors (the “November 2006 Financing”). The offering closed on November 16, 2006. The shares of common stock were sold at a price of $1.85 per share or an aggregate of $15,499,997. Each investor was issued warrants to purchase a number of shares of common stock equal to 30% of the number of shares of common stock purchased. The warrants have an exercise price of $3.00 per share and a term of five years.

The Company agreed to prepare and file a registration statement with the Securities and Exchange Commission registering the resale of the shares of common stock sold in the private placement on or prior to 30 days following the closing date. If the registration statement is not filed within such time, the Company must pay liquidated damages to the investors equal to 1% of the dollar amount of their investment for each calendar month or portion thereof that the registration statement is not filed, up to a maximum of 10%. Also, if the registration statement is not declared effective within 120 days following the closing date, the Company must pay liquidated damages to the investors equal to 1% of the dollar amount of their investment for each calendar month or portion thereof that the registration statement is declared effective, up to a maximum of 10%, which increases to 18% if the registration statement is not declared effective within 2 years following the closing date.

Merriman Curhan Ford & Co. and Brimberg & Co., financial advisors and registered broker-dealers, acted as placement agents for the sale of the Company's common stock. In connection with the closing we paid the placement agents a cash fee of an aggregate $930,000. In addition, the Company issued to the placement agents 326,757 warrants to purchase shares of our common stock with an exercise price of $3.00 per share exercisable for a period of five years.

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In connection with the November 2006 Financing, we received net proceeds of $14,501,147 after payment of placement agent fees of $930,000, legal fees and expenses of $63,850, and escrow agent fees of $5,000.
 
Except as set forth below, none of the investors in the November 2006 are affiliates of the Company. Because Tudor Investment Corporation (“TIC”) provides investment advisory services to (i) BVI Global Portfolio Ltd. (“BVI”) which directly owns 419,815 shares in common stock and 125,945 warrants to purchase common stock, and (ii) Witches Rock Portfolio (“Witches Rock”) which owns, 2,597,374 shares in common stock and 779,212 in warrants to purchase common stock, TIC may be deemed to beneficially own the shares of Common Stock owned by BVI and Witches Rock which in the aggregate represents 14.6 % of the Company’s outstanding common stock. TIC expressly disclaims such beneficial ownership. In addition, because Paul Tudor Jones, II, is the controlling shareholder of TIC and the indirect controlling equity holder of Tudor Proprietary Trading, L.L.C (“TPT”) which owns directly 226,054 shares in common stock and 67,816 warrants to purchase common stock, Mr. Jones may be deemed to beneficially own the shares of Common Stock deemed beneficially owned by TIC and TPT, which in the aggregate represents 15.6% of the Company’s outstanding stock. Mr. Jones expressly disclaims such beneficial ownership.

Further, Ashford Capital Partners, L.P may be considered an affiliate of the Company by virtue of its ownership of 1,548,324 shares of common stock and 464,497 warrants to purchase common stock or 7.58% of the Company’s outstanding common stock. Theodore H. Ashford, President of Ashcap. Corp, the General Partner of Ashford Capital Partners, L.P. has voting and dispositive control over the securities held by Ashford Capital Partners, L.P. In addition, Mr. Ashford as Chairman and CEO of Ashford Capital Management, Inc, the investment advisor to Hank & Co. may be deemed to beneficially own an additional 451,676 shares and 135,503 warrants to purchase common stock owned by Hank & Co. which represents 2.24% of the Company’s outstanding common stock. In addition, Mr. Ashord as member of Anvil Management Co. the General Partner of Anvil Investment Associates, L.P. may be deemed to beneficially own an additional 270,270 shares and 81,081warrants to purchase common stock owned by Anvil Investment or 1.34% of the Company’s outstanding stock.

MARKET RISKS

We conduct our operations in primary functional currencies: the United States dollar, the British pound and the Australian dollar. Historically, neither fluctuations in foreign exchange rates nor changes in foreign economic conditions have had a significant impact on our financial condition or results of operations. We currently do not hedge any of our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations. We invoice our international customers primarily in U.S. dollars, except in the United Kingdom and Australia, where we invoice our customers primarily in British pounds and Australian dollars, respectively. In the future we anticipate billing certain European customers in Euros, though we have not done so to date.
 
We are exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation and as our foreign currency consumer receipts are converted into U.S. dollars. Our exposure to foreign exchange rate fluctuations also arises from payables and receivables to and from our foreign subsidiaries, vendors and customers. Foreign exchange rate fluctuations did not have a material impact on our financial results in the three and nine months ended September 30, 2006 and 2005.
 
 
Concentrations of credit risk with respect to trade accounts receivable are limited due to the wide variety of customers who are dispersed across many geographic regions. As of September 30, 2006, one customer accounted for approximately 18% of our trade accounts receivable portfolio. We routinely assess the financial strength of customers and, based upon factors concerning credit risk, we establish an allowance for uncollectible accounts. Management believes that accounts receivable credit risk exposure beyond such allowance is limited.

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GOING CONCERN
 
Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred net operating losses of approximately $6,015,000 for the year ended December 31, 2005, compared to $2,174,000 for the year ended December 31, 2004. Additionally, as of December 31, 2005, we had a net working capital of approximately $5,007,000 and negative cash flows from operating activities of approximately $4,917,000. Since ROO Media Corporation's inception, we have incurred losses, had an accumulated deficit, and have experienced negative cash flows from operations. The expansion and development of our business may require additional capital. This condition raises substantial doubt about our ability to continue as a going concern. Our management expects cash flows from operating activities to improve in fiscal 2006, primarily as a result of an increase in sales, although there can be no assurance thereof. The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. If we fail to generate positive cash flows or obtain additional financing when required, we may have to modify, delay or abandon some or all of our business and expansion plans.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The policies discussed below are considered by our management to be critical to an understanding of our financial statements because their application places the most significant demands on our management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described below. For these policies, our management cautions that future events rarely develop as forecast, and that best estimates may routinely require adjustment.
 
The SEC has issued cautionary advice to elicit more precise disclosure about accounting policies management believes are most critical in portraying our financial results and in requiring management's most difficult subjective or complex judgments.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments and estimates. On an on-going basis, we evaluate our estimates, the most significant of which include establishing allowances for doubtful accounts and determining the recoverability of our long-lived assets. The basis for our estimates are historical experience and various assumptions that are believed to be reasonable under the circumstances, given the available information at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from the amounts estimated and recorded in our financial statements.
 
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
Revenue Recognition: Revenues are derived principally from professional services, digital media management and advertising. Revenue is recognized when service has been provided. We may enter into agreements whereby we guarantee a minimum number of advertising impressions, click-throughs or other criteria on our websites or products for a specified period. To the extent these guarantees are not met, we may defer recognition of the corresponding revenue until guaranteed delivery levels are achieved.
 
Allowance for Doubtful Accounts: We maintain an allowance for doubtful accounts for estimated losses resulting from our customers not making their required payments. Based on historical information, we believe that our allowance is adequate. Changes in general economic, business and market conditions could result in an impairment in the ability of our customers to make their required payments, which would have an adverse effect on cash flows and our results of operations. The allowance for doubtful accounts is reviewed monthly and changes to the allowance are updated based on actual collection experience. We use a combination of the specific identification method and analysis of the aging of accounts receivable to establish an allowance for losses on accounts receivable.
 
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Goodwill and Intangible Asset Impairment: In assessing the recoverability of our goodwill and other intangibles we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. This impairment test requires the determination of the fair value of the intangible asset. If the fair value of the intangible asset is less than its carrying value, an impairment loss will be recognized in an amount equal to the difference. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. We adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (FAS 142) effective January 1, 2002, and are required to analyze goodwill and indefinite lived intangible assets for impairment on at least an annual basis.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
 
In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting for Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“FAS 154”). FAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
 
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment to FASB Statements No. 133 and 140” (“FAS 155”). FAS 155 simplifies the accounting for certain hybrid financial instruments containing embedded derivatives. FAS 155 allows fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under FAS 133. In addition, it amends FAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. FAS 155 is effective for all financial intruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. The implementation of FAS 155 is not expected to have a material impact on our consolidated financial statements.
 
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140” (“FAS 156”). This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to accounting for separately recognized servicing assets and servicing liabilities. This Statement clarifies when servicing rights should be separately accounted for, requires companies to account for separately recognized servicing rights initially at fair value, and gives companies the option of subsequently accounting for those servicing rights at either fair value or under the amortization method. FAS 156 is effective for fiscal years beginning after September 15, 2006. The implementation of FAS 156 is not expected to have a material impact on our consolidated financial statements.
 
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This Interpretation 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. Specifically, FIN 48 requires the recognition in financial statements of the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Additionally, FIN 48 provides guidance on the derecognition of previously recognized deferred tax items, classification, accounting for interest and penalties, and accounting in interim periods related to uncertain tax positions, as well as, requires expanded disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We have not completed our evaluation of adopting FIN 48.
 
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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“FAS 157”). FAS 157 defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. This Statement also applies to other accounting pronouncements that require or permit a fair value measure. As defined by this Statement, the fair value of an Asset or Liability would be based on an “exit price” basis rather than an “entry price” basis. Additionally, the fair value should be market-based and not an entity-based measurement. FAS 157 is effective for fiscal years beginning after November 15, 2007. The implementation of FAS 157 is not expected to have a material impact on our consolidated financial statements.
 
