**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-QSB**





(Mark
      One)





x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934 FOR
                THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
                2006





o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR
                THE TRANSITION
              PERIOD
                FROM __________ TO __________  COMMISSION
                FILE NUMBER
                ________________________________


**ROO
      GROUP, INC.**


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


**Delaware**
              
              **11-3447894**(State
                  or other jurisdiction of incorporation or organization)
              
              (IRS
                  Employer Identification No.)


****


**228
      East 45th Street 8th Floor New York, NY 10017** ****


(Address
      of principal executive offices)





**(212)
      661-4111**


(Issuer’s
      telephone number)





**WITH
      COPIES TO:**





Richard
      A. Friedman, Esq.


Sichenzia
      Ross Friedman Ference LLP


1065
      Avenue of the Americas


New
      York,
      New York 10018


(212)
      930-9700





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 x No o





**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 17, 2006, the issuer had
      25,974,813 outstanding
      shares of Common Stock.





Transitional
      Small Business Disclosure Format (check one): Yes o No x




















**TABLE
      OF CONTENTS**





**Page****PART
                I - FINANCIAL INFORMATION**Item
                1. Financial Statements
            1Consolidated
                Balance Sheet
            1Consolidated
                Statements of Operations
            2Consolidated
                Statements of Cash Flows
            3Notes
                to Consolidated Financial Statements
            5Item
                2. Management’s Discussion and Analysis or Plan of
                Operation
            10Item
                3. Controls and Procedures
            14**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            14Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            14Item
                3. Defaults Upon Senior Securities
            14Item
                4. Submission of Matters to a Vote of Security Holders
            14Item
                5. Other Information
            14Item
                6. Exhibits and Reports on Form 8-K
            14**SIGNATURES**
            16





























**PART
      I - FINANCIAL INFORMATION**


**Item
      1.**  **Financial
      Statements.**





**ROO
      GROUP, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEET AS OF SEPTEMBER 30, 2006**





**(Amounts
      in Thousands, Except Share Data)**


**(Unaudited)**





***Assets:*****Current
                assets:**Cash
                and cash equivalents
            
            $
            2,269Accounts
                receivable, net
            
            
            2,028Other
                current assets
            
            
            1,460**Total
                current assets**
            
            
            5,757Property
                and equipment, net
            
            
            544Deferred
                tax assets
            
            
            23Content,
                net
            
            
            186Software,
                net
            
            
            1,268Customer
                list, net
            
            
            276Domain
                names, net
            
            
            43Goodwill
            
            
            1,123**Total
                assets**
            
            $
            9,220***Liabilities
                and Stockholders' Equity:*****Current
                liabilities:**Bank
                overdraft
            
            $
            144Accounts
                payable
            
            
            2,033Accrued
                expenses
            
            
            717Income
                tax payable
            
            
            108Other
                current liabilities
            
            
            944**Total
                current liabilities**
            
            
            3,946**Non-current
                liabilities**
            
            
            34**Total
                liabilities**
            
            
            3,980**Commitments**
            
            
            --**Minority
                interest**
            
            
            123**Stockholders'
                equity:**Series
                A Preferred Stock, $0.0001 par value: authorized
                10,000,000shares;
                issued and outstanding 10,000,000
            
            
            1Common
                Stock, $0.0001 par value: authorized 500,000,000 shares;issued
                and outstanding 17,596,436
            
            
            2Additional
                paid-in capital
            
            
            29,126Accumulated
                deficit
            
            
            (23,969
            )Accumulated
                other comprehensive loss
            
            
            (43
            )**Total
                stockholders' equity**
            
            
            5,117**Total
                liabilities and stockholders' equity**
            
            $
            9,220





The
      Accompanying Notes are an Integral Part of these Consolidated Financial
      Statements.


1


**ROO
      GROUP, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)**


**(Amounts
      in Thousands, Except Share and Per Share Data)**


**(Unaudited)**








**Three
                months**
            
            **Three
                months**
            
            **Nine
                months**
            
            **Nine
                months****ended**
            
            **ended**
            
            **ended**
            
            **Ended****September
                30, 2006**
            
            **September
                30, 2005**
            
            **September
                30, 2006**
            
            **September
                30, 2005**Revenue
            
            $
            2,230
            
            $
            1,605
            
            $
            6,024
            
            $
            4,742Expenses:Operations
            
            
            2,138
            
            
            980
            
            
            5,864
            
            
            3,002Research
                and development
            
            
            382
            
            
            207
            
            
            899
            
            
            513Sales
                and marketing
            
            
            1,415
            
            
            727
            
            
            3,364
            
            
            1,640General
                and administrative
            
            
            1,455
            
            
            913
            
            
            3,769
            
            
            2,414General
                and administrative (non-cash)
            
