UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K




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




For
the fiscal year ended December 31, 2008




OR




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




For the
transition period from __________ to _____________




Commission
file number: 333-131651




BETAWAVE
CORPORATION


(Exact
name of registrant as specified in its charter)





Nevada
              
              20-2471683(State or other jurisdiction of incorporation or organization)
              
              (I.R.S. Employer Identification No.)706 Mission Street, 10th Floor, San Francisco, California
              
              94103(Address of principal executive offices)
              
              (Zip Code)




(415) 738-8706


(Registrant’s telephone number, including area code)










Securities registered pursuant to Section
12(b) of the Act: None




Securities
registered pursuant to section 12(g) of the Act: None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


 ̈ Yes  þ No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


 ̈ Yes  þ No




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


þ Yes   ̈ No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.


þ







Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer (Do not check if a smaller reporting company)  ̈
              Smaller
      reporting company þ




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




 ̈ Yes  þ No




The
aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sales price on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. (“NASD”) on June 30, 2008, was
approximately $7,915,518.  For purposes of this calculation, the
registrant has assumed that only shares beneficially held by executive officers
and directors of the registrant are deemed shares held by affiliates of the
registrant.  This assumption of affiliate status is not necessarily a
conclusive determination of affiliate status for any other purpose.




The
number of shares outstanding of the registrant’s common stock, $0.001 par value
per share, as of March 27, 2009 was 29,229,284 shares.




Documents
incorporated by reference: None.







TABLE
OF CONTENTS




PageCAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS
                                        1PART
      IITEM
      1.
                                        BUSINESS
                                        1ITEM
      1A.
                                        RISK
      FACTORS
                                        8ITEM
      1B.
                                        UNRESOLVED
      STAFF COMMENTS
                                        24ITEM
      2.
                                        PROPERTIES
                                        24ITEM
      3.
                                        LEGAL
      PROCEEDINGS
                                        25ITEM
      4.
                                        SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                        25PART
      IIITEM
      5.
                                        MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                                        25ITEM
      6.
                                        SELECTED
      FINANCIAL DATA
                                        30ITEM
      7.
                                        MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                        30ITEM
      7A.
                                        QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                                        41ITEM
      8.
                                        FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                                        41ITEM
      9.
                                        CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                                        41ITEM
      9A.
                                        CONTROLS
      AND PROCEDURES
                                        41ITEM
      9B.
                                        OTHER
      INFORMATION
                                        43PART
      IIIITEM
      10.
                                        DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                        44ITEM
      11.
                                        EXECUTIVE
      COMPENSATION
                                        48ITEM
      12.
                                        SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                                        56ITEM
      13.
                                        CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                        58ITEM
      14.
                                        PRINCIPAL
      ACCOUNTING FEES AND SERVICES
                                        59PART
      IVITEM
      15.
                                        EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                                        59SIGNATURES
                                        S-1EXHIBIT
      INDEX
                                        S-2FINANCIAL
      STATEMENTS
                                        F-1





CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
Annual Report on Form 10-K contains forward-looking statements.  This
Annual Report on Form 10-K includes statements regarding our plans, goals,
strategies, intentions, beliefs or current expectations.  These
statements are expressed in good faith and based upon a reasonable basis when
made, but there can be no assurance that these expectations will be achieved or
accomplished.  These forward looking statements can be identified by
the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect,” and the like, and/or future-tense or conditional
constructions “may,” “could,” “should,” etc.  Items contemplating or
making assumptions about, actual or potential future sales, market size,
collaborations, and trends or operating results also constitute such
forward-looking statements.  Forward-looking statements in this Annual
Report on Form 10-K include, but are not limited to, statements regarding the
following subject matters:




·
            expectations
      and estimates about our market and the trends in our market, including,
      among other things, the buying power of our targeted demographics and the
      loss of traffic of large websites to smaller
  websites;




·
            expectations
      about our revenues, expenses and operating results, including our outlook
      for fiscal year 2009 under the heading “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” in Item 7 of
      this Annual Report on Form 10-K;
and




·
            expectations
      about our growth and future
success.




Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our management, forward-looking statements are inherently
subject to known and unknown risks, business, economic and other risks and
uncertainties that could cause actual results to be materially different from
those expressed or implied in these forward-looking
statements.  Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this Annual
Report on Form 10-K, and in particular, the risks discussed under the heading
“Risk Factors” in Item 1A of this Annual Report on Form 10-K and those discussed
in other documents we file with the Securities and Exchange Commission (the
“SEC”).




Given
these risks and uncertainties, readers are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K.  We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking
statements.  Readers are urged to carefully review and consider the
various disclosures made by us in our reports filed with the SEC which attempt
to advise interested parties of the risks and factors that may affect our
business, financial condition, results of operation and cash
flows.  If one or more of these risks or uncertainties materialize, or
if the underlying assumptions prove incorrect, our actual results could vary
materially from those expected or projected.




PART
I




ITEM
1.      BUSINESS.




Company
Overview




Betawave
Corporation (the “Company,” “Betawave,” “we,” “our,” or “us”) is an
attention-based digital media company.  We have assembled some of the
leading immersive casual gaming, virtual world, social play and entertainment
websites into a network of sites (the “Betawave Network”).  We
generate revenue by selling innovative, accountable and attention-grabbing
advertising campaigns on those sites to brand advertisers.




Our
Mission




Our goal
is to become the most valuable digital media company for brand
advertisers.  To do so, we seek to expand the size of the Betawave
Network by forging relationships with publishers that have large, deeply engaged
audiences with which advertisers want their brands to be
affiliated.


1


Our
History




Our
business was originally conducted by GoFish Technologies, Inc. (“GoFish
Technologies”), which was incorporated in California in May
2003.  GoFish Technologies originally operated a multimedia search
service, delivering targeted results for Internet searches conducted on digital
media content from the entertainment and media sectors.  During the
third quarter of 2005, due to the increasing popularity of user-generated video,
GoFish Technologies refined its focus to aggregating original short-form and
user-generated video at the URL www.gofish.com.




In order
to obtain additional financing to continue its operations, in October 2006,
GoFish Technologies completed a reverse merger and related transactions, which
also resulted in the business of GoFish Technologies being acquired by a
publicly-traded company. These transactions consisted principally of three
parts. In the first part of these transactions, GoFish Technologies merged with
and into GF Acquisition Corp. ("GF Acquisition Corp."), a wholly-owned
subsidiary of GoFish Corporation (formerly known as Unibio Inc. until September
14, 2006) ("GoFish Corporation"), which was originally a publicly-traded "shell
company" as that term is defined in Rule 405 of the Securities Act of 1933, as
amended (the "Securities Act"), and Rule 12b-2 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). In the second part of these transactions,
ITD Acquisition Corp., a wholly-owned subsidiary of GoFish Corporation, merged
with and into Internet Television Distribution Inc., a Delaware corporation
("ITD") (collectively both the GoFish Technologies and the ITD mergers are
referred to herein as the "mergers"). In the third part of these transactions,
GoFish Corporation split off a wholly-owned subsidiary, GF Leaseco, Inc. ("GF
Leaseco"), through the sale of all of the outstanding capital stock of GF
Leaseco to the former owners of GoFish Corporation.




As a
result of the mergers, GoFish Corporation acquired the business of GoFish
Technologies and continued its business operations as a publicly-traded company
whose common stock is quoted on the NASD’s OTC Bulletin Board.  Also,
as a result of the mergers, GoFish Technologies and ITD became wholly-owned
subsidiaries of GoFish Corporation.




During
2007, GoFish Corporation made a strategic decision to focus on an aspect of its
business where it saw an attractive market opportunity and began building a
network of youth oriented websites for which it could sell advertising and
deliver premium content.  As a result of its success in the youth
market, the Company expanded its focus to include “moms.”  By June
2008, GoFish Corporation had built the largest youth-focused advertising network
in the United States which was also top 10 in the “moms” category based on the
number of unique monthly users, in each case, excluding portals and as measured
by comScore Media Metrix.  Our sites were high engagement sites that
delivered consumers in a deeply engaged state of mind, far in excess of industry
averages.




In June
2008, GoFish Corporation appointed Matt Freeman, a leading digital advertising
executive, to serve as its new Chief Executive Officer.  In December
2008, GoFish Corporation completed a financing in which it raised approximately
$22.5 million in gross proceeds and cancelled indebtedness representing an
aggregate principal amount of approximately $5.4 million in exchange for the
issuance of shares of Series A preferred stock and warrants to purchase common
stock.




In
January 2009, GoFish Corporation changed its name to “Betawave Corporation” and
launched a rebranding campaign, announcing that it would focus on the highest
attention span media environments as measured by time spent per month, time
spent per page and receptivity to brand advertising, and not solely on youth and
moms.


In March
2009, the Company entered into a loan and security agreement with Silicon Valley
Bank that provides for a secured revolving credit arrangement to provide
advances in an aggregate principal amount of up to $4 million (based upon a
percentage of certain eligible billed and unbilled accounts receivable). See
Note 17 to our audited consolidated financial statements included in this Annual
Report on Form 10-K.