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for us as of December 31, 2007. We have not completed our evaluation of the possible impact on our financial position, if any, related to implementation of SAB 108.
 

 
BACKGROUND
 
ROO Group, Inc. was incorporated on August 11, 1998 under the laws of the State of Delaware as Virilitec Industries, Inc. We were formed to license and distribute a line of bioengineered virility nutritional supplements designed to enhance human male sperm count and potency. We were not successful in implementing our business plan, and after looking at other possible products to expand our product line, our management determined that it was in the best interests of our shareholders to attempt to acquire an operating company. As a result, we terminated all of our existing contracts and were inactive until we acquired ROO Media Corporation, a Delaware corporation.
 
ACQUISITION OF ROO MEDIA CORPORATION
 
On December 2, 2003, Virilitec Industries, VRLT Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Virilitec Industries, ROO Media, Jacob Roth and Bella Roth, entered into an Agreement and Plan of Merger. Upon the terms and subject to the conditions set forth in the Agreement and Plan of Merger, VRLT Acquisition Corp. was merged with and into ROO Media. As a result of the merger, Virilitec Industries, through VRLT Acquisition Corp., acquired 100% of the capital stock of ROO Media. All of the issued and outstanding shares of capital stock of ROO Media held by the stockholders of ROO Media were cancelled and converted into the right to receive an aggregate of 2,960,000 shares of common stock of Virilitec Industries. The separate corporate existence of VRLT Acquisition Corp. ceased, and ROO Media continued as the surviving corporation in the merger, as a wholly owned subsidiary of Virilitec Industries.
 
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In connection with the merger, we agreed to cause the resignation of all of the members of our Board of Directors and appoint new Directors as designated by the Chairman of the Board of Directors of ROO Media. As additional consideration for the 2,960,000 shares of common stock of Virilitec Industries,
 
(1) ROO Media paid to Virilitec Industries $37,500 cash prior to the execution of the Agreement and Plan of Merger, (2) ROO Media paid an aggregate of $100,000 of Virilitec Industries' total $162,500 of liabilities as reflected on Virilitec Industries' balance sheet on the closing date of the merger, and (3) ROO Media paid Virilitec Industries' $62,500 debt to Jacob Roth, Virilitec Industries' former Chief Executive Officer. In connection with the $62,500 payment to Mr. Roth, ROO Media entered into an agreement to pay such debt within 90 days after the effective date of the merger, which was December 3, 2003. The $62,500 debt to Jacob Roth was paid during the first quarter of 2004.
 
OTHER ACQUISITIONS: REALITY GROUP PTY LTD., UNDERCOVER MEDIA PTY LTD. BICKHAMS MEDIA, INC. AND FACTORY 212 PTY LTD.
 
REALITY GROUP PTY LTD.
 
On April 30, 2004, we purchased 80 shares of the common stock of Reality Group Pty Ltd ("Reality Group") which represented 80% of the issued and outstanding common stock of Reality Group, a corporation formed under the laws of Australia, from the shareholders of Reality Group. The consideration for the Reality Group common shares was the issuance of an aggregate of 167,200 shares of our common stock. As additional consideration for the Reality Group shares, we paid an aggregate of 200,000 Australian Dollars to the Reality Group shareholders. Further, the Reality Group shareholders agreed to cause Reality Group to increase the number of directors on its Board of Directors to allow us to appoint up to four nominees to its Board.
 
The Reality Group shareholders also agreed to grant us an option to purchase the remaining 20 shares of the issued and outstanding common stock of Reality Group over the next two years. The terms of the option shall be negotiated in good faith. Notwithstanding this, the option is exercisable by us on July 30, 2004, January 30, 2005, July 30, 2005 and January 30, 2006, and shall expire on March 5, 2006. On October 28, 2005 the terms of the Purchase Agreement were amended as further described on page 35 of this Registration Statement.
 
Pursuant to the purchase agreement, we guaranteed that the Reality Group shareholders will be able to sell the shares of our common stock that they received, subject to the requirements of Rule 144, for greater than or equal to $15.00 per share for a period of twelve months after the Reality Group shareholders have satisfied the Rule 144 requirements. The foregoing guarantee was predicated upon the assumption that the Reality Group shareholders will be able to sell the greater of (a) 1/4 of their respective exchange shares per quarter of the guarantee period or (b) such maximum number of exchange shares permissible under Rule 144 per quarter of the guarantee period. If the Reality Group shareholders do not sell their quarterly allotment during any one quarter of the guarantee period, the guarantee shall not be effective for the number of shares not sold during that quarter.
 
During the guarantee period, the Reality Group shareholders have the option to buy back an aggregate of 29 Reality Group shares, or such number of shares as shall decrease our ownership percentage in Reality Group to 51%. The consideration for such buy-back shares shall be 2,280 shares of our common stock for each share of Reality Group common stock. The earliest date for exercising this buy-back provision is September 1, 2004. On October 28, 2005 the terms of the Purchase Agreement were amended as further described on page 35 of this Registration Statement.
 
In the event that the Reality Group shareholders are not able to sell their shares of our common stock for greater than or equal to $15.00 per share during the guarantee period, a share variance shall be determined based on the difference between (a) the number of exchange shares to be sold multiplied by $15.00 per share and (b) the number of exchange shares to be sold multiplied by the closing sale price of the exchange shares on the trading day immediately prior to the day that a Reality Group shareholder notifies us of its enforcement of the guarantee. In the event that a Reality Group shareholder enforces the guarantee, we, in our sole discretion, may pay the share variance to the Reality Group shareholder in one of the following ways: (1) in cash; (2) we shall authorize the escrow agent (as defined in the purchase agreement) to return to the Reality Group shareholders on a pro rata basis that amount of shares, based on a share valuation of $20,900 per Reality Group ordinary share, that shall constitute the share variance; or (3) if mutually agreeable to the Reality Group shareholders, in shares of our common stock based on the average closing sale price of shares of our common stock during the previous 15 trading days. To ensure the guarantee, we agreed to not offer or negotiate, either in writing or orally, the sale of the Reality Group shares or any Reality Group option shares acquired by us with any other party during the guarantee period.
 
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If during the guarantee period: (a) we undergo a voluntary or involuntary dissolution, liquidation or winding up; (b) our shares of common stock cease trading for more than 15 business days; or (c) the quotation of our common stock is removed or suspended from the Over-the-Counter Bulletin Board for a continuous period of greater than 30 days (other than as a consequence of the quotation of our securities on an internationally recognized stock exchange), then the following shall occur: (1) the Reality Group shares shall revert back to the Reality Group shareholders; (2) the shares of our common stock exchanged for 80% of the Reality Group shares shall revert back to us; (3) the option shall be revoked; and (4) our nominees to the Reality Group's Board of Directors shall immediately resign.
 
Pursuant to the terms of the purchase agreement, each Reality Group shareholder agreed to not, unless permitted by our Board of Directors, sell more than 25% of their exchange shares during any three-month period for a period of two years after the effective date of the purchase agreement. Furthermore, each Reality Group shareholder granted to us a right of first refusal with respect to the purchase of the Reality Group shareholders' exchange shares for a period of one year after the first date on which the exchange shares are eligible for sale by the Reality Group shareholders in accordance with Rule 144 or any other applicable legislation, regulation or listing rule. If we elect to purchase the shares, such shares shall be purchased at the highest closing sale price for the period commencing on the trading day immediately prior to our receipt of notice of intent to sell from the Reality Group shareholders until the trading day immediately prior to the date on which we give notice to the selling Reality Group shareholder of its election to purchase.
 
Reality Group provides integrated communication solutions, including direct marketing, Internet advertising and sales promotion. Reality Group was formed as a result of the change in direction of marketing with the advent of the Internet and a need for more accountable, integrated advertising. Reality Group believes that it is a pioneer of integrated communication, with an emphasis on web-based solutions and customer relationship management systems built to manage the inquiries generated through their web based campaigns. Its clients include Saab Automobile Australia, BP Australia, Bob Jane T-Marts, Tontine, Dennis Family Corporation, Tabaret, Superannuantion Trust of Australia, Federal Hotels & Resorts, and CityLink.
 
To help identify the most effective way to communicate with each client's audience, Reality Group created a proprietary management tool that provides specific costs per response for each media channel. The management tool allows Reality Group to focus on effective media channels and eliminate the rest by identifying the parts of a client's budget that are working.
 
AMENDMENT TO REALITY GROUP PURCHASE AGREEMENT
 
On October 28, 2005, we entered into an amendment (the "Amendment") to the Stock Purchase Agreement (the "Reality Purchase Agreement") dated as of March 11, 2004 among the Company and the shareholders of Reality Group Pty Ltd. ("Reality Group"). Pursuant to the Amendment, the Reality Group shareholders agreed to exercise their buyback option effective January 1, 2006 at which date we must sell to the Reality Group shareholders such number of shares of Reality Group's common stock so as to reduce our ownership of Reality Group to 51%. The Reality Group shareholders further agreed that the Share Variance (as defined in the Reality Purchase Agreement and as described in a Form 8-K filed by the Company on May 17, 2004) shall be calculated based upon a closing sale price of $2.50 and the Share Variance equals $1,263,500.
 