            
            581
            
            
            
            
            
            1,737
            
            
            1,140Total
                expenses
            
            
            5,971
            
            
            2,827
            
            
            15,633
            
            
            8,709(Loss)
                from operations
            
            
            (3,741
            )
            
            (1,222
            )
            
            (9,609
            )
            
            (3,967
            )Non
                cash cost of capital
            
            
            --
            
            
            (498
            )
            
            --
            
            
            (498
            )Cost
                of capital
            
            
            --
            
            
            (525
            )
            
            --
            
            
            (525
            )Commission
                on loan procurement
            
            
            --
            
            
            --
            
            
            --
            
            
            (60
            )Cost
                of Omnibus Consent and Waiver Agreement
            
            
            --
            
            
            (78
            )
            
            --
            
            
            (78
            )Redemption
                premium on convertible note
            
            
            --
            
            
            (744
            )
            
            --
            
            
            (801
            )Interest
                income
            
            
            17
            
            
            --
            
            
            72
            
            
            4Interest
                expense - related party
            
            
            --
            
            
            (32
            )
            
            --
            
            
            (65
            )Non-cash
                interest expense - related party
            
            
            --
            
            
            (62
            )
            
            --
            
            
            (62
            )Interest
                expense - other
            
            
            (21
            )
            
            (31
            )
            
            (42
            )
            
            (163
            )Financing
                fees - convertible notes
            
            
            --
            
            
            (320
            )
            
            --
            
            
            (760
            )Net
                (loss) before income taxes
            
            
            (3,745
            )
            
            (3,512
            )
            
            (9,579
            )
            
            (6,975
            )Income
                tax benefit (expense)
            
            
            3
            
            
            (33
            )
            
            (26
            )
            
            (73
            )Net
                (loss) before minority interest
            
            
            (3,742
            )
            
            (3,545
            )
            
            (9,605
            )
            
            (7,048
            )Minority
                interest
            
            
            3
            
            
            (14
            )
            
            (29
            )
            
            (31
            )Net
                (loss)
            
            $
            (3,739
            )
            $
            (3,559
            )
            $
            (9,634
            )
            $
            (7,079
            )Basic
                and diluted net (loss) per common share
            
            $
            (0.24
            )
            $
            (0.54
            )
            $
            (0.65
            )
            $
            (1.44
            )Weighted
                average common shares outstanding
            
            
            15,290,349
            
            
            6,549,560
            
            
            14,811,231
            
            
            4,920,512Comprehensive
                (loss):Net
                (loss)
            
            $
            (3,739
            )
            $
            (3,559
            )
            $
            (9,634
            )
            $
            (7,079
            )Foreign
                currency translation
            
            
            2
            
            
            (7
            )
            
            (8
            )
            
            (17
            )Fair
                market value adjustment for available for sale securities
            
            
            --
            
            
            (2
            )
            
            --
            
            
            (4
            )Comprehensive
                (loss)
            
            $
            (3,737
            )
            $
            (3,568
            )
            $
            (9,642
            )
            $
            (7,100
            )











The
      Accompanying Notes are an Integral Part of these Consolidated Financial
      Statements.





2


**ROO
      GROUP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**(Amounts
      in Thousands)**


**(Unaudited)**








**Nine
                months ended****September
                30,****2
                0 0 6**
            
            **2
                0 0 5****Operating
                Activities:**Net
                (loss)
            
            $
            (9,634
            )
            $
            (7,079
            )Adjustments
                to reconcile net (loss) to net cash(used)
                by operating activities:Provision
                for doubtful accounts
            
            
            8
            
            
            --Depreciation
            
            
            106
            
            
            104Amortization
                of intangible assets
            
            
            444
            
            
            455Non
                cash cost of capital
            
            
            --
            
            
            498Non
                cash cost of Omnibus Consent and Waiver agreement
            
            
            --
            
            
            78Non
                cash stock based compensation
            
            
            1,544
            
            
            --Non
                cash warrants and options for services
            
            
            129
            
            
            190Non
                cash preferred stock issued for consulting services
            
            
            --
            
            
            200Non
                cash preferred stock issued as performance bonuses
            
            
            64
            
            
            750Non
                cash interest expense related party
            
            
            --
            
            
            62Non
                cash financing fees on convertible note
            
            
            --
            
            
            759Minority
                interest in subsidiaries
            
            
            29
            
            
            31Changes
                in assets and liabilities:(Increase)
                decrease in:Accounts
                receivable
            
            
            (537
            )
            
            (530
            )Other
                assets
            
            
            (1,121
            )
            
            (53
            )Increase
                (decrease) in:Accounts
                payable
            
