10QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

^{______________}

FORM 10-QSB

^{______________}

ý  QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

¨  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from: ____________ to ____________

Commission File Number  0-15949

^{______________}

BROADCASTER, INC.

(Exact name of small business issuer as specified in its charter)

______________

CALIFORNIA	94-2862863
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

9201 Oakdale Avenue, Suite 200, Chatsworth, California 91311

(Address of principal executive offices)

(818) 206-9274

(Issuer’s telephone number)

International Microcomputer Software, Inc.

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No ¨

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ¨  No ý

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨  No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

As of November 16, 2006, 64,725,529 shares of the issuer’s common stock, no par value, were outstanding.

Transitional Small Business Disclosure Format (check one): Yes ¨  No ý

BROADCASTER, INC.

AND SUBSIDIARIES

Table of Contents

PART I – FINANCIAL INFORMATION	3
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	3
CONDENSED CONSOLIDATED BALANCE SHEETS	3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS)	4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY	5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3 - CONTROLS AND PROCEDURES	27
PART II- OTHER INFORMATION	28
ITEM 1 - LEGAL PROCEEDINGS	28
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	28
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES	28
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	28
ITEM 5 - OTHER INFORMATION	29
ITEM 6 - EXHIBITS
SIGNATURES	30
INDEX TO EXHIBITS

2

PART I – FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BROADCASTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	September 30, 2006			June 30, 2006
ASSETS	Unaudited
Current assets:
Cash and cash equivalents	$	12,926		$	14,107
Receivables, less allowances for doubtful accounts, discounts and returns of $0 as of  September 30, 2006 and $0 as of June 30, 2006.		943			254
Notes Receivables		101			1,604
Receivables, other		—			175
Other current assets		599			420
Assets related to discontinued operations		131			181
Total current assets		14,700			16,741
Fixed assets, net		266			306
Intangible assets
Goodwill		30,206			30,198
Other intangible assets, net		19,772			18,700
Total intangible assets		49,978			48,898
Total assets	$	64,944		$	65,945
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short term debt		51			52
Short term debt – related party		1,725			1,725
Trade accounts payable		1,466			1,928
Accrued and other liabilities		1,644			1,846
Liabilities related to discontinued operations		70			89
Deferred revenues		533			674
Total current liabilities		5,489			6,314
Long-term debt and other obligations		181			178
Unearned contract fees		108			122
Deferred Tax		7,001			7,180
Total liabilities		12,779			13,794
Shareholders’ equity
Common stock, no par value; 300,000,000 authorized; 64,576,109 issued and outstanding as of September 30, 2006 and 63,124,518 issued and outstanding as of June 30, 2006.		77,990			76,304
Accumulated deficit		(26,172	)		(24,483	)
Accumulated other comprehensive income (loss)		347			330
Total shareholders’ equity		52,165			52,151
Total liabilities and shareholders’ equity	$	64,944		$	65,945

See Notes to Condensed Consolidated Financial Statements

3

BROADCASTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE INCOME / (LOSS)

(In thousands, except per share amounts)

(Unaudited)

	Three months ended September 30,
	2006			2005
Net revenues	$	4,635		$	1,717
Product costs		1,833			674
Gross margin		2,802			1,043
Costs and expenses
Sales and marketing		2,135			646
General and administrative		2,558			757
Research and development		71			37
Total operating expenses		4,764			1,440
Operating loss		(1,962	)		(397	)
Other income and (expense)
Interest and other, net		98			(3	)
Loss before income tax		(1,864	)		(400	)
Income tax (benefit) provision		(142)			—
Loss from continuing operations		(1,722	)		(400	)
Loss from discontinued operations, net of income tax		33			(708)
Loss  from the sale of discontinued operations, net of income tax		—			(843)
Net loss		(1,689	)		(1,951	)
Other comprehensive income (loss)
Unrealized gain on restricted securities		—			478
Foreign currency translation adjustments		17			188
Comprehensive loss	$	(1,672	)	$	(1,285	)
Basic and diluted earnings (loss) per share
Loss from continuing operations	$	(0.03	)	$	(0.01	)
Income (loss) from discontinued operations, net of income tax	$	(0.00	)	$	(0.02	)
Income (loss) from the sale of discontinued operations, net of income tax	$	(0.00	)	$	(0.03	)
Net loss	$	(0.03	)	$	(0.07	)
Shares used in computing basic earnings (loss) per share		63,389			29,689
Shares used in computing diluted earnings (loss) per share		63,389			29,689

See Notes to Condensed Consolidated Financial Statements

4

BROADCASTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months ended September 30, 2006

(In thousands, except share amounts)

(Unaudited)

	Common Stock				Accumulated deficit			Accumulated other comprehensive income (loss)		Total
	Shares		Amount
Balance at July 1, 2006		63,124,518	$	76,304	$	(24,483	)	$	330	$	52,151
Issuance of common stock related to:
Stock options exercised		325,250		195		—			—		195
Acquisitions		1,000,000		984		—			—		984
Warrants exercised		126,341		—		—			—		—
Stock compensation expense				507							507
Net loss						(1,689	)		—		(1,689	)
Foreign currency translation adjustment, net of income tax						—			17		17
Balance at September 30, 2006		64,576,109	$	77,990	$	(26,172	)	$	347	$	52,165

See Notes to Condensed Consolidated Financial Statements

5

BROADCASTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three months ended September 30,
	2006			2005
Cash flows from operating activities:
Net cash used in operating activities	$	(2,389	)	$	(394	)
Cash flows from investing activities:
Proceeds from sale of discontinued operations		1,500			9,304
Acquisition of intangible assets		(500	)		—
Purchases of equipment and software		5			—
Cash used in discontinued operations in investing activities		—			(1,835	)
Net cash provided by (used in) investing activities		1,005			7,469
Cash flows from financing activities:
Repayments of notes		(1	)		—
Proceeds from warrants and options exercised		195			—
Cash used in discontinued operations in financing activities					(2,020	)
Net cash used in financing activities		194			(2,020	)
Effect of exchange rate change on cash and cash equivalents		9			9
Unrealized gain on available-for-sale securities		—			478
Net increase in cash and cash equivalents		(1,181	)		5,542
Cash and cash equivalents at beginning of period		14,107			4,347
Cash and cash equivalents at end of the period	$	12,926		$	9,889
	Three months ended September 30,
	2006			2005
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	27		$	55
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Notes payable incurred in conjunction with acquisition of subsidiaries		—			1,000
Capital stock issued in conjunction with acquisition of subsidiaries		—			1,046
Capital stock issued in conjunction with acquisition of intangible assets		984			—
Warrants issued in conjunction with short-term debt		—			68

See Notes to Condensed Consolidated Financial Statements

6

BROADCASTER, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim condensed consolidated financial statements have been prepared from the records of Broadcaster, Inc., a California corporation, and Subsidiaries (“Broadcaster”, “we” or the “Company”) without audit. All significant inter-company balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, which consist of only normal recurring adjustments, to present fairly the financial position at September 30, 2006 and the results of operations and cash flows for the three months ended September 30, 2006 and 2005, have been made. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-KSB, as amended, for the fiscal year ended June 30, 2006. The results of operations for the three months ended September 30, 2006 are not necessa rily indicative of the results to be expected for any other interim period or for the full year.

Use of Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of our condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Reclassifications

Reclassifications have been made to the amounts reported for the quarter ended September 30, 2005 to conform to the current quarter’s presentation. The amounts reported for the quarter ended September 30, 2005 present results of operations of the Software segment as discontinued operations due to the sale of Precision Design on June 9, 2006.

2.

STOCK BASED AWARDS

On July 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense in the statement of operations for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). Using the modified prospective transition method of adopting SFAS 123(R), the Company began recognizing compensation expense for stock-based awards granted or modified after June 30, 2006 and awards that were granted prior to the adoption of SFAS 123(R) but were still unvested at June 30, 2006. Under this method of implementation, no restatement of prior periods is required or has been made.

Stock-based compensation expense recognized under SFAS 123(R) in the unaudited condensed consolidated statement of operations for the three months ended September 30, 2006 related to stock options was $507,000. The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. As a result of adopting SFAS 123(R), the Company’s loss before income taxes and net loss for the three months ended September 30, 2006 were increased by $507,000. The implementation of SFAS 123(R) reduced basic and diluted earnings per share by $0.01 for the three months ended

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September 30, 2006. The implementation of SFAS 123(R) did not have an impact on cash flows from operations during the three months ended September 30, 2006.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statements of operations. Prior to July 1, 2006, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method under APB 25 and related interpretations. For the quarter ended September 30, 2005, in accordance with APB 25, the Company recognized expense of $1,000 in its statements of operations for stock options granted to employees and directors that had an exercise price equal to the quoted market price of the underlying common stock on the date of grant.

Stock-based compensation expense recognized in the Company’s statement of operations for the three months ended September 30, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of June 30, 2006, based on the grant date fair value estimated in accordance with the pro forma provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Effective July 1, 2006, as new grants occur, our stock-based compensation expense will also include compensation expense for the share-based payment awards granted subsequent to June 30, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation expense recognized in the consolidated statement of operations for the three months ended September 30, 2006 is based on awards ultimately expected to ve st, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred.

On November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” This FSP provides a practical transition election related to the accounting for the tax effects of share-based payment awards to employees, as an alternative to the transition guidance for the additional paid-in capital pool (“APIC pool”) in paragraph 81 of SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the APIC pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R). The guidance in this FSP is effective after November 10, 2005. The Compan y may take up to one year from the later of adoption of SFAS 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. The Company is currently evaluating the transition alternatives.

3

DISCONTINUED OPERATIONS

Sale of Precision Design

In June, 2006, we sold Precision Design, our legacy software business as part of our overall strategy to position the Company solely as an on-line business. We received a combination of $6.5 million in cash of which $0.5 million was deposited in an escrow to back our representations and warranties in the sale Agreement, and an interest free note of $1.5 million which was paid in full on July 3, 2006. Included in the assets sold were the TurboCad and DesignCAD product lines as well as other design and personal productivity titles.

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Operating results of Precision Design, which was formerly included in the Software segment are as follows:

	Quarter ended September 30,
(In thousands)	2006			2005
Net revenues	$	—		$	2,248
Pre-tax loss		(—	)		(708	)

Sale of Allume

On July 1, 2005, we sold 100% of the issued and outstanding capital stock of Allume to Smith Micro Software, Inc. for $11 million cash and 397,547 unregistered shares of its common stock, having a market value (based on a 10 day trading average covering $4.40) of $1.75 million. A portion of the purchase price, including $1.25 million cash and shares of common stock having a closing date market value of $750,000 was deposited in an indemnity escrow to secure certain representations and warranties included in the stock purchase agreement. The loss on sale of Allume for the quarter ended September 30, 2005 was approximately $843,000 .This amount does not include the cash or value of the Smith Micro common stock held in escrow at September 30, 2005 and released in subsequent periods. At September 30, 2006, an amount of $312,000 was still held in the indemnity escrow account. This amount is expected to be released by December  ;31, 2006. The gain on sale of Allume from the date of closing to September 30, 2006 was approximately $302,000, all of which was recognized in fiscal 2006.

4.

PRODUCT LINE AND OTHER ACQUISITIONS

The Weinmaster Homes, Ltd. Acquisition

On July 1, 2005, Houseplans, Inc, our wholly owned subsidiary consummated the acquisition of all the stock of Weinmaster Homes, Ltd. (“WHL”), pursuant to a Stock Purchase Agreement, dated July 1, 2005, between Weinmaster Homes, Ltd., Bruce Weinmaster and Janice Weinmaster and Houseplans, Inc.

The purchase price of approximately $4.2 million was comprised as follows:

(In thousands)
Description	Amount
Fair value of common stock	$	1,021
Cash		2,000
Promissory note		1,000
Expenses		146
Total	$	4,167

The fair value of our common stock was determined based on 826,583 shares issued and priced using the average market price of our common stock over the five day period immediately preceding and including June 28, 2005.

9

The allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values was as follows:

(In thousands)
Description	Amounts (unaudited)
Cash acquired	$	297
Other tangible assets acquired		115
Amortizable intangible assets
Domain names		640
Designer agreements / relationships		1,100
Trademarks		20
Proprietary plans		610
Customer lists		40
Goodwill		2,499
Liabilities assumed		(160)
Deferred tax liability		(994)
Total	$	4,167

The assets will be amortized or depreciated over a period of years shown on the following table:

Description	Estimated remaining life (years)
Tangible assets
Furniture and equipments		3 – 5
Software and computer equipment		3
Amortizable intangible assets
Trade names / trademarks / domain names		5 – 8
Designer agreements / relationships		5 – 8
Broker agreements / relationships		5 – 8
Proprietary plans		15 – 20
Customer lists		1 – 2

2,499,000 has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is not deductible for tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually.

The following attributes of the combination of the WHL and Houseplans businesses were considered significant factors to the establishment of the purchase price, resulting in the recognition of goodwill:

WHL is the operator of the #2 Google ranked globalHouseplans.com website as well as the Canadian focused Weinmaster.com. WHL, one of the leading marketers of stock house plans in Canada, has operated its plans business in the United States and Canada for more than 25 years, and is one of the leading innovators in the market. In addition to more than 14,800 plans available to customers, which includes over 500 proprietary Weinmaster plans, WHL has an impressive array of content and tools to help homeowners and their builders economically build their dream homes. Potential operating synergies are anticipated to arise and are more likely to include sales growth from joint marketing programs, utilization of best practices developed in each organization, shared content and  reduced common product development costs and limited reductions in administrative costs.

AccessMedia Acquisition

On December 16, 2005, Broadcaster and AccessMedia entered into a definitive agreement whereby Broadcaster agreed to acquire 100% of the outstanding capital stock of AccessMedia. The acquisition was completed on June 1, 2006. Broadcaster accounted for the business combination as a purchase.

10

The purchase price of approximately $32.1 million was comprised as follows:

(In thousands)
Description	Amount
Fair value of common stock	$	28,420
Direct transaction costs		3,690
Total	$	32,110

The calculation is based on the issuance of 29,000,000 shares of Broadcaster common stock to the shareholders of AccessMedia measured as of the date of the definitive merger agreement using a five-trading-day average price of Broadcaster’s common stock. We also issued 2,450,000 shares of our common stock to Baytree Capital Associates, LLC, which is controlled by a former AccessMedia shareholder. Baytree received 1,450,000 of the shares as a financial advisory fee and 1,000,000 shares for consulting services. The definitive merger agreement was announced on December 16, 2005.

The value of AccessMedia’s net tangible and intangible assets is based upon their estimated fair value as of the date of the completion of the business combination. The estimated fair value is independent of the preliminary values historically recorded on the books and records of AccessMedia. The allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values was as follows:

(In thousands)
Description	Amounts (unaudited)
Cash acquired	$	134
Other tangible assets acquired		719
Amortizable intangible assets
Software		9,800
Domain names		80
Media content		5,800
Goodwill		25,901
Liabilities assumed		(3,943	)
Deferred tax liability		(6,381	)
Total	$	32,110

$15,680,000 has been allocated to amortizable intangible assets with useful lives ranging from 10 to 30 years as follows: software – 10 years, domain names and content – 30 years.

The residual purchase price of $25,901,000 has been recorded as goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill will not be amortized and will be tested for impairment at least annually. The agreement provides that 35 million additional shares may be earned and awarded to the current stockholders of AccessMedia. Any additional shares earned would be a future addition to goodwill.

AccessMedia’s acquired technology includes certain additional products with market opportunities. These opportunities were significant contributing factors to the establishment of the purchase price, resulting in the recognition of a significant amount of goodwill. In addition, the acquisition provides an experienced workforce, development of certain technology assets permitting the company to deliver content to consumers over the Internet, existing business knowledge and practice supporting the proposed products and services, marketing programs and a base level of customers.

Acquisition of America’s Biggest, Inc. Assets

On September 29, 2006, Broadcaster, Inc. completed the acquisition of 100% of the assets of America’s Biggest, Inc. The consideration paid to America’s Biggest consisted of 1,000,000 shares of Broadcaster stock and $500,000 in cash. America’s Biggest is an online grassroots talent showcase for actors, comedians, dancers, models as well as bands and musicians. America’s Biggest empower its artist

11

membership with technology and business tools to enable them to build their own brand and fan base independent of big labels.

The allocation of the purchase price to the assets acquired based on their estimated fair values was as follows:

(In thousands)
Description	Amounts (unaudited)
Amortizable intangible assets
Domain names	$	525
Software		350
Customer Lists		250
Trademark		150
Marketing materials		209
Total	$	1,484

Pro Forma Information

The following pro forma financial information for the quarter ended September 30, 2005 gives effect to the acquisition of AccessMedia as if that acquisition had occurred on the first day of the fiscal year.

	Quarter ended September 30, 2005 (unaudited)
	As Originally Stated			AccessMedia			Pro Forma
Net revenues	$	1,717		$	394		$	2,111
Net Income		(1,951	)		(1,170	)		(3,121	)
Earnings per share		(0.07	)		(0.04	)		(0.11	)

The unaudited pro forma financial information has been prepared by Broadcaster for illustrative purposes only and is not necessarily indicative of the condensed combined consolidated financial position or results of operations in future periods, or the results that actually would have been realized had Broadcaster and AccessMedia been a combined company during the specified periods.

5.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of cash and cash equivalents, trade receivables, trade payables and debt approximates carrying value due to the short maturity of such instruments.

6.

INTANGIBLE ASSETS

Software Development Costs and License Fees

Costs incurred in the initial design phase of software development are expensed as incurred in research and development. Once the point of technological feasibility is reached, direct production costs are capitalized in compliance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. We cease capitalizing computer software costs when the product is available for general release to customers. Costs associated with acquired completed software are capitalized.