We paid $200,000 of the $1,263,500 Share Variance in cash and issued 425,400 shares (the "Variance Shares") of common stock as payment of the remaining $1,063,500 based on a stock price of $2.50 per share. We guaranteed (the "Variance Guarantee") the Reality Group shareholders that they will be able to sell their Exchange Shares (as defined in the Reality Purchase Agreement and as described in a Form 8-K filed by the Company on May 17, 2004) and Variance Shares for a price equal to or greater than $2.50 per share for a period of 14 days after the earliest date that the Reality Group shareholders can publicly sell their shares of our common stock (the "Variance Guarantee Period"). In the event the Reality Group shareholders are unable to sell any of the Exchange Shares or the Variance Shares for a price equal to or greater than $2.50 per share during the Variance Guarantee Period, then we must issue them such number of shares of common stock equal to: (x) the applicable number of Variance and/or Exchange Shares multiplied by $2.50, less (y) the applicable number of Variance and/or Exchange Shares multiplied by the average closing sale price of our common stock on the OTC Bulletin Board during the Variance Guarantee Period, divided by (z) the average closing sale price of our common stock on the OTC Bulletin Board during the Variance Guarantee Period. Notwithstanding the above agreements, if at any time during the Variance Guarantee Period an offer is presented to a Reality Group shareholder to purchase their Variance Shares for a price equal to or greater than $2.50 per share and such shareholder does not accept the offer, then our obligations pursuant to the Variance Guarantee shall be automatically terminated with respect to such shareholder. We agreed to prepare and file a registration statement providing for the resale of 359,280 of the Variance Shares by November 27, 2005. The variance guarantee in the amendment to the Reality Group Purchase Agreement has been satisfied.
 
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UNDERCOVER MEDIA PTY LTD.
 
On May 26, 2004, we entered into an asset purchase agreement to purchase the business and business assets of Undercover Media Pty Ltd. ("Undercover Media"), a Victorian, Australia corporation. The purchase price for Undercover Media's assets consisted of 20,000 shares of our common stock. We also agreed to issue additional shares of our common stock upon Undercover Media attaining performance milestones as follows: (a) upon the commercial launch of a broadband music portal suitable for operation as a stand alone site that is capable of worldwide syndication, the issuance of that number of shares of common stock that is equal to the quotient of (x) $75,000 divided by (y) the average closing sale price of the shares of common stock for the five trading days prior to such commercial launch; (b) upon the execution of an agreement for the supply and worldwide syndication of music videos with an aggregate of four mutually acceptable major music labels, the issuance of that number of shares of common stock that is equal to the quotient of (x) $75,000 divided by (y) the closing sale price prior to the execution of the last of the four of such agreements; (c) upon the generation of at least $30,000 per month in revenues for three consecutive months attributable to the company's music subdivision, the issuance of that number of shares of common stock that is equal to the quotient of (x) $75,000 divided by (y) the closing sale price prior to the determination that such revenues have been achieved; and (d) upon obtaining an aggregate of thirty video interviews with mutually acceptable recognized artists; the issuance of that number of shares of common stock that is equal to the quotient of (x) $75,000 divided by (y) the closing sale price prior to the last of the thirty interviews. On November 21, 2006, we issued 100,000 shares of common stock in full and final settlement of the milestones detailed in the Undercover Media Purchase Agreement. The shares were valued at $260,000, based on the closing trading value of the shares on the previous day.
 
Included in the purchase is the www.undercover.com.au web site, which currently serves over 500,000 visitors per month with 55% from the United States, 18% from Europe, 7% from Asia and 20% from other countries throughout the world. The Undercover Media website, through its relationship with HMV, clearly displays the link between music content and the sale of music; the user reads the article or interview and can then click through to purchase the artist's CD from HMV's web site.
 
At the time of the acquisition, Undercover Media features included original music content ranging from raw interview footage to propriety editorial content combined with industry released footage. Undercover Media has served both the music industry and music community with daily music news, reviews and editorial bulletins. Undercover Media's clients include Telstra Corporation, AAP and Coca Cola, and its distribution partners include Google, VH1, Nova, Artist Direct and News Now. In addition, Undercover has a strategic online partnership with HMV for online music sales.
 
BICKHAMS MEDIA, INC.
 
On September 10, 2004, we entered into an agreement to purchase all of the outstanding shares of common stock of Bickhams Media, Inc. ("Bickhams") from Avenue Group, Inc. pursuant to a Stock Purchase Agreement dated September 10, 2004. The only business of Bickhams is its ownership interest in VideoDome.com Networks, Inc. ("VideoDome"), a California corporation. In consideration for the purchase, we agreed to: (1) pay Avenue Group $300,000 cash; (2) issue Avenue Group 80,000 shares of our common stock; and (3) guaranty all of the obligations of VideoDome.com Networks, Inc. under a promissory note of VideoDome that was issued to Avenue Group in October 2003 in the principal amount of $290,000. In addition, we agreed to issue Avenue Group 60,000 shares of our common stock in consideration for a termination letter which shall serve to terminate a Registration Rights Agreement dated as of November 28, 2003.
 
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As of November 1, 2004, we entered into an agreement with Bickhams and Daniel and Vardit Aharonoff for Bickhams to purchase 50% of the outstanding common stock of VideoDome.com Networks, Inc. Prior to November 1, 2004, Bickhams already owned the other 50% of the outstanding common stock of VideoDome. As a result of this transaction, Bickhams now owns 100% of the outstanding common stock of VideoDome. Under the agreement, we agreed to: (1) issue 100,000 shares of our common stock to Daniel Aharonoff on the closing date; (2) issue an additional 60,000 shares of our common stock to Daniel Aharonoff upon meeting jointly agreed milestones; and (3) pay up to $220,000 in cash to Daniel Aharonoff upon meeting jointly agreed milestones.
 
The jointly agreed milestones are as follows: (1) upon the commercial launch of VideoDome's embedded player and music player, we agreed to pay Mr. Aharonoff $100,000 cash and issue Mr. Aharonoff 20,000 shares of our common stock; (2) upon the commercial launch of a combined ROO Media and VideoDome Media Manager platform, we agreed to pay Mr. Aharonoff $100,000 cash and issue Mr. Aharonoff 40,000 shares of our common stock; and (3) after the combined platform has delivered a minimum of 50,000,000 video views for two consecutive months excluding mini player views, we agreed to pay Mr. Aharonoff $20,000 cash. On December 21, 2004 the first milestone was reached and we issued 20,000 shares and $100,000 to Mr. Aharonoff. On May 9, 2005 the requirements of the second milestone was reached and we issued 40,000 shares of common stock paid $100,000 to Mr. Aharonoff. On April 11, 2006, the third and final milestone payment of $20,000 was paid to Mr. Aharonoff
 
In connection with the agreement, Mr. Aharonoff agreed not to directly or indirectly agree or offer to sell, grant an option for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or dispose of the shares of our common stock acquired by him under the agreement until the earlier of: (a) two years from the respective issuance(s) of such shares; or (b) the date that holders (the "Holders") of certain Callable Secured Convertible Notes (the "Notes") and Stock Purchase Warrants (the "Warrants"), issued by us on September 10, 2004, no longer hold the Notes and the Warrants and no longer beneficially own any shares of our common stock issuable upon conversion or exercise of the Notes or the Warrants, without the prior written consent of such Holders of the Notes and the Warrants. The Holders agreed to waive any adjustment that otherwise would have been required to the conversion and exercise prices of the Notes and the Warrants due to the issuance of shares of common stock to Mr. Aharonoff.
 
VideoDome was a Los Angeles based company that provides a range of Media Management solutions through its flagship 5th generation ASP application, VideoDome Media Manager(R). VideoDome customers have direct access to their individual accounts, media inventory, customized media delivery method and style, as well as the ability to add, edit, delete, schedule and track streaming media from any Internet enabled browser. Some of VideoDome's clients include Kenneth Cole, L'Oreal Cosmetics, Redken, and Stanley Tools. VideoDome provides its media management application to these customers which allows them the ability to manage and publish video on their web sites. The VideoDome Publishing Platform is a database driven, web-based application that allows clients to upload, organize and publish streaming media through unified interface.
 
The most current version of VideoDome Media Manager is Media Manager 4.0, which offers VideoDome customers direct access to their individual accounts, media inventory, customized media delivery method and style, as well as the ability to add, edit, delete, schedule & track streaming media from any Internet enabled browser.
 
The features of Media Manager 4.0 include:
 
 
·
VideoDome Tracker(R) - Generate colorful user reports/statistics and find out what your viewing audience is experiencing.
     
 
·
VideoDome Scheduler(R) - Schedule when you would like certain media to be available on your web site.
     
 
·
VideoDome AutoSense(R) - AutoSense technology automatically takes the guess work out of the equation by detecting installed media player & available bandwidth across all media formats.
     
 
·
VideoDome Skin Wizard(R) - Create a compelling branded media player or video portal within minutes using our skin wizard system.
     
 
·
VideoDome Syndication Manager(R) - Powerful syndication module allows you to replicate then syndicate streaming content to your partners in a completely controlled environment.