            
            933
            
            
            609Accrued
                expenses
            
            
            336
            
            
            (224
            )Income
                tax payable
            
            
            (23
            )
            
            1Other
                liabilities
            
            
            462
            
            
            15Total
                adjustments
            
            
            2,374
            
            
            2,945**Net
                Cash (Used) By Operating Activities**
            
            
            (7,260
            )
            
            (4,134
            )**Investing
                Activities:**Investment
                in VideoDome
            
            
            (20
            )
            
            (100
            )Investment
                in ROO Media Europe
            
            
            (90
            )
            
            --Capitalization
                of software
            
            
            (432
            )
            
            --Capitalization
                of content
            
            
            (132
            )
            
            (155
            )Purchase
                of equipment
            
            
            (178
            )
            
            (188
            )**Net
                Cash (Used) By Investing Activities**
            
            
            (852
            )
            
            (443
            )**Financing
                Activities:**Proceeds
                from private placements, net
            
            
            4,985
            
            
            5,750Bank
                overdraft
            
            
            144
            
            
            192(Increase)
                in related party loans
            
            
            --
            
            
            (80
            )Increase
                in stockholder loan
            
            
            --
            
            
            600(Decrease)
                in stockholder loan
            
            
            --
            
            
            (150
            )Convertible
                note
            
            
            --
            
            
            1,465Repayment
                of convertible note
            
            
            --
            
            
            (2,743
            )(Decrease)
                in capital leases
            
            
            (14
            )
            
            (20
            )**Net
                Cash Provided By Financing Activities**
            
            
            5,115
            
            
            5,014








3


**ROO
      GROUP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Amounts
      in Thousands)**


**(Unaudited)**





**Nine
                months ended****September
                30,****2
                0 0 6**
            
            **2
                0 0 5****Effect
                of Exchange Rate Changes on Cash**
            
            
            (8
            )
            
            (19
            )**Net
                (Decrease) Increase in Cash**
            
            
            (3,005
            )
            
            418**Cash
                and Cash Equivalents - Beginning of Period**
            
            
            5,274
            
            
            322**Cash
                and Cash Equivalents - End of Period**
            
            $
            2,269
            
            $
            740**Supplemental
                Disclosures of Cash Flow Information:**Cash
                paid during the periods for:Income
                taxes
            
            $
            --
            
            $
            98Interest
            
            $
            42
            
            $
            228Supplemental
                disclosure of non-cash investing and financing activitiesPurchase
                agreement of VideoDome.com Networks, Inc
            
            $
            --
            
            $
            44Conversions
                of convertible notes
            
            $
            --
            
            $
            807







The
      Accompanying Notes are an Integral Part of these Consolidated Financial
      Statements.








4


**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Amounts
      in Thousands, Except Share and Per Share Data)**


**(Unaudited)**




***(1)
      Basis of Presentation***





The
      accompanying unaudited consolidated financial statements of ROO Group, Inc.
      ("ROO" or the "Company") have been prepared in accordance with generally
      accepted accounting principles for interim financial information and the
      instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly,
      they
      do not include all information and footnotes required by general accounting
      principles for complete financial statements. In the opinion of management,
      all
      adjustments (consisting of normal recurring accruals) considered necessary
      in
      order to make the interim financial statements not misleading have been
      included. Results for the three and nine months ended September 30, 2006 are
      not
      necessarily indicative of the results that may be expected for the year ending
      December 31, 2006. These interim consolidated financial statements should be
      read in conjunction with the consolidated financial statements and footnotes
      thereto of the Company and management's discussion and analysis of financial
      condition and results of operations included in the Company's annual report
      on
      Form 10-KSB for the year ended December 31, 2005.





***(2)
      Summary of Significant Accounting Policies***





***(A)
      Principles of Consolidation -*** The
      consolidated financial statements include the accounts of ROO Group, Inc.,
      its
      wholly owned subsidiary ROO Media Corporation, its wholly owned subsidiary
      Bickhams and its 51% owned subsidiary Reality Group (Note 3). Included in the
      consolidation with ROO Media Corporation are ROO Media Corporation's wholly
      owned subsidiary ROO Media (Australia) Pty Ltd. and ROO Media (Australia) Pty
      Ltd.'s wholly owned subsidiary Undercover Media, its wholly owned subsidiary
      ROO
      Media Europe Pty Ltd (Note 3), its wholly owned subsidiary ROO Broadcasting
      Limited, its 51% owned subsidiary Factory212 Pty. Ltd. and its wholly owned
      subsidiary ROO TV Pty Ltd. Included in the consolidation with Bickhams is
      Bickhams' wholly owned subsidiary VideoDome.com Networks, Inc.