Business
Operations




Betawave
is the industry’s first attention-based media company.  We deliver
quality advertising and content to large audiences of highly-engaged users
through innovative ad formats.  Publishers in the
Betawave Network span all types of online experiences enjoyed by Internet
users, including entertainment focused and educational virtual worlds, casual
and massively multi-player games avatar-based social networks, educational,
informational and photo sharing sites.  We offer marketers broad reach
into a targeted audience in desirable editorial environments.  We
combine the scale of a portal or advertising network, with the custom programs
and client focus of a niche publisher.


2


The
Betawave Network delivers scale with a unique monthly audience of over 25
million domestically and attention with an average audience engagement of more
than 48 minutes per month.  We have extended beyond the narrow
industry definition of a vertical advertising network as we provide additional
services to our publishers, for example, securing and providing our publishers
with: (i) relevant and engaging video content for use on their sites, (ii)
enabling technology, and (iii) business services to facilitate the growth of
capabilities and revenue on their sites. In addition, we work with publishers to
ensure that their brand is well positioned and their website is maximized for
monetization through standard and immersive advertising
experiences.




To ensure
that we consistently offer the highest level of service to publishers and
advertisers, we are highly discriminate in our selection of
publishers.  We seek to ensure that the Betawave Network is comprised
of quality publishers that have unique value propositions for marketers and
advertisers trying to reach youth, moms, and a growing audience base of 18 to 34
year olds.  Some of the publishers in the Betawave portfolio
are:




·
            Miniclip.com
      (www.miniclip.com), the Internet’s largest dedicated online games
      website;




·
            Cartoon
      Doll Emporium (www.cartoondollemporium.com), a leading dress-up game
      destination for girls age 6-16;




·
            Shutterfly
      (www.shutterfly.com), the leading site for publishing, sharing and
      printing memories and has an audience primarily composed of moms and
      families: memory makers; and




·
            Cookie
      Jar Entertainment (www.thecookiejarcompany.com), a global independent
      producer, marketing and brand manager of such renowned children’s
      properties as “Magi-Nation,” “The Doodlebops,” “Caillou,” “Spider Riders”
      and “Johnny Test.”




We enter
into agreements with our publishers where we are responsible for selling their
advertising inventory.  Generally, these relationships are exclusive
and allow us to decide how we sell the advertising inventory, what we sell and
to whom we sell it.  We have secured advertising buys from strong
brands, including four of the biggest spenders against kids
online.  Our advertisers fall into various categories, including
consumer packaged goods (e.g. Kellogg’s, General Mills, Procter & Gamble),
entertainment (e.g. Disney, Cartoon Network, Lionsgate), consumer electronics
and software (e.g. Sony, Electronics Arts, Nintendo, Ubisoft) and retail (e.g.
Lego, Hasbro, Sears).




In
addition, we procure media content that we believe to be compelling to both
users of the sites within the Betawave Network and advertisers in categories
targeting these users.  In February 2009, we launched Betawave TV, an
ad-supported video platform with distribution on several publishers in the
Betawave Network.  The product features advertiser-safe,
family-friendly programming including quality animation, youth-oriented news,
action sports, movie and video game information, special events, celebrity
interviews, fashion, and health and beauty segments.




Betawave
TV offers marketers a scalable video advertising and distribution solution and
enables them to extend their relationship beyond display media and immersive
integrations.  The universal video player is customized for each
publisher’s look and feel and is incorporated into the navigation of each site
ensuring a high level of consumer adoption.  Sponsorship opportunities
include the ability to feature messages before and after professionally produced
video programming, as well as through overlays at appropriate points in the
viewing experience




Betawave
has secured distribution agreements with several prestigious content providers
including:




·
            Cookie
      Jar Entertainment – A leading independent producer of children’s
      entertainment and world-renowned programmer of the CBS Saturday morning
      kids’ block presents long-term franchises like: “Johnny Test,” “Paddington
      Bear,” “Mona the Vampire,” “Dark Oracle,” “The Wombles,” “Ripley’s Believe
      It or Not!,” “The Wonderful Wizard of Oz,” “Animal Crackers”
      and “Emily of New Moon” plus special full-length animated
      movies.


3


·
            Kids
      Who Rip – An action sports movement of kids who are fearless, fun, focused
      and ready to show the world their skills.  From surfing, to
      skateboarding, to snowboarding, these kids are positive role models who
      know who they and are ready to compete to
win.




·
            MGM
      – One of the movie world’s most prestigious studios provides live action
      and animated programming ranging from series like “Pink Panther and Sons”
      and “All Dogs Go To Heaven” to full-length live-action movies and TV
      series.




·
            Teen/Kid
      News – The creator of Eyewitness News, Al Primo, presents news coverage
      just for kids and teens.  Delivered on a full-news set by an
      anchor team of youth who bring the audience the latest on celebrities,
      news and events of special appeal.




·
            Young
      Hollywood – R.J. Williams founded Young Hollywood to create unique
      celebrity programming that provides an authentic take on the next
      generation of Hollywood.  It’s the inside story of celebrity
      life as told by the best source...the celebrities themselves.  The
      programming offers unparalleled access to the world beyond the velvet
      rope.




The
advertising that we sell on the publisher sites in the Betawave Network can be
divided into two categories: Direct Sales and Remnant Inventory.




Direct
Sales




The
majority of our revenues come from direct sales to brand advertisers. Direct
sales of advertising can take the following two forms:




·
            IAB
      Graphical Advertising – IAB graphical advertising is standard banner and
      text ads where advertisers pay a cost per thousand impressions (“CPM”) fee
      directly to us.  Banners are ad graphics hyperlinked to the URL
      of the advertiser or to a custom landing page within the Betawave
      portfolio.  This form of online advertising entails embedding an
      advertisement on a web page.  It is intended to attract traffic
      to the advertiser’s website by linking them from the ad on a website to
      the website of the advertiser, to initiate an action within the site where
      the banner is embedded (i.e. watch a movie trailer), or to increase
      metrics on brand awareness.  The banner advertisement is
      constructed from an image (GIF, JPEG, PNG), JavaScript program or
      multimedia object employing technologies  such as Java,
      Shockwave or Flash.




·
            Rich
      Media/Immersive Advertising – We also provide custom marketing
      opportunities to brands by tailoring advertising solutions to specific
      needs and leveraging the rich, immersive environments of publishers in the
      Betawave portfolio.  These include roadblocks, front page
      takeovers, rich media ads, video and interstitial ads, custom integration
      in leading virtual worlds, advergames and custom
      sponsorships.  These opportunities provide for the highest CPMs,
      which start at $10.  These out-of-the-box ideas are developed on
      a custom basis with the goal of productizing the solution for future
      advertisers and campaigns.




Our
blended CPM on direct sales advertising is currently over $5.




Remnant
Inventory




Advertising
inventory on a website that is not sold directly to an advertiser is referred to
as “remnant inventory.”  Publishers typically monetize this inventory,
at a small fraction of direct sales, through third-party ad networks
(ValueClick, Tribal Fusion, and Advertising.com) and ad network exchanges (Right
Media and ContextWeb).  We offer our publishers the ability to achieve
a higher rate of return on their remnant inventory through our network of
partnerships.  Our service is designed to be easy to implement and
lifts the operational minutia and complexity for  publishers of having
to monetize remnant inventory.


4


In
addition, we may monetize a percentage of remnant inventory through cost per
click (“CPC”) or cost per action (“CPA”) campaigns.  In the case of
CPC advertisements, advertisers will pay fees per click throughs to their site
generated from ads placed throughout the website.  CPA banners placed
throughout the website generate fees only when an action occurs as a result of
the click-through on an individual advertisement.  That action may be
a purchase, a registration, or some other transaction.  We do not
currently have, or plan to have, any CPC or CPA campaigns.  However,
we may choose to include these formats in the future.




Sales
and Marketing




We sell
our inventory and marketing services in the United States through a sales and
marketing organization that consisted of 17 employees as of March 27,
2009.  These employees are located at our headquarters in San
Francisco (California) and New York (New York) and also are based in our sales
offices in Los Angeles (California) and Chicago (Illinois).  The team
is focused on selling advertising space on the websites in the Betawave Network
to top quality brands and their advertising agencies.




In
addition, we operate a business development team tasked with sourcing, securing
and retaining quality publishers into the Betawave Network.  These
employees are located at our headquarters in San Francisco.  They keep
current with the latest online trends in our targeted demographics and are
responsible for finding and securing relationships with a broad network of sites
that extends the reach of the Betawave portfolio.




Market




Our
market consists of publishers that operate websites with large, deeply engaged
audiences and advertisers interested in reaching consumers online within our
target demographics.  Publisher websites provide a platform for brands
to engage consumers through effective and targeted advertising
initiatives.  Our advertisers provide us with revenue by paying us to
promote their brands, products and services on the websites in the Betawave
Network.