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Since the acquisition of Videodome, we have made significant enhancements to the original Videodome software which has included the integration of ROO’s technology and the combined platform is now the primary video platform for ROO.
 
FACTORY 212 PTY LTD.
 
On October 28, 2005, we entered into an agreement with ROO Broadcasting Limited, a wholly owned subsidiary of the Company ("ROO Broadcasting"), and the shareholders of Factory 212 Pty Ltd. ("Factory212"), pursuant to which ROO Broadcasting acquired 51% of the outstanding ordinary shares of Factory212. Factory212 is an Australian based interactive marketing agency.
 
As consideration for the ordinary shares of Factory212, we issued 10,000 shares (the "Initial Shares") of common stock to the Factory212 shareholders. Subject to the conditions described below, we may issue additional shares ("Additional Shares") of common stock to the Factory212 shareholders, issuable after December 31, 2007, calculated as follows:
 
51% of [(1 * Factory212 Revenue) + (4 * Factory212 Earnings)]
 Average ROO Share Price
 
where: "Factory212 Revenue" means the billings less all media and third party supplier costs of Factory212 for the twelve month period ending December 31, 2007; "Factory212 Earnings" means the earnings of Factory212 before tax and after deduction of interest and all other expenses for the twelve month period ending December 31, 2007; and "Average ROO Share Price" means the average price of our common stock during the final five trading days of December 2007.
 
If we do not issue the maximum number of Additional Shares, ROO Media's 51% ownership of Factory212 will be reduced on a pro rata basis by the difference between the maximum number of Additional Shares and the actual number of Additional Shares issued. If we do not issue any Additional Shares, ROO Media will relinquish all of its 51% ownership of Factory212. However, if the Factory212 Earnings are greater than 15% of the Factory212 Revenue and the number of Additional Shares to be issued are less than 4.9% of the then current outstanding shares of our common, we must proceed with issuing the maximum number of Additional Shares in accordance with the above formula.
 
The acquisition of Factory212 was conditioned upon the parties entering into the Amendment described above under "Amendment to Reality Group Purchase Agreement." If we fail to meet our material obligations under the terms of the Amendment, then together with ROO Media, we agreed that the Factory212 shareholders may in their sole discretion require ROO Media to relinquish all of its ownership of Factory212. In such event, we agreed that the Factory 212 shareholders shall be entitled to retain ownership of their Initial Shares.
 
OVERVIEW OF OUR BUSINESS
 
We, through our operating subsidiaries, are a digital media company in the business of providing products and solutions that enable the broadcast of topical video content from our customers' Internet websites. This includes providing the technology and content required for video to be played on computers via the Internet as well as emerging broadcasting platforms such as set top boxes and wireless devices (i.e., mobile phones and PDAs). Our core activities include the aggregation of video content, media management, traditional and online advertising, hosting, and content delivery. We also operate a global network of individual destination portals under the brand ROO TV, that enables end users in different regions around the world to view video content over the Internet that is topical, informative, up to date, and specific to the region in which they live. In conjunction with our subsidiaries, we currently service websites based in Europe, Australia and North America. As of December 2006, our network of websites includes approximately 160 web sites based in the United States, Australia and the United Kingdom. An independent research report which tracks the video streams sent to users per month placed us as the 10th largest broadcaster of video in the world. Source: iBroadcast Stream report released November 21, 2005 prepared by AccuStream iMedia Research.
 
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HISTORY OF THE DEVELOPMENT OF OUR BUSINESS
 
Our consolidated financial statements include the accounts of ROO Group, Inc., its wholly owned subsidiary ROO Media Corporation, its wholly owned subsidiary Bickhams and its 50% owned subsidiary Reality Group. Included in the consolidation with ROO Media Corporation are ROO Media Corporation's wholly owned subsidiary ROO Media (Australia) Pty Ltd. and ROO Media (Australia) Pty Ltd.'s wholly owned subsidiary Undercover Media, its 100%-owned subsidiary ROO Media Europe Pty Ltd, its wholly owned subsidiary ROO Broadcasting Limited, its 51% owned subsidiary Factory212 Pty. Ltd. and its wholly owned subsidiary ROO TV Pty Ltd. Included in the consolidation with Bickhams is Bickhams' wholly owned subsidiary VideoDome, Inc. ROO Media Europe Pty Ltd. was 76% owned by ROO Media Corporation until January 27, 2006 when ROO Media Corporation purchased the remaining 24% of ROO Media Europe Pty Ltd. for $90,000. We provide topical video content, including news, business, entertainment, fashion, video games, movies, music, sport and travel video, and associated services for broadcasting video over the Internet to a global base of clients. ROO Media's delivery platform supports worldwide syndication and television-style advertising. During 2001 and 2002, ROO Media focused on developing and refining its products and solutions, and commenced the commercial selling of its solutions in late 2003. ROO Media developed a technology platform specifically designed to provide a cost effective, robust, and scaleable solution to manage and syndicate video content over the Internet.
 
Our media operations management and updating functions are partially based in Australia and partially in the United States and United Kingdom. We believe that our Australian presence is beneficial due to lower currency costs and because the time differences between the eastern and western hemispheres allow daily media content to be processed during the evening in the United States and the United Kingdom and during the daytime in Australia. As a result, we believe we have a strategic cost benefit over our competitors.
 
Our business plan is to develop a worldwide network of websites that utilize our technology and content to broadcast video from individual websites. The network of websites includes third party websites that license our technology and content as well as our own network of websites, which are branded as ROO TV. The network is designed to be similar to traditional satellite or cable networks that distribute content throughout the world, with the difference being it is broadcasted over the Internet rather than via television. Our technology platform allows access to over 5,000 videos that can be viewed on a daily basis by computer users. The video content available for viewing includes topical content such as news, business, entertainment, fashion, music, movies and travel. We update the video content and distribute the content to websites receiving our services on a daily basis. We generate revenue from fees paid by the websites for our content and technology services and, like traditional media companies, from TV style ads which play before the topical videos across our network of websites. We also generate revenue through the sale of online and traditional advertising.
 
OPERATIONS STRATEGY
 
Our operations strategy for the next twelve months is broken into the following core areas:
 
 
·
Expanding content database and developing new products based on our existing pool of video content for emerging markets such as wireless and set top boxes;
     
 
·
Increasing market penetration and growing market share and distribution in the United States, Europe, Asia and Australia;
     
 
·
Expanding the network of websites in which we provide content and technology by expanding the ROO branded network of websites to more countries, and activating new customers to our content solutions using our direct sales force and resellers of our products and services in markets in the United States, Australia, United Kingdom, Europe and Asia;
     
 
·
Acquiring commercially viable companies or businesses that have the potential for accelerating or enhancing our business model;
     
 
·
Investing in research and development of products, platform and technology to offer a wider range of video content and improved user experience for users viewing videos from our platform; and
     
 
·
Developing awareness and relationships with advertising agencies and advertisers of the benefits of advertising on our network of websites and traditional and creative online solutions.
 
The implementation of our operational strategies will depend on our capital and we cannot be sure that such operational strategies will be achieved. See "Item 6. Management's Discussion and Analysis or Plan of Operation" beginning on page 15 of this report.
 
39

 
SALES AND MARKETING
 
Our products and services are sold by our direct sales force and appointed resellers. Our syndication and video solutions products are sold by our direct sales force based in the United States, Australia and Europe, our online and traditional advertising is sold by our direct sales force and through appointed interactive online advertising agencies.
 
Our direct sales force targets the following market segments for our content syndication products: (1) media and newspaper chains; (2) Internet service providers; and (3) dedicated vertical websites such as entertainment websites that are potential purchasers of entertainment video content. Through our direct sales force and third party advertising agencies, we target potential advertisers to advertise on our network of websites. We manage our sales database through a customer relationship management system, which allows for access and tracking from any ROO Media sales staff connected to the Internet. Marketing of our products and services is done through traditional public relations, print media and web-based marketing.
 
TECHNOLOGY
 
Our proprietary technology platform and infrastructure is largely based in the United States and is designed to be accessed and maintained from satellite offices anywhere in the world via a Virtual Private Network (VPN) over the Internet. The technology platform has been specifically designed to provide a cost effective, robust, scaleable solution to manage and syndicate video content over the Internet. The platform architecture allows for the flexible use of third party software, hardware and internally developed applications. Components forming the platform are housed with various third party service providers located within the United States and Australia.
 
The key features of our technology platform include:
 
 
·
Full screen video viewing;
     
 
·
Viewing of all content via either a narrowband (Dial up) or broadband connection;
     
 
·
Platform supporting Real Networks and Microsoft Windows Media or Flash formats;
     
 
·
Global delivery and hosting allowing for video viewing throughout the world by anyone connected to the Internet;
     
 
·
Ability to program TV commercials to be played before selected videos on selected web sites;
     
 
·
Secure storage and protection of media files;
     
 
·
Full reporting on videos viewed by type, date, country, web site, etc.;
     
 
·
The ability to present the videos in players and templates which match the branding of the multiple web sites on which the content is syndicated;
     
 
·
Central technology platform allowing videos to be automatically updated across the multiple web sites in which they are displayed; and
     
 
·
Media Management solutions allowing or web sites to upload and manage there media.