We amortize capitalized software development costs and visual content license fees on a product-by-product basis. The amortization for each product is the greater of the amount computed using (a) the ratio of current gross revenues to the total of current and anticipated future gross revenues for the product or (b) 18, 36, or 60 months, depending on the product. We evaluate the net realizable value of each software product at each balance sheet date and record write-downs to net realizable value for any products for which the carrying value is in excess of the estimated net realizable value.

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Other Intangible Assets

Other intangible assets other than goodwill represent Internet domain names, acquired customer lists and contracts, distribution rights and relationships, proprietary plans, trade names and trademarks. These assets are amortized using the straight-line method over the estimated useful lives, generally five to fifteen years.

Impairment of Long Lived Assets

We review long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess these assets for impairment based on estimated undiscounted future cash flows from these assets. If the carrying value of the assets exceeds the estimated future undiscounted cash flows, a loss is recorded for the excess of the asset’s carrying value over the fair value. We did not recognize any impairment loss for long-lived assets for the quarters ended September 30, 2006 and 2005

Goodwill

In accordance with SFAS No. 142, Goodwill and Intangible Assets, goodwill is assessed for impairment annually (in our first fiscal quarter) or more frequently if circumstances indicate impairment. We had goodwill in the amount of $30.2 million and $30.2 million as of September 30, 2006 and June 30, 2006, respectively, mainly related to the acquisition of AccessMedia. We have not recognized any impairment related to goodwill for the quarters ended September 30, 2006 and 2005.

7.

DEBT

The following table details our outstanding debt as of September 30, 2006:

(In thousands)	As of September 30, 2006
Short-term
Acquisition related obligations	$	51
Demand notes payable to related party	&nbs p;	1,725
Subtotal short-term	&nbs p;	1,776
Long-term
Acquisition related obligations	&nbs p;	181
Subtotal long-term	&nbs p;	181
Grand total	$	1,957

Short term acquisition related obligations were non-interest bearing. Demand notes payable consisted of a 4% secured note payable to a related party amounting to $1,725,000 and a 10% unsecured note payable to a non-related party amounting to $50,000. The related party notes are owed to Mr. Nolan Quan, our principal shareholder, and are secured by the assets of AccessMedia, a subsidiary company.

Long term debt consists of non-interest bearing obligations related to the acquisition of product lines.

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8.

GAIN / (LOSS) ON MARKETABLE SECURITIES

The following table details the realized and unrealized net loss on marketable securities that we recognized on our  condensed consolidated statements of operations and comprehensive income/(loss) for the three months ended September 30, 2005. There were no realized or unrealized gains or losses on marketable securities during the three months ended September 30, 2006.

	Gain (loss) on marketable securities for the three months ended September 30, 2005
(In thousands)	Realized					Unrealized					Total
Description				Reversal of unrealized gain / (loss) recognized in prior periods		Unrealized gain / (loss) for the quarter ended September 30, 2005			Sub total Unrealized gain / (loss)
Other stock in investment portfolio	$	(234	)	$	90	$	(14	)	$	76	$	(158	)
Total	$	(234	)	$	90	$	(14	)	$	76	$	(158	)

We also recognized an unrealized gain of $478,000 on our holdings of restricted common stock of Smith Micro, which is included in our condensed consolidated balance sheet as of September 30, 2005 as accumulated other comprehensive income (loss) in shareholders equity .

9.

SEGMENT INFORMATION

We have two reportable operating segments which are based on our product families that generate revenues and incur expenses related to the sale of our software and Internet content. All inter-company amounts are eliminated through consolidation. Certain general and administrative expenses are allocated among our different segments.

	Three months ended September, 30 2006									Three months ended September, 30 2005
(In thousands)	AccessMedia			Houseplans			Total			AccessMedia		Houseplans			Total
Net revenues	$	2,936		$	1,699		$	4,635		$	—	$	1,717		$	1,717
Gross margin		1,756			1,046		$	2,802			—		1,043		$	1,043
Operating loss		(1,367	)		(293	)	$	(1,660	)		—		(397	)	$	(397	)
Total assets	$	55,876		$	8,937		$	64,813		$	—	$	5,380		$	5,380

The following table details the breakdown of our net revenues and total assets by geographical location. The International column includes revenues relating to our wholly owned subsidiary, Weinmaster Homes Ltd., in Canada.

	Three months ended September, 30 2006						Three months ended September, 30 2005
(In thousands)	Domestic		International		Total		Domestic		International		Total
Net revenues	$	4,141	$	494	$	4,635	$	1,117	$	600	$	1,717
Total assets	$	59,715	$	5,229	$	64,944	$	807	$	4,573	$	5,380

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10.

EARNINGS PER SHARE – POTENTIALLY DILUTIVE SECURITIES

Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of the incremental common shares issuable upon on exercise of stock options and warrants (using the treasury stock method). Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. The following table summarizes the weighted average shares outstanding:

	Three months  ended September 30,
(In thousands)	2006			2005
Basic weighted average shares outstanding		63,389			29,689
Total stock options outstanding		4,186			3,158
Less: anti dilutive stock options due to loss		(4,186	)		(3,158	)
Total warrants outstanding		4,537			6,888
Less: anti dilutive warrants due to loss		(4,537	)		(6,888	)
Diluted weighted average shares outstanding		63,389			29,689

11.

STOCK BASED AWARDS

The Company has two stock option plans, The 2004 Incentive Stock Option Plan (the “2004 Plan”) adopted during fiscal 2004 and the 1993 Incentive Option Plan adopted on June 30, 1993 (the “1993 Plan”). The purpose of the 2004 and the 1993 Plans was to further the growth and general prosperity of Broadcaster by enabling our employees to acquire our common stock, increasing their personal involvement in the Company and thereby enabling Broadcaster to attract and retain our employees.

Under existing federal tax laws, certain benefits are not applicable to stock options granted under plans adopted more than 10 years prior. In particular, options granted more than 10 years after adoption of the 1993 Plan are not eligible for incentive stock option treatment within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. Broadcaster believes that the ability to grant incentive stock options to its employees is critically important. We hope to offer incentive compensation to such employees on par with those provided by our competition and others in the high-tech industry. In addition, tax laws and incentive compensation policies have changed since adoption of the 1993 Plan. As a result, our Board of Directors has adopted and our shareholders approved the 2004 Plan to permit Broadcaster to offer a wide range of incentives, including incentive and non-statutory stock options and stock purchase rights.

Stock options are granted at an exercise price equivalent to the closing fair market value on the date of grant. All options are granted at the discretion of the Company’s Board of Directors and have a term of not greater than 10 years from the date of grant. Options are exercisable when vested. Vesting requires continuous employment up to the vesting date and the vesting schedule is determined by the Board of Directors at the time of each option grant.

The 2004 Plan

The 2004 Plan provides for the granting of options to purchase up to an aggregate of 10,500,000 common shares to employees, directors and other service providers of Broadcaster. Any options that expire prior to exercise will become available for new grants from the “pool” of ungranted options. Options that are granted under the 2004 Plan may be either options that qualify as incentive stock options under the Internal Revenue Code (“Incentive Options”), or those that do not qualify as such incentive stock options (“Non-Qualified Options”).

The 2004 Incentive Options may not be granted at a purchase price less than the fair market value of the Common Shares on the date of the grant (or, for an option granted to a person holding more than 10% of the Company’s voting stock, at less than 110% of fair market value) and Non-Qualified Options may not be granted at a purchase price less than 85% of fair market value on the date of grant.

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The term of each option, under the 2004 Plan, which is fixed at the date of grant, may not exceed 10 years from the date the option is granted (by law, an Incentive Option granted to a person holding more than 10% of the Company’s voting stock may be exercisable only for five years). At June 30, 2006, 6,500,000 options were available for future grants under the 2004 Plan. The 6,500,000 shares were approved by Broadcaster shareholders at the Annual Meeting held in May 2006.

The 1993 Plan

The 1993 Plan, as amended, permitted us to grant options to purchase up to 2,925,000 shares of common stock to employees, directors and consultants at prices not less than the fair market value at date of grant for incentive stock options and not less than 85% of fair market value for non-statutory stock options. These options generally expire 10 years from the date of grant and become exercisable ratably over a three to five-year period. The Plan expired on June 30, 2003. At June 30, 2006, no shares were available for future grants under the 1993 Plan.

	Number of Shares			Weighted Average Exercise Price
Outstanding, June 30, 2005		4,507,929		$	1.10
Granted		1,575,500			1.33
Exercised		(904,688	)		0.74
Cancelled		(657,234	)		1.23
Outstanding, June 30, 2006		4,521,507		$	1.19
Granted		350,000			0.95
Exercised		(392,550)			0.68
Cancelled		(292,647	)		1.22
Outstanding, September 30, 2006		4,186,310		$	1.22

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value ($000’s)
Outstanding		4,186,310		1.22		8.47		181
Vested and Expected to Vest		4,055,438		1.22		8.44		181
Exercisable		3,462,605		1.17		8.24		168

At September 30, 2006, the Company had $2,729,000 of unrecognized compensation expense, net of forfeitures, related to stock option plans that will be recognized over the weighted average remaining vesting period of 1.38 years.

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Warrants

Warrants have been granted from time to time in conjunction with financings, debt settlements, Board of Directors and employee compensation and consulting arrangements. Warrant activity is as follows:

	Number of Warrants			Average Exercise Price
Outstanding, June 30, 2005		6,398,244		$	1.40
Granted		126,250			1.13
Exercised		—			—
Exercised – cashless		(1,987,501	)		—
Expired		—			—
Outstanding, June 30, 2006		4,536,993		$	1.72
Granted		—			—
Exercised		—			—
Exercised – cashless		(150,000	)		—
Expired		—			—
Outstanding, September 30, 2006		4,386,993		$	1.72

Other Information Regarding Stock Options and Warrants

Additional information regarding common stock options and warrants outstanding as of September 30, 2006 is as follows:

Options Outstanding							Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Avg. Remaining Life		Weighted Avg. Exercise Price		Number Exercisable		Weighted Avg. Exercise Price
$0.20-$0.60		117,500		7.16		0.46		117,500		0.46
$0.61-$0.71		87,426		6.74		0.71		87,426		0.71
$0.72-$1.06		1,207,864		8.70		0.92		969,947		0.91
$1.07-$1.44		1,801,408		8.34		1.20		1,681,370		1.21
$1.45-$4.17		972,112		8.70		1.76		606,362		1.70
		4,186,310				1.22		3,462,605		1.17

Warrants Outstanding					Warrants Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Avg. Exercise Price		Number Exercisable		Weighted Avg. Exercise Price
$0.21 - $0.75		361,952		0.56		361,952		0.56
$0.81		1,887,500		0.81		1,887,500		0.81
$0.90		147,000		0.90		147,000		0.90
$1.03 - $1.26		996,250		1.15		981,250		1.15
$1.65 - $2.30		600,000		1.98		600,000		1.98
$5.00 - $14.85		394,291		9.05		394,291		9.05
		4,386,993				4,371,993

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Prior to July 1, 2006, the Company had adopted the disclosure only provisions of SFAS 123. Had compensation cost for the stock-based compensation plans been determined based upon the fair value at grant dates for awards under those plans consistent with the method prescribed by SFAS 123, net loss would have been increased to the pro forma amounts indicated below. The pro forma consolidated financial information should be read in conjunction with the related historical information and is not necessarily indicative of actual results.

(In thousands, except per share amounts)	Three months ended September 30, 2005
Net loss, as reported	$	(1,951	)
Intrinsic compensation charge recorded under APB 25		1
Pro Forma compensation charge under SFAS 123, net of tax		(78	)
Pro Forma net loss	$	(2,028	)
Earnings Per Share:
Basic—as reported	$	(0.07	)
Basic—pro forma	$	(0.07	)
Diluted—as reported	$	(0.07	)
Diluted—pro forma	$	(0.07	)

The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted average assumptions:

	Three months ended September 30,
	2006			2005
Risk-free interest rates		4.59	%		4.2	%
Expected dividend yields		—			—
Expected volatility		82	%		75	%
Expected option life (in years)		5			10

The weighted average fair value as of the grant date for grants made during the quarter ended September 30, 2006 and 2005 were $0.65 and $1.14, respectively.

The weighted average fair values as of the grant date for options vested during the quarter ended September 30, 2006 was $0.92.

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE INFORMATION CONTAINED IN THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS FORM 10-QSB.

Overview

We historically operated as a software company. Prior to the acquisition of AccessMedia Networks, Inc. (“AccessMedia”) on June 1, 2006, we operated in two business segments: (i) computer aided design and precision engineering (“Precision Design”) and (ii) house plans and architectural drawings (“Houseplans”). As discussed below, we subsequently disposed of Precision Design and, as a result, we now operate in two business segments, AccessMedia and Houseplans.

In 2004, we began exploring various ways to enhance shareholder value, including the further migration of Broadcaster from a traditional or packaged software company to offering downloadable media and content over the Internet. We believe that the growth and reach of the Internet coupled with the predictability of recurring revenues should lead to enhanced Broadcaster shareholder value. As such, during 2005 we began discussions with AccessMedia, a developer of a platform for delivering real-time and interactive media over the Internet through its unique “virtual set-top box” technology. Concurrent with the completion of the acquisition of AccessMedia, we changed our name to Broadcaster, Inc.

Highlights for the quarter ended September 30, 2006 consisted of:

·

The first full quarter of contribution from AccessMedia with revenues of $2,936,000;

·

We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), effective July 1, 2006, resulting in a non-cash expense of $507,000;

·

On September 29, 2006, we acquired the assets of America’s Biggest, Inc in exchange for 1,000,000 shares of Broadcaster stock and $500,000 in cash, and

·

Despite a downturn in the housing market and increased interest rates, revenues at our Houseplans segment remained stable.

We are now a global Internet entertainment network providing consumers with access to online entertainment that is fast, easy, safe, fun, and of great value. We offer a wide variety of on-demand programming including movies, music, television shows, viral videos, mobile media, games, news, sports, and other entertainment focused content, in one place that can be viewed or downloaded at anytime and on any device.  Our proprietary virtual set-top box technology available at www.accessmedia.tv puts Internet users in control of their entertainment experience allowing users to choose what, when and on which device they want to view media and content.

We provide users with delivery of both short and long form digital entertainment content − giving them the power to download content to their desktop computer, laptop, PSP, iPod or preferred mobile entertainment device. We enable consumers to easily find, organize, download and enjoy the growing volumes of high quality content available online. Our capabilities span our proprietary media library, media under license, and media readily available on the Internet. We are also in discussions with major studios, cable and television networks, music labels, and game producers to become a gateway for the direct delivery of first run movies, popular television shows, music and online games.

Our multi-channel Internet entertainment network redefines the user experience on the Web, putting more control into the hands of the user with the most advanced technologies including a Download Manager, Entertainment Meta Search, Content Manager, Mobile Transfer Capabilities, Peer-to-Peer Technology, Social Networking Tools and Parental Lock functionality, among others. In addition, our entertainment meta search is one of the most advanced available on the Web and is optimized for rich media content allowing for advanced identification and indexing of media and content.

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In addition to our Internet entertainment network, we are also a leading on-line distributor of stock architechtural house plans. We have an extensive library of over 25,000 unique architectural house plans and have more than 150,000 registered members. Our house plans are sold to developers, builders, architects and individuals allowing our customers to substantially reduce upfront planning and building costs.

The Acquisition  of AccessMedia

We completed the merger with AccessMedia (the “Merger”) on June 1, 2006 pursuant to which we issued 29,000,000 shares of our common stock and agreed to issue up to an additional 35,000,000 shares of our common stock upon achievement of certain revenue milestones to the former shareholders of AccessMedia. An additional 2,450,000 shares of Broadcaster common stock were issued in payment of merger related fees.

AccessMedia is led by seasoned Internet entrepreneurs. This team has been one of the foremost innovators of technologies, marketing, and advertising strategies for Internet-based consumer media offerings, and until now this team has operated in a private company environment. Additionally, this team has been a leader in providing web site development, traffic, database management, and hosting for many of the largest worldwide media companies.

We believe that the Merger offers us a unique opportunity to enter into the highly scalable Internet media industry. The underlying growth in the Internet media industry, coupled with high margin product offerings, innovative marketing strategies, and our exceptional management team, should combine to provide us with substantial growth and profit opportunities, creating significant shareholder value. We expect this substantial revenue growth and positive cash flow to begin almost immediately.

Sale of Precision Design

In June 2006, we sold Precision Design, our legacy software business as part of our overall strategy to position the company solely as an on-line business. We received a combination of $6.5 million in cash and an interest free note of $1.5 million, which was paid in full on July 3, 2006. $0.5 million of the purchase price is deposited in an indemnity escrow to secure certain representations and warranties included in the asset purchase agreement. Included in the assets sold were the TurboCad and DesignCAD product lines as well as other design and personal productivity titles.

The sale of Precision Design will reduce our operating expenses for fiscal year 2007 by approximately $5 million. Additionally, our increased cash positions us to grow our Internet entertainment business and to take advantage of future opportunities.

Strategy and Growth

We believe that consistent growth of both the revenues and operating earnings can be achieved through internally developed products and services, and through acquisitions. Management believes that good value target companies are present in the marketplace and that business combinations with these entities would help us achieve our growth potential in addition to providing synergies that would improve profitability.

Critical Accounting Policies

Those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition are discussed below.

Our significant accounting policies are more fully described in the notes to our consolidated financial statements. The policies discussed immediately below, are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management to determine the appropriate assumptions to be used in the determination of certain estimates.