Despite
the economic downturn, eMarketer still forecasts online ad spending will
increase in 2009 to $25.7 billion up from an estimated $23.6 billion in 2008,
ultimately reaching $42 billion by 2013. The research firm gives several
reasons for the resiliency of Internet advertising spending in the context of
the overall macroeconomic decline in the economy. These are: measurability
with a better understanding of the audience, more effective ad placements
resulting in increased prices, easier purchases for advertisers and their
agencies through networks and exchanges, better targeting, wooing audiences
through video advertising and reaching that vital audience by following
eyeballs. eMarketer also projects that Internet ad spend growth will surpass all
other major media. Search-based advertising still leads in ad spending but
the greatest growth will come from rich media and video ads, both categories in
which Betawave is an active participant.




The
growth of online video consumption further underscores the trend of people
consuming media online at the expense of other sources. According to comScore
Media Metrix, in November 2008, 146 million people (77% of the U.S. Internet
audience) viewed online video, watching 34% more videos than they did in
2008.  The increase in online video consumption has lead to the
creation of new vernacular, for example, “Video snacking,” a term now used to
describe how consumers are creating viewing habits around repeated, quick
consumption of online video, causing significant spikes in online video watching
right at lunchtime. As MediaPost puts it, there are “more people, watching more
videos, more often.”




We
believe that advertisers must reach consumers online as this is where
they increasingly spend time relative to other
media.  The advertiser’s ability to effectively reach these
consumers, however, is being impacted by several trends taking place on the
Internet.  Consumer behavior online is changing through an
accelerated progression towards “deportalization.” Deportalization describes the
phenomenon where Internet traffic moves from large portals to smaller,
niche sites.  The drivers of this trend are search and increased user
confidence with regard to the medium.  We expect that, in the next
several years, the large sites will continue to lose traffic to smaller
sites.




This
fragmentation makes it difficult for marketers to reach their targeted
demographics at scale.  As a result, they are turning to
advertising networks to help them bridge the gap. A survey done at the iMedia
Brand Summit showed that brand agency executives think that ad networks will be
the second most important channel for their advertising dollars in 2009. Most ad
networks, however, are geared towards direct response advertisers (“e-tailers”)
and specialize in driving consumers towards an immediate response (i.e. purchase
online). These ad networks have become fairly commoditized and provide little in
the way of the quality, transparent and integrated experiences that brand
advertisers seek. That realm has typically belonged to the same portals and
large publishers which are now quickly losing market share to small and medium
sized sites which have, until now, relied on general ad networks to sell their
advertising.


5


Betawave
believes there is a better way to approach this opportunity, bringing together
the best of both worlds - diversity, scale and the targeting of a network with
the integration,
editorial quality and customization of large
publishers. Betawave seeks to bridge the gap by uniting mid-size sites, offering
rich content experiences, and introducing standard and immersive ad formats
uniformly across our portfolio. The focus on immersive experiences is
central to the concept of Attention-Based Media. Our offering is built around
products that leverage the consumer activities in which our publisher sites
specialize. Betawave works closely with the publishers to understand audience
expectations of the site experience and to ensure that the delivery of the
intersection between audience needs and brand needs, the “Attention Opportunity”
is systematically sought and delivered for every marketing campaign. Betawave
does not operate portfolio sites. Thus, we retain flexibility to optimize
inventory based on changing traffic patterns or brand needs.
 
 In this
way, Betawave offers the rich, impactful, scalable experiences and
objective-based solutions that have typically been the expertise of the Portals
while mitigating the negative impact of deportalization suffered by competitors
entrenched by owned and operated properties. We believe that buying advertising
through Betawave provides marketers the ability to reach their intended audience
while achieving scale and without sacrificing deep engagement. In addition,
marketers can supplement campaigns anchored on other sites and extend their
reach against key demographics due to a large percentage of unduplicated
audience with top competitors also serving these demographics. As an example,
for a youth target, comScore Media Metrix reported that, in January 2009, 43% of
Betawave users did not visit the other top three youth sites.
 
 Betawave
breaks down its advertising opportunities into demographic categories, which is
how brand advertisers tend to buy media. At inception, Betawave served the 6-17
year old demographic. We later expanded to the “moms” demographic as there is a
high concentration of women visiting the same websites their children use either
through co-play or on their own time. Betawave will expand beyond just youth and
moms as there are opportunities for us to reach new demographics through
attention-based executions. We already reach 7.1 million 18-34 year
olds, who spend 44 minutes per month on the sites in the Betawave
Network.




It is our
belief that brand advertisers trying to reach the youth demographic are
relatively underserved by the current online market, particularly in the
area of deep immersive advertising experiences.  The youth demographic
tends to be on the cusp of the most recent online trends, including gaming,
virtual worlds and social networking.  Kids and teens also represent
an important consumer segment.  According to Packaged Facts, a
consumer goods market research company, teens alone have an estimated total
annual aggregate income of $80 billion, while the buying power of kids is
expected to total $21.4 billion in 2010.  Combined, kids and teens
influence an estimated additional $225 billion in spending by their
parents.




There are
an estimated 31.5 million 6 to 17 year old Internet users per month in the U.S
(source: comScore Media Metrix) and eMarketer estimates that 82% of US teens
ages 12 to 17 and 43.5% of children ages 3 to 11 will use the Internet on a
monthly basis in 2009. Approximately 48% of consumers between the ages of 8 and
12 spend two hours online every day, according to eMarketer, while 24% of teens
between 13 and 17 spend more than 15 hours online each week. A
recent article by AdAge titled “SOURCE” suggests that the rise of
social-networking sites, online video and applications for portable media
devices will further drive up the hours young consumers spend with these forms
of media, eroding the advertising base of television.




In
addition, there are an estimated 50 million moms in the U.S. today with spending
power estimated at $2.1 trillion.  This is projected to grow to $3
trillion by 2012.  According to Nielsen NetRatings, 32 million of
these women in the U.S. who have children under 18 go online, which translates
to about 64% of all moms and 40% of all women online in the U.S.
today.  Although moms go online for their own enjoyment, many spend
time monitoring their child’s behavior, including as much as 47% of women with
children ages 12-17 who use social networking sites, according to a study by
Razorfish and CafeMom. MediaPost also noted a significant trend in how women are
using video compared to last year, noting that women watched 41% more online
videos than they did last year, with average videos per month up 33% to 79
videos and average minutes watching online video up 46% to 227
minutes.  The average video length for women is 2.9 minutes, vs. 3.4
for men.  Moms control 85% of household spending and upwards of
two-thirds of online moms research products online.




For
publishers, Betawave is designed to provide a scalable offering, expertise in
high impact, cross-network takeovers and sponsorships and immersive experiences,
and established relationships with brand marketers and their agencies.
Specifically, mid-size publishers benefit from the reach of other partners
increasing the value of their own site through the combined scale while still
being able to execute upon the immersive experiences that define their offering.
This results in increased mindshare from marketers. Generally, the publishers in
the Betawave Network would not have access to the type and quality of
advertising that they receive as a result of their inclusion in the Betawave
Network.




Competition




We
compete against well-capitalized advertising companies as well as smaller
companies.  The market for our services is highly
competitive.


6


Advertisers
have several options for how to reach consumers online.  Advertisers
must first select between the various mediums, including television, radio,
direct mail, print media and the Internet, as well as others.  In the
online advertising market, we compete for advertising dollars with all websites
catering to our target demographics, including portals, large independent sites,
and websites belonging to other advertising networks.




Historically,
the portals have been a primary vehicle for big brands to reach big audiences
online.  Though once experts in audience and customer-centric
solutions, the portals have largely devolved into utility environments that
offer reach at the expense of attention and engagement, in part due to
the trend of “Deportalization” described above.  Betawave offers an
alternative for brand advertisers who are seeking both scale and attention with
increasing efficiency and accountability.




Betawave
has several attributes which we believe allow us to
compete aggressively for online advertising dollars.  With over
25 million unique users in the United States, the average U.S. user on the
Betawave Network of sites spends 48 minutes per month according to comScore
MediaMetrix, with tweens (9-14) and teen girls spending well over 60 minutes per
month and teen boys just under that number.  The average of 1 minute
per page across publishers in the Betawave Network is 41% higher than the
Internet average and is 66% higher than the minutes per page average at teen
sites and is two times as high as the minutes per page average at social
networking sites.




Publishers
have several options to monetize the traffic on their websites.  They
can build a direct sales organization to sell the advertising space on their
website directly. However, the high cost to build, train and operate such an
organization is significant and cost prohibitive for many but the largest
websites.  In addition, it requires substantial traffic to achieve
advertiser mindshare.