INTELLECTUAL PROPERTY
 
We have obtained a service mark of the name "ROO" (Reg. No. 3095622) from the U.S. Patent and Trademark Office. We have applied for a trademark of the name "ROO" in both the European Union (European Community Application No. 004758488) and in Australia (Australian Trademark Application Serial No. 1110843). Both applications are pending.
 
Through our subsidiary, VideoDome.com Networks, Inc., we have the rights to a registered service mark of the name "VideoDome.com Network" (Reg. No. 2,214,202). This service mark was registered with the U.S. Patent and Trademark Office on December 29, 1998. We do not have any registered copyrights on any software and do not have the rights to any other registered trademarks or service marks. A portion of our software is licensed from third parties and a large portion is developed by our own team of developers. We rely upon confidentiality agreements signed by our employees, consultants and third parties to protect our intellectual property.
 
40

 
We depend on a portion of technology licensed to us by third parties and a portion owned and developed by us. We license technology from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. We anticipate that we will continue to license technology from third parties in the future. Although we do not believe that we are substantially dependent on any individual licensed technology, some of the software that we license from third parties could be difficult for us to replace. The effective implementation of our products depends upon the successful operation of third-party licensed products in conjunction with our products, and therefore any undetected errors in these licensed products could prevent the implementation of our products, impair the functionality of our products, delay new product introductions, and/or damage our reputation.
 
OUR PRODUCTS
 
Our products and services, including those of our subsidiaries, are broken into the following core areas:
 
ROO VIDEO SOLUTIONS. We utilize our expertise in video broadcasting over the Internet to build customized video solutions for specific customers or industry segments. Our platform has been designed to be flexible in accommodating various opportunities for activating video for broadcast over the Internet and accommodating emerging technologies such as wireless devices (i.e., mobile phones and PDAs) and set top boxes. The same platform, or components thereof, used by us to run our network of websites can be adapted to suit the individual needs of clients with specific objectives in mind. As our profile within the market segment increases, organizations have increasingly approached us to aid them in addressing a variety of individual Internet broadcasting requirements. An example is B & T Weekly, a Reed Business Information publication targeted to the advertising and marketing industry; we utilize our platform and solutions to provide a wide range of television commercials for the advertising industry, which can be viewed from the B & T website located at www.bandt.com.au.We also maintain a web site targeting wireless users at www.roomobile.com which allows wireless users with the Microsoft Windows Mobile operating system to access and view videos on news, business, entertainment and other topics via their wireless device.
 
ROO SYNDICATION OF LICENSED VIDEO CONTENT. We provide a turnkey solution for customers located throughout the world to activate licensed topical video content on their web sites. ROO Media supplies our wholesale clients with a cost-effective turnkey solution whereby the client receives the licensed video content it selects, such as news, business, music, fashion, entertainment, travel, etc., the technology to integrate the video into its website, daily management and updating of the content, and regular reporting on which content is being viewed. We generally receive a base fee per month from the client and a share of the advertising revenue generated on the client's website. Samples of current customers for this service include Verizon (http://surround.verizon.net/) in the United States, Financial Times and Financial Newspaper based in the United Kingdom (http://www.ft.com) and News Interactive a subsidiary of News Corp (http://video.news.com.au/) in Australia.
 
ROO'S ONLINE ADVERTISING NETWORK. Through our syndication clients, we have developed a network of web sites across which we can sell advertising inventory. Specifically, we have developed and implemented an advertising platform specifically designed to simultaneously provide advertisers with a targeted demographic and calculated success, and ROO Media, our content providers and our wholesale clients with a substantial and additional incremental revenue stream. The advertising includes traditional banner ads and television-style 15 second and 30 second commercials, which can be programmed to play before and after topical video clips that are most likely to be viewed by the advertisers' chosen demographic. The platform has also been designed to allow for two to three minute advertorials to be included on a wholesale client's website, or as a standalone clip within certain content categories of our content bank. Advertising inventory across our network of web sites is sold by our direct sales force and through appointed interactive online advertising agents. Revenue is generated for us every time an advertising clip is viewed. Our syndication clients can receive a percentage of the advertising revenue generated on their websites by our online advertising.
 
Our platform provides the ability to:
 
 
·
Program an advertisement to run only on selected web sites in selected countries;
     
 
·
Program a commercial to run a specific amount of times or between a selected range of dates;
     
 
·
Program a commercial to run within a selected content category; and
     
 
·
Provide reports on how many times the advertisement was viewed.
 
41

 
Recent advertisers over our network of websites utilizing our in-stream advertising have included Microsoft, Ford, American Express, Honda, Hyundai, Target, Proctor & Gamble and Pfizer.
 
Through our partially owned subsidiaries Reality Group and Factory212 based in Australia, we also offer a range of specialized online and offline marketing solutions
 
INDUSTRY
 
We focus on providing technology and content solutions to the emerging and growing segment of broadcasting video over the Internet and emerging broadcasting platforms such as wireless and set top boxes. Through technology advancements and the expansion of broadband services worldwide, the Internet now enables the viewing of video from a computer connected to the Internet. This creates a fundamental change in the way people can view media and transforms the Internet into a broadcasting platform similar to television and radio platforms. Internet access and audio and video use over the Internet have grown substantially over the past twelve months as broadband access by end users expands.
 
COMPETITION
 
The provisioning and streaming of digital media content over the Internet is rapidly becoming a competitive industry. The key barriers to new firms to enter and compete against existing companies within the digital media segment are (1) the timeframe and costs to develop a commercially robust, feature rich media delivery platform, and (2) the time involved to build a digital media data base of licensed topic videos. While there are only a few industry participants similar to us that provide a full suite of associated products and services, there are a number of traditional content syndicators who have entered the industry by providing their own content for streaming over their own portals. For example, Disney, Time Warner and CNN all provide access to their own content in digital format over their own destination Internet portals. There are also a number of smaller operations that provide wholesale syndication services such as The FeedRoom www.feedroom.com),and Brightcove (www.brightcove.com), which provides a range of online broadcasting solutions. Other competitors on select products of ROO Media include: Real Networks, Inc., a global provider of network-delivered digital media service and the technology that enables digital media creation, distribution and consumption; and Loudeye Corporation, a service provider facilitating the use of digital media for live and on-demand applications for enterprise communication, marketing and entertainment. We believe that as the market segment continues to grow, new competitors will enter the market and compete directly with us. We compete with these firms and emerging competitors by offering competitive pricing, unique products, flexible business models for our customers to generate revenue, and continually developing and adding new functionality to our media management platform. We also complete by continuing to expand our media database and the amount of content categories and videos available.
 
GOVERNMENT REGULATION
 
We are subject to risks associated with governmental regulation and legal uncertainties. Few existing laws or regulations specifically apply to the Internet, other than laws and regulations generally applicable to businesses. Many laws and regulations, however, are pending and may be adopted in the United States, individual states and local jurisdictions and other countries with respect to the Internet. These laws may relate to many areas that impact our business, including content issues (such as obscenity, indecency and defamation), caching of content by server products, sweepstakes, promotions, and the convergence of traditional communication services with Internet communications, including the future availability of broadband transmission capability and wireless networks. These types of regulations are likely to differ between countries and other political and geographic divisions. Other countries and political organizations are likely to impose or favor more and different regulation than that which has been proposed in the United States, thus furthering the complexity of regulation. In addition, state and local governments may impose regulations in addition to, inconsistent with, or stricter than federal regulations. The adoption of such laws or regulations, and uncertainties associated with their validity, interpretation, applicability and enforcement, may affect the available distribution channels for and costs associated with our products and services, and may affect the growth of the Internet. Such laws or regulations may harm our business. Our products and services may also become subject to investigation and regulation of foreign data protection authorities, including those in the European Union. Such activities could result in additional product and distribution costs for us in order to comply with such regulation.
 
42

 
There is uncertainty regarding how existing laws governing issues such as illegal or obscene content and retransmission of media apply to the Internet. The vast majority of such laws were adopted before the advent of the Internet and related technologies and do not address the unique issues associated with the Internet and related technologies. Most of the laws that relate to the Internet have not yet been interpreted. In addition to potential legislation from local, state and federal governments, labor guild agreements and other laws and regulations that impose fees, royalties or unanticipated payments regarding the distribution of media over the Internet may directly or indirectly affect our business. While we and our customers may be directly affected by such agreements, we are not a party to such agreements and have little ability to influence the degree such agreements favor or disfavor Internet distribution or our business models.
 
The Child Online Protection Act and the Child Online Privacy Protection Act impose civil and criminal penalties on persons distributing material harmful to minors (e.g., obscene material) over the Internet to persons under the age of 17, or collecting personal information from children under the age of 13. We do not knowingly distribute harmful materials to minors or collect personal information from children under the age of 13. The manner in which these Acts may be interpreted and enforced cannot be fully determined, and future legislation similar to these Acts could subject us to potential liability if we were deemed to be non-compliant with such rules and regulations, which in turn could harm our business.
 
RESEARCH AND DEVELOPMENT
 
We continue to pursue opportunities to improve and expand our products and services and have dedicated resources which continue to review and enhance our technology platform and the products and solutions we offer. Currently, research and development is conducted internally as well as through outsourcing agreements. We plan to consider opportunities to expand our current content categories to offer specific lifestyle, children's content, sport, science and educational content. We also plan to explore opportunities to further enhance our distribution and technological infrastructures to maintain our competitive position. Furthermore, we are planning to launch a new upgraded version of our platform offering improved user features and to improve operational process and costs for maintaining and uploading our database on a daily basis. We cannot assure you, however, that we will achieve our research and development goals.
 