Revenue Recognition

Revenue is recognized in accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With Respect to Certain Transactions. Revenue is recognized when persuasive evidence of an arrangement exists (generally a purchase order), product or service has been delivered, the fee is fixed and determinable, and collection of the resulting account is probable.

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·

For software and content delivered via the Internet, revenue is recorded when the customer downloads the software, activates the subscription account or is shipped the content. For online media revenue  when payment is collected

·

Subscription revenue is recognized ratably over the contract period.

·

Revenue related to the display of advertisements on its Internet properties as impressions (the number of times that an advertisement appears in pages viewed by users) are delivered, as long as no significant obligations remain at the end of the period. To the extent that significant obligations remain at the end of the period, the Company defers recognition of the corresponding revenue until the remaining guaranteed amounts are achieved.

·

Revenue from the display of text-based links to the websites of its advertisers is recognized as the click-throughs (the number of times a user clicks on an advertiser’s listing) occur.

·

Revenue related to the sale of Houseplans is recognized when the plan is shipped to the customer.

Impairment

Property, equipment, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenues. We account for the impairment and disposition of long-lived assets in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In accordance with SFAS 144, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

In accordance with SFAS No. 142, Goodwill and Intangible Assets, goodwill is being assessed for impairment annually or more frequently if circumstances indicate impairment. The Company’s assessment of goodwill at September 30, 2006 indicated that no impairment exists at that date.

Stock Based Awards

On July 1, 2006, the Company adopted SFAS 123(R) which requires the measurement and recognition of compensation expense in the statement of operations for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”.

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Results of Operations

The following table sets forth our results of operations for the three months ended September 30, 2006 and 2005 in absolute dollars and as a percentage of net revenues. It also details the changes from the prior fiscal year in absolute dollars and in percentages.

Three Months Ended September 30, 2006 Compared to the Three Months Ended September 30, 2005

	Three months ended September 30,
(In Thousands)	2006						2005						$ Change from previous year
	$			As % of sales			$			As % of sales			Variance			%
Net revenues	$	4,635			100	%	$	1,717			100	%	$	2,918			170	%
Product cost		1,833			40	%		674			39	%		1,159			172	%
Gross margin		2,802			60	%		1,043			61	%		1,759			169	%
Operating expenses
Sales & marketing		2,135			46	%		646			38	%		1,489			230	%
General & administrative		2,558			55	%		757			44	%		1,801			138	%
Research & development		71			2	%		37			2	%		34			92	%
Total operating expenses		4,764			103	%		1,440			84	%		3,324			231	%
Operating loss		(1,962	)		-42	%		(397	)		-23	%		(1,565	)		394	%
Other income (expenses)
Interest expense		(30	)		-1	%		(3	)		0	%		(27	)		900	%
Interest income		125			2	%		—			0	%		125			—
Foreign exchange gain		3			0	%		—			0	%		3			—
Total other income		98			2	%		(3	)		0	%		101			-3,367	%
Income (loss) before income tax		(1,864	)		-40	%		(400	)		-23	%		(1,464	)		366	%
Income tax benefit (provision)		(142	)		-3	%		—			0	%		(142	)		—
Income loss from continuing operations		(1,722	)		-37	%		(400	)		-23	%		(1,322	)		330	%
(Loss) from discontinued operations, net of income tax		33			1	%		(708	)		-41	%		741			-104	%
Gain (loss)from the sale of discontinued operations, net of income tax		—			0	%		(843	)		-49	%		843			-100	%
Net income (loss)	$	(1,689	)		-36	%	$	(1,951	)		-114	%	$	262			-13	%

All of the numbers which follow are approximate and have been rounded to the nearest thousand dollars.

Revenues by Business Segment

We have two business segments: AccessMedia and Houseplans.

AccessMedia: Although it was only recently commercially launched, AccessMedia generated revenue of $2,936,000 for the three months ended September 30, 2006. Revenue includes software sales, internet media advertising sales and the sale of text-based internet links. Sales of downloaded products are recognized ratably over the term of the license sold. Sales of advertisements are recognized upon the delivery of the impressions guaranteed. Sales of click-throughs are recognized upon delivery of the click-throughs guaranteed.

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Houseplans: We acquired Houseplans Inc (formerly Planworks LLC) in November 2003, Abbisoft House Plans, Inc in September 2004 and Weinmaster Homes, Ltd in July 2005. We have grown this business to be the leading online seller of stock house plans, targeting general contractors, consumers and designers. Our websites include houseplans.com, homeplanfinder.com, houseplanguys.com, globalhouseplans.com and weinmaster.com.

Revenues generated by this segment declined slightly during the three months ended September 30, 2006 as compared to the same period in the previous fiscal year from $1,717,000 to $1,699,000 a 1.0% decrease. Excluding the acquisition of Weinmaster, revenue grew from $1,117,000 to $1,204,000 a 7.8% increase.

Net Revenues

Net revenues increased to $4,635,000 for the quarter ended September 30, 2006 from $1,717,000 for the quarter ended September 30, 2006 or an increase of approximately 170%. The increase is due to the acquisition of AccessMedia.

Gross Profit

Our consolidated gross profit increased from $1,043,000 to $2,802,000 or 168.6% for the three months ended September 30, 2005 and September 30, 2006 respectively. Gross margin decreased from 60.7% to 60.4%.

AccessMedia’s cost of revenue consists of costs related to the products and services AccessMedia provides to customers. These costs include materials, salaries and related expenses for product support personnel, depreciation and maintenance of equipment used in providing services to customers and facilities expenses. The cost of revenue increased as a function of increasing activity over the periods and as result of amortization of assets acquired during 2005. Alchemy Communications, Inc, a company controlled by Mr. Nolan Quan, our principal shareholder, provides us with services including Internet connectivity, hosting services, programming services and equipment and office facilities. During the quarter ended September 30, 2006, cost of sales included $130,000 related to these services.

AccessMedia also expects its product offerings to expand and the mixture of sales to change. Because of its limited operating history, changes in revenue mix, recent exit from the development stage and evolving business model, AccessMedia believes that analysis of historical cost of revenues as a percentage of revenues is not meaningful.

Sales and Marketing

Sales and marketing expenses increased from $646,000 to $2,135,000, or 230.5% for the three months ended September 30, 2005 and September 30, 2006 respectively. This increase was principally due to the merger with AccessMedia.

Sales and marketing expense for AccessMedia consists primarily of salaries and related expenses for sales, support and marketing personnel, commissions, costs and expenses for customer acquisition programs and referrals, a portion of facilities expenses and depreciation and amortization of equipment. AccessMedia’s expense levels have increased because of staffing and costs involved in testing and prototyping programs for selling its software, advertising and text-based links. AccessMedia anticipates that sales and marketing expense will continue to increase in absolute dollars as AccessMedia adds sales and marketing personnel and increases its customer acquisition activities.

General and Administrative

General and administrative expense consists primarily of salaries and related expenses for administrative, finance, legal, human resources and executive personnel, fees for professional services and costs of accounting and internal control systems to support its operations. Expenses have increased primarily due to the addition of headcount in management and administration to support the increasing activity levels and as a result of amortization of assets acquired during 2006. Additionally, the adoption of SFAS 123 (R) resulted in an expense of $507,000 for the quarter ended September 30, 2006. We expect we will incur approximately $2,729,000 of non cash stock option expense over the next six quarters related to the fair value of options unvested at September 30, 2006.

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We anticipate that general and administrative expense will continue to increase in absolute dollars as AccessMedia builds its management team and hires additional administrative personnel and incurs increased costs such as professional fees. AccessMedia expects to secure a number of services from a related party at a market rate.

During the quarter ended September 30, 2006, general and administrative expenses included $55,000 related to services provided by Alchemy Communications.

Research and Development

Our research and development expenses consist primarily of salaries and benefits for research and development employees and payments to independent contractors, mainly our third party contract development teams. During the quarter ended September 30, 2006, research and development costs included $48,000 related to services provided by Alchemy Communications.

Interest and Other, Net

Interest and other, net, changed from a net expense of $3,000 to a net gain of $98,000 for the three months ended September 30, 2005 and September 30, 2006 respectively. The change was principally due to an increase in cash balances and a reduction in debt obligations resulting from the deployment of proceeds from the sale of Precision Design.

Provision for State and Federal Income Taxes

We recorded income tax benefit of $142,000 and $0 for the three months ended September 30, 2006 and 2005, respectively. The tax benefit for the three months ended September 30, 2006 primarily represented the release of deferred tax provision on amortization of intangible assets offset by accrued Canadian income taxes.

We have not recorded a tax benefit for domestic tax losses because of the uncertainty of realization. We adhere to SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Consistent with our past practice, we have recorded a full valuation allowance at September 30, 2006 as the realizeability of our net operating loss carry-forwards is not determinable.

Discontinued Operations

(Loss) from discontinued operations, net of income tax

Sale of Allume

On July 1, 2005, we sold all of the issued and outstanding capital stock of Allume to Smith Micro for an aggregate sales price of $12.8 million made up as follows:

(In millions)
Description		Amount
Cash	$	11.0
Fair value of 397,547 unregistered shares of our Smith Micro common stock		1.8
Total	$	12.8

The fair value of the common stock was based on the five-trading-day average price of Smith Micro’s common stock surrounding the date the business combination was announced.

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At closing an indemnity escrow was established to secure certain representations and warranties included in our stock purchase agreement with Smith Micro. The following sale proceeds were deposited into the escrow.

(In millions)
Description		Amount
Cash	$	1.25
170,398 unregistered shares of our Smith Micro common stock		0.784
Total	$	2.034

The value of the common stock was based on the date of closing.

On November 2, 2005, we replaced the shares of Smith Micro common stock in escrow with cash, as permitted by the escrow agreement.

On November 10, 2005, we sold 100% of our holdings of Smith Micro shares at a gain of $923,000 which was shown in Other Income as Realized Gain on Securities in the December quarter.

Pursuant to the stock purchase agreement, Smith Micro released $500,000 plus interest of $7,000 and $750,000 plus interest of $26,000 of the escrowed cash to us in December 2005 and March 2006, respectively. These amounts, when released, added to our calculation of gain or loss on the sale.

As a result of this sale we recorded a loss on the sale of discontinued operations of $843,000 during the three months ended September 30, 2005. This loss calculation does not consider the remaining cash held in escrow of approximately $0.3 million and is subject to change in future reporting periods depending upon the future release of cash from escrow.

Sale of Precision Design

On June 9, 2006 Broadcaster, Inc. (formerly, International Microcomputer Software, Inc.) sold substantially all of the assets used in the operation of the segment of our business referred to as the Precision Design Software Business. The assets were sold to IMSI Design, LLC, a California limited liability company (the “Purchaser”) which was newly formed for the purpose of the acquisition.

In consideration for the transfer of the assets, the Purchaser paid $6,500,000 in cash, of which $500,000 was deposited in an escrow to back our representations and warranties in the sale Agreement, and the Purchaser delivered its promissory note, due July 3, 2006, in the principal amount of $1,500,000. In addition, the Purchaser assumed certain liabilities, and agreed to perform a number of contracts that were associated with the Precision Design Software Business.

As a result of this sale, we have categorized the assets, liabilities and operations of the Precision Design as discontinued operations for the twelve months ended June 30, 2006.

Loss from discontinued operations totaling $708,000 for the quarter ended September 30, 2006 represents the net loss of Precision Design Segment.

Basis of Presentation

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its applicatio n. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

25

Liquidity and Capital Resources

Net cash used in operating activities was ($2,389,000) for the three months ended September 30, 2006 in contrast to ($3,094,000) for the three months ended September 30, 2005.

Net cash provided by investing activities was $1,005,000 for the three months ended September 30, 2006 in contrast to $7,469,000 for the same quarter of 2005. A principal factor for the quarter ended September 30, 2006 consisted of $1,500,000 received from the sale of Precision Design. For the three months ended September 30, 2005, the principal factor consisted of $9,304,000 received from the sale of Allume offset by ($1,825,000) used in discontinuing operations and investing activities from the same sale.

Our net cash used in financing activities for the quarter ended September 30, 2006 was $1,094,000 consisting of proceeds received from the exercise of options and warrants, offset by the repayment of notes. For the three months ended September 30, 2005, our net cash used in financing activities was ($2,020,000) consisting of cash used in discontinuing operations and financing activities.

At September 30, 2006, we had $12,926,000 in cash which is sufficient to meet all of our working capital needs during this current fiscal year and beyond. We have no material indebtedness, other than a note payable to a related party discussed in the paragraph below.

Related-Party Transactions

When we acquired AccessMedia on June 1, 2006, we acquired its demand note payable of $1,725,000 payable to Mr. Nolan Quan, who became our principal shareholder in conjunction with the AccessMedia acquisition. The note pays below market interest of 4% per annum. Mr. Quan controls Alchemy Communications which provides us with services described under “Results of Operations”, above. Additionally, beyond four limited liability companies controlled by Mr. Quan, the remaining shareholder of AccessMedia was Mr. Michael Gardner. Mr. Gardner as the sole member of Baytree Capital Associates, LLC received 2,450,000 shares of our common stock in connection with the merger, 1,450,000 shares as a financial advisory fee in connection with the merger and 1,000,000 shares as a consulting fee. Baytree Capital continues to provide consulting services to us at no additional cost. These services consist primarily of managerial advice, strate gic advice, capital markets advice and working with our lawyers in connection with, among other things, our filings with the Securities and Exchange Commission.

Forward-Looking Statements

This quarterly report on Form 10-QSB contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including our growth and profit opportunities, the timing of our substantial revenue growth and positive cash flow, our completion of acquisitions, the favorable impact from the Weinmaster acquisition and our liquidity. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements other than statements of historical facts included or incorporated by reference in this report, including statements regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans, and objectives, are forward-looking statements. When used in this report, the words “will,” “believe,” “anticipate,” “plan,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we cannot assure you that these plans, intentions, or expectations will be achieved. Actual results may differ materially from those stated in these forward-looking statements as a result of a variety of factors including acceptance by consumers of our current and future products, our ability to complete development of new products, our ability to reach agreements with third parties relating to acquisitions, our ability to integrate Weinmaster and the risk factors contained in our Form 10-KSB for the year ended June 30, 2006. We do not undertake any duty to update these forward-looking statements.

26

ITEM 3 - CONTROLS AND PROCEDURES

(a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as of September 30, 2006, the end of the period covered by this quarterly report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.

(b) We have evaluated our accounting procedures and control processes in place as of September 30, 2006 related to material transactions to ensure they are recorded timely and accurately in the financial statements. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

27

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Our subsidiary, AccessMedia, was named as one of a number of co-defendants in a suit filed by the FTC on August 8, 2006 in the United States District Court for the Central District of California alleging a violation of Section 5 of the FTC Act arising from products known as Movieland.com, Moviepass.tv, and Popcorn.net. The complaint challenges the validity of the use of pop-up payment reminders for software licenses in conjunction with a free trial offer for the Movieland.com, Moviepass.tv and Popcorn.net products. A copy of the complaint may be viewed online at http://www.ftc.gov/os/caselist/0623008/060808movielandcmplt.pdf. A United States District Court judge denied the FTC’s request to issue a temporary restraining order. The parties have entered into an interim consent order t hat allows the pop-up payment reminders to continue to issue at least until time of trial and on a reduced frequency per day. Trial on the merits of the case will be scheduled for a later time. Our management believes the claims are without merit and intends to defend the actions vigorously. While our management believes there is no legal basis for liability, due to the uncertainty surrounding the litigation process, no reasonable estimate of loss is available. In addition, AccessMedia was also named as one of a number of co-defendants in a suit filed by the Washington State Attorney General on or about August 8, 2006 in King County Superior Court, alleging violations of the Washington Spyware Act and Consumer Protection Act and arising from products known as Movieland.com, Moviepass.tv, and Popcorn.net. A copy of the Washington complaint can be viewed online at http://www.atg.wa.gov/releases/2006/Documents/MovielandComplaint8-14-06.pdf. AccessMedia intends to vigorously defend the allegations. W hile management believes there is no legal basis for liability, due to the uncertainty surrounding the litigation process, no reasonable estimate of loss is available.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended September 30, 2006, we sold the following securities in transactions not registered under the Securities Act of 1933:

Date Securities Issued	Securities Title		Issued to		Number of Securities Issued		Consideration		Footnotes
									< P style="font-size:2pt">
September 29, 2006		Common Stock		America’s Biggest, Inc.		1,000,000		(1)
September 12, 2006		Stock Options		Blair Mills		150,000		(2)
September 12, 2006		Stock Options		Martin Wade, III		3,750,000		(2)

———————

(1)

Stock issued as partial consideration related to an acquisition.

(2)

Stock options issued in exchange for services to be rendered. Of these options, Mr. Mills’ vest over one year, subject to continued employment. Mr. Wade’s options consist of $200,000 which immediately vested and the balance which vest upon AccessMedia achieving certain revenue milestones.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable

ITEM 5 - OTHER INFORMATION

Not Applicable

28

29

ITEM 6 - EXHIBITS

Exhibits

The following exhibits are filed as part of, or incorporated by reference into this Report:

Number	Exhibit Title	Note
10.1	Amended and Restated Employment Agreement, dated September 12, 2006, by and between Broadcaster and Martin R. Wade, III	(1)
10.2	Amendment No. 1 to Parent Voting Agreement, dated September 18, 2006 by and between AccessMedia Networks, Inc. and certain shareholders of Broadcaster	(2)
10.3	Amendment No. 1 to Company Voting Agreement, dated September 18, 2006, by and between Broadcaster, AccessMedia Networks, Inc. and certain former shareholders of AccessMedia Networks, Inc.	(3)
10.4	Asset Purchase Agreement dated September 29, 2006, by and between Broadcaster, America’s Biggest, Inc. and certain former shareholders of America’s Biggest, Inc.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Notes

———————

(1)

Incorporated by reference to Exhibit 1.01 from Broadcaster’s Current Report on Form 8-K filed on September 22, 2006.