Publishers
can also partner with a third party advertising network to sell their
advertising.  There are several ways to categorize advertising
networks, but they can generally be divided into several categories based on how
they target consumers.  The first is performance-based networks, such
as Google (AdSense), Valueclick and Advertising.com, which try to use a variety
of optimization tools to increase the value of a publisher’s ad
inventory.  However, in general, these companies cater to the direct
response model and tend to deliver low CPMs and advertisers with low
relevance to the sites themselves.  Behavioral-targeting networks,
such as Tacoda and Revenue Science use a consumer’s past web-surfing habits to
target them with relevant ads.  Contextual networks try to match an
ad's subject to that of the page on which it appears.  Video and
widget networks sell in videos and widgets.




Finally,
publishers can choose to use full-service advertising representation networks
that provide a more robust solution when selling advertising.  Some
companies, such as Gorilla Nation, incorporate a wide variety of sites into
their network.  Others, such as Glam Media, aggregate inventory in a
specific vertical and sell advertising to those trying to reach that
audience.  These companies are able to offer more relevant advertising
to the publishers in their network while delivering better content alignment for
brands. Few, if any, offer the depth of products offered by Betawave, and
none offer the same combination of scale, transparency and custom advertising
opportunities that websites on the Betawave Network offer.




We
believe our company is attractive to publishers in our targeted demographics
because of our ability to attract relevant, high quality advertisers at higher
CPMs than can otherwise be obtained.  We have expertise in defining
innovative ad products and strategy, and we provide related platfroms such as
Betawave TV. We also believe that we are uniquely positioned with our
focus and experience with attention-based media.  Betawave
is the only online media company targeted to youth and moms that
offers this level of transparency and integration on its partner
sites.




Intellectual
Property




We
currently rely on a combination of copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property
rights.  We also enter into proprietary information and
confidentiality agreements with our employees, consultants and commercial
partners and generally control access to and distribution of our confidential
and proprietary information.  We rely on the technology of third
parties to assist us with several aspects of our business.  When doing
so, we obtain appropriate licenses which allow us to use that
technology.  We have registered the trademark “GOFISH” in the United
States.  We have applied for registration of the service marks
“BETAWAVE” and “ATTENTION-BASED MEDIA” in the United States.  These
applications are currently pending.


7


Government
Regulation




We are
subject to a number of foreign and domestic laws and regulations that affect
companies conducting business on the Internet.  Laws applicable to
e-commerce, online privacy and the Internet generally are becoming more
prevalent and it is possible that new laws and regulations may be adopted
regarding the Internet or other online services in the United States and foreign
countries.  Such new laws and regulations may address user privacy,
advertising, freedom of expression, pricing, content and quality of products and
services, taxation, intellectual property rights and information
security.  The nature of such legislation and the manner in which it
may be interpreted and enforced cannot be fully determined at this
time.  Such legislation could subject us and/or our customers to
potential liability or restrict our present business practices, which, in turn,
could have an adverse effect on our business, results of operations and
financial condition.  In addition, the FTC has investigated the
privacy practices of several companies that collect information about
individuals on the Internet.  The adoption of any such laws or
regulations might also decrease the rate of growth of Internet use generally,
which, in turn, could decrease the demand for our service or increase our cost
of doing business or in some other manner have a material adverse effect on our
business, results of operations and financial condition.




The
Children’s Online Privacy Protection Act (“COPPA”) imposes civil penalties on
persons collecting personal information from children under the age of
13.  We do not knowingly collect personal information from children
under the age of 13.  We work with our publishers to ensure that they
are compliant with both of COPPA and we currently require all new publishers to
protect us from any violation of these laws on their website.




Employees




As of
December 31,2008,
we had 44 full-time employees and two part-time employees.  None of
our employees is represented by a labor union, and we consider our employee
relations to be good.  We believe that our future success will depend
in part on our continued ability to attract, hire and retain qualified
personnel.




Seasonality




Both
seasonal fluctuations in internet usage and traditional retail seasonality have
affected, and are likely to continue to affect, our
business.  Advertisers generally place fewer advertisements during the
first and third calendar quarters of each year, which directly affects our
business.  Further, Internet user traffic typically drops during the
summer months, which reduces the amount of online advertising.  Online
advertising has, in the past, peaked during the fourth quarter holiday
season.  Advertising expenditures tend to vary in cycles that reflect
overall economic conditions as well as budgeting and buying
patterns.  Our revenue has been, and may continue to be, affected
by these fluctuations.  Our revenue has been, and will continue to be,
materially affected by the recent decline in the economic prospects of our
customers and the economy and our industry in general, which has had the effect
of altering our current and prospective customers’ spending priorities and
budget cycles and extending our sales cycle.




ITEM
      1A.
              RISK
      FACTORS.




We
face a variety of risks that may affect our financial condition, results of
operations or business, and many of those risks are driven by factors that we
cannot control or predict.  The following discussion addresses those
risks that management believes are the most significant, although there may be
other risks that could arise, or may prove to be more significant than expected,
that may affect our financial condition, results of operations or
business.


8




RISKS
RELATED TO OUR COMPANY




We
have a history of operating losses, which we expect to continue, and we may not
be able to achieve profitability.


We have a
history of losses and expect to continue to incur operating and net losses for
the foreseeable future.  We incurred a net loss of approximately $16.4
million for the year ended December 31, 2007 and a net loss of approximately
$17.0 million for the year ended December 31, 2008.  As of December
31, 2008, our accumulated deficit was approximately $41.1 million.  We
have not achieved profitability on a quarterly or on an annual
basis.  We may not be able to achieve profitability.  Our
revenues for the year ended December 31, 2008 were approximately $7.7
million.  If our revenues grow more slowly than anticipated or if our
operating expenses exceed expectations, then we may not be able to achieve
profitability in the near future or at all, which may depress the price for our
common stock.




The
effects of the current global economic crisis may impact our business, operating
results, or financial condition.




The
current global economic crisis has caused significant disruptions and extreme
volatility in global financial markets and increased rates of default and
bankruptcy, and has significantly impacted levels of consumer
spending.  The current deterioration in economic conditions has caused
and could cause additional decreases in or delays in advertising spending in
general.  In addition, many industry forecasts are predicting negative
growth in certain channels of online advertising in 2009.  These
developments could negatively affect our business, operating results, or
financial condition in a number of ways.  For example, current or
potential customers such as advertisers may delay or decrease spending with us
or may not pay us or may delay paying us for previously purchased
services.  In addition, if consumer spending continues to decrease,
this may affect consumer’s behavior on the Internet and online advertising
spending.




A
limited number of advertisers account for a significant percentage of our
revenue, and a loss of one or more of these advertisers could materially
adversely affect our results of operations.




We
generate almost entirely all of our revenues from advertisers on our
network.  For the year ended December 31, 2008, revenue from our five
largest advertisers accounted for 36.3% of our revenue.  Our largest
advertiser accounted for 12.3% of our revenue for the year ended December 31,
2008.  Our advertisers can generally terminate their contracts with us
at any time.  The loss of one or more of the advertisers that
represent a significant portion of our revenue could materially adversely affect
our results of operations.  In addition, our relationships with
publishers participating in our network require us to bear the risk of
non-payment of advertising fees from advertisers.  Accordingly, the
non-payment or late payment of amounts due to us from a significant advertiser
could materially adversely affect our financial condition and results of
operations.




A
small number of publishers account for a substantial percentage of our revenue
and our failure to develop and sustain long-term relationships with our
publishers, or the reduction in traffic of a current publisher in our network,
could limit our ability to generate revenue.




For the
year ended December 31, 2008, advertising revenue connected to our largest
publisher accounted for approximately 66% of our revenues.  Until the
sales cycle on the newest sites in our publisher network matures, a small number
of publishers will account for a substantial percentage of our
revenue.  We cannot assure you that any of the publishers
participating in our network will continue their relationships with
us.  Moreover, we may lose publishers to competing publisher networks
that have longer operating histories, the ability to attract higher ad rates,
greater brand recognition, or the ability to generate greater financial,
marketing and other resources.  Furthermore, we cannot assure you that
we would be able to replace a departed publisher with another publisher with
comparable traffic patterns and demographics, if at all.  Accordingly,
our failure to develop and sustain long-term relationships with publishers or
the reduction in traffic of a current publisher in our network could limit our
ability to generate revenue.




9


Our
future financial results, including our expected revenues, are unpredictable and
difficult to forecast.
  Our
revenues, expenses and operating results fluctuate from quarter to quarter and
are unpredictable which could increase the volatility of the price of our common
stock.  We expect that our operating results will continue to
fluctuate in the future due to a number of factors, some of which are beyond our
control.  These factors include:


·
            our
      ability to attract and incorporate publishers into our
      network;




·
            the
      ability of the publishers in our network to attract visitors to their
      websites;




·
            the
      amount and timing of costs relating to the expansion of our operations,
      including sales and marketing
expenditures;




·
            our
      ability to control our gross
margins;




·
            our
      ability to generate revenue through third-party advertising and our
      ability to be paid fees for advertising on our network;
  and




·
            our
      ability to obtain cost-effective advertising throughout our
      network.