***(B)
      Management Estimates -*** The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities, disclosure of contingent
      assets and liabilities at the date of the financial statements, and the reported
      amounts of revenues and expenses during the reporting period. Certain amounts
      included in the financial statements are estimated based on currently available
      information and management's judgment as to the outcome of future conditions
      and
      circumstances. Changes in the status of certain facts or circumstances could
      result in material changes to the estimates used in the preparation of financial
      statements and actual results could differ from the estimates and assumptions.
      Every effort is made to ensure the integrity of such estimates.





***(C)
      Foreign Currency Translation -*** Assets
      and liabilities of ROO Group's foreign subsidiaries are translated at current
      exchange rates and related revenues and expenses are translated at average
      exchange rates in effect during the period. Resulting translation adjustments
      are recorded as a component of accumulated comprehensive income (loss) in
      stockholders' equity.





***(D)
      Fair Value of Financial Instruments -*** The
      carrying amounts reported in the balance sheet for cash and cash equivalents,
      accounts receivable, accounts payable and accrued liabilities approximate their
      fair values because of the immediate or short-term maturity of these financial
      instruments.





***(E)
      Impairment of Long-Lived Assets -*** We
      review
      our long-lived assets and identifiable intangibles for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. When such factors and circumstances exist, we compare
      the projected undiscounted future cash flows associated with the future use
      and
      disposal of the related asset or group of assets to their respective carrying
      amounts. Impairment, if any, is measured as the excess of the carrying amount
      over the fair value based on market value (when available) or discounted
      expected cash flows of those assets, and is recorded in the period in which
      the
      determination is made.





5


**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Amounts
      in Thousands, Except Share and Per Share Data)**


**(Unaudited)**





***(2)
      Summary of Significant Accounting Policies
      (Continued)***





***(F)
      Cash and Cash Equivalents -*** ROO
      considers all highly liquid investments with original maturities of ninety
      days
      or less to be cash and cash equivalents. Such investments are valued at quoted
      market prices.





***(G)
      Property and Equipment -*** Property
      and equipment are stated at cost. Depreciation is provided for using the
      straight-line and declining balance methods of accounting over the estimated
      useful lives of the assets.





***(H)
      Intangible Assets -*** Intangible assets of the Company are recorded at cost less accumulated
      amortization. Amortization is computed using the straight-line method over
      the
      estimated useful lives of the assets, with periods of up to five years. All
      intangible assets are reviewed for impairment annually or more frequently if
      deemed necessary, and no impairment write-offs were recorded.





***(I)
      Risk Concentrations -*** Financial
      instruments which potentially subject us to concentrations of credit risk
      consist principally of cash and cash equivalents and trade accounts receivable.
      We place our cash and cash equivalents with high credit quality institutions
      to
      limit credit exposure. We believe no significant concentration of credit risk
      exists with respect to these investments.





Concentrations
      of credit risk with respect to trade accounts receivable are limited due to
      the
      wide variety of customers who are dispersed across many geographic regions.
      Management believes that accounts receivable credit risk exposure beyond such
      allowance is limited. The allowance as of September 30, 2006 was
      $19.  As
      of
      September 30, 2006, one customer accounted for approximately 18% of our trade
      accounts receivable portfolio.





We
      generally do not require collateral for our financial instruments.





***(J)
      Revenue Recognition -*** Revenues
      are derived principally from professional services, digital media management
      and
      advertising. Revenue is recognized when service has been provided.





***(K)
      Earnings (Loss) Per Share Calculation -*** Net loss
      per share is based on the weighted average number of shares
      outstanding





Earnings
      (loss) per common share are calculated under the provisions of Statement of
      Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
      establishes standards for computing and presenting earnings per share. SFAS
      No.
      128 requires ROO Group to report both basic earnings (loss) per share, which
      is
      based on the weighted average number of common shares outstanding during the
      period, and diluted earnings (loss) per share, which is based on the weighted
      average number of common shares outstanding plus all potential dilutive common
      shares outstanding. Options and warrants are not considered in calculating
      diluted earnings (loss) per share since considering such items would have an
      anti-dilutive effect. Potential shares from the conversion of Series A Preferred
      Stock are excluded as these are not convertible for two years from the date
      of
      issuance, though any conversion thereof would also have an anti-dilutive
      effect.