(2)

Incorporated by reference to Exhibit 10.13 from Broadcaster’s Annual Report on Form 10-KSB filed on October 13, 2006.

(3)

Incorporated by reference to Exhibit 10.15 from Broadcaster’s Annual Report on Form 10-KSB filed on October 13, 2006.

30

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BROADCASTER, INC.

Date: November 20, 2006

By:	/s/ Martin Wade, III
Martin Wade, III
Director & Chief Executive Officer
By:	/s/ Blair Mills
Blair Mills
Chief Financial Officer (Principal Accounting Officer)

31

INDEX TO EXHIBITS

Number	Exhibit Title	Note
10.1	Amended and Restated Employment Agreement, dated September 12, 2006, by and between Broadcaster and Martin R. Wade, III	(1)
10.2	Amendment No. 1 to Parent Voting Agreement, dated September 18, 2006 by and between AccessMedia Networks, Inc. and certain shareholders of Broadcaster	(2)
10.3	Amendment No. 1 to Company Voting Agreement, dated September 18, 2006, by and between Broadcaster, AccessMedia Networks, Inc. and certain former shareholders of AccessMedia Networks, Inc.	(3)
10.4	Asset Purchase Agreement dated September 29, 2006, by and between Broadcaster, America’s Biggest, Inc. and certain former shareholders of America’s Biggest, Inc.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Notes

———————

(1)

Incorporated by reference to Exhibit 1.01 from Broadcaster’s Current Report on Form 8-K filed on September 22, 2006.

(2)

Incorporated by reference to Exhibit 10.13 from Broadcaster’s Annual Report on Form 10-KSB filed on October 13, 2006.

(3)

Incorporated by reference to Exhibit 10.15 from Broadcaster’s Annual Report on Form 10-KSB filed on October 13, 2006.

32

EX-10.4

EXHIBIT 10.4

ASSET PURCHASE AGREEMENT

Dated as of September 29, 2006

among

Broadcaster, Inc.,

America’s Biggest, Inc.

and

The Stockholders of America's Biggest, Inc.

Listed on the Signature Page hereto

TABLE OF CONTENTS

Page

i

TABLE OF CONTENTS

(continued)

Page

ii

TABLE OF CONTENTS

(continued)

Page

EXHIBITS

EXHIBIT A – Bill of Sale

EXHIBIT B – Escrow Agreement

EXHIBIT C – Seller Letter Agreement

EXHIBIT D – Lockup Agreement

EXHIBIT E – Registration Rights Agreement

iii

ASSET PURCHASE AGREEMENT

ASSET PURCHASE AGREEMENT, dated as of September [___], 2006 (the "Agreement"), among Broadcaster, Inc., a California corporation ("Buyer"), America’s Biggest, Inc., a Delaware corporation ("Seller"), and the stockholders of Seller listed on the signature page hereto (each, a "Stockholder" and collectively, the "Stockholders").

WHEREAS, Seller was engaged in the business of providing an online virtual entertainment showcase for aspiring artists (the "Business");

WHEREAS, Buyer has been operating such Business since May 31, 2005; and

WHEREAS, the parties desire that Seller sell, assign, transfer, convey and deliver to Buyer, and that Buyer purchase and acquire from Seller, all of the right, title and interest of Seller in and to the Purchased Assets (as hereinafter defined), and that Buyer assume the Assumed Liabilities (as hereinafter defined), upon the terms and subject to the conditions of this Agreement.

NOW, THEREFORE, in consideration of the foregoing premises and the respective representations and warranties, covenants and agreements contained herein, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

1.1

Definitions

"Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling, controlled by or under common control with such specified Person.

"Ancillary Agreements" means the Bill of Sale and the other agreements, instruments and documents delivered at the Closing.

"Authorization" means any authorization, approval, consent, certificate, license, permit or franchise of or from any Governmental Entity or pursuant to any Law.

"Benefit Plan" means (a) any "employee benefit plan" as defined in ERISA Section 3(3), including any (i) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension Benefit Plan (as defined in ERISA Section 3(2)), (ii) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (iii) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any Multiemployer Plan (as defined in ERISA Section 3(37)) and (iv) Employee Welfare Benefit Plan (as defined in ERISA Section 3(1)) or material fringe benefit plan or program, or (b) stock purchase, stock option, severance pay, employment, change-in-control, vacation pay,

company awards, salary continuation, sick leave, excess benefit, bonus or other incentive compensation, life insurance, or other employee benefit plan, contract, program, policy or other arrangement, whether or not subject to ERISA.

"Books and Records" means books of account, general, financial, warranty and shipping records, invoices, supplier lists, product specifications, product formulations, drawings, correspondence, engineering, maintenance, operating and production records, advertising and promotional materials, credit records of customers and other documents, records and files, in each case Related to the Business, including books and records relating to Seller Intellectual Property.

"Business Employee" means any individual employed by Seller in or in connection with the Business.

"Buyer Common Stock" means the common stock of Buyer.

"Capital Stock" means (a) in the case of a corporation, its shares of capital stock, (b) in the case of a partnership or limited liability company, its partnership or membership interests or units (whether general or limited), and (c) any other interest that confers on a Person the right to receive a share of the profits and losses of, or distribution of assets, of the issuing entity.

"Charter Documents" means, with respect to any entity, the certificate of incorporation, the articles of incorporation, by-laws, articles of organization, limited liability company agreement, partnership agreement, formation agreement, joint venture agreement or other similar organizational documents of such entity (in each case, as amended).

"Code" means the Internal Revenue Code of 1986.

"Contract" means any agreement, contract, license, lease, commitment, arrangement or understanding, written or oral, including any sales order or purchase order.

"Equipment" means machinery, fixtures, furniture, supplies, accessories, materials, equipment, parts, automobiles, office equipment, computers, telephones and all other items of tangible personal property, in each case Related to the Business.

"Equity Securities" means (a) shares of Capital Stock and (b) options, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other Contracts that, directly or indirectly, could require the issuer thereof to issue, sell or otherwise cause to become outstanding shares of Capital Stock.

"ERISA" means the Employee Retirement Income Security Act of 1974.

"ERISA Affiliate" means any entity which is a member of a "controlled group of corporations" with, under "common control" with or a member of an "affiliated services group" with, Seller, as defined in Section 414(b), (c), (m) or (o) of the Code.

2

"Governmental Entity" means any entity or body exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to United States federal, state, local, or municipal government, foreign, international, multinational or other government, including any department, commission, board, agency, bureau, subdivision, instrumentality, official or other regulatory, administrative or judicial authority thereof, and any non-governmental regulatory body to the extent that the rules and regulations or orders of such body have the force of Law.

"Indebtedness" means any of the following: (a) any indebtedness for borrowed money, (b) any obligations evidenced by bonds, debentures, notes or other similar instruments, (c) any obligations to pay the deferred purchase price of property or services, except trade accounts payable and other current Liabilities arising in the ordinary course of the Business, (d) any obligations as lessee under capitalized leases, (e) any indebtedness created or arising under any conditional sale or other title retention agreement with respect to acquired property, (f) any obligations, contingent or otherwise, under acceptance credit, letters of credit or similar facilities, and (g) any guaranty of any of the foregoing.

"Indemnitee" means any Person that is seeking indemnification from an Indemnitor pursuant to the provisions of this Agreement.

"Indemnitor" means any party hereto from which any Indemnitee is seeking indemnification pursuant to the provisions of this Agreement.

"Intellectual Property" means the proprietary information defined in Section 4.11.

"Knowledge" of Seller or any similar phrase means, with respect to any fact or matter, the actual knowledge of the directors and employees of Seller, together with such knowledge that such directors or employees could be expected to discover after due investigation concerning the existence of the fact or matter in question.

"Law" means any statute, law (including common law), constitution, treaty, ordinance, code, order, decree, judgment, rule, regulation and any other binding requirement or determination of any Governmental Entity.

"Lien" means, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest, adverse claim or other encumbrance in respect of such property or asset.

"Mutual Release" means a mutual release agreement by and among Buyer, on the one hand, and Seller, Latitude Venture Partners, LLC, Dean Rositano and Robert Rositano, on the other hand, mutually releasing each of the parties thereto from any and all claims except for such claims as specifically contemplated in this Agreement.

"Order" means any award, injunction, judgment, decree, order, ruling, subpoena or verdict or other decision issued, promulgated or entered by or with any Governmental Entity of competent jurisdiction.

3

"Permitted Liens" means (a) Liens for current real or personal property Taxes not yet due and payable and with respect to which Seller maintains adequate reserves, and (b) Liens that are immaterial in character, amount, and extent and which do not detract from the value or interfere with the present or proposed use of the properties they affect.

"Person" means an individual, a corporation, a partnership, a limited liability company, a trust, an unincorporated association, a Governmental Entity or any other entity or body.

"Pre-Closing Environmental Liabilities" means Liabilities arising out of (a) the ownership or operation of the Business at any time on or prior to the Closing or (b) the operation or condition of the Leased Real Property or any other real property currently or formerly owned, operated or leased by Seller related to the Business at any time on or prior to the Closing, in each case to the extent based upon or arising out of (i) Environmental Law, (ii) a failure to obtain, maintain or comply with any Environmental Permit, (iii) a Release of any Hazardous Substance, or (iv) the use, generation, storage, transportation, treatment, sale or other off-site disposal of Hazardous Substances.

“Related to the Business” means used, held for use or acquired or developed for the use in the Business or otherwise relating to, or arising out of, the operation or conduct of the Business.

"Subsidiary" or "Subsidiaries" means, with respect to any party, any Person, of which (i) such party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which held by such party or any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such Person is directly or indirectly owned or controlled by such party and/or by any one or more of its Subsidiaries.

"Tax" or "Taxes" means any and all federal, state, local, or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, bank shares, withholding, payroll, employment, excise, property, deed, stamp, alternative or add-on minimum, environmental, profits, windfall profits, transaction, license, lease, service, service use, occupation, severance, energy, unemployment, social security, workers' compensation, capital, premium, and other taxes, assessments, customs, duties, fees, levies, or other governmental charges of any nature whatever, whether disputed or not, together with any interest, penalties, additions to tax, or additional amounts with respect thereto.

"Tax Returns" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

4

"Taxing Authority" means any Governmental Entity having jurisdiction with respect to any Tax.

"WARN Act" means the Worker Adjustment and Retraining Notification Act of 1988.

"$" means United States dollars.

ARTICLE II

PURCHASE AND SALE

2.1

Purchase and Sale of the Purchased Assets

At the Closing as defined in Section 3.1, Buyer shall purchase and Seller shall sell the assets as set forth below (hereinafter referred to as the “Purchased Assets”):

(a)

all Equipment;

(b)

all Seller Intellectual Property;

(c)

all Business Authorizations;

(d)

all Books and Records;

(e)

all claims, causes of action, choses in action, rights of recovery and rights under all warranties, representations and guarantees made by suppliers of products, materials or equipment, or components thereof, arising from or relating to the other Purchased Assets or the Assumed Liabilities; and

(f)

all insurance benefits, including rights and proceeds, arising from or relating to the Purchased Assets.

2.2

Excluded Assets

The Purchased Assets do not include, and Seller is not selling, assigning, transferring, conveying or delivering, and Buyer is not purchasing, acquiring or accepting from Seller any of the assets, properties or rights set forth below:

(a)

all cash, cash equivalents and bank accounts of Seller;

(b)

all Contracts (the "Excluded Contracts");

(c)

the corporate seals, Charter Documents, minute books, stock books, Tax Returns, books of account or other records having to do with the corporate organization of Seller;

(d)

all Policies and all rights and benefits thereunder;

5

(e)

the shares of Capital Stock of Seller; and

(f)

the rights which accrue or will accrue to Seller under this Agreement and the Ancillary Agreements.

2.3

Liabilities

All liabilities of the Seller shall be retained by the Seller and not assumed by Buyer, including:

(a)

all Liabilities for Taxes relating to the Seller or any affiliate of Seller or the Purchased Assets for any Pre-Closing Tax Period;  

(b)

all Liabilities in respect of the Excluded Contracts and other Excluded Assets;

(c)

all product Liability, warranty and similar claims for damages or injury to person or property, claims of infringement of Intellectual Property Rights and all other Liabilities, regardless of when made or asserted, which arise out of or are based upon any events occurring or actions taken or omitted to be taken by Seller, or otherwise arising out of or incurred in connection with the conduct of the Business, on or before May 31, 2005;

(d)

all Pre-Closing Environmental Liabilities;

(e)

all Indebtedness of the Business incurred on or before May 31, 2005 or arising out of Seller’s operations other than the operation of the Business by Buyer after May 31, 2005;

(f)

all Liabilities under Seller Benefit Plans; and

(g)

all Liabilities arising out of or incurred in connection with the negotiation, preparation and execution of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby, including Taxes and fees and expenses of counsel, accountants and other experts.

2.4

Purchase Price

The purchase price for the Purchased Assets shall be (i) One Million (1,000,000) shares of Buyer Common Stock (the "Consideration Shares"), and (ii) Five Hundred Thousand Dollars ($500,000) (the "Cash Consideration" and, together with the Consideration Shares, the "Purchase Price"), payable in the manner as set forth in Section 3.3 herein.  

2.5

Allocation

The parties hereto agree that for all federal and state tax purposes,  the consideration received by Seller for the Purchased Assets hereof shall be allocated in

6

accordance with Section 1060 of the Code, as amended, which shall be delivered at the Closing, and that all financial reports, and income and other tax returns and information reports, will be prepared and filed in a manner consistent with such allocation and no party hereto will take any position inconsistent with such allocation in any subsequent returns or proceedings.  Buyer and Seller each agree to file IRS Form 8594 and any corresponding state tax forms on a timely basis.

2.6

Consents

(a)

Notwithstanding anything in this Agreement to the contrary, this Agreement shall not constitute an agreement to sell, assign, transfer, convey or deliver any Purchased Asset or any benefit arising under or resulting from such Purchased Asset if the sale, assignment, transfer, conveyance or delivery thereof, without the Consent of a third party, (i) would constitute a breach or other contravention of the rights of such third party, (ii) would be ineffective with respect to any party to a Contract concerning such Purchased Asset, or (iii) would, upon transfer, in any way adversely affect the rights of Buyer under such Purchased Asset.  If the sale, assignment, transfer, conveyance or delivery by Seller to, or any assumption by Buyer of, any interest in, or Liability under, any Purchased Asset requires the Consent of a third party, then such sale, assignment, transfer, conveyance, delivery or assumption s hall be subject to such Consent being obtained.  

(b)

Nothing contained in this Section 2.6 or elsewhere in this Agreement shall be deemed a waiver by Buyer of its right to have received on the Closing Date an effective assignment of all of the Purchased Assets or of the covenant of Seller to obtain all Consents, nor shall this Section 2.6 or any other provision of this Agreement be deemed to constitute an agreement to exclude from the Purchased Assets any Purchased Asset as to which a Consent may be necessary.

ARTICLE III

CLOSING

3.1

Closing Date

The transactions contemplated by this Agreement shall be completed on the third business day after the day on which the last of the conditions contained in Sections 7.1, 7.2 and 7.3 are satisfied or waived.  The date of the Closing is hereafter referred to as the "Closing Date." The Closing shall take place at the offices of Morgan Lewis & Bockius, LLP, 2 Palo Alto Square, 3000 El Camino Real, Suite 700, Palo Alto, CA 94306.

3.2

Deliveries by Seller at the Closing

At the Closing, Seller shall deliver to Buyer the following documents and instruments, all properly executed:

7

(a)

a Bill of Sale in the form of Exhibit A hereto duly executed by Seller;

(b)

Trademark Assignments in a form satisfactory to Buyer duly executed by Seller;

(c)

such other good and sufficient instruments of transfer as Buyer reasonably deems necessary and appropriate to vest in Buyer all right, title and interest in, to and under the Purchased Assets;

(d)

the Seller Closing Certificate;

(e)

a completed certification of non-foreign status pursuant to Section 1.1445-2(b)(2) of the Treasury regulations duly executed by Seller;

(i)

the escrow agreement substantially in the form of Exhibit B hereto (the "Escrow") duly executed by Seller;

(f)

the Seller letter agreement (the "Seller Letter Agreement") in the form of Exhibit B hereto duly executed by Seller and attesting to Seller’s status as an accredited investor;

(g)

the Lockup Agreement substantially in the form attached as Exhibit D hereto ("Lockup Agreement") duly executed by Seller; and

(h)

the Mutual Release Agreement.   

3.3

Deliveries by Buyer at the Closing

At the Closing, the Buyer shall deliver to Seller the following:

(a)

the Cash Consideration;

(b)

the Consideration Shares, by delivering (i) a certificate in the name of Seller representing shares of Buyer Common Stock equal to 950,000 Consideration Shares to the transfer agent of Buyer, and (ii) a certificate representing the Escrow Shares to U.S. Bank, National Association, as escrow agent (the "Escrow Agent") pursuant to the Escrow Agreement and Section 9.3.