EMPLOYEES
 
As of December 13, 2006, we had 124 full time employees and 4 part time employees, based in Australia, Europe and the United States. We consider our relations with our employees to be good.


We have two offices in the United States which are in New York, New York and Los Angeles, California, two offices in South Melbourne, Australia and an office in London, United Kingdom.

Our principal office and operations are located at 228 East 45th Street 8th Floor New York, NY 10017. These premises consist of 9,000 square feet of office space. The related sublease agreement expires November 29, 2008. Rent on the premises is currently $17,587 per month until December 31, 2006, and is scheduled to increase each year as follows: from January 1, 2007 to December 31, 2007, $17,896 per month; and from January 1, 2008 to November 29, 2008, $19,207 per month.

Our Los Angeles office is located at 10 Universal City Plaza, Universal City, CA 91608. These premises consist of 6,694 square feet of office space. The related sublease agreement expires May 31, 2010. Rent on the premises is $19,413 per month until May 31, 2007 and is scheduled as follows: from Jun 1, 2007 to May 31, 2009, $19,078 per month; and from June 1, 2009 to May 31, 2010, $18,743 per month.

43

 
Our Australian office is located at 210 Albert Road, South Melbourne 3205, Victoria, Australia. These premises consist of 18,654 square feet of office space. The lease period commences July 15, 2006 and expires on July 14, 2011. Rent on these premises is (Australia dollars) 31,050 per month until July 14, 2007, and is scheduled as follows: from July 15, 2007 to July 14, 2008, (Australia dollars) 32,292, from July 15, 2008 to July 14, 2009, (Australia dollars) 33,583, from July 15, 2009 to July 14, 2010, (Australia dollars) 34,927, from July 15, 2010 to July 14, 2011, (Australia dollars) 36,324.

Our London office is a serviced office at 131-151 Great Tichfield Street London W1W5BB. Rent for the office is (pound) 4,250 per month. This lease is on a month-to-month basis.


We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.


The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each.

Name 
   
 Age
   
 Position
 
Robert Petty
   
42
   
Chief Executive Officer, President and Chairman of the Board of Directors
 
Lou Kerner
   
45
   
Chief Financial Officer
 
Robin Smyth
   
53
   
Executive Director and Director
 
Douglas M. Chertok
   
38
   
Director
 
 
ROBERT PETTY. Mr. Petty was appointed Chief Executive Officer, President and Chairman of the Board of Directors on December 3, 2003, the effective date of the merger with ROO Media Corporation. Mr. Petty has also served as the President, Chief Executive Officer and Chairman of the Board of Directors of ROO Media Corporation since May 2001. From December 2002 to June 30, 2003, Mr. Petty was a Director of A. Cohen & Co, Plc. From 1999 to 2002, Mr. Petty worked in New York in various positions, including Chairman and Chief Executive Officer of Avenue Group, Inc. (AVNU) (formerly I.T. Technology Inc.) and President of VideoDome.com Networks, Inc, a middleware streaming media service provider. From 1997 to 1999, Mr. Petty was Manager of Electronic Business Services for e-commerce products for Telstra Corp. Mr. Petty is also on the Board of Directors of Reality Group Pty Ltd, Undercover Media Pty Ltd, Petty Consulting Inc., ROO Media (Australia) Pty Ltd, ROO Media Europe Ltd, Bickhams Media Inc, VideoDome.com Networks Inc, BAS Digital Pty Ltd, ROO Broadcasting Ltd, Factory 212 Pty Ltd and ROO TV Pty Ltd.

LOU KERNER. Mr. Kerner was appointed as Chief Financial Officer on December 4, 2006. Mr. Kerner served as President and Chief Operating Officer of Bolt Media from May 2003 through August 2006, where he was responsible for day-to-day management of the corporation including strategy, finance, sales, marketing and business development. Prior to Bolt Mr. Kerner was as an equity analyst at Mark Asset Management from April 2002 through August 2002 where he followed media companies. From Freburary 2000-February 2002, Mr. Kerner was Chief Executive Officer of The .tv Corporation, where he built a successful, global organization to commercialize the top level domain .tv. The .tv Corporation was acquired by Verisign. Mr. Kerner holds a Bachelor of Arts degree from U.C.L.A and an MBA from Stanford University.
 
ROBIN SMYTH. Mr. Smyth currently serves as Executive Director of the Company. Mr. Smyth served as our Chief Financial Officer from December 2003 through December 2006. Mr. Smyth was appointed as a Director on December 3, 2003, the effective date of the merger with ROO Media Corporation. Mr. Smyth became involved with ROO Media Corporation in 2002 and was appointed a Director in 2003. Since 1998 Mr. Smyth was a partner at Infinity International, a consulting and IT recruitment operation. During the period from 1990 to 1998 Mr. Smyth worked for three years as EVP of Computer Consultants International in the U.S. and for five years in London as CEO of Computer Consultants International's European operations. Mr. Smyth was Secretary and a Director of the All-States group of companies involved in merchant banking operations, where he was responsible for corporate banking activities. Mr. Smyth is also on the Board of Directors of Reality Group Pty Ltd, Undercover Media Pty Ltd ROO Media (Australia) Pty Ltd, ROO Media Europe Ltd, Bickhams Media Inc, ROO Broadcasting Ltd, Factory 212 Pty Ltd, ROO TV Pty Ltd, VideoDome.com Networks Inc, and Corporate Advice Pty Ltd.
 
44

 
DOUGLAS M. CHERTOK. Mr. Chertok was appointed as a Director on July 13, 2003. From March 2000 through February 2006, Mr. Chertok served in various capacities with Hudson Management Associates LLC, a venture capital firm based in New York City. Since March 2006, Mr. Chertok has served as a General Partner of Archer Martin Ventures, a venture capital and advisory firm with offices in New York City and San Francisco.  Mr. Chertok also serves as a director of Daylife, Inc. and NMD Interactive, Inc.  Mr. Chertok holds a Bachelor of Science degree from Cornell University and Juris Doctorate (J.D) from New York University.
 
BOARD COMPOSITION
 
At each annual meeting of our stockholders, all of our directors are elected to serve from the time of election and qualification until the next annual meeting of stockholders following election. The exact number of directors is to be determined from time to time by resolution of the board of directors.
 
Each officer is elected by, and serves at the discretion of the board of directors. Each of our officers and employee directors devotes his full time to our affairs.
 
AUDIT COMMITTEE FINANCIAL EXPERT
 
We do not have an audit committee financial expert as that term is defined in Item 401 of Regulation S-B. We have not been able to identify a suitable nominee to serve as an audit committee financial expert.



The following table sets forth information concerning the annual and long-term compensation of our Chief Executive Officer and the other named executive officer, for services as executive officers for the last three fiscal years.

           
Long-Term
Compensation
 
       
Annual Compensation
 
Awards
 
Payouts
 
 
 
 
Name and
Principal Position
 
 
 
Year
 
 
 
 
 
Salary ($)
 
 
 
 
 
Bonus ($)
 
 
Other
Annual
Compen-
sation ($)
 
Restricted Stock Award(s) ($)
 
Securities Under-lying Options/ SARs (#)
 
 
 
 
LTIP
Payouts ($)
 
All
Other
Compen-
sation ($)
 
Robert Petty (1),
   
2005
 
$
253,846
   
0
   
0
 
$
600,000 (3
)
 
0
   
0
   
0
 
Chief Executive Officer,
   
2004
 
$
192,501
   
0
   
0
   
0
   
0
   
0
   
0
 
President and Chairman of
   
2003
 
$
10,000
   
0
   
0
   
0
   
0
   
0
   
0
 
the Board
                                                 
                                                   
Robin Smyth (2),
   
2005
 
$
152,307
   
0
 
$
5,000
 
$
150,000 (4
)
 
0
   
0
   
0
 
Chief Financial Officer,
   
2004
 
$
101,619
   
0
   
0
   
0
   
0
   
0
   
0
 
Secretary, Treasurer,
   
2003
 
$
5,000
   
0
   
0
   
0
   
0
   
0
   
0
 
Principal Accounting Officer
                                                 
and Director
                                                 

 
(1)
Mr. Petty became our Chief Executive Officer, President and Chairman on December 3, 2003.
 
(2)
Mr. Smyth became our Chief Financial Officer, Secretary, Treasurer, Principal Accounting Officer and a Director on December 3, 2003.
 
(3)
On March 17, 2005, we issued 6,000,000 shares of Series A Preferred Stock to Robert Petty as a performance bonus. These shares have been valued at the equivalent of common shares valued as at the issue date.
 
(4)
On March 17, 2005, we issued 1,500,000 shares of Series A Preferred Stock to Robin Smyth as a performance bonus. These shares have been valued at the equivalent of common shares valued as at the issue date

45


Options Grant Table

The following table sets forth information with respect to the named executive officers concerning the grant of stock options during the fiscal year ended December 31, 2005. We did not have during such fiscal year, and currently do not have, any plans providing for the grant of stock appreciation rights ("SARs").