6


**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Amounts
      in Thousands, Except Share and Per Share Data)**


**(Unaudited)**





***(2)
      Summary of Significant Accounting Policies
      (Continued)***





***(L)
      Stock-Based Compensation -*** In
      December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
      No.
      123R, "Share-Based Payment". SFAS No. 123R is a revision of SFAS No. 123,
      "Accounting for Stock Based Compensation", and supersedes APB 25. Among other
      items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method
      of
      accounting, and requires companies to recognize the cost of employee services
      received in exchange for awards of equity instruments, based on the grant date
      fair value of those awards, in the financial statements. On January 1, 2006,
      the
      Company adopted SFAS 123R. The provisions of SFAS 123R became effective the
      first annual reporting period beginning after December 15, 2005. SFAS 123R
      requires companies to adopt its requirements using a "modified prospective"
      method. Under the "modified prospective" method, compensation cost is recognized
      in the financial statements beginning with the effective date, based on the
      requirements of SFAS 123R for all share-based payments granted after that date,
      and based on the requirements of SFAS 123 for all unvested awards granted prior
      to the effective date of SFAS 123R.





Beginning
      in the 2006 calendar year, with the adoption of SFAS 123R, we included stock
      based compensation in general and administrative for the cost of stock options.
      Stock based compensation expense for the three and nine months ended September
      30, 2006 was $452 and $1,544, respectively.





The
      fair
      value of each employee option grant is estimated on the date of grant using
      the
      Black-Scholes-Merton option pricing model.





The
      Company granted options with exercise prices ranging from $2.00 to $3.00 to
      purchase 1,081,000 shares of its common stock during the nine months ended
      September 30, 2006.





During
      the three months ended March 31, 2006, a total of 350,000 employee stock options
      had vested. During the three months ended June 30, 2006, a total of 376,400
      employee stock options had vested. During the three months ended September
      30,
      2006 322,250 employee stock options had vested with the remaining 1,404,750
      employee stock options still unvested as of September 30, 2006.





***(M)
      Reverse Stock Split -*** Effective
      October 3, 2005, the Company amended its Certificate of Incorporation to effect
      a one-for-fifty reverse split of the Company's issued and outstanding shares
      of
      common stock. All references to numbers or values of the Company’s shares have
      been adjusted to reflect this one-for-fifty reverse split. All option amounts
      and exercise prices have been adjusted to reflect the stock split.





***(N)
      Financing Fees-Convertible Notes***





Financing
      fees-convertible notes reclassifies non-cash expenses relating to the issuance
      of various convertible notes to investors in the Company. All such convertible
      securities were retired prior to September 30, 2005.


7


**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Amounts
      in Thousands, Except Share and Per Share Data)**


**(Unaudited)**





***(3)
      Acquisitions***





On
      October 28, 2005, the Company entered into an amendment (the "Amendment") to
      the
      Stock Purchase Agreement (the "Reality Purchase Agreement") dated as of March
      11, 2004 among the Company and the shareholders of Reality Group Pty Ltd.
      ("Reality Group"). Pursuant to the Amendment, the Reality Group shareholders
      agreed to exercise their buyback option effective January 1, 2006 at which
      date
      the Company returned 29% of the shares in Reality Group to Reality Group
      shareholders reducing the Company's ownership of Reality Group to 51% in
      exchange for 66,200 shares of the common stock of the Company (the “exchange
      shares”). This buyback of shares was recorded as a reduction of goodwill of
      $957.





On
      January 27, 2006 ROO Media Corporation purchased 24% of ROO Media Europe Limited
      for $90. ROO Media Europe is now a wholly owned subsidiary of ROO Media
      Corporation.





***(4)
      Goodwill***





Goodwill
      of $1,123 represents the excess of acquisition costs over the fair value of
      net
      assets of the Reality acquisition of $1,033 and ROO Media Europe Limited of
      $90.
      The exercise of the Reality Group buy-back option led to a reduction of goodwill
      of $957 during the nine months ended September 30, 2006 (Note 3).





***(5)
      Preferred Shares***





On
      June
      30, 2006, ROO Group, Inc. (the “Company”) issued 500,000 shares of Series A
      Preferred Stock to an employee. These shares were valued at the equivalent
      number (1:25) of common shares based upon the fair market value as at the issue
      date at $64. Such amount is expensed in “General and administrative (non-cash)”
for the three and nine months ended September 30, 2006. These shares were issued
      as a performance bonus for, among other things, the employee’s role in helping
      expand and grow the Company’s business operations. These shares were issued
      pursuant to the exemption from registration provided by Rule 506 under the
      Securities Act of 1933.





8


**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Amounts
      in Thousands, Except Share and Per Share Data)**


**(Unaudited)**





***(6)
      Stock Issuances***





On
      July
      28, 2006, the Company issued 50,000 warrants at an exercise price of $2.00
      to
      Highbridge International LLC for investor related services. These
      warrants were valued under the Black-Scholes method as $129.