(c)

the Buyer Closing Certificate;

(d)

the Escrow Agreement;

(e)

the Mutual Release Agreement duly executed by Buyer; and

(f)

the Registration Rights Agreement.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Buyer that (i) the statements contained in Sections 4.1 – 4.8 and Sections 4.21 – 4.23 of Article IV are true and correct as of the date hereof and (ii) the statements contained in Sections 4.9 – 4.20 were true and correct as of May 31, 2005, except as set forth in the disclosure schedule dated and delivered as of the date hereof by Seller to Buyer (the "Seller Disclosure Schedule"), which is attached to this Agreement and is designated therein as being the Seller Disclosure Schedule.  The Seller Disclosure Schedule shall be arranged in paragraphs corresponding to each representation and warranty set forth in this Article IV.  Each exception to a representation and warranty set forth in the Seller Disclosure Schedule shall qualify the specific representation and warranty which is referenced in the applicable paragraph of the Seller D isclosure Schedule, and no other representation or warranty.

4.1

Organization and Good Standing

Seller is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation, has all requisite power to own, lease and operate its properties and to carry on its business as now being conducted and as proposed to be conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which it owns or leases property or conducts any business so as to require such qualification.

4.2

Authority and Enforceability

(a)

Seller has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby.  The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Seller.  Seller has duly executed and delivered this Agreement.  This Agreement constitutes the valid and binding obligation of Seller, enforceable against it in accordance with its terms, except as such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting or relating to creditors' rights generally, and (ii) the availability of injunctive relief and other equitable remedies.  

(b)

Seller has the requisite power and authority to enter into each Ancillary Agreement to which it is, or specified to be, a party and to consummate the transactions contemplated thereby.  Seller has obtained stockholder approval regarding the transactions contemplated hereby.  The execution and delivery by Seller of each Ancillary Agreement to which it is, or specified to be, a party and the consummation of the transactions contemplated thereby have been duly authorized by all necessary corporate, limited liability company or other action on the part of Seller.  Prior to the Closing Seller will have duly executed and delivered each Ancillary Agreement to which it is, or specified to be, a party.  The Ancillary Agreements will constitute the valid and binding obligation of Seller, enforceable against it in accordance with its terms, except as

9

such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting or relating to creditors' rights generally, and (ii) the availability of injunctive relief and other equitable remedies. The Ancillary Agreements will effectively vest in Buyer good, valid and marketable title to all the Purchased Assets free and clear of all Liens.

4.3

No Conflicts; Consents

(a)

The execution and delivery of this Agreement by Seller do not, and the execution and delivery of each Ancillary Agreement to which Seller is, or specified to be, a party, the performance by Seller of its obligations hereunder and thereunder and the consummation by Seller of the transactions contemplated hereby and thereby (in each case, with or without the giving of notice or lapse of time, or both), will not, directly or indirectly, (i) violate the provisions of any of the Charter Documents of Seller, (ii) violate or constitute a default, an event of default or an event creating rights of acceleration, termination, cancellation, imposition of additional obligations or loss of rights under any Contract (A) to which Seller is a party, (B) of which Seller is a beneficiary or (C) by which Seller or any of its assets is bound,  (iii) violate or conflict with any Law, Authorization or Order applicable to Se ller, or give any Governmental Entity or other Person the right to challenge any of the transactions contemplated by this Agreement or the Ancillary Agreements or to exercise any remedy, obtain any relief under or revoke or otherwise modify any rights held under, any such Law, Authorization or Order, or (iv) result in the creation of any Liens upon any of the assets owned or used by Seller, except for any such violations, defaults and events referred to in clause (ii) and for any such violations, conflicts, challenges, remedies, relief, revocations, modifications or Liens referred to in clauses (iii) and (iv) that would not in the aggregate be material to the Business and the Purchased Assets taken as a whole. Section 4.3(a) of Seller Disclosure Schedule sets forth all consents, waivers, assignments and other approvals and actions that are required in connection with the transactions contemplated by this Agreement under any Contract to which Seller is a party (collectively, "Consents") in or der to preserve all rights and benefits of Seller thereunder.

(b)

No Authorization or Order of, registration, declaration or filing with, or notice to, any Governmental Entity or other Person, is required by or with respect to Seller in connection with the execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby.

4.4

No Undisclosed Liabilities

To the best of its Knowledge, Seller has no liabilities, obligations or commitments of any nature whatsoever, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, matured or unmatured or otherwise ("Liabilities"), except (a) those which are adequately reflected or reserved against in the balance sheet of the Business as of December 31, 2005, and (b) those which have been incurred in the ordinary course of business and consistent with past practice since December 31, 2005 and which are not, individually or in the aggregate, material in amount.

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4.5

Taxes

(a)

All Tax Returns required to have been filed by or with respect to Seller have been duly and timely filed (or, if due between the date hereof and the Closing Date, will be duly and timely filed), and each such Tax Return correctly and completely reflects Liability for Taxes and all other information required to be reported thereon.  All Taxes owed by Seller (whether or not shown on any Tax Return) have been timely paid (or, if due between the date hereof and the Closing Date, will be duly and timely paid).  Seller has adequately provided for, in its books of account and related records, Liability for all unpaid Taxes, being current Taxes not yet due and payable.

(b)

There is no action or audit now proposed, threatened or pending against, or with respect to, Seller in respect of any Taxes.  Seller is not the beneficiary of any extension of time within which to file any Tax Return, nor has Seller made (or had made on its behalf) any requests for such extensions.  No claim has ever been made by an authority in a jurisdiction where Seller does not file Tax Returns that any of them is or may be subject to taxation by that jurisdiction or that any of them must file Tax Returns.  There are no Liens on any of the stock or assets of Seller with respect to Taxes.

(c)

Seller has withheld and timely paid all Taxes required to have been withheld and paid and has complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto.

(d)

There is no dispute or claim concerning any Liability for Taxes with respect to Seller for which notice has been provided, or which is asserted or threatened, or which is otherwise known to Seller.  No issues have been raised in any Taxes examination with respect to Seller which, by application of similar principles, could be expected to result in Liability for Taxes for Seller or period not so examined.  Seller has delivered to Buyer correct and complete copies of all federal income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by Seller.  Seller has not waived (or is subject to a waiver of) any statute of limitations in respect of Taxes or has agreed to (or is subject to) any extension of time with respect to a Tax assessment or deficiency.

(e)

Seller has never been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code.  Seller has never held a "United States real property interest" within the meaning of Section 897(1)(1) of the Code.  Seller is not a "foreign person" within the meaning of Section 1445 of the Code.  Seller has not made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could obligate it to make payments that would result in a nondeductible expense under Section 280G of the Code or an excise Tax to the recipient of such payments pursuant to Section 4999 of the Code.  

(f)

Seller has disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Code.

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(g)

Seller is not a party to any Tax allocation or sharing agreement.  Seller has no Liability for the Taxes of any Person, other than under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local, or foreign Law) with respect to any Relevant Group of which Seller currently is a member.  Seller is not a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income tax purposes.  

4.6

Compliance with Law

(a)

Seller has conducted, and is conducting, the Business in compliance with all applicable Laws.

(b)

No event has occurred and no circumstances exist that (with or without the passage of time or the giving of notice) may result in a violation of, conflict with or failure on the part of Seller to conduct the Business in compliance with, any applicable Law. Seller has not received notice regarding any violation of, conflict with, or failure to conduct the Business in compliance with, any applicable Law.

4.7

Business Authorizations

(a)

Seller owns, holds or lawfully uses in the operation of the Business all Authorizations which are necessary for it to conduct the Business as currently conducted or as proposed to be conducted or for the ownership and use of the assets owned or used by Seller in the conduct of the Business (the "Business Authorizations") free and clear of all Liens. Such Business Authorizations are valid and in full force and effect.  All material Business Authorizations are listed in the Seller Disclosure Schedule.  

(b)

No event has occurred and no circumstances exist that (with or without the passage of time or the giving of notice) may result in a violation of, conflict with, failure on the part of Seller to comply with the terms of, or the revocation, withdrawal, termination, cancellation, suspension or modification of any Business Authorization.  Seller has not received notice regarding any violation of, conflict with, failure to comply with the terms of, or any revocation, withdrawal, termination, cancellation, suspension or modification of, any Business Authorization.  Seller is not in default, nor has Seller received notice of any claim of default, with respect to any Business Authorization.

(c)

No Person other than Seller owns or has any proprietary, financial or other interest (direct or indirect) in any Business Authorization.

4.8

Title to Personal Properties

(a)

The Seller Disclosure Schedule sets forth a complete and accurate list of all personal properties and assets ("Personal Property") that are Purchased Assets as of the date of this Agreement, with a current fair market value in excess of $10,000, specifying whether such Personal Property is owned or leased and, in the case of leased assets, indicating the parties to, execution dates of and annual payments under, the lease.

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(b)

With respect to Personal Property that it purports to own including all Personal Property reflected as owned on the Interim Balance Sheet (other than inventory sold in the ordinary course of the Business since the date thereof), Seller has good and transferable title to all such Personal Property, free and clear of all Liens except for Permitted Liens.

(c)

All leases under which Personal Property is leased are in full force and effect and constitute valid and binding obligations of the other party(ies) thereto, and neither Seller nor, to Seller's Knowledge, any other party thereto, is in breach of any of the terms of any such lease.

4.9

Condition of Tangible Assets

All equipment and other items of tangible property and assets which are owned, leased or used by Seller or any of its Subsidiaries are in good operating condition and repair (subject to normal wear and tear given the use and age of such assets), are usable in the regular and ordinary course of business and conform to all Laws and Authorizations relating to their construction, use and operation.

4.10

Real Property

Seller does not own any real property.  The Seller Disclosure Schedule contains a list of all real property and interests in real property leased by Seller Related to the Business (the "Leased Real Property").

4.11

Intellectual Property

(a)

As used in this Agreement, "Intellectual Property" means: (i) inventions (whether or not patentable), trade secrets, technical data, databases, customer lists, designs, tools, methods, processes, technology, ideas, know-how, source code, product road maps and other proprietary information and materials ("Proprietary Information"); (ii) trademarks and service marks (whether or not registered), trade names, logos, trade dress and other proprietary indicia and all goodwill associated therewith; (iii) documentation, advertising copy, marketing materials, web-sites, specifications, mask works, drawings, graphics, databases, recordings and other works of authorship, whether or not protected by Copyright; (iv) computer programs, including any and all software implementations of algorithms, models and methodologies, whether in source code or object code, design documents, flow-char ts, user manuals and training materials relating thereto and any translations thereof (collectively, "Software"); and (v) all forms of legal rights and protections that may be obtained for, or may pertain to, the Intellectual Property set forth in clauses (i) through (iv) in any country of the world ("Intellectual Property Rights"), including all letters patent, patent applications, provisional patents, design patents, PCT filings, invention disclosures and other rights to inventions or designs ("Patents"), all registered and unregistered copyrights in both published and unpublished works ("Copyrights"), all trademarks, service marks and other proprietary indicia (whether or not registered) ("Marks"), trade secret rights, mask works, moral rights or other literary property or authors rights, and all applications,

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registrations, issuances, divisions, continuations, renewals, reissuances and extensions of the foregoing.

(b)

The Seller Disclosure Schedule lists (by name, owner and, where applicable, registration number and jurisdiction of registration, application, certification or filing) all Intellectual Property that is owned by Seller and Related to the Business (whether exclusively, jointly with another Person or otherwise)  ("Seller Owned Intellectual Property"); provided that the Seller Disclosure Schedule is not required to list items of Seller Owned Intellectual Property which are both (i) immaterial to the Business and (ii) not registered or the subject of an application for registration. Except as described in the Seller Disclosure Schedule, Seller owns the entire right, title and interest to all Seller Owned Intellectual Property free and clear of all Liens.

(c)

The Seller Disclosure Schedule lists all licenses, sublicenses and other agreements ("In-Bound Licenses") pursuant to which a third party authorizes Seller to use, practice any rights under, or grant sublicenses with respect to, any Intellectual Property Related to the Business owned by a third party other than In-Bound Licenses that consist solely of "shrink-wrap" and similar commercially available end-user licenses, including the incorporation of any such Intellectual Property into products of Seller and, with respect to each In-Bound License, whether the In-Bound License is exclusive or non-exclusive.

(d)

The Seller Disclosure Schedule lists all licenses, sublicenses and other agreements ("Out-Bound Licenses") pursuant to which Seller authorizes a third party to use, practice any rights under, or grant sublicenses with respect to, any Seller Owned Intellectual Property or pursuant to which Seller grants rights to use or practice any rights under any Intellectual Property owned by a third party and, with respect to each Out-Bound License, whether the Out-Bound License is exclusive or non-exclusive.

(e)

Seller (i) exclusively owns the entire right, interest and title to each item of Intellectual Property Related to the Business as it is currently conducted or as proposed to be conducted free and clear of Liens (including the design, manufacture, license and sale of all products currently under development or in production), or (ii) otherwise rightfully uses or otherwise enjoys such Intellectual Property pursuant to the terms of a valid and enforceable In-Bound License that is listed in the Seller Disclosure Schedule. The Seller Owned Intellectual Property, together with Seller's rights under the In-Bound Licenses listed in the Seller Disclosure Schedule (collectively, the "Seller Intellectual Property"), constitutes all the Intellectual Property used in or necessary for the operation of the Business as it is currently conducted and as proposed to be conducted.

(f)

All registration, maintenance and renewal fees related to Patents, Marks, Copyrights and any other certifications, filings or registrations that are owned by Seller and Related to the Business ("Seller Registered Items") that are currently due have been paid and all documents and certificates related to such Seller Registered Items have been filed with the relevant Governmental Entity or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such

14

Seller Registered Items.  There are no actions that must be taken by Buyer within 120 days after the date hereof, including the payment of any registration, maintenance or renewal fees or the filing of any documents, applications or certificates for the purposes of maintaining, perfecting or preserving or renewing any Seller Registered Items. All Seller Registered Items are in good standing, held in compliance with all applicable legal requirements and enforceable by Seller.  All Patents Related to the Business that have been issued to Seller are valid.  

(g)

Seller is not aware of any challenges (or any basis therefor) with respect to the validity or enforceability of any Seller Owned Intellectual Property. The Seller Disclosure Schedule lists the status of any proceedings or actions before the United States Patent and Trademark Office or any other Governmental Entity anywhere in the world related to any of the Seller Owned Intellectual Property, including the due date for any outstanding response by Seller in such proceedings. Seller has not taken any action or failed to take any action that could reasonably be expected to result in the abandonment, cancellation, forfeiture, relinquishment, invalidation, waiver or unenforceability of any Seller Owned Intellectual Property. The Seller Disclosure Schedule lists all previously held Seller Registered Items that Seller has abandoned, cancelled, forfeited or relinquished during the 12 months prior to the date of thi s Agreement.

(h)

None of the products or services currently or formerly developed manufactured, sold, distributed, provided, shipped or licensed by Seller, in each case Related to the Business, has infringed or infringes upon, or otherwise unlawfully used or uses, the Intellectual Property Rights of any third party. Seller, by conducting the Business as currently conducted or as proposed to be conducted, has not infringed or does not infringe upon, or otherwise unlawfully has used or uses, any Intellectual Property Rights of a third party. Seller has not received any communication alleging that Seller has violated or, by conducting the Business as currently conducted or as proposed to be conducted, would violate, any Intellectual Property Rights of a third party nor, to Seller's Knowledge, is there any basis therefor.  No Action has been instituted, or, to Seller's Knowledge, threatened, relating to any Intellectual Pr operty formerly or currently used by Seller Related to the Business and none of the Seller Intellectual Property is subject to any outstanding Order.  To Seller's Knowledge, no Person has infringed or is infringing any Intellectual Property Rights of Seller Related to the Business or has otherwise misappropriated or is otherwise misappropriating any Seller Intellectual Property.

(i)

With respect to the Proprietary Information of Seller Related to the Business, the documentation relating thereto is current, accurate and sufficient in detail and content to identify and explain it and to allow its full and proper use without reliance on the special knowledge or memory of others. To the best of Seller’s Knowledge, Seller has taken commercially reasonable steps to protect and preserve the confidentiality of all Proprietary Information owned by Seller Related to the Business that is not covered by an issued Patent. Any receipt or use by, or disclosure to, a third party of Proprietary Information Related to the Business owned by Seller has been pursuant to the terms of binding written confidentiality agreement between Seller and such third party ("Nondisclosure Agreements").  True and complete copies of the Nondisclosure Agreements, and any amendments thereto, have been provided to Buyer. Seller is, and to

15

Seller's Knowledge, all other parties thereto are, in compliance with the provisions of the Nondisclosure Agreements. Seller is in compliance with the terms of all Contracts pursuant to which a third party has disclosed to, or authorized Seller to use, Proprietary Information Related to the Business owned by such third party.

(j)

All current and former employees, consultants and contractors of the Business have executed and delivered, and are in compliance with, enforceable agreements regarding the protection of Proprietary Information and providing valid written assignments of all Intellectual Property Related to the Business conceived or developed by such employees, consultants or contractors in connection with their services for the Business ("Work Product Agreements").  True and complete copies of the Work Product Agreements have been provided to Buyer.  No current or former employee, consultant or contractor or any other Person has any right, claim or interest to any of the Seller Owned Intellectual Property.

(k)

No employee, consultant or contractor of Seller has been, is or will be, by performing services for the Business, in violation of any term of any employment, invention disclosure or assignment, confidentiality or noncompetition agreement or other restrictive covenant or any Order as a result of such employee's, consultant's or contractor's employment in the Business or any services rendered by such employee, consultant or contractor.

(l)

All Intellectual Property that has been distributed, sold or licensed to a third party by Seller Related to the Business that is covered by warranty conformed and conforms to, and performed and performs in accordance with, the representations and warranties provided with respect to such Intellectual Property by or on behalf of Seller for the time period during which such representations and warranties apply.