Option/SAR Grants in Last Fiscal Year
 
Individual Grants
 
   
(a) 
 
(b) 
 
(c) 
 
(d) 
 
(e) 
 
                   
Name
 
Number of Securities Underlying Options/ SARs Granted (#)
 
% of Total Options/ SARs Granted to Employees in Fiscal Year
 
 
Exercise or Base Price ($/Sh)
 
 
Expiration Date
 
Robert Petty
   
520,000
   
29.2
%
$
2.00
   
8/23/2007
 
Robin Smyth
   
260,000
   
14.6
%
$
2.00
   
8/23/2007
 

Aggregate Option Exercises in Last Fiscal Year

No options were exercised by the named executive officers during the most recent fiscal year.

Compensation of Directors

In addition to Robert Petty, pursuant to his employment agreement described below, Douglas Chertok receives a quarterly cash compensation of $20,000 for service as a Director. All directors are reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to us.

Employment Agreements
 
On April 1, 2004, we entered into an employment agreement with Robert Petty. Under the agreement, Mr. Petty agreed to serve as our President, Chief Executive Officer and Chairman of our Board of Directors. The expiration date of the agreement is March 31, 2006, but will automatically be extended for two additional years unless at least 90 days prior to such time either party notifies the other party that the term will not be extended. Mr. Petty's base salary under the agreement is $200,000 annually and will increase 10% each year. Mr. Petty's base salary will also be reviewed at least annually for merit increases and may, by action and in the discretion of the Board, be increased at any time or from time to time. Mr. Petty is entitled to receive bonus payments or incentive compensation as may be determined by our Board of Directors. In addition, Mr. Petty was granted an incentive stock option to purchase 120,000 shares of our common stock, which is exercisable at $2.00 per share and expires on August 23, 2007, as amended.
 
On November 1, 2004, we entered into an employment agreement with Robert Petty that supersedes the April 1, 2004 employment agreement except as it relates to the options that were issued to Mr. Petty. This agreement is also for the employment of Mr. Petty as our President, Chief Executive Officer and Chairman of our Board of Directors. The expiration of the agreement is October 31, 2007, but will automatically be extended for two additional years unless at least 90 days prior to such time either party notifies the other party that the term will not be extended. Mr. Petty's base salary under the agreement is $250,000 annually and will increase 10% each year. Mr. Petty's base salary will also be reviewed against milestones set by our Board of Directors, and be increased in line with these milestones at any time or from time to time. The agreement provides that we will provide Mr. Petty with the use of a motor vehicle and we will contribute 10% of Mr. Petty's base salary to a 401K or similar plan. In addition, Mr. Petty is entitled to receive bonus payments or incentive compensation as may be determined by our Board of Directors.
 
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On April 1, 2004, we entered into an employment agreement with Robin Smyth. Under the agreement, Mr. Smyth agreed to serve as our Chief Financial Officer. The expiration date of the agreement is March 31, 2006, but will automatically be extended for two additional years unless at least 90 days prior to such time either party notifies the other party that the term will not be extended. Mr. Smyth's base salary under the agreement is $120,000 annually and will increase 10% each year. Mr. Smyth's base salary will also be reviewed at least annually for merit increases and may, by action and in the discretion of the Board, be increased at any time or from time to time. Mr. Smyth is entitled to receive bonus payments or incentive compensation as may be determined by our Board of Directors. In addition, Mr. Smyth was granted an incentive stock option to purchase 60,000 shares of our common stock, which is exercisable at $2.00 per share and expires on August 23, 2007, as amended.
 
On November 1, 2004, we entered into an employment agreement with Robin Smyth that supersedes the April 1, 2004 employment agreement except as it relates to the options that were issued to Mr. Smyth. This agreement is also for the employment of Mr. Smyth as our Chief Financial Officer. The expiration of the agreement is October 31, 2007, but will automatically be extended for two additional years unless at least 90 days prior to such time either party notifies the other party that the term will not be extended. Mr. Smyth's base salary under the agreement is $150,000 annually and will increase 10% each year. Mr. Smyth's base salary will also be reviewed against milestones set by our Board of Directors, and be increased in line with these milestones at any time or from time to time. The agreement provides that we will provide Mr. Smyth with the use of a motor vehicle and we will contribute 10% of Mr. Smyth's base salary to a 401K or similar plan. In addition, Mr. Smyth is entitled to receive bonus payments or incentive compensation as may be determined by our Board of Directors.

On December 4, 2006, we entered into an employment agreement with Mr. Kerner. The agreement may be terminated by either party upon two weeks written notice. Mr. Kerner’s base salary under the agreement is $3,846.15 per week. Mr. Kerner’s base salary will be reviewed at least annually and the Company may determine at such time to vary the base salary. Pursuant to the terms of the agreement, Mr. Kerner shall receive a $25,000 bonus per calendar quarter, with the first quarter’s bonus paid upon execution of the agreement. In addition, Mr. Kerner was granted a four year option to purchase 500,000 shares of ROO Media Corporation, the Company’s wholly owned subsidiary, which is exercisable at $2.20 per share.

 
CONSULTING AGREEMENT WITH OUR CHIEF EXECUTIVE OFFICER/DIRECTOR
 
ROO Media entered into a consulting agreement with Petty Consulting, Inc. on August 1, 2001, whereby Petty Consulting, Inc. made Robert Petty available to ROO Media to serve as its Chairman, President and Chief Executive Officer. The agreement expired on August 1, 2004. Mr. Petty is the President of Petty Consulting, Inc. Mr. Petty was paid $10,000 per month for his services to ROO Media pursuant to the consulting agreement. In April 2004 this agreement was terminated and Robert Petty entered into an employment agreement directly with us. Our management believes that this agreement was on terms at least as favorable as could have been obtained from an unrelated third party.
 
LOANS FROM OUR CHIEF EXECUTIVE OFFICER/DIRECTOR
 
On January 7, 2003, ROO Media entered into a new loan agreement with Mr. Petty to replace the loan agreement entered into with Mr. Petty dated July 29, 2001. The interest on the loan is 10% per annum and the outstanding balance as of December 31, 2003 was $514,164. Mr. Petty has agreed that no demand for payment will be made to the company over the following 12 months and any principle repayment during any month above $20,000 will require board approval. The loan is secured by all of the assets of ROO Media. Our management believes that this loan is on terms at least as favorable as could have been obtained from an unrelated third party.
 
47

 
We have periodically received cash advances from our Chief Executive Officer and director, Robert Petty. These amounts are recorded as a loan payable. The interest on the loan is 10% per annum and the outstanding balance as of December 31, 2005 was $0. Interest expense for this loan amounts to $81 and $51 for the twelve months ended December 31, 2005 and 2004, respectively.
 
On May 18, 2005, we entered into a note purchase agreement with our Chief Executive Officer and director, Robert Petty. As consideration for a loan of $600,000, we incurred a debt payable to Mr. Petty in the amount of $600,000. In connection with this loan, we paid transaction fees totaling $92,500, which includes a $60,000 placement agent fee in connection with the sale by Mr. Petty of $600,000 principal amount of secured convertible promissory notes (described below) and $32,500 in legal fees in connection with such transaction. As evidence of the $600,000 debt and a prior existing $500,000 debt payable to Mr. Petty, we issued Mr. Petty a promissory note in the principal amount of $1,100,000. The principal sum of $1,100,000 plus interest at the rate of 10% per annum calculated beginning June 1, 2005 was due to be repaid on December 31, 2005. Our obligations under the promissory note were secured by a subordinated security interest in all of our assets. In October 2005, Mr. Petty converted $600,000 of the $1,100,000 principal amount promissory note into shares of our common stock at a price of $1.50 per share.
 
In connection with the May 18, 2005 loan from Mr. Petty, Mr. Petty personally sold an aggregate of $600,000 principal amount of secured convertible promissory notes to certain investors. The secured convertible promissory notes were convertible into common stock held by Mr. Petty at a price of $1.25 per share, as adjusted. Mr. Petty's obligations under the secured convertible promissory notes were secured by a security interest in the $1,100,000 principal amount promissory note payable by us to Mr. Petty. The secured convertible promissory notes bear interest at a rate of 8% per annum.
 
As partial consideration for the loan from Mr. Petty, we entered into a registration rights agreement, pursuant to which we agreed to prepare and file a registration statement providing for the resale of the shares of common stock issuable upon conversion of the secured convertible promissory notes, including shares of common stock that may be issued as interest payments under the secured convertible promissory notes.
 
In connection with Mr. Petty's sale of the $600,000 principal amount secured convertible promissory notes Mr. Petty was personally obligated to issue warrants exercisable into shares of ROO Group, Inc. common stock owned by Mr. Petty to placement agents. On August 23, 2005 we assumed the liability for such warrants. This resulted in the issuance by us of warrants to purchase 48,000 shares of our common stock exercisable for five years with an exercise price of $1.25 per share.
 