On
      August
      18, 2006, the Company entered into a Common Stock Purchase Agreement pursuant
      to
      which the Company sold 4,420,000 shares of its common stock and 2,210,000
      warrants to purchase shares of common stock to accredited investors, a number
      of
      which are existing shareholders of the Company. The offering closed on August
      23, 2006. The warrants were valued under the Black-Scholes method as $2,658.
      The
      shares of common stock were sold at a price of $1.25 per share resulting in
      gross proceeds of $5,525. Each investor was issued warrants to purchase a number
      of shares of common stock equal to 50% of the number of shares of common stock
      purchased. The warrants have an exercise price of $3.00 per share and a term
      of
      five years. The Company agreed to prepare and file a registration statement
      with
      the Securities and Exchange Commission registering the resale of the shares
      of
      common stock sold in the private placement on or prior to 30 days following
      the
      closing date. If the registration statement was not filed within such time
      or if
      the registration statement was not declared effective within 120 days following
      the closing date, the Company would be required to pay liquidated damages to
      the
      investors equal to 1% of the dollar amount of their investment for each calendar
      month or portion thereof that the registration statement is not filed or
      declared effective. **** Savvian
      LLC, Burnham Hill Partners, a division of Pali Capital, Inc. and Brimberg &
Co., registered broker-dealers, acted as placement agents for the sale of the
      Company's common stock. In connection with the closing, the Company paid the
      placement agents a cash fee of $461. In addition, the Company issued the
      placement agents 801,369 warrants to purchase shares of common stock with an
      exercise price of $1.25 per share for a period of five years and were valued
      under the Black-Scholes method as $1,057. The net proceeds of $4,985 were
      received after deducting placement agent fees of $461 and legal fees of $79.
      The
      transaction was exempt from registration requirements pursuant to Rule 506
      of
      Regulation D promulgated under the Securities Act of 1933, as
      amended.




***(7)
      Subsequent Events***





On
      November 14, 2006, the Company entered into a securities purchase agreement
      pursuant to which the Company sold an aggregate of 8,378,377 shares of the
      Company’s common stock and warrants to purchase an additional 2,513,513 shares
      of the Company’s common stock to accredited investors resulting in gross
      proceeds of $15,500. The offering closed on November 16, 2006. The unit price
      of
      the common stock and corresponding warrant was $1.85. The warrants have an
      exercise price of $3.00 per share and a term of five years. At any time at
      which
      the market price of the Company's Common Stock exceeds $5.00 for 10 trading
      days
      during any 20 consecutive trading days, the Company may elect to call the
      warrants, provided that, the shares underlying such warrants are registered
      pursuant to a registration statement. The Company agreed to prepare and file
      a
      registration statement with the Securities and Exchange Commission registering
      the resale of the shares of common stock sold in the private placement on or
      prior to 30 days following the closing date. If the registration statement
      is
      not filed within such time, the Company must pay liquidated damages to the
      investors equal to 1% of the dollar amount of their investment for each calendar
      month or portion thereof that the registration statement is not filed, up to
      a
      maximum of 10%. Also, if the registration statement is not declared effective
      within 120 days following the closing date, the Company must pay liquidated
      damages to the investors equal to 1% of the dollar amount of their investment
      for each calendar month or portion thereof that the registration statement
      is
      declared effective, up to a maximum of 10%, which increases to 18% if the
      registration statement is not declared effective within 2 years following the
      closing date.





Merriman
      Curhan Ford & Co. and Brimberg & Co. financial advisors and registered
      broker-dealers, acted as placement agents for the sale of the Company’s common
      stock.





The
      offering was made pursuant to an exemption from securities registration afforded
      by Section 4(2) the Securities Act of 1933, as amended and/or Regulation D
      promulgated thereunder.


9


**Item
      2.**  **Management’s
      Discussion and Analysis or Plan of Operation.**







Certain
      statements contained herein constitute forward-looking statements. In some
      cases, you can identify forward-looking statements by terminology such as "may,"
      "will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
      "predict," "potential" or "continue," the negative of such terms, or other
      comparable terminology. All statements other than statements of historical
      fact
      made in this report are forward looking. In particular, the statements herein
      regarding industry prospects and future results of operations or financial
      position are forward-looking statements. Because such statements include risks
      and uncertainties, actual results may differ materially from those expressed
      or
      implied by such forward-looking statements as a result of certain factors,
      including, but not limited to, risks associated with the integration of
      businesses following an acquisition, competitors with broader product lines
      and
      greater resources, emergence into new markets, the termination of any of our
      significant contracts, our inability to maintain working capital requirements
      to
      fund future operations, or our inability to attract and retain highly qualified
      management, technical and sales personnel.