(m)

The execution and delivery of this Agreement by Seller does not, and the consummation of the transactions contemplated hereby (in each case, with or without the giving of notice or lapse of time, or both), will not, directly or indirectly, result in the loss or impairment of, or give rise to any right of any third party to terminate or reprice or otherwise renegotiate Seller's rights to own any of its Intellectual Property or their respective rights under any Out-Bound License or In-Bound License, nor require the consent of any Governmental Entity or other third party in respect of any such Intellectual Property.

(n)

Software.  

(i)

The Software owned, or purported to be owned by Seller (collectively, the "Seller Owned Software,") was either (A) developed by employees of Seller within the scope of their employment by Seller, (B) developed by independent contractors who have assigned all of their right, title and interest therein to Seller pursuant to written agreements or (C) otherwise acquired by Seller from a third party pursuant to a written agreement in which such third party assigns all of its right, title and interest therein.  None of Seller Owned Software contains any programming code, documentation or other materials or development environments that embody Intellectual

16

Property Rights of any person other than Seller, other than such materials obtained by Seller from other Persons who make such materials generally available to all interested purchasers or end-users on standard commercial terms. 

(ii)

Seller has not exported or transmitted Software or other material in connection with Seller's business to any country to which such export or transmission is restricted by any applicable Law, without first having obtained all necessary and appropriate Authorizations.

(iii)

Seller has not exported or transmitted Software or other material in connection with Seller's business to any country to which such export or transmission is restricted by any applicable Law, without first having obtained all necessary and appropriate Authorizations.

(iv)

Seller Owned Software is free of any disabling codes or instructions (a "Disabling Code"), and any virus or other intentionally created, undocumented contaminant (a "Contaminant"), that may, or may be used to, access, modify, delete, damage or disable any Systems or that may result in damage thereto.  Seller have taken reasonable steps and implemented reasonable procedures to ensure that its and their internal computer systems used in connection with Seller's business are free from Disabling Codes and Contaminants.  The Software licensed by Seller is free of any Disabling Codes or Contaminants that may, or may be used to, access, modify, delete, damage or disable any of the hardware, software, databases or embedded control systems of Seller ("Systems") or that might result in damage thereto.  Seller has taken all reasonable step s to safeguard their respective Systems and restrict unauthorized access thereto.

(v)

No Public Software: (A) forms part of any Seller Intellectual Property; (B) was, or is, used in connection with the development of any Seller Owned Intellectual Property or any products or services developed or provided by Seller; or (C) was, or is, incorporated or distributed, in whole or in part, in conjunction with Seller Intellectual Property.  "Public Software" means any software that contains, or is derived in any manner (in whole or in part) from, any software that is distributed as free software, open source software or similar licensing or distribution models, including software licensed or distributed under any of the following licenses or distribution models, or licenses or distribution models similar to any of the following: (i) GNU's General Public License or Lesser/Library GPL; (ii) Mozilla Public License; (iii) Netscape Public License; (iv) Sun Community So urce/ Industry Standard License; (v) BSD License; and (vi) Apache License.

4.12

Absence of Certain Changes or Events

Since May 31, 2005,

(a)

Seller has not amended or changed, or proposed to amend or change, its Charter Documents in a manner that could be expected to delay the consummation of the transactions contemplated by this Agreement;

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(b)

Seller has not sold, leased, transferred or assigned any property or assets Related to the Business;

(c)

Seller has not incurred, assumed or guaranteed any Indebtedness Related to the Business;

(d)

Seller has not mortgaged, pledged or subjected to Liens any assets, properties or rights Related to the Business, except for Liens arising under lease financing arrangements existing as of the Balance Sheet Date and Permitted Liens;

(e)

Seller has not entered into, amended, modified, canceled or waived any rights under, any Material Contract and no Material Contract has been terminated or cancelled;

(f)

Seller has not taken any action outside the ordinary course of the Business;

(g)

there has not been any violation of, or conflict with, any applicable Law or any Business Authorization; and

(h)

Seller has not agreed, whether in writing or otherwise, to do any of the foregoing.

4.13

Contracts

(i)

Except as set forth in Section 4.13 of the Seller Disclosure Schedule, Seller is not party to, or bound by, any Contracts that are Related to the Business.

(b)

Each Contract required to be listed in Section 4.13 of the Seller Disclosure Schedule (collectively, the "Material Contracts") is valid and enforceable in accordance with its terms. Seller has complied in all material respects with and is in compliance in all material respects with, and to Seller's Knowledge, all other parties thereto have complied with and are in compliance in all material respects with, the provisions of each Material Contract.

(c)

Seller is not, and to Seller's Knowledge, no other party thereto is, in default in the performance, observance or fulfillment of any obligation, covenant, condition or other term contained in any Material Contract, and Seller has not given or received notice to or from any Person relating to any such alleged or potential default that has not been cured. No event has occurred which with or without the giving of notice or lapse of time, or both, may conflict with or result in a violation or breach of, or give any Person the right to exercise any remedy under or accelerate the maturity or performance of, or cancel, terminate or modify, any Material Contract.

(d)

Seller has delivered accurate and complete copies of each Material Contract to Buyer.

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4.14

Sufficiency of Purchased Assets

(a)

The Purchased Assets will be sufficient for the conduct and operation of the Business by Buyer following the Closing in the same manner as conducted and operated by Seller on the Balance Sheet Date, in the period since the Balance Sheet Date and as currently conducted.

(b)

None of the Excluded Assets is material to the Business.

4.15

Litigation

(a)

There is no action, suit or proceeding, claim, arbitration, litigation or investigation (each, an "Action"), in each case Related to the Business, (i) pending or, to Seller's Knowledge, threatened against or affecting Seller, or (ii) that challenges or seeks to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement or the Ancillary Agreements. No event has occurred or circumstances exist that may give rise or serve as a basis for any such Action. There is no Action against any current or, to Seller's Knowledge, former director or employee of the Business with respect to which Seller has or is reasonably likely to have an indemnification obligation.

(b)

There is no unsatisfied judgment, penalty or award, in each case Related to the Business, against or affecting Seller or any of its respective assets, properties or rights.

4.16

Employee Benefits

(a)

The Seller Disclosure Schedule sets forth a complete and accurate list of all Benefit Plans maintained or contributed to by Seller for the benefit of any present or former directors, employees, contractors or consultants of the Business or with respect to which Seller otherwise has any present or future Liability (collectively, "Seller Benefit Plans"). A current, accurate and complete copy of each Seller Benefit Plan has been provided to Buyer. Seller has no intent or commitment to create any additional Seller Benefit Plan or amend any Seller Benefit Plan.

(b)

Each Seller Benefit Plan has been and is currently administered in compliance in all material respects with all reporting, disclosure and other requirements of ERISA and the Code applicable to such Seller Benefit Plan. Each Seller Benefit Plan that is an employee pension benefit plan  (as defined in Section 3(2) of ERISA) and which is intended to be qualified under Section 401(a) of the Code (a "Pension Plan"), has been determined by the Internal Revenue Service to be so qualified and no condition exists that would adversely affect any such determination.  No Seller Benefit Plan is a "defined benefit plan" as defined in Section 3(35) of ERISA.

(c)

There are no material outstanding Liabilities of any Seller Benefit Plan other than Liabilities for benefits to be paid to participants in any Seller Benefit Plan and their beneficiaries in accordance with the terms of such Seller Benefit Plan.

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4.17

Labor and Employment Matters

(a)

Seller has complied with each, and to the best of Seller’s Knowledge, is not in violation of any, Law relating to anti-discrimination and equal employment opportunities in connection with the Business. There are, and have been, no violations of any other Law respecting the hiring, hours, wages, occupational safety and health, employment, promotion, termination or benefits of any Business Employee or other Person in connection with the Business. Seller has filed all reports, information and notices required under any Law respecting the hiring, hours, wages, occupational safety and health, employment, promotion, termination or benefits of any Business Employee or other Person in connection with the Business, and will timely file prior to Closing all such reports, information and notices required by any Law to be given prior to Closing.

(b)

Seller has paid or properly accrued in the ordinary course of the Business all wages and compensation due to Business Employees, including all vacations or vacation pay, holidays or holiday pay, sick days or sick pay, and bonuses.

(c)

Seller is not a party to any Contract which restricts Seller from relocating, closing or terminating any of its operations or facilities or any portion thereof.  Seller has not effectuated a "plant closing" (as defined in the WARN Act) or (ii) a "mass lay-off" (as defined in the WARN Act), in either case affecting any site of employment or facility of Seller, except in accordance with the WARN Act.  The consummation of the transactions contemplated by this Agreement will not create liability for any act by Seller on or prior to the Closing under the WARN Act or any other Law respecting reductions in force or the impact on employees of plant closings or sales of businesses.

(d)

Seller has complied and is in compliance in all material respects with the requirements of the Immigration Reform and Control Act of 1986. The Seller Disclosure Schedule sets forth a true and complete list of all Business Employees working in the United States who are not U.S. citizens and a description of the legal status under which each such Business Employee is permitted to work in the United States.  All Business Employees who are performing services for Seller in the United States are legally able to work in the United States and will be able to continue to work in the Business in the United States following the consummation of the transactions contemplated by this Agreement.

4.18

Environmental

(a)

As used in this Agreement, the following words and terms have the following definitions:

(i)

The term "Environment" means all indoor or outdoor air, surface water, groundwater, surface or subsurface land, including all fish, wildlife, biota and all other natural resources.

(ii)

The term "Environmental Action" means any claim, proceeding or other Action brought or threatened under any Environmental Law or the assertion of any claim with respect to Pre-Closing Environmental Liabilities.

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(iii)

The term "Environmental Clean-up Site" means any location which is listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System, or on any similar state or foreign list of sites requiring investigation or cleanup, or which is the subject of any pending or threatened Action related to or arising from any alleged violation of any Environmental Law, or at which there has been a threatened or actual Release of a Hazardous Substance.

(iv)

The term "Environmental Laws" means any and all applicable Laws and Authorizations issued, promulgated or entered into by any Governmental Entity relating to the Environment, worker health and safety, preservation or reclamation of natural resources, or to the management, handling, use, generation, treatment, storage, transportation, disposal, manufacture, distribution, formulation, packaging, labeling, Release or threatened Release of or exposure to Hazardous Substances, whether now existing or subsequently amended or enacted and any similar or implementing state or local Law, and any non-U.S. Laws and regulations of similar import, and all amendments or regulations promulgated thereunder; and any common law doctrine, including but not limited to, negligence, nuisance, trespass, personal injury, or property damage related to or arising out of the presence, Release, or exposure to Hazardous Substances.

(v)

The term "Environmental Permit" means any Authorization under Environmental Law and includes any and all Orders issued or entered into by a Governmental Entity under Environmental Law.

(vi)

The term "Hazardous Substances" means all explosive or regulated radioactive materials or substances, hazardous or toxic materials, wastes or chemicals, petroleum and petroleum products (including crude oil or any fraction thereof), asbestos or asbestos containing materials, and all other materials, chemicals or substances which are regulated by, form the basis of liability or are defined as hazardous, extremely hazardous, toxic or words of similar import, under any Environmental Law.

(vii)

The term "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing of Hazardous Substances into the Environment.

(b)

Seller has obtained, and is in compliance with, all Environmental Permits required in connection with the Business.  Each Environmental Permit, together with the name of the Governmental Entity issuing such Environmental Permit, is set forth in the Seller Disclosure Schedule.  All such Environmental Permits are valid and in full force and effect and all renewal applications for such Environmental Permits have been timely filed with the appropriate Governmental Entity.  None of such Environmental Permits will be terminated or impaired or become terminable as a result of the consummation of the transactions contemplated by this Agreement.  Seller has been, and is currently, in compliance with all Environmental Laws and Seller has not received notice alleging that Seller is not in such compliance with Environmental Laws, in each case in connection with the Business.

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(c)

There are no past, pending or, to Seller's Knowledge, threatened Environmental Actions against or affecting Seller in connection with the Business, and Seller is not aware of any facts or circumstances which could be expected to form the basis for any such Environmental Action.

(d)

Seller has not entered into or agreed to any Order, and Seller is not subject to any Order, relating to compliance with any Environmental Law or to investigation or cleanup of a Hazardous Substance under any Environmental Law, in each case in connection with the Business.

(e)

No Lien has been attached to, or asserted against, any assets or rights in connection with the Business pursuant to any Environmental Law, and, to Seller's Knowledge, no such Lien has been threatened.  

(f)

To Seller’s Knowledge, there has been no treatment, storage, disposal or Release of any Hazardous Substance at, from, into, on or under any Leased Real Property or any other property currently or formerly owned, operated or leased by Seller in connection with the Business.  To Seller’s Knowledge, no Hazardous Substances are present in, on, about or migrating to or from any Leased Real Property that could be expected to give rise to an Environmental Action against Seller.

(g)

There are no polychlorinated biphenyls ("PCBs") leaking from any article, container or equipment on, under or about the Leased Real Property and there are no such articles, containers or equipment containing PCBs in, at, on, under or within the Leased Real Property.

(h)

There is no asbestos containing material or lead based paint containing materials in at, on, under or within the Leased Real Property.

(i)

Seller has not in connection with the Business transported or arranged for the treatment, storage, handling, disposal, or transportation of any Hazardous Material to any off-site location which is an Environmental Clean-up Site.

4.19

Insurance

(a)

All premiums due under the insurance policies that cover the Business (“Policies”) have been paid in full or, with respect to premiums not yet due, accrued.  Seller has not received a notice of cancellation of any Policy or of any material changes that are required in the conduct of the Business as a condition to the continuation of coverage under, or renewal of, any such Policy. There is no existing default or event which, with the giving of notice or lapse of time or both, would constitute a default under any Policy or entitle any insurer to terminate or cancel any Policy with respect to the Business.  Seller has no Knowledge of any threatened termination of any Policy.

4.20

Product Warranty

(a)

There are no warranties (express or implied) outstanding with respect to any products currently or formerly manufactured, sold, distributed, shipped or

22

licensed ("Products"), or any services rendered, by Seller in connection with the Business, beyond that set forth in the standard conditions of sale or service, copies of which are included in the Seller Disclosure Schedule.

(b)

Each Product manufactured, sold, distributed, shipped or licensed, or service rendered, by Seller in connection with the Business has been in conformity with all applicable contractual commitments and warranties. There are no material design, manufacturing or other defects, latent or otherwise, with respect to any Products.  Each Product that has been manufactured, sold, distributed, shipped or licensed prior to Closing contains all warnings required by applicable Law and such warnings are in accordance with reasonable industry practice.

4.21

Solvency

(a)

Seller is not insolvent nor will be rendered insolvent by any of the transactions contemplated by this Agreement and the Ancillary Agreements. "Insolvent" means, with respect to any Person, that the sum of the debts and other probable Liabilities of such Person exceeds the present fair saleable value of such Person's assets.

(b)

Immediately after giving effect to the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements: (i) Seller will be able to pay its Liabilities as they become due in the usual course of its business, (ii) Seller will not have an unreasonably small capital with which to conduct its present or proposed business, (iii) Seller will have assets (calculated at fair market value) that exceed its Liabilities, and (iv) taking into account all pending and threatened litigation, final judgments against Seller in actions for money damages are not reasonably anticipated to be rendered at a time when, or in amounts such that, Seller will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account the maximum probable amount of such judgments in any such actions and the earliest reasonable time at which such judgments might be rendered) as well a s all other obligations of Seller.  The cash available to Seller, after taking into account all other anticipated uses of the cash, will be sufficient to pay all such Liabilities and judgments promptly in accordance with their terms.

4.22

Brokers or Finders

There is no investment banker, broker, finder, financial advisor or other intermediary which has been retained by or is authorized to act on behalf of Seller or Stockholders who is entitled to any fee or commission in connection with the transactions contemplated by this Agreement. No claim exists or will exist against Seller, or, based on any action by Seller or against Seller for payment of any "topping," "break-up" or "bust­-up" fee or any similar compensation or payment arrangement as a result of the transactions contemplated hereby.

4.23

Completeness of Disclosure

No representation or warranty by Seller in this Agreement, and no statement made by Seller in the Seller Disclosure Schedule, the Exhibits attached hereto or any certificate

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furnished or to be furnished to Buyer pursuant hereto contains or will at the Closing contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make any statement herein or therein, in light of the circumstances under which they were made, not misleading.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to Seller that each statement contained in this Article V is true and correct as of the date hereof.

5.1

Organization and Good Standing

Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation, has all requisite power to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which it owns or leases property or conducts any business so as to require such qualification, except for those jurisdictions where the failure to be so qualified and in good standing would not reasonably be expected to be, individually or in the aggregate, material to Buyer taken as a whole.

5.2

Authority and Enforceability

(a)

Buyer has the requisite power and authority to enter into this Agreement and to consummate the purchase of the Purchased Assets.  The execution and delivery of this Agreement by Buyer and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Buyer.

(b)

This Agreement has been duly executed and delivered by Buyer and, assuming due authorization, execution and delivery by Seller, constitutes the valid and binding obligation of Buyer.

5.3

No Conflicts; Consents

(a)

The execution and delivery of this Agreement by Buyer do not, and the execution and delivery of the Ancillary Agreements to which Buyer is a party and the consummation of the transactions contemplated hereby and thereby will not, (i) violate the provisions of any of the Charter Documents of Buyer, (ii) violate any Contract to which Buyer is a party, (iii) to the knowledge of Buyer, violate any Law of any Governmental Entity applicable to Buyer on the date hereof, or (iv) to the knowledge of Buyer, result in the creation of any Liens upon any of the assets owned or used by Buyer, except in each such case where such violation or Lien would not reasonably be expected materially to impair or delay the ability of Buyer to perform its obligations under this Agreement or the Ancillary Agreements.   

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(b)

No Authorization or Order of, registration, declaration or filing with, or notice to any Governmental Entity is required by Buyer in connection with the execution and delivery of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby, except for such Authorizations, Orders, registrations, declarations, filings and notices the failure to obtain which would not reasonably be expected to materially impair the ability of Buyer  to perform its obligations under this Agreement and the Ancillary Agreements to which Buyer is a party.

5.4

 SEC Filings; Financial Statements.

(a)

Buyer has made available to Seller all forms, reports and documents required to be filed by it with the Securities and Exchange Commission (the "SEC") since its fiscal year 2003 (collectively, the "Buyer SEC Reports").  

5.5

Compliance with Law

Buyer has complied with each, and is not in violation of, any applicable Law to which the Buyer or its business, operations, assets or properties is or has been subject, and no event has occurred and no circumstances exist that (with or without the passage of time or the giving of notice) may result in a violation of, conflict with or failure on the part of the Buyer to comply with, any Law.  Buyer has not received notice regarding any such violation of, conflict with, or failure to comply with, any Law.  Buyer has further operated  the  Business since June 1, 2005, in compliance with each material, applicable law.

5.6

Absence of Certain Changes or Events

Since the date of the last filed Buyer SEC Report, to the date of this Agreement (with respect to the representation and warranty made as of the date of this Agreement) and to the Closing Date (with respect to the representation and warranty made as of the Closing Date):

(a)

there has not been any material adverse change in the business, financial condition, operations or results of operations of Buyer taken as a whole;

(b)

Buyer has not amended or otherwise modified its Charter Documents;

(c)

Buyer has not declared, set aside or paid any dividend or other distribution (whether in cash, stock or property) with respect to any of its securities;

(d)

Buyer has not split, combined or reclassified any of its securities, or issued, or authorized for issuance, any securities other than the grant of Buyer stock options and the issuance of shares of Buyer common stock upon exercise of Buyer stock options, in each case, in the ordinary course of business consistent with past practice; and

(e)

Buyer has not altered any term of any outstanding securities.

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5.7

Brokers or Finders

Other than Baytree Capital Associates, LLC (“Baytree Capital”), there is no investment banker, broker, finder, financial advisor or other intermediary which has been retained by or is authorized to act on behalf of Buyer who is entitled to any fee or commission in connection with the transactions contemplated by this Agreement. No claim exists or will exist against Buyer, or based on any action by Buyer against Buyer, for payment of any "topping," "break-up" or "bust­-up" fee or any similar compensation or payment arrangement as a result of the transactions contemplated hereby.

5.8

Information Supplied

The information supplied by the Buyer for use in the Information Statement will not contain any untrue statement of a material fact or omit to state a material fact necessary to make any statement therein, in light of the circumstances under which they were made, not misleading.

ARTICLE VI

COVENANTS OF BUYER AND SELLER

6.1

Regulatory Approvals

(a)

Buyer and Seller shall each promptly apply for, and take all reasonably necessary actions to obtain or make, as applicable, all Orders and Authorizations of, and all filings with, any Governmental Entity or other Person required to be obtained or made by it for the consummation of the transactions contemplated by this Agreement. Each party shall cooperate with and promptly furnish information to the other party necessary in connection with any requirements imposed upon such other party in connection with the consummation of the transactions contemplated by this Agreement.  Buyer and Seller shall each be responsible for one half of all filing and other similar fees payable in connection with such filings and for any local counsel fees.

(b)

Seller shall assist Buyer in identifying the Authorizations required by Buyer to operate and conduct the Business from and after the Closing Date and will either transfer current Business Authorizations of Seller to Buyer or assist Buyer in obtaining new Authorizations.

6.2

Sale of Shares Pursuant to Regulation D

Each of Buyer and Seller shall use reasonable best efforts to cause the issuance of the shares of Buyer Common Stock to be issued in the Asset Purchase pursuant to an exemption under Regulation D promulgated under the Securities Act.

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6.3

Public Announcements

Neither Buyer nor Seller shall make, or cause to be made, any press release or other public statement or any statement to any analyst or member of the press concerning the transactions contemplated by this Agreement without the approval of the other party hereto; provided, however, that Buyer may, without such approval, make such press releases or other public statements as it reasonably believes are required under the rules of the OTC Bulletin Board or applicable securities Laws.

6.4

Names

(a)

On the Closing Date, Seller shall deliver to Buyer all such executed documents as may be required to change the name of Seller on that date to another name or names bearing no similarity to any of the Names, including, where applicable, name change amendments and appropriate name change notices for each state where Seller is qualified to do business. Seller hereby appoints Buyer as its attorney-in-fact to file all such documents on or after the Closing Date.  Seller will terminate the use of any and all d/b/a's currently or formerly used by it Related to the Business. "Names" means "America’s Biggest" or any name, logo or trademark that includes "America’s Biggest", any variation and derivatives thereof and any other logos or trademarks of the Business transferred to Buyer pursuant to this Agreement and the Ancillary Agreements.

6.5

Employees

(a)

Any and all Liabilities relating to or arising out of the employment, or cessation of employment, of any Business Employee on or prior to the close of business on the Closing Date shall be the sole responsibility of Seller, including wages and other remuneration due through the close of business on the Closing Date.  

(b)

Seller shall be liable for any severance, separation, deferred compensation or similar benefits that are payable to any Person who is or was an employee of Seller including any Person whose employment with the Business was terminated prior to the Closing ("Seller Employees").

(c)

Seller shall be liable for the administration and payment of all workers' compensation Liabilities and benefits with respect to Seller Employees.  

(d)

Seller shall be liable for the administration and payment of all health and welfare Liabilities and benefits under the Seller Benefit Plans with respect to Seller Employees.

(e)

Seller shall retain and perform all Liabilities and maintain all insurance under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") with respect to Seller Employees and their covered dependents.

(f)

Buyer shall have no obligation with respect to any Business Employee or any other employee of Seller.

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(g)

Nothing in this Agreement confers upon any Business Employee any rights or remedies of any nature or kind whatsoever under or by reason of this Section 6.5.  

6.6

Taxes

(a)

Seller shall pay all federal, state and local sales, documentary and real estate and other transfer Taxes, if any, due as a result of the purchase, sale or transfer of the Purchased Assets in accordance herewith whether imposed by Law on Seller or Buyer.

(b)

All real property Taxes, personal property Taxes and similar ad valorem obligations levied with respect to the Purchased Assets for a taxable period that includes (but does not end on) the Closing Date shall be apportioned between Seller and Buyer as of the Closing Date based on the number of days of such taxable period included in the period ending with and including the Closing Date (with respect to any such taxable period, the "Pre-Closing Tax Period"), and the number of days of such taxable period beginning after the Closing Date (with respect to any such taxable period, the "Post-Closing Tax Period").  Seller shall be liable for the proportionate amount of such Taxes that is attributable to the Pre-Closing Tax Period, and Buyer shall be liable for the proportionate amount of such Taxes that is attributable to the Post-Closing Period.  If bills for such Taxes have not been issued as of the Closing Date, and, if the amount of such Taxes for the period including the Closing Date is not then known, the apportionment of such Taxes shall be made at Closing on the basis of the prior period's Taxes.  After Closing, upon receipt of bills for the period including the Closing Date, adjustments to the apportionment shall be made by the parties, so that if either party paid more than its proper share at the Closing, the other party shall promptly reimburse such party for the excess amount paid by them.

(c)

Buyer and Seller agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information and assistance relating to the Business, the Purchased Assets and Assumed Liabilities (including access to books and records) as is reasonably necessary for the filing of all Tax Returns, the making of any election relating to Taxes, the preparation for any audit by any Taxing Authority, and the prosecution or defense of any Action relating to any Tax.  Any expenses incurred in furnishing such information or assistance shall be borne by the party requesting it.

6.7

Bulk Sales Laws

Each Party hereby waives compliance by the other with the provisions of the Bulk Sales Law of any state.

6.8

Discharge of Business Obligations After Closing

(a)

From and after the Closing, Seller shall pay and discharge on a timely basis all of the Excluded Liabilities.

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6.9

Further Assurances

Upon the terms and subject to the conditions hereof each of the parties hereto shall execute such documents and other instruments and take such further actions as may be reasonably required to carry out the provisions hereof and consummate the Asset Purchase and the transactions contemplated hereby.

ARTICLE VII

CONDITIONS TO CLOSING

7.1

Conditions to Obligations of Buyer and Seller

(a)

All Authorizations and Orders of, declarations and filings with, and notices to any Governmental Entity, required to permit the consummation of the transactions contemplated by this Agreement shall have been obtained or made and shall be in full force and effect.

(b)

No temporary restraining order, preliminary or permanent injunction or other Order preventing the consummation of the transactions contemplated by this Agreement shall be in effect. No Law shall have been enacted or shall be deemed applicable to the transactions contemplated by this Agreement which makes the consummation of such transactions illegal.

7.2

Conditions to Obligations of Buyer

(a)

The representations and warranties of Seller set forth in this Agreement shall have been true and correct at and as of the date hereof and shall be true and correct at and as of the Closing Date as if made at and as of the Closing Date, except to the extent that such representations and warranties refer specifically to an earlier date, in which case such representations and warranties shall have been true and correct as of such earlier date.

(b)

Seller shall have performed or complied in all material respects with all obligations and covenants required by this Agreement to be performed or complied with by Seller at or prior to the Closing.

(c)

Buyer shall have received a certificate dated the Closing Date signed on behalf of Seller by the President of Seller to the effect that the conditions set forth in Sections 7.2(a) and 7.2(b) have been satisfied (the "Seller Closing Certificate").

(d)

No Action shall be pending or threatened before any court or other Governmental Entity or before any other Person wherein an unfavorable Order would (i) prevent consummation of any of the transactions contemplated by this Agreement or the Ancillary Agreements, (ii) affect adversely the right of Buyer to own the Purchased Assets or (iii) restrain or prohibit Buyer's ownership or operation (or that of its Subsidiaries or Affiliates) of all or any material portion of the Business or Purchased

29

Assets, or compel Buyer or any of its Subsidiaries or Affiliates to dispose of or hold separate all or any material portion of the Business or Purchased Assets or all or any material portion of the business and assets of Buyer and its Subsidiaries.  No such Order shall be in effect.

(e)

No Law shall have been enacted or shall be deemed applicable to the transactions contemplated by this Agreement or the Ancillary Agreements which has any of the effects set forth in clauses (i) through (iii) in Section 7.2(d).

(f)

Buyer shall have received all Authorizations that are necessary for it to conduct the Business substantially as conducted by Seller on May 31, 2005.

(g)

Seller shall have delivered to Buyer all agreements and other documents required to be delivered by Seller or a Stockholder to Buyer pursuant to Section 3.2 of this Agreement.

(h)

Buyer shall have received a certificate of the Secretary of Seller dated the Closing Date and certifying: (A) that attached thereto are true and complete copies of all resolutions adopted by the Board of Directors and the stockholders of Seller in connection with the transactions contemplated by this Agreement and the Ancillary Agreements, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated by this Agreement and the Ancillary Agreements; and (B) to the incumbency and specimen signature of each officer of Seller executing this Agreement and/or the Ancillary Agreements, and a certification by another officer of Seller as to the incumbency and signature of the Secretary of Seller.

(i)

Buyer shall have received evidence in form and substance satisfactory to Buyer that all Liens other than Permitted Liens with respect to the Purchased Assets have been released.

(j)

A registration rights agreement substantially in the form of Exhibit E hereto (the "Registration Rights Agreement") shall have been duly executed by Seller and Buyer.

7.3

Conditions to Obligations of Seller

(a)

The representations and warranties of Buyer set forth in this Agreement shall have been true and correct at and as of the date hereof and shall be true and correct at and as of the Closing Date as if made at and as of the Closing Date, except to the extent that such representations and warranties refer specifically to an earlier date, in which case such representations and warranties shall have been true and correct as of such earlier date.

(b)

Buyer shall have performed or complied in all material respects with all obligations and covenants required by this Agreement to be performed or complied with by Buyer at or prior to the Closing.

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(c)

Seller shall have received a certificate dated the Closing Date signed on behalf of Buyer by the President of Buyer to the effect that the conditions set forth in Section 7.3(a) and 7.3(b) have been satisfied (the "Buyer Closing Certificate").

(d)

No Action shall be pending or threatened before any court or other Governmental Entity or other Person wherein an unfavorable Order would (i) prevent consummation of any of the transactions contemplated by this Agreement and the Ancillary Agreements or (ii) cause any of the transactions contemplated by this Agreement and the Ancillary Agreements to be rescinded following consummation.  No such Order shall be in effect.

(e)

Buyer shall have delivered to Seller all agreements and other documents required to be delivered by Buyer to Seller pursuant to Section 3.3 of this Agreement.

(f)

The Registration Rights Agreement shall have been duly executed by Seller and Buyer.

ARTICLE VIII

TERMINATION

8.1

Termination

(a)

This Agreement may be terminated at any time prior to the Closing:

(i)

by mutual written consent of Buyer and Seller;

(ii)

by Buyer or Seller if:

(A)

the Closing does not occur on or before September 30, 2006; provided that the right to terminate this Agreement under this clause (ii)(A) shall not be available to any party whose breach of a representation, warranty, covenant or agreement under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date; or  

(B)

a Governmental Entity shall have issued an Order or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, which Order or other action is final and non-appealable;

(iii)

by Buyer if:

(A)

any condition to the obligations of Buyer hereunder becomes incapable of fulfillment other than as a result of a breach by Buyer of any

31

covenant or agreement contained in this Agreement, and such condition is not waived by Buyer; or

(B)

there has been a breach by Seller of any representation, warranty, covenant or agreement contained in this Agreement or the Seller Disclosure Schedule, or if any representation or warranty of Seller shall have become untrue, in either case such that the conditions set forth in Sections 8.2(a) or 8.2(b) would not be satisfied and, in either case, such breach is not curable, or, if curable, is not cured within 30 days after written notice of such breach is given to Buyer by Seller; or

(iv)

by Seller if:

(A)

any condition to the obligations of Seller hereunder becomes incapable of fulfillment other than as a result of a breach by Seller of any covenant or agreement contained in this Agreement, and such condition is not waived by Seller; or

(B)

there has been a breach by Buyer of any representation, warranty, covenant or agreement contained in this Agreement, or if any representation or warranty of Buyer shall have become untrue, in either case such that the conditions set forth in Sections 7.3(a) or 7.3(b) would not be satisfied and, in either case, such breach is not curable, or, if curable, is not cured within 30 days after written notice of such breach is given to Buyer by Seller.

(b)

The party desiring to terminate this Agreement pursuant to clause (ii), (iii) or (iv) shall give written notice of such termination to the other party hereto.

8.2

Effect of Termination

In the event of termination of this Agreement as provided in Section 8.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part of Buyer or Seller or their respective officers, directors, stockholders or Subsidiaries, provided, in addition, that the provisions of Section 6.3 (Public Announcements) and Article XI of this Agreement shall remain in full force and effect and survive any termination of this Agreement.

ARTICLE IX

INDEMNIFICATION

9.1

Survival

(a)

Except as set forth in Section 9.1(b), all representations and warranties contained in this Agreement, the Ancillary Agreements, any Schedule, certificate or other document delivered pursuant to this Agreement or the Ancillary Agreements, shall survive the Closing for a period of 18 months.

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(b)

The representations and warranties of Seller contained in Sections 4.1 (Organization and Good Standing) and 4.2 (Authority and Enforceability), shall survive the Closing indefinitely.  The representations and warranties of Seller contained in Sections 4.5 (Taxes) and 4.16 (Employee Benefits) shall survive the Closing until 60 days after the expira­tion of the applicable statute of limitations period (after giving effect to any waivers and extensions thereof).  The representations and warranties of Seller contained in Section 4.18 (Environmental) shall survive the Closing for a period of 3 years following the Closing Date.

(c)

The covenants and agreements which by their terms do not contemplate performance after the Closing shall survive the Closing for a period of 3 years.  The covenants and agreements which by their terms contemplate performance after the Closing Date shall survive the Closing indefinitely.

(d)

The period for which a representation or warranty, covenant or agreement survives the Closing is referred to herein as the "Applicable Survival Period."  In the event notice of claim for indemnification under Section 9.2 is given within the Applicable Survival Period, the representation or warranty, covenant or agreement that is the subject of such indemnification claim (whether or not formal legal action shall have been commenced based upon such claim) shall survive with respect to such claim until such claim is finally resolved. The Indemnitor shall indemnify the Indemnitee for all Losses (subject to the limitations set forth herein, if applicable) that the Indemnitee may incur in respect of such claim, regardless of when incurred.

9.2

Indemnification by Seller and the Stockholders

(a)

Seller and the Stockholders shall jointly and severally indemnify and defend Buyer and its Affiliates and their respective stockholders, members, managers, officers, directors, employees, agents, successors and assigns (the "Buyer Indemnitees") against, and shall hold them harmless from, any and all losses, damages, claims (including third party claims), charges, interest, penalties, Taxes, diminution in value, costs and expenses (including legal, consultant, accounting and other professional fees, costs of sampling, testing, investigation, removal, treatment and remediation of contamination and fees and costs incurred in enforcing rights under this Section 9.2) (collectively, "Losses") resulting from, arising out of, or incurred by any Buyer Indemnitee in connection with, or otherwise with respect to:

(i)

the failure of any representation and warranty or other statement by Seller contained in this Agreement, the Ancillary Agreements, the Seller Disclosure Schedule or any certificate or other document furnished or to be furnished to Buyer in connection with the transactions contemplated by this Agreement and the Ancillary Agreements to be true and correct in all respects as of the date of this Agreement and as of the Closing Date;

(ii)

any breach of any covenant or agreement of Seller contained in this Agreement, the Ancillary Agreements, the Seller Disclosure Schedule or

33

any certificate or other document furnished or to be furnished to Buyer in connection with the transactions contemplated by this Agreement and the Ancillary Agreements;

(iii)

any Excluded Liability, regardless of whether or not the Seller Disclosure Schedule discloses any such Excluded Liability, and including any Liability arising from Bulk Sales Laws; and

(iv)

any fees, expenses or other payments incurred or owed by Seller to any agent, broker, investment banker or other firm or person retained or employed by it in connection with the transactions contemplated by this Agreement and the Ancillary Agreements.