ROO MEDIA
 
Pursuant to the terms of an Agreement and Plan of Merger, dated December 2, 2003, between Virilitec, VRLT Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Virilitec, ROO Media, and Jacob Roth and Bella Roth, each an individual, ROO Media entered into an agreement to pay within 90 days after December 3, 2003, the effective date of the Merger, Virilitec's $62,500 debt to Jacob Roth, Virilitec's former Chief Executive Officer. The obligation to pay such debt is secured by the pledge of the 72,000,000 shares of the Virilitec Common Stock issued to Robert Petty, the Chief Executive Officer of ROO Media, after the merger. Our management believes that this agreement was on terms at least as favorable as could have been obtained from an unrelated third party. The final payment on this debt was made on May 10, 2004.
 
BICKHAMS MEDIA, INC.
 
On September 10, 2004, we entered into an agreement to purchase all of the outstanding shares of common stock of Bickhams Media, Inc. from Avenue Group, Inc. Avenue Group is a founding shareholder of ROO Group, Inc. and as of September 10, 2004 owned over 20% of our outstanding common stock. Also, in connection with the purchase of Bickhams Media, we agreed to guaranty all of the obligations of VideoDome.com Networks, Inc. under a promissory note of VideoDome that was issued to Avenue Group in October 2003 in the principal amount of $290,000. Our management believes that the terms of this transaction were at least as favorable as could have been obtained from an unrelated third party.
 
48

 
SERIES A PREFERRED STOCK
 
On March 17, 2005, we issued 6,000,000 shares of Series A Preferred Stock to our Chief Executive Officer and director, Robert Petty, and 1,500,000 shares of Series A Preferred Stock to our Chief Financial Officer and director, Robin Smyth. These shares have a combined valuation of $750,000. These shares were issued as a performance bonus to Messrs. Petty and Smyth for, among other things, their role in helping expand and grow our business operations.



The following table sets forth information regarding the beneficial ownership of our common stock as of December 14, 2006. The information in this table provides the ownership information for: each person known by us to be the beneficial owner of more than 5% of our common stock; each of our directors; each of our executive officers; and our executive officers and directors as a group.

Unless otherwise indicated, the persons named in the table below have sole voting and investment power with respect to the number of shares indicated as beneficially owned by them. Furthermore, unless otherwise indicated, the address of the beneficial is c/o ROO Group, Inc., 228 East 45th Street, 8th Floor, New York, NY 10017.

Name and Address
of Beneficial Owner
 
Common Stock
Beneficially Owned (1)
 
Percentage of
Common Stock (1)
 
Series A Preferred Stock Beneficially Owned (2)
 
Percentage of Series A Preferred Stock
 
Percentage of Total Vote (1) (2)
 
Robert Petty
   
2,147,774(3
)
 
8.24
%
 
6,000,000
   
60
%
 
49.29
%
                                 
Robin Smyth
   
386,387(4
)
 
1.48
%
 
1,500,000
   
15
%
 
12.20
%
                                 
Douglas Chertok
   
58,335 (5
)
 
< 1
%
             
< 1
%
                                 
Stephen Quinn
   
237,506 (6
)
 
< 1
%
 
500,000
   
5
%
 
4.15
%
                                 
Lou Kerner
   
0
   
0
   
0
   
0
   
0
 
                                 
Cobble Creek Consulting, Inc.
                               
445 Central Ave.
                               
Cedarhurst, NY 11516
   
40,000(7
)
 
< 1
%
 
1,000,000
   
10
%
 
7.96
%
                                 
Rubin Irrevocable Family Trust
                               
25 Highland Blvd.
                               
Dix Hills, NY 11746
   
60,000(8
)
 
< 1
%
 
1,000,000
   
10
%
 
7.98
%
                                 
Witches Rock Portfolio Ltd.
                               
c/o CITCO
                               
Kaya Flamboyan 9
                               
P.O. Box 4774
                               
Curacao, Netherlands Antilles
   
3,376,586(9
)
 
12.96
%
 
0
   
0
   
2.68
%
                                 
Ashford Capital Partners, L.P
                               
One Walkers Mill Rd.
                               
Wilmington, DE 19807
   
2,012,821(10
)
 
7.58
%
 
0
   
0
%
 
1.60
%
                                 
                                 
All Directors and Executive Officers as a Group (3 persons)
   
2,592,496
   
9.94
%
 
7,500,000
   
75
%
 
61.54
%
 
49

 
 
(1)
Applicable percentage ownership is based on 26,074,813 shares of common stock outstanding as of December 13, 2006, together with securities exercisable or convertible into shares of common stock within 60 days of December 13, 2006 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of December 13, 2006 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
 
(2)
Holders of Series A Preferred Stock are entitled to vote on all matters submitted to shareholders of the Company and are entitled to ten votes for each share of Series A Preferred Stock owned. Holders of shares of Series A Preferred Stock vote together with the holders of common stock on all matters and do not vote as a separate class. As of December 13, 2006 there were 10,000,000 outstanding shares of Series A Preferred Stock.
 
(3)
Represents: (a) 1,360,000 shares of common stock; (b) 120,000 shares of common stock issuable upon the exercise of vested stock options with an exercise price of $2.00 per share and an expiration date of August 23, 2007; (c) 400,000 shares of common stock issuable upon the exercise of stock options of which 377,774 will be vested within the next 60 days with an exercise price of $2.00 per share and an expiration date of August 23, 2007; (d) 600,000 share of common stock issuable upon the exercise of stock options of which 50,000 will be vested within the next 60 days with an exercise price of $2.20 per share and an expiration date of November 16, 2010; and (e) 240,000 shares of common stock issuable upon the conversion of outstanding shares of Series A Preferred Stock.
 
(4)
Represents: (a) 32,000 shares of common stock owned directly by Mr. Smyth; (b) 8,000 shares of common stock owned indirectly through the Smyth Family Superannuation Fund; (c) 60,000 shares of common stock issuable upon the exercise of vested stock options with an exercise price of $2.00 per share and an expiration date of August 23, 2007; (d) 200,000 shares of common stock issuable upon the exercise of stock options of which 188,887 will be vested within the next 60 days with an exercise price of $2.00 per share and an expiration date of August 23, 2007; (e) 450,000 share of common stock issuable upon the exercise of stock options of which 37,500 will be vested within the next 60 days with an exercise price of $2.20 per share and an expiration date of November 16, 2010; and (f) 60,000 shares of common stock issuable upon the conversion of outstanding shares of Series A Preferred Stock.
 
(5)
Represents (a) 100,000 shares of common stock issuable upon the exercise of stock options of which 29,169 will be vested within the next 60 days with an exercise price of $2.50 and an expiration date of June 15, 2008; and (b) 350,000 share of common stock issuable upon the exercise of stock options of which 29,166 will be vested within the next 60 days with an exercise price of $2.20 and an expiration date of November 16, 2010.
 
(6)
Represents (a) 100,000 shares of common stock issuable upon the exercise of stock options of which 45,837 will be vested within the next 60 days with and exercise price of $2.45 and an expiration date of February 15, 2010; (b) 400,000 shares of common stock issuable upon the exercise of stock options of which 150,003 will be vested within the next 60 days with and exercise price of $3.00 and an expiration date of May 1, 2010; (c) 500,000 shares of common stock issuable upon the exercise of stock options of which 41,666 will be vested within the next 60 days with and exercise price of $2.20 and an expiration date of November 16, 2010; and (d) 20,000 shares of common stock issuable upon the conversion of outstanding shares of Series A Preferred Stock.
 
(7)
Represents 40,000 shares of common stock issuable upon the conversion of outstanding shares of Series A Preferred Stock.
 
(8)
Represents: (a) 20,000 shares of common stock; and (b) 40,000 shares of common stock issuable upon the conversion of outstanding shares of Series A Preferred Stock.
 
(9)
As reported in a Schedule 13G filed with the Securities and Exchange Commission on November 22, 2006, Witches Rock Portfolio, Ltd. directly owns 2,597,374 and 779,212 warrants to purchase common stock of the Company. Tudor Investment Corporation provides investment advisory services to Witches Rock Portfolio and may be deemed to beneficially own the securities held by Witches Rock Portfolio, Ltd. In addition, as the controlling shareholder of Tudor Investment Corporation and the indirect controlling shareholder of Tudor Proprietary Trading, L.L.C., Paul Tudor Jones, II may be deemed to be the beneficial owner of the shares of the Company held by Witches Portfolio, Ltd. and Tudor Proprietary Trading, L.L.C. Tudor Proprietary Trading, L.L.C. owns 226,054 shares and 67,816 warrants to purchase shares of the Company’s common stock. Tudor Investment Corporation and Mr. Jones disclaims beneficial ownership of the securities held by Witches Rock Portfolio, Ltd.
 
(10)
Represents (a) 1,548,324 shares of common stock purchased in our November 2006 financing; and (b) 464,497 shares of common stock issuable upon exercise of warrants with an exercise price of $3.00 per share with an expiration date of November 16, 2011 purchased pursuant to our November 2006 financing. Theodore H. Ashford, President of Ashcap. Corp., the General Partner of Ashford Capital Partners, L.P. has voting and dispositive control over the securities held by Ashford Capital Partners, L.P.

50



The following description of our capital stock is a summary and is qualified in its entirety by the provisions of our Articles of Incorporation, with amendments, all of which have been filed as exhibits to our registration statement of which this prospectus is a part.

Dividend Policy

We have not declared any dividends to date. We have no present intention of paying any cash dividends on our common stock in the foreseeable future, as we intend