**OVERVIEW**




Set
      forth
      below is a discussion of the financial condition and results of operations
      of
      ROO Group, Inc. and its consolidated subsidiaries (the "Company," "we," "us,"
      or
      "our") for the three and nine months ended September 30, 2006 and 2005. The
      consolidated financial statements include the accounts of ROO Group, Inc.,
      its
      wholly owned subsidiary ROO Media Corporation, its wholly owned subsidiary
      Bickhams and its 51% owned subsidiary Reality Group. Included in the
      consolidation with ROO Media Corporation are ROO Media Corporation's wholly
      owned subsidiary ROO Media (Australia) Pty Ltd. and ROO Media (Australia) Pty
      Ltd.'s wholly owned subsidiary Undercover Media, its wholly owned subsidiary
      ROO
      Media Europe Pty Ltd, its wholly owned subsidiary ROO Broadcasting Limited,
      its
      51% owned subsidiary Factory212 Pty. Ltd. and its wholly owned subsidiary ROO
      TV
      Pty Ltd. Included in the consolidation with Bickhams is Bickhams' wholly owned
      subsidiary VideoDome.com Networks, Inc. ROO Media Europe Pty Ltd. was 76% owned
      by ROO Media Corporation until January 27, 2006 when ROO Media Corporation
      purchased the remaining 24% of ROO Media Europe Pty Ltd. for $90,000. The
      following discussion should be read in conjunction with the information set
      forth in the consolidated financial statements and the related notes thereto
      appearing elsewhere in this quarterly report.




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





RESULTS
      OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO
      THE
      THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005





NET
      REVENUE





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





EXPENSES





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


10





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





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





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





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





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





INTEREST
      INCOME. Interest income increased by $17,000 from $0 for the three months ended
      September 30, 2005 to $17,000 for the three months ended September 30, 2006
      and
      by $68,000 from $4,000 for the nine months ended September 30, 2005 to $72,000
      for the nine months ended September 30, 2006. This increase was primarily due
      to
      an increase in our cash and cash equivalents.




INTEREST
      EXPENSE, RELATED PARTY. Interest expense, related party, includes interest
      charges on our indebtedness to Robert Petty, our Chairman and Chief Executive
      Officer. The expense decreased from $32,000 for the three months ended September
      30, 2005 to $0 for the three months ended September 30, 2006 and decreased
      from
      $62,000 for the nine months ended September 30, 2005 to $0 for the nine months
      ended September 30, 2006. The outstanding balance from loans from Mr. Petty
      as
      of December 31, 2005 was $0.





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


11








NET
      LOSS
      BEFORE INCOME TAXES. As a result of the factors described above, we reported
      a
      net loss before income taxes of $3,745,000 for the three months ended September
      30, 2006, compared to $3,512,000 for the three months ended September 30, 2005,
      an increase of $233,000 or 7% and we reported a net loss before income taxes
      of
      $9,579,000 for the nine months ended September 30, 2006, compared to $6,975,000
      for the nine months ended September 30, 2005, an increase of $2,604,000 or
      37%.





LIQUIDITY
      AND CAPITAL RESOURCES





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





Net
      cash
      used in operating activities was $7,260,000 for the nine months ended September
      30, 2006, compared to $4,134,000 for the nine months ended September 30, 2005,
      an increase of $3,126,000 or 76%. The increase in net cash used in operating
      activities is primarily the result of our increased expenses with our expanded
      operations.





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





Net
      cash
      provided by financing activities was $5,115,000 for the nine months ended
      September 30, 2006 compared to net cash provided by financing activities of
      $5,014,000 for the nine months ended September 30, 2005, a decrease in net
      cash
      provided by financing activities of $101,000 or 2%.







MARKET
      RISKS




We
      conduct our operations in primary functional currencies: the United States
      dollar, the British pound and the Australian dollar. Historically, neither
      fluctuations in foreign exchange rates nor changes in foreign economic
      conditions have had a significant impact on our financial condition or results
      of operations. We currently do not hedge any of our foreign currency exposures
      and are therefore subject to the risk of exchange rate fluctuations. We invoice
      our international customers primarily in U.S. dollars, except in the United
      Kingdom and Australia, where we invoice our customers primarily in British
      pounds and Australian dollars, respectively. In the future we anticipate billing
      certain European customers in Euros, though we have not done so to date.




We
      are
      exposed to foreign exchange rate fluctuations as the financial results of
      foreign subsidiaries are translated into U.S. dollars in consolidation and
      as
      our foreign currency consumer receipts are converted into U.S. dollars. Our
      exposure to foreign exchange rate fluctuations also arises from payables and
      receivables to and from our foreign subsidiaries, vendors and customers. Foreign
      exchange rate fluctuations did not have a material impact on our financial
      results in the three and nine months ended September 30, 2006 and 2005.