Due to
all of these factors, our operating results may fall below the expectations of
investors, which could cause a decline in the price of our common
stock.  In addition, since we expect that our operating results will
continue to fluctuate in the future, it is difficult for us to accurately
forecast our revenues.




Our
limited operating history in the operation of an online entertainment and media
network of websites makes evaluation of our business difficult, and our revenues
are currently insufficient to generate positive cash flows from our
operations.




We have
limited historical financial data upon which to base planned operating expenses
or forecast accurately our future operating results.  We formally
launched our website in October 2004 and only began building our network during
2007.  We formally launched our network in February 2008 and we
rebranded as Betawave Corporation in January 2009.  The revenue
received currently is insufficient to generate positive cash flows from our
operations.




We
may need to raise additional capital to meet our business requirements in the
future and such capital raising may be costly or difficult to obtain and could
dilute current stockholders’ ownership interests.




We may
need to raise additional capital in the future, which may not be available on
reasonable terms or at all, especially in light of the recent downturn in the
economy and dislocations in the credit and capital markets.  The
raising of additional capital may dilute our current stockholders’ ownership
interests.  We may need to raise additional funds through public or
private debt or equity financings to meet various objectives including, but not
limited to:




·
            pursuing
      growth opportunities, including more rapid
  expansion;




·
            acquiring
      complementary businesses;




·
            growing
      our network, including the number of publishers and advertisers in our
      network;




·
            hiring
      qualified management and key
employees;




·
            responding
      to competitive pressures; and




·
            maintaining
      compliance with applicable laws.




In
addition, the raising of any additional capital through the sale of equity or
equity-backed securities would dilute our current stockholders’ ownership
percentages and would also result in a decrease in the fair market value of our
equity securities because our assets would be owned by a larger pool of
outstanding equity.  The terms of those securities issued by us in
future capital transactions may be more favorable to new investors, and may
include preferences, superior voting rights and the issuance of warrants or
other derivative securities, which may have a further dilutive
effect.


10




If we are
unable to obtain required additional capital, we may have to curtail our growth
plans or cut back on existing business and, further, we may not be able to
continue operating if we do not generate sufficient revenues from operations
needed to stay in business.




We may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs.  We may also
be required to recognize non-cash expenses in connection with certain securities
we issue, such as convertible notes and warrants, which may adversely impact our
financial condition.




Our
auditors have indicated that there are a number of factors that raise
substantial doubt about our ability to continue as a going concern.




Our
audited consolidated financial statements for the fiscal year ended December 31,
2008 were prepared on a going concern basis in accordance with United States
generally accepted accounting principles.  The going concern basis of
presentation assumes that we will continue in operation for the foreseeable
future and will be able to realize our assets and discharge our liabilities and
commitments in the normal course of business.  However, the report of
our independent registered public accounting firm on our audited consolidated
financial statements for the fiscal year ended December 31, 2008 has indicated
that we have incurred net loss since our inception, have experienced liquidity
problems, negative cash flows from operations, and a working capital deficit at
December 31, 2008, that raise substantial doubt about our ability to continue as
a going concern.  There can be no assurance that we will be able to
continue as a going concern.




If
we acquire or invest in other companies, assets or technologies and we are not
able to integrate them with our business, or we do not realize the anticipated
financial and strategic goals for any of these transactions, our financial
performance may be impaired.




As part
of our growth strategy, we routinely consider acquiring or making investments in
companies, assets or technologies that we believe are strategic to our
business.  We do not have extensive experience in integrating new
businesses or technologies, and if we do succeed in acquiring or investing in a
company or technology, we will be exposed to a number of risks,
including:




·
            we
      may find that the acquired company or technology does not further our
      business strategy, that we overpaid for the acquired company or technology
      or that the economic conditions underlying our acquisition decision have
      changed;




·
            we
      may have difficulty integrating the assets, technologies, operations or
      personnel of an acquired company, or retaining the key personnel of the
      acquired company;




·
            our
      ongoing business and management’s attention may be disrupted or diverted
      by transition or integration issues and the complexity of managing
      geographically or culturally diverse
  enterprises;




·
            we
      may encounter difficulty entering and competing in new markets or
      increased competition, including price competition or intellectual
      property litigation; and




·
            we
      may experience significant problems or liabilities associated with
      technology and legal contingencies relating to the acquired business or
      technology, such as intellectual property or employment
      matters.




If we
were to proceed with one or more significant acquisitions or investments in
which the consideration included cash, we could be required to use a substantial
portion of our available cash.  To the extent we issue shares of
capital stock or other rights to purchase capital stock, including options and
warrants, existing shareholders might be diluted.


11


Our
recently announced business model and name changes carry a number of risks which
may be harmful to our business.




We have
recently refined our business model significantly to become an attention-based
media company and have recently changed our name to Betawave
Corporation.  A significant portion of our future success will depend
on us forging contractual relationships with additional third-party websites
(“publishers”) under which we will assume responsibility for selling their
inventory of available advertising opportunities, as well as syndicating video
content to them.  With the implementation of the new phase of our
business strategy, we are susceptible to the risks of operating an
advertising-supported business.  There is no guarantee that we will
enter into contracts with such publishers and, if we are unable to enter into
such contractual relationships, our business will be adversely
affected.




Furthermore,
in connection with the development and implementation of our refined strategic
focus, we have spent, and continue to expect to spend, additional time and
costs, including those associated with advertising and marketing efforts and
building a network that includes other publishers.  If we are unable
to effectively implement our refined strategic focus, our business and operating
results would be adversely affected.




Our
recent name change to Betawave Corporation and rebranding campaign may involve
substantial costs and may not be favorably received by our base of users,
advertisers, publishers in our network and other partners.




In
January 2009, we changed our name from GoFish Corporation to Betawave
Corporation and launched a campaign to rebrand our business using the “Betawave”
name.  As a result, we may lose any brand recognition associated with
the “GoFish” name that we previously established with advertisers, publishers in
our network and other partners.  In addition, our rebranding campaign
may involve substantial costs and may not be favorably received by advertisers,
publishers in our network and other partners.  We may not be able to
establish, maintain and/or enhance brand recognition associated with the
“Betawave” name that is comparable to the brand recognition that we may have
previously had associated with the “GoFish” name.  If we fail to
establish, maintain and/or enhance brand recognition associated with the
“Betawave” name, it could affect our ability to attract advertisers, publishers
in our network and other partners, which could adversely affect our ability to
generate revenues and could impede our business plan.




Our
business depends on enhancing our brand, and any failure to enhance our brand
would hurt our ability to expand our base of users, advertisers and publishers
in our network.




Enhancing
our brand is critical to expanding our base of users, advertisers, publishers in
our network, and other partners.  We believe that the importance of
brand recognition will increase due to the relatively low barriers to entry in
the internet market.  If we fail to enhance our brand, or if we incur
excessive expenses in this effort, our business, operating results and financial
condition will be materially and adversely affected.  Enhancing our
brand will depend largely on our ability to provide high-quality products and
services, which we may not do successfully.




We
intend to expand our operations and increase our expenditures in an effort to
grow our business.  If we are unable to achieve or manage significant
growth and expansion, or if our business does not grow as we expect, our
operating results may suffer.




Our
business plan anticipates continued additional expenditure on development and
other growth initiatives.  We may not achieve significant
growth.  If achieved, significant growth would place increased demands
on our management, accounting systems, network infrastructure and systems of
financial and internal controls.  We may be unable to expand
associated resources and refine associated systems fast enough to keep pace with
expansion.  If we fail to ensure that our management, control and
other systems keep pace with growth, we may experience a decline in the
effectiveness and focus of our management team, problems with timely or accurate
reporting, issues with costs and quality controls and other problems associated
with a failure to manage rapid growth, all of which would harm our results of
operations.


12


Payments
to certain of our publishers have exceeded the related fees we receive from our
advertisers.




We are
obligated under certain agreements to make non-cancelable guaranteed minimum
revenue share payments to certain of our publishers.  In these
agreements, we promise to make these minimum payments to the publisher for a
pre-negotiated period of time.  At December 31, 2008, our aggregate
outstanding non-cancelable guaranteed minimum revenue share commitments totaled
$5.65 million through 2010.  It is difficult to forecast with
certainty the fees that we will earn under agreements with guarantees, and
sometimes the fees we earn fall short of the guaranteed minimum payment
amounts.




Losing
key personnel or failing to attract and retain other highly skilled personnel
could affect our ability to successfully grow our business.




Our
future performance depends substantially on the continued service of our senior
management, sales and other key personnel.  We do not currently
maintain key person life insurance.  If our senior management were to
resign or no longer be able to serve as our employees, it could impair our
revenue growth, business and future prospects.  In addition, the
success of our monetization and sales plans depends on our ability to retain
people in direct sales and to hire additional qualified and experienced
individuals into our sales organization.




To meet
our expected growth, we believe that our future success will depend upon our
ability to hire, train and retain other highly skilled
personnel.  Competition for quality personnel is intense among
technology and Internet-related businesses such as ours.  We cannot be
sure that we will be successful in hiring, assimilating or retaining the
necessary personnel, and our failure to do so could cause our operating results
to fall below our projected growth and profit targets.




Decreased
effectiveness of equity compensation could adversely affect our ability to
attract and retain employees and harm our business.




We have
historically used stock options as a key component of our employee compensation
program in order to align employees’ interests with the interests of our
stockholders, encourage employee retention, and provide competitive compensation
packages.  Volatility or lack of positive performance in our stock
price may adversely affect our ability to retain key employees, many of whom
have been granted stock options, or to attract additional highly-qualified
personnel.




Rules
issued under the Sarbanes-Oxley Act of 2002 may make it difficult for us to
retain or attract qualified officers and directors, which could adversely affect
the management of our business and our ability to retain the trading status of
our common stock on the OTC Bulletin Board.




We may be
unable to attract and retain those qualified officers, directors and members of
board committees required to provide for our effective management because of
rules and regulations that govern publicly held companies, including, but not
limited to, certifications by principal executive officers.  The
enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of
rules and regulations and the strengthening of existing rules and regulations by
the SEC.  The perceived increased personal risk associated with these
recent changes may deter qualified individuals from accepting roles as directors
and executive officers.




We may
have difficulty attracting and retaining directors with the requisite
qualifications.  If we are unable to attract and retain qualified
officers and directors, the management of our business and our ability to retain
the quotation of our common stock on the OTC Bulletin Board or obtain a listing
of our common stock on a stock exchange or NASDAQ could be adversely
affected.


13


Our
management has identified a number of material weaknesses in our internal
control over financial reporting as of December 31, 2008, which, if not
sufficiently remediated, could result in material misstatements in our annual or
interim financial statements in future periods and the ineffectiveness of our
disclosure controls and procedures.




In
connection with our management’s assessment of our internal control over
financial reporting as required under Section 404 of the Sarbanes-Oxley Act of
2002, our management identified a number of material weaknesses in our internal
control over financial reporting as of December 31, 2008.  A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis by our internal controls.  As
a result, our management has concluded that we did not maintain effective
internal control over financial reporting as of December 31, 2008.  In
addition, based on the evaluation and the identification of these material
weaknesses in our internal control over financial reporting, our Chief Executive
Officer and our Chief Accounting Officer concluded that, as of December 31,
2008, our disclosure controls and procedures were not effective.




We are in
the process of implementing remediation efforts with respect to our control
environment and these material weaknesses.  However, if these
remediation efforts are insufficient to address these material weaknesses, or if
additional material weaknesses in our internal control over financial reporting
are discovered in the future, we may fail to meet our future reporting
obligations, our financial statements may contain material misstatements and our
financial conditions and results of operations may be adversely
impacted.  Any such failure could also adversely affect our results of
periodic management assessment regarding the effectiveness of our internal
control over financial reporting, as required by the SEC’s rules under Section
404 of the Sarbanes-Oxley Act of 2002.  The existence of a material
weakness could result in errors in our financial statements that could result in
a restatement of financial statements or failure to meet reporting obligations,
which in turn could cause investors to lose confidence in reported financial
information leading to a decline in our stock price.




Although
we believe that these remediation efforts will enable us to improve our internal
control over financial reporting, we cannot assure you that these remediation
efforts will remediate the material weaknesses identified or that any additional
material weaknesses will not arise in the future due to a failure to implement
and maintain adequate internal control over financial
reporting.  Furthermore, there are inherent limitations to the
effectiveness of controls and procedures, including the possibility of human
error and circumvention or overriding of controls and procedures.




We
may have undisclosed liabilities that could harm our revenues, business,
prospects, financial condition and results of operations.




Our
present management had no affiliation with Unibio Inc. (which changed its name
to GoFish Corporation on September 14, 2006 and subsequently to Betawave
Corporation on January 20, 2009) prior to the October 27, 2006 mergers, in which
Betawave Corporation acquired GoFish Technologies, Inc. as a wholly-owned
subsidiary in a reverse merger transaction and IDT Acquisition Corp., a
wholly-owned subsidiary of Betawave Corporation, simultaneously merged with and
into Internet Television Distribution, Inc. as a wholly-owned
subsidiary.  Pursuant to the mergers, the officers and board members
of Betawave Corporation resigned and were replaced by officers of GoFish
Technologies, Inc. along with newly elected board members.




Although
the October 27, 2006 Agreement and Plan of Merger contained customary
representations and warranties regarding our pre-merger operations and customary
due diligence was performed, all of our pre-merger material liabilities may not
have been discovered or disclosed.  We do not believe this to be the
case but can offer no assurance as to claims which may be made against us in the
future relating to such pre-merger operations.  The Agreement and Plan
of Merger and Reorganization contained a limited, upward, post-closing,
adjustment to the number of shares of common stock issuable to pre-merger GoFish
Technologies Inc. and Internet Television Distribution Inc. shareholders as a
means of providing a remedy for breaches of representations made by us in the
Agreement and Plan of Merger and Reorganization, including representations
related to any undisclosed liabilities, however, there is no comparable
protection offered to our other stockholders.  Any such undisclosed
pre-merger liabilities could harm our revenues, business, prospects, financial
condition and results of operations upon our acceptance of responsibility for
such liabilities.


14


Regulatory
requirements may materially adversely affect us.




We are
subject to various regulatory requirements, including the Sarbanes-Oxley Act of
2002.  Section 404 of the Sarbanes-Oxley Act of 2002 requires the
evaluation and determination of the effectiveness of a company’s internal
control over its financial reporting.  In connection with management’s
assessment of our internal control over financial reporting as required under
Section 404 of the Sarbanes-Oxley Act of 2002, we identified material weaknesses
in our internal control over financial reporting as of December 31,
2008.  As a result, we have incurred additional costs and may suffer
adverse publicity and other consequences of this determination.




We
may be subject to claims relating to certain actions taken by our former
external legal counsel.




In
February 2007, we learned that approximately half of the three million shares of
our common stock issued as part of a private placement transaction we
consummated in October 2006 to entities controlled by Louis Zehil, who at the
time of the purchase was a partner of our former external legal counsel for the
private placement transaction, McGuireWoods LLP, may have been improperly
traded.  We believe that Mr. Zehil improperly caused our former
transfer agent not to place a required restrictive legend on the certificate for
these three million shares and that Mr. Zehil then caused the entities he
controlled to resell certain of these shares.  Mr. Zehil’s conduct was
reported to the SEC, and the SEC recently sued Mr. Zehil in connection with this
matter and further alleged that Mr. Zehil engaged in a similar fraudulent scheme
with respect to six additional public companies represented at the relevant time
by McGuireWoods LLP.  Mr. Zehil also is the subject of criminal
charges brought by federal prosecutors in connection with the fraudulent
scheme.




In
December 2008, Sunrise Equity Partners, L.P. (“Sunrise”) brought an action
against us in the United States District Court in the Southern District of New
York on behalf of itself and all other purchasers of our securities in our 2006
private placement.  In the complaint, Sunrise alleged, among other
things, that we breached the representation in the subscription agreement for
the 2006 private placement which provided that no purchaser in the private
placement had an agreement or understanding on terms that differed substantially
from those of any other investor.  Sunrise claimed that we breached
this representation because Mr. Zehil’s entities received certificates without
any restrictive legend while all other investors in the private placement
received certificates with such restrictive legends.  In February
2008, Sunrise dismissed the complaint without prejudice.  It is
possible that Sunrise will refile the complaint in federal or state court or
that one or more other stockholders could also claim that they somehow suffered
a loss as a result of Mr. Zehil’s conduct and attempt to hold us responsible for
their losses.  If any such claims are successfully made against us and
we are not adequately indemnified for those claims from available sources of
indemnification, then such claims could have a material adverse effect on our
financial condition.  We also may incur significant costs resulting
from our investigation of this matter, defending any litigation against us
relating to this matter, and our cooperation with governmental
authorities.  We may not be adequately indemnified for such costs from
available sources of indemnification.




RISKS
RELATED TO OUR BUSINESS




We
may be unable to attract advertisers to our network.




Advertising
revenues comprise, and are expected to continue to comprise, almost entirely all
of our revenues generated from our network.  Most large advertisers
have fixed advertising budgets, only a small portion of which have traditionally
been allocated to Internet advertising.  In addition, the overall
market for advertising, including Internet advertising, has been generally
characterized in recent periods by softness of demand, reductions in marketing
and advertising budgets, and by delays in spending of budgeted
resources.  Advertisers may continue to focus most of their efforts on
traditional media or may decrease their advertising spending.  If we
fail to convince advertisers to spend a portion of their advertising budgets
with us, we will be unable to generate revenues from advertising as we
intend.




Even if
we initially attract advertisers to our network, they may decide not to
advertise to our community if their investment does not have the desired result,
or if we do not deliver their advertisements in an appropriate and effective
manner.  If we are unable to provide value to our advertisers,
advertisers may reduce the rates they are willing to pay or may not continue to
place ads with us.


15


We
generate almost entirely all of our revenue from advertising, and the reduction
in spending by, or loss of, advertisers could seriously harm our
business.




We
generate almost entirely all of our revenues from advertisers on our
network.  Our advertisers can generally terminate their contracts with
us at any time.  If we are unable to remain competitive and provide
value to our advertisers, they may stop placing ads with us, which would
negatively affect our revenues and business.  In addition,
expenditures by advertisers tend to be cyclical, reflecting overall economic
conditions and budgeting and buying patterns.  Any decreases in or
delays in advertising spending due to general economic conditions could reduce
our revenues or negatively impact our ability to grow our
revenues.  We also may encounter difficulty collecting from our
advertisers.  We are a relatively small company and advertisers may
choose to pay our bills after paying debts of their larger clients.




If
we fail to compete effectively against other Internet advertising companies, we
could lose customers or advertising inventory and our revenue and results of
operations could decline.




The
Internet advertising markets are characterized by rapidly changing technologies,
evolving industry standards, frequent new product and service introductions, and
changing customer demands.  The introduction of new products and
services embodying new technologies and the emergence of new industry standards
and practices could render our existing products and services obsolete and
unmarketable or require unanticipated technology or other
investments.  Our failure to adapt successfully to these changes could
harm our business, results of operations and financial condition.




The
market for Internet advertising and related products and services is highly
competitive.  We expect this competition to continue to increase, in
part because there are no significant barriers to entry to our
industry.  Increased competition may result in price reductions for
advertising space, reduced margins and loss of market share.  We
compete against well-capitalized advertising companies as well as smaller
companies.




We
compete against self-serve advertising networks such as Google AdSense,
Valueclick, Advertising.com and Tribal Fusion that serve impressions onto a wide
variety of mostly small and medium sites.  We compete against
behavioral networks, such as Tacoda and Blue Lithium, which serve the same
inventory as general networks, but add behavioral targeting.  We also
compete against other full-service advertising networks that provide a more
complete service when selling advertising, such as Gorilla Nation and
Glam.




If
existing or future competitors develop or offer products or services that
provide significant performance, price, creative or other advantages over those
offered by us, our business, results of operations and financial condition could
be negatively affected.  Many current and potential competitors enjoy
competitive advantages over us, such as longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical, sales and marketing resources.  As a result, we may not be
able to compete successfully.  If we fail to compete successfully, we
could lose customers or advertising inventory and our revenue and results of
operations could decline.




We
face competition from websites catering to consumers, as well as traditional
media companies, and we may not be included in the advertising budgets of large
advertisers, which could harm our revenues and results of
operations.




In the
online advertising market, we compete for advertising dollars with all websites
catering to consumers, including portals, search engines and websites belonging
to other advertising networks.  We also compete with traditional
advertising media, such as direct mail, television, radio, cable, and print, for
a share of advertisers’ total advertising budgets.  Most large
advertisers have fixed advertising budgets, a small portion of which is
allocated to Internet advertising.  We expect that large advertisers
will continue to focus most of their advertising efforts on traditional
media.  If we fail to convince these companies to spend a portion of
their advertising budgets with us, or if our existing advertisers reduce the
amount they spend on our programs, our revenues and results of operations would
be harmed.


16


We
may be unable to attract and incorporate high quality publishers into our
network.




Our
future revenues and success depend upon, among other things, our ability to
attract and contract with high-quality publishers to participate in our
network.  We cannot assure you that publishers will want to
participate, or continue to participate, in our network.  If we are
unable to successfully attract publishers to our network, it could adversely
affect our ability to generate revenues and could impede our business
plan.  Even if we do successfully attract publishers, we cannot assure
you that we will be able to incorporate these publishers into our network
without substantial costs, delays or other problems.




Our
services may fail to maintain the market acceptance they have achieved or to
grow beyond current levels, which would adversely affect our competitive
position.




We have
not conducted any independent studies with regard to the feasibility of our
proposed business plan, present and future business prospects and capital
requirements.  Our services may fail to gain market acceptance and our
infrastructure to enable such expansion is still limited.  Even if
adequate financing is available and our services are ready for market, we cannot
be certain that our services will find sufficient acceptance in the marketplace
to fulfill our long and short-term goals.  Failure of our services to
achieve or maintain market acceptance would have a material adverse effect on
our business, financial condition and results of operations.




We
may fail to select the best publishers for our network.




The
number of websites has increased substantially in recent years.  Our
publishers’ websites face numerous competitors both on the Internet, and in the
more traditional broadcasting arena.  Some of these companies have
substantially longer operating histories, significantly greater financial,
marketing and technical expertise, and greater resources and name recognition
than we do.  Moreover, the offerings on our network may not be
sufficiently distinctive or may be copied by others.  If we fail to
attain commercial acceptance of our services and to be competitive with these
companies, we may not ever generate meaningful revenues.  In addition,
new companies may emerge at any time with services that are superior, or that
the marketplace perceives are superior, to ours.




If
we fail to anticipate, identify and respond to the changing tastes and
preferences of consumers, our business is likely to suffer.




Our
business and results of operations depend upon the appeal of the sites in our
network to consumers.  The tastes and preferences of our consumers
frequently change, and our success depends on our ability to anticipate,
identify and respond to these changing tastes and preferences by incorporating
appropriate publishers into our network.  If we are unable to
successfully anticipate, identify or respond to changing tastes and preferences
of consumers or misjudge the market for our network, we may not be able to
establish relationships with the most popular publishers, which may cause our
revenues to decline.




We
may be subject to market risk and legal liability in connection with the data
collection capabilities of the publishers in our network.




Many
components of websites on our network are interactive Internet applications that
by their very nature require communication between a client and server to
operate.  To provide better consumer experiences and to operate
effectively, many of the websites on our network collect certain information
from users.  The collection and use of such information may be subject
to U.S. state and federal privacy and data collection laws and regulations, as
well as foreign laws such as the EU Data Protection Directive.  Recent
growing public concern regarding privacy and the collection, distribution and
use of information about Internet users has led to increased federal, state and
foreign scrutiny and legislative and regulatory activity concerning data
collection and use practices.  Any failure by us to comply with
applicable federal, state and foreign laws and the requirements of regulatory
authorities may result in, among other things, in liability and materially harm
our business.


17




The
websites on our network post privacy policies concerning the collection, use and
disclosure of user data, including that involved in interactions between our
client and server products.  Because of the evolving nature of our
business and applicable law, such privacy policies may now or in the future fail
to comply with applicable law.  The websites on our network are
subject to various federal and state laws concerning the collection and use of
information regarding individuals.  These laws include the Children’s
Online Privacy Protection Act, the Federal Drivers Privacy Protection Act of
1994, the privacy provisions of the Gramm-Leach-Bliley Act, the Federal CAN-SPAM
Act of 2003, as well as other laws that govern the collection and use of
information.  We cannot assure you that the websites on our network
are currently in compliance, or will remain in compliance, with these laws and
their own privacy policies.  Any failure to comply with posted privacy
policies, any failure to conform privacy policies to changing aspects of the
business or applicable law, or any existing or new legislation regarding privacy
issues could impact the market for our publishers’ websites, technologies and
products and this may adversely affect our business.




Activities
of advertisers or publishers in our network could damage our reputation or give
rise to legal claims against us.




The
promotion of the products and services by publishers in our network may not
comply with federal, state and local laws, including but not limited to laws and
regulations relating to the Internet.  Failure of our publishers to
comply with federal, state or local laws or our policies could damage our
reputation and adversely affect our business, results of operations or financial
condition.  We cannot predict whether our role in facilitating our
customers’ marketing activities would expose us to liability under these
laws.  Any claims made against us could be costly and time-consuming
to defend.  If we are exposed to this kind of liability, we could be
required to pay substantial fines or penalties, redesign our business methods,
discontinue some of our services or otherwise expend resources to avoid
liability.




We also
may be held liable to third parties for the content in the advertising we
deliver on behalf of our publishers.  We may be held liable to third
parties for content in the advertising we serve if the music, artwork, text or
other content involved violates the copyright, trademark or other intellectual
property rights of such third parties or if the content is defamatory, deceptive
or otherwise violates applicable laws or regulations.  Any claims or
counterclaims could be time consuming, result in costly litigation or divert
management’s attention.




We
depend on third-party Internet, telecommunications and technology providers for
key aspects in the provision of our services and any failure or interruption in
the services that third parties provide could disrupt our business.




We depend
heavily on several third-party providers of Internet and related
telecommunication services, including hosting and co-location facilities, as
well as providers of technology solutions, including software developed by third
party vendors, in delivering our services.  In addition, we use third
party vendors to assist with product development, campaign deployment, video
streaming for Betawave TV and support services for some of our products and
services.  These companies may not continue to provide services or
software to us without disruptions in service, at the current cost or at
all.




If the
products and services provided by these third-party vendors are disrupted or not
properly supported, our ability to provide our products and services would be
adversely impacted.  In addition, any financial or other difficulties
our third party providers face may have negative effects on our business, the
nature and extent of which we cannot predict.  While we believe our
business relationships with our key vendors are good, a material adverse impact
on our business would occur if a supply or license agreement with a key vendor
is materially revised, is not renewed or is terminated, or the supply of
products or services were insufficient or interrupted.  The costs
associated with any transition to a new service provider could be substantial,
require us to reengineer our computer systems and telecommunications
infrastructure to accommodate a new service provider and disrupt the services we
provide to our customers.  This process could be both expensive and
time consuming and could damage our relationships with customers.




In
addition, failure of our Internet and related telecommunications providers to
provide the data communications capacity in the time frame we require could
cause interruptions in the services we provide.  Unanticipated
problems affecting our computer and telecommunications systems in the future
could cause interruptions in the delivery of our services, causing a loss of
revenue and potential loss of customers.


18


More
individuals are using non-PC devices to access the internet.  We may
be unable to capture market share for advertising on these devices.




The
number of people who access the Internet through devices other than personal
computers, including mobile telephones, smart phones, handheld computers and
video game consoles, has increased dramatically in the past few
years.  Most of the publishers in our network originally designed
their services for rich, graphical environments such as those available on
desktop and laptop computers.  The lower resolution, functionality and
memory associated with alternative devices make the use of these websites
difficult and the publishers in our network developed for these devices may not
be compelling to users of alternative devices.  In addition, the
creative advertising solutions that thrive in rich environments may be less
attractive to advertisers on these devises.  The use of such creative
advertising is part what makes our services attractive to advertisers and is
what most contributes to our margins.  If we are slow to develop
services and technologies that are more compatible with non-PC communications
devices or if we are unable to attract and retain a substantial number of
publishers that focus on alternative device users to our online services, we
will fail to capture a significant share of an increasingly important portion of
the market for online services, which could adversely affect our
business.




RISKS
RELATED TO OUR INDUSTRY




Anything
that causes users of websites on our network to spend less time on their
computers, including seasonal factors and national events, may impact our
profitability.




Anything
that diverts users of our network from their customary level of usage could
adversely affect our business.  Geopolitical events such as war, the
threat of war or terrorist activity, and natural disasters such as hurricanes or
earthquakes all could adversely affect our profitability.  Similarly,
our results of operations historically have varied seasonally because many of
our users reduce their activities on our website with the onset of good weather
during the summer months, and on and around national holidays.




If
the delivery of Internet advertising on the Web is limited or blocked, demand
for our services may decline.




Our
business may be adversely affected by the adoption by computer users of
technologies that harm the performance of our services.  For example,
computer users may use software designed to filter or prevent the delivery of
Internet advertising; block, disable or remove cookies used by our ad serving
technologies; prevent or impair the operation of other online tracking
technologies; or misrepresent measurements of ad penetration and
effectiveness.  We cannot assure you that the proportion of computer
users who employ these or other similar technologies will not increase, thereby
diminishing the efficacy of our products and services.  In the event
that one or more of these technologies became more widely adopted by computer
users, demand for our products and services would decline.




Advertisers
may be reluctant to devote a portion of their budgets to marketing technology
and data products and services or online advertising.




Companies
doing business on the Internet, including us, must compete with traditional
advertising media, including television, radio, cable and print, for a share of
advertisers’ total marketing budgets.  Potential customers may be
reluctant to devote a significant portion of their marketing budget to online
advertising or marketing technology and data products and services if they
perceive the Internet or direct marketing to be a limited or ineffective
marketing medium.  Any shift in marketing budgets away from marketing
technology and data products or services or online advertising spending, or our
offerings in particular, could materially and adversely affect our business,
results of operations or financial condition.  In addition, online
advertising could lose its appeal to those direct marketers and advertisers
using the Internet as a result of its ad performance relative to other
media.




The
lack of appropriate measurement standards or tools may cause us to lose
customers or prevent us from charging a sufficient amount for our products and
services.




Because
many online marketing technology and data products and services remain
relatively new disciplines, there is often no generally accepted methods or
tools for measuring the efficacy of online marketing and advertising as there
are for advertising in television, radio, cable and print.  Therefore,
many advertisers may be reluctant to spend sizable portions of their budget on
online marketing and advertising until more widely accepted methods and tools
that measure the efficacy of their campaigns are developed.  In
addition, direct marketers are often unable to accurately measure campaign
performance across all response channels or identify which of their marketing
methodologies are driving customers to make purchases.  Therefore, our
customers may not be able to assess the effectiveness of our services and as a
result, we could lose customers, fail to attract new customers or existing
customer could reduce their use of our services.


19




We could
lose customers or fail to gain customers if our services do not utilize the
measuring methods and tools that may become generally
accepted.  Further, new measurement standards and tools could require
us to change our business and the means used to charge our customers, which
could result in a loss of customer revenues and adversely impact our business,
financial condition and results of operation.




We
may infringe on third-party intellectual property rights and could become
involved in costly intellectual property litigation.




Other
parties claiming infringement by the advertisements or video content on the
sites in our network could sue us. We may be liable to third parties for
elements of advertising campaigns designed by us, which may violate the
copyright, trademark, or other intellectual property rights of such third
parties.


In
addition, any future claims, with or without merit, could impair our business
and financial condition because they could:




·
            result
      in significant litigation costs;




·
            divert
      the attention of management;




·
            divert
      resources; or




·
            require
      us to enter into royalty and licensing agreements that may not be
      available on terms acceptable to us or at
all.




We
may experience unexpected expenses or delays in service enhancements if we are
unable to license third-party technology on commercially reasonable
terms.




We rely
on a variety of technology that we license from third parties.  These
third-party technology licenses might not continue to be available to us on
commercially reasonable terms or at all.  If we are unable to obtain
or maintain these licenses on favorable terms, or at all, our ability to
efficiently deliver advertisements at the best rates available might be impaired
and this would adversely impact our business.




It
is not yet clear how laws designed to protect children that use the Internet may
be interpreted and enforced, and whether new similar laws will be enacted in the
future which may apply to our business in ways that may subject us to potential
liability.




The
Children’s Online Privacy Protection Act (“COPPA”) imposes civil penalties for
collecting personal information from children under the age of 13 without
complying with the requirements of COPPA.  Publishers in our network
may violate COPPA on their websites. Although
COPPA is a relatively new law, the Federal Trade Commission (the “FTC”) has
recently been more active in enforcing violations with COPPA.  In the
last two years, the FTC has brought a number of actions against website
operators for failure to comply with COPPA requirements, and has imposed fines
of up to $3 million.  Future legislation similar to these Acts could
subject us to potential liability if we were deemed to be noncompliant with such
rules and regulations.


20


Increasing
governmental regulation of the Internet could harm our business.




The
publishers in our network are subject to the same federal, state and local laws
as other companies conducting business on the Internet.  Today there
are relatively few laws specifically directed towards conducting business on the
Internet.  However, due to the increasing popularity and use of the
Internet, many laws and regulations relating to the Internet are being debated
at the state and federal levels.  These laws and regulations could
cover issues such as user privacy, freedom of expression, pricing, fraud,
quality of products and services, advertising, intellectual property rights and
information security.  Furthermore, the growth and development of
Internet commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on companies conducting business over the
Internet.




Applicability
to the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, libel, obscenity and personal
privacy could also harm our business.  The majority of these laws was
adopted before the advent of the Internet, and do not contemplate or address the
unique issues raised by the Internet.  The courts are only beginning
to interpret those laws that do reference the Internet, such as the Digital
Millennium Copyright Act and COPPA, and their applicability and reach are
therefore uncertain.  These current and future laws and regulations
could harm our business, results of operation and financial
condition.




In
addition, several telecommunications carriers have requested that the Federal
Communications Commission regulate telecommunications over the Internet. Due to
the increasing use of the Internet and the burden it has placed on the current
telecommunications infrastructure, telephone carriers have requested the FCC to
regulate Internet service providers and impose access fees on those
providers.  If the FCC imposes access fees, the costs of using the
Internet could increase dramatically which could result in the reduced use of
the Internet as a medium for commerce and have a material adverse effect on our
Internet business operations.




We
depend on the growth of the Internet and Internet infrastructure for our future
growth, and any decrease or less than anticipated growth in Internet usage could
adversely affect our business prospects.




Our
future revenue and profits, if any, depend upon the continued widespread use of
the Internet as an effective commercial and business medium.  Factors
which could reduce the widespread use of the Internet include:




·
            possible
      disruptions or other damage to the Internet or telecommunications
      infrastructure;




·
            failure
      of the individual networking infrastructures of our merchant advertisers