Any and all Losses hereunder shall bear interest from the date incurred until paid at the rate of 6% per annum.

(b)

Seller and the Stockholders shall not be liable for any Loss or Losses pursuant to Section 9.2(a)(i) ("Buyer Warranty Losses") (i) unless and until the aggregate amount of all Buyer Warranty Losses incurred by the Buyer Indemnitees exceeds $25,000 (the "Indemnification Threshold"), in which event Seller and the Stockholders shall be liable for all Buyer Warranty Losses from the first dollar, and (ii) to the extent that Buyer Warranty Losses exceed $300,000 in the aggregate; provided, however, nothing contained in this Section 9.2(b) shall be deemed to limit or restrict in any manner any rights or remedies which Buyer has, or might have, at Law, in equity or otherwise, based on fraud or a willful misrepresentation or willful breach of warranty hereunder.

9.3

Escrow Fund

(a)

As soon as practicable after the Closing, Buyer shall cause to be delivered to the Escrow Agent a certificate or certificates representing the Escrow Shares. The term "Escrow Shares" means an aggregate of 50,000 shares of Buyer Common Stock plus any shares as may be issued upon any stock split, stock dividend or similar recapitalization with respect to such shares.  The Escrow Shares shall be referred to hereinafter as the "Escrow Fund."  The Escrow Fund shall be available to compensate the Buyer Indemnitees pursuant to the indemnification obligations of the Indemnitors. In addition to any other remedies Buyer may have for Losses described in Section 9.2 hereof, Buyer may make a claim against the Escrow Fund for the amount of such Losses by sending a Notice of Claim described in Section 9.4 or 9.5 to the Escrow Agent. Buyer's recourse to the Escrow Fund shall be w ithout prejudice to any and all other remedies Buyer may have pursuant to this Article IX or otherwise. Buyer's remedies for Losses shall not be limited to the assets comprising the Escrow Fund.  

(b)

The Escrow Fund shall be held and disbursed by the Escrow Agent in accordance with the Escrow Agreement.  Subject to and in accordance with the Escrow Agreement, once the Indemnification Threshold has been reached, the full amount of all Losses (aggregating all of the claims against the Indemnitors) shall be subject to indemnification from the first dollar and a number of Escrow Shares shall be released to

34

Buyer from the Escrow Fund that have an aggregate value equal to the amount of all such Losses.  The value of the Escrow Shares shall be computed, with respect to Losses attributable to each respective claim, on the basis of the closing price of Buyer Common Stock on the trading day immediately preceding the Closing (the "Indemnity Stock Price").

9.4

Indemnification Procedures for Third Party Claims

(a)

In the event that an Indemnitee receives notice of the assertion of any claim or the commencement of any Action by a third party in respect of which indemnity may be sought under the provisions of this Article IX ("Third Party Claim"), the Indemnitee shall promptly notify the Indemnitor in writing of such Third Party Claim ("Notice of Claim").  Failure or delay in notifying the Indemnitor will not relieve the Indemnitor of any Liability it may have to the Indemnitee, except and only to the extent that such failure or delay causes actual harm to the Indemnitor with respect to such Third Party Claim.  The Notice of Claim shall set forth the amount, if known, or, if not known, an estimate of the foreseeable maximum amount of claimed Losses (which estimate shall not be conclusive of the final amount of such Losses) and a description of the basis for such Third Party C laim.

(b)

Subject to the further provisions of this Section 9.4, the Indemnitor will have 10 days (or less if the nature of the Third Party Claim requires) from the date on which the Indemnitor received the Notice of Claim to notify the Indemnitee that the Indemnitor will assume the defense or prosecution of such Third Party Claim and any litigation resulting therefrom with counsel of its choice and at its sole cost and expense (a "Third Party Defense").  If the Indemnitor assumes the Third Party Defense in accordance with the preceding sentence, the Indemnitor shall be conclusively deemed to have acknowledged that the Third Party Claim is within the scope of its indemnity obligation hereunder and shall hold the Indemnitee harmless from and against the full amount of any Losses resulting therefrom (subject to the terms and conditions of this Agreement).  Any Indemnitee shall have the right to employ separate counsel in any such Third Party Defense and to participate therein, but the fees and expenses of such counsel shall not be at the expense of the Indemnitor unless (A) the Indemnitor shall have failed, within the time after having been notified by the Indemnitee of the exist­ence of the Third Party Claim as provided in the first sentence of this paragraph (b), to assume the defense of such Third Party Claim, or (B) the employment of such counsel has been specifically authorized in writing by the Indemnitor, which authorization shall not be unreasonably withheld.

(c)

The Indemnitor will not be entitled to assume the Third Party Defense if:

(i)

the Third Party Claim seeks, in addition to or in lieu of monetary damages, any injunctive or other equitable relief (except where non-monetary relief is merely incidental to a primary claim or claims for monetary damages);

35

(ii)

the Third Party Claim relates to or arises in connection with any criminal proceed­ing, action, indictment, allegation or investigation;

(iii)

the Third Party Claim relates to or arises in connection with any Environmental Action;

(iv)

under applicable standards of professional conduct, a conflict on any significant issue exists between the Indemnitee and the Indemnitor in respect of the Third Party Claim;

(v)

the Third Party Claim involves a material customer or supplier of the Business;

(vi)

the Indemnitee reasonably believes an adverse determination with respect to the Third Party Claim would be detrimental to or injure the Indemnitee's reputation or future business prospects;

(vii)

the Indemnitor failed or is failing to vigorously prosecute or defend such Third Party Claim; or

(viii)

the Indemnitor fails to provide reasonable assurance to the Indemnitee of its financial capacity to prosecute the Third Party Defense and provide indemnification in accordance with the provisions of this Agreement; or

(ix)

the Third Party Claim would give rise to Losses which are more than the amount indemnifiable by the Indemnitor pursuant to this Article X.  

(d)

If by reason of the Third Party Claim a Lien, attachment, garnishment or execution is placed upon any of the property or assets of the Indemnitee, the Indemnitor, if it desires to exercise its right to assume such Third Party Defense, must furnish a satisfactory indemnity bond to obtain the prompt release of such Lien, attachment, garnishment or execution.

(e)

If the Indemnitor assumes a Third Party Defense, it will take all steps necessary in the defense, prosecution, or settlement of such claim or litigation and will hold all Indemnitees harmless from and against all Losses caused by or arising out of such Third Party Claim (subject to the last sentence of Section 9.4(b)).  The Indemnitor will not consent to the entry of any judgment or enter into any settlement except with the written consent of the Indemnitee to which the Indemnitor is obligated to furnish indemnification pursuant to this Agreement; provided that the consent of the Indemnitee shall not be required if all of the following conditions are met: (i) the terms of the judgment or proposed settlement include as an unconditional term thereof the giving to the Indemnitees by the third party of a release of the Indemnitees from all Liability in respect of such Third Party Claim, (ii) there is no finding or admission of (A) any violation of Law by the Indemnitees (or any Affiliate thereof), (B) any violation of the rights of any Person and (C) no effect on any other Action or claims of a similar nature that may be made against the Indemnitees (or any Affiliate thereof), and (iii) the sole form of relief is monetary damages which are paid in full by the Indemnitor. The

36

Indemnitor shall conduct the defense of the Third Party Claim actively and diligently, and the Indemnitee will provide reasonable cooperation in the defense of the Third Party Claim.  So long as the Indemnitor is reasonably conducting the Third Party Defense in good faith, the Indemnitee will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnitor (not to be unreasonably withheld or delayed).   Notwithstanding the foregoing, the Indemnitee shall have the right to pay or settle any such Third Party Claim; provided that, in such event, subject to the following sentence, it shall waive any right to indemnity therefor by the Indemnitor for such claim unless the Indemnitor shall have consented to such payment or settlement (such consent not to be unreasonably withheld or delayed).  If the Indemn itor is not reasonably conducting the Third Party Defense in good faith, the Indemnitee shall have the right to consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnitor and the Indemnitor shall reimburse the Indemnitee promptly for all Losses incurred in connection with such judgment or settlement.

(f)

In the event that (i) an Indemnitee gives Notice of Claim to the Indemnitor and the Indemnitor fails or elects not to assume a Third Party Defense which the Indemnitor had the right to assume under this Section 9.4 or (ii) the Indemnitor is not entitled to assume the Third Party Defense pursuant to this Section 9.4, the Indemnitee shall have the right, with counsel of its choice, to defend, conduct and control the Third Party Defense, at the sole cost and expense of the Indemnitor.  In each case, the Indemnitee shall conduct the Third Party Defense actively and diligently, and the Indemnitor will provide reasonable cooperation in the Third Party Defense.  The Indemnitee shall have the right to consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim on such terms as it may deem appropriate; provided, however, that the amount of an y settlement made or entry of any judgment consented to by the Indemnitee without the consent of the Indemnitor shall not be determinative of the validity of the claim, except with the consent of the Indemnitor (not to be unreasonably withheld or delayed). Notwithstanding Section 10.6 hereof, in connection with any Third Party Claim, the Indemnitor hereby consents to the nonexclusive jurisdiction of any court in which an Action in respect of a Third Party Claim is brought against any Indemnitee for purposes of any claim that the Indemnitee may have under this Article IX with respect to such Action or the matters alleged therein and agrees that process may be served on the Indemnitor with respect to such a claim anywhere in the world. If the Indemnitor does not elect to assume a Third Party Defense which it has the right to assume hereunder, the Indemnitee shall have no obligation to do so.   

(g)

Each party to this Agreement shall use its commercially reasonable efforts to cooperate and to cause its employees to cooperate with and assist the Indemnitee or the Indemnitor, as the case may be, in connection with any Third Party Defense, including attending conferences, discovery proceedings, hearings, trials and appeals and furnishing records, information and testimony, as may reasonably be requested; provided that each party shall use its best efforts, in respect of any Third Party Claim of which it has assumed the defense, to preserve the confidentiality of all confidential information and the attorney-client and work-product privileges.

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ARTICLE X

MISCELLANEOUS

10.1

Notices

If to Buyer, to:

Broadcaster, Inc.

9201 Oakdale Avenue

Chatsworth, CA 91311

Attn: Martin Wade, III, Chief Executive Officer

Facsimile:

With a required copy to:

Morgan, Lewis & Bockius, LLP

2 Palo Alto Square

3000 El Camino Real

Suite 700

Palo Alto, CA  94306

Attn: Tom Kellerman

Facsimile: (650) 843-4001

If to Seller or a Stockholder, to:

America's Biggest

720 University Avenue, Suite 130

Los Gatos, CA  95032

Attn:  Robert Rositano, Jr.

Facsimile: (408) 884-2021

With a required copy to:

Silicon Valley Law Group

25 Metro Drive, Suite 600

San Jose, CA  95110

Attn:  James C. Chapman

Facsimile: (408) 573-5701

or to such other address or to the attention of such Person or Persons as the recipient party has specified by prior written notice to the sending party (or in the case of counsel,

38

to such other readily ascertainable business address as such counsel may hereafter maintain).  If more than one method for sending notice as set forth above is used, the earliest notice date established as set forth above shall control.

10.2

Amendments and Waivers

(a)

Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective.

(b)

No failure or delay by any party in exercising any right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

(c)

To the maximum extent permitted by Law, (i) no waiver that may be given by a party shall be applicable except in the specific instance for which it was given and (ii) no notice to or demand on one party shall be deemed to be a waiver of any obligation of such party or the right of the party giving such notice or demand to take further action without notice or demand.

10.3

Expenses

Each party shall pay its own expenses incurred in this transaction, including, but not limited to, those for attorneys, accountants, and investment bankers.

10.4

Successors and Assigns

This Agreement may not be assigned by any party hereto without the prior written consent of the other parties.  Subject to the foregoing, all of the terms and provisions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective executors, heirs, personal representatives, successors and assigns.

10.5

Governing Law

This Agreement and the Exhibits and Schedules hereto shall be governed by and interpreted and enforced in accordance with the Laws of the State of California, without giving effect to any choice of Law or conflict of Laws rules or provisions (whether of the State of California or any other jurisdiction) that would cause the application of the Laws of any jurisdiction other than the State of California.

10.6

Counterparts

This Agreement may be executed in any number of counterparts, and any party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. This Agreement shall become effective when

39

each party hereto shall have received a counterpart hereof signed by the other parties hereto. The parties agree that the delivery of this Agreement may be effected by means of an exchange of facsimile signatures with original copies to follow by mail or courier service.

10.7

Third Party Beneficiaries

No provision of this Agreement is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder; except that (i) in the case of Article IX hereof, the Indemnitees and their respective heirs, executors, administrators, legal representatives, successors and assigns, and (ii) in the case of Section 2.8 hereof, Seller’s stockholders, are intended third party beneficiaries of such sections and shall have the right to enforce such sections in their own names.

10.8

Entire Agreement

This Agreement and the documents, instruments and other agreements specifically referred to herein or delivered pursuant hereto set forth the entire understanding of the parties hereto with respect to the purchase of the Purchased Assets.  All Exhibits and Schedules referred to herein are intended to be and hereby are specifically made a part of this Agreement.  Any and all previous agreements and understandings between or among the parties regarding the subject matter hereof, whether written or oral, including without limitation the Letter of Intent dated August 2, 2005, are superseded by this Agreement, other than the Nondisclosure Agreements, which shall continue in full force and effect in accordance with its terms.

10.9

Captions

All captions contained in this Agreement are for convenience of reference only, do not form a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement.

10.10

Severability

Any provision of this Agreement which is invalid or unenforceable in any jurisdiction shall be ineffective to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

10.11

Specific Performance

Buyer and Seller each agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by them in accordance with the terms hereof and that each party shall be entitled to specific performance of the terms hereof, in addition to any other remedy at Law or equity.

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10.12

Interpretation

(a)

The meaning assigned to each term defined herein shall be equally applicable to both the singular and the plural forms of such term and vice versa, and words denoting either gender shall include both genders as the context requires. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning.

(b)

The terms "hereof", "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement.

(c)

When a reference is made in this Agreement to an Article, Section, paragraph, Exhibit or Schedule, such reference is to an Article, Section, paragraph, Exhibit or Schedule to this Agreement unless otherwise specified.

(d)

The word "include", "includes", and "including" when used in this Agreement shall be deemed to be followed by the words "without limitation", unless otherwise specified.

(e)

A reference to any party to this Agreement or any other agreement or document shall include such party's predecessors, successors and permitted assigns.

(f)

Reference to any Law means such Law as amended, modified, codified, replaced or reenacted, and all rules and regulations promulgated thereunder.

(g)

The parties have participated jointly in the negotiation and drafting of this Agreement and the Ancillary Agreements. Any rule of construction or interpretation otherwise requiring this Agreement or the Ancillary Agreements to be construed or interpreted against any party by virtue of the authorship of this Agreement or the Ancillary Agreements shall not apply to the construction and interpretation hereof and thereof.

(h)

All accounting terms used and not defined herein shall have the respective meanings given to them under generally accepted accounting principles in the United States.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written.

		BROADCASTER, INC.,
		a California corporation
		By:	/s/
		Name:
		Title:
		AMERICA'S BIGGEST, INC.,
		a Delaware corporation
		By:	/s/
		Name:
		Title:
STOCKHOLDERS:
/s/
Dean Rositano
/s/
Robert Rositano
LATITUDE VENTURE PARTNERS, LLC
By:	/s/
Title:

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, Martin Wade, III, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Broadcaster, Inc;

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

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

4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(15e)) for the small business issuer and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared:

b. [Paragraph omitted];

c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Dated: November 20, 2006

/s/ MARTIN WADE III

Martin Wade III

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, Blair Mills, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Broadcaster, Inc;

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

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

4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(15e)) for the small business issuer and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared:

b. [Paragraph omitted];

c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: November 20, 2006

By:  /s/ Blair Mills

Blair Mills

Chief Financial Officer (Principal Accounting Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Securities and Exchange Commission

450 Fifth Street, N.W

Washington, D.C. 20549

Ladies and Gentlemen:

The certification set forth below is being furnished to the Securities and Exchange Commission solely for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and with Section 1350 of Chapter 63 of Title 18 of the United States Code.

Martin Wade III, the Chief Executive Officer of Broadcaster, Inc, certifies that:

1.

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Broadcaster, Inc.

November 20, 2006

By: /s/ MARTIN WADE III

Martin Wade III

Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Securities and Exchange Commission

450 Fifth Street, N.W

Washington, D.C. 20549

Ladies and Gentlemen:

The certification set forth below is being furnished to the Securities and Exchange Commission solely for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and with Section 1350 of Chapter 63 of Title 18 of the United States Code.

Blair Mills, the Chief Financial Officer of Broadcaster, Inc, certifies that:

1.

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Broadcaster, Inc.

Dated: November 20, 2006

By: /s/ BLAIR MILLS

Blair Mills

Chief Financial Officer (Principal Accounting Officer)