12


Financial
      instruments which potentially subject us to concentrations of credit risk
      consist principally of cash and cash equivalents and trade accounts receivable.
      We place our cash and cash equivalents with high credit quality institutions
      to
      limit credit exposure. We believe no significant concentration of credit risk
      exists with respect to these investments.




Concentrations
      of credit risk with respect to trade accounts receivable are limited due to
      the
      wide variety of customers who are dispersed across many geographic regions.
      As
      of September 30, 2006, one customer accounted for approximately 18% of our
      trade
      accounts receivable portfolio. We routinely assess the financial strength of
      customers and, based upon factors concerning credit risk, we establish an
      allowance for uncollectible accounts. Management believes that accounts
      receivable credit risk exposure beyond such allowance is limited.







GOING
      CONCERN




The
      accompanying consolidated financial statements have been prepared assuming
      that
      we will continue as a going concern, which contemplates the realization of
      assets and the satisfaction of liabilities in the normal course of business.
      We
      have incurred net operating losses of approximately $9,609,000 for the nine
      months ended September 30, 2006, compared to $3,967,000 for the nine months
      ended September 30, 2005. Additionally,
      as of September 30, 2006, we had negative cash flows from operating activities
      of approximately $7,260,000. Since ROO Media Corporation's inception, we have
      incurred losses, had an accumulated deficit, and have experienced negative
      cash
      flows from operations. The expansion and development of our business may require
      additional capital. This condition raises substantial doubt about our ability
      to
      continue as a going concern. Our management expects cash flows from operating
      activities to continue to improve, primarily as a result of an increase in
      sales, although there can be no assurance thereof. The accompanying consolidated
      financial statements do not include any adjustments that might be necessary
      should we be unable to continue as a going concern. If we fail to generate
      positive cash flows or obtain additional financing when required, we may have
      to
      modify, delay or abandon some or all of our business and expansion plans.







OFF-BALANCE
      SHEET ARRANGEMENTS





We
      do not
      have any off balance sheet arrangements that are reasonably likely to have
      a
      current or future effect on our financial condition, revenues, results of
      operations, liquidity or capital expenditures.





13


**Item
      3.**  **Controls
      and Procedures.**





(a)
        Evaluation of Disclosure Controls and Procedures. As of the end of the
      period covered by this report, we conducted an evaluation, under the supervision
      and with the participation of our chief executive officer and chief financial
      officer of our disclosure controls and procedures (as defined in Rule 13a-15(e)
      and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief
      executive officer and chief financial officer concluded that our disclosure
      controls and procedures are effective to ensure that the information required
      to
      be disclosed by us in the reports that we file or submit under the Exchange
      Act
      is (i) recorded, processed, summarized and reported within the time periods
      specified in the Securities and Exchange Commission’s rules and forms, and (ii)
      is accumulated and communicated to our management, including our chief executive
      officer and chief financial officer, to allow timely decisions regarding
      required disclosure.





(b)
        Changes in internal controls.   There was no change in our internal
      controls or in other factors that could affect these controls during our last
      fiscal quarter that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.








**PART
      II - OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings.**





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





**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds.**




On
      August
      18, 2006, we sold an aggregate of 4,420,000 of shares of common stock and
      2,210,000 warrants to purchase shares of our common stock to accredited
      investors. The shares of common stock were sold at a price of $1.25 per share,
      resulting in aggregate proceeds of $5,525,000. Each investor received warrants
      to purchase a number of shares of common stock equal to 50% of the number of
      shares of common stock purchased. The warrants have an exercise price of $2.00
      per share and a term of five years. The Company also issued an aggregate of
      801,369 warrants to purchase shares of our common stock to the placement agents
      for the sale of the common stock. The warrants have an exercise price of $1.25
      and a term of five years.




These
      securities were issued pursuant to the exemption from registration requirements
      provided by Section 4(2) of the Securities Act and Rule 506 promulgated
      thereunder.





**Item
      3.**  **Defaults
      Upon Senior Securities.**





None.





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





There
      were no matters submitted to a vote of security holders during the period
      covered by this report.





**Item
      5.**  **Other
      Information.**





None.





**Item
          6.** **Exhibits.**





14





**Exhibit
                Number**
            
            **Description**31.1
            
            Certification
                by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act.31.2
            
            Certification
                by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act.32.1
            
            Certification
                by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code.32.2
            
            Certification
                by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code.





15


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**ROO
              GROUP, INC.**Dated:
                November 20, 2006
            By:
            **/s/ Robert PettyRobert PettyChief
                Executive OfficerDated:
                November 20, 2006
            By:
            /s/ Robin SmythRobin SmythChief
                Financial Officer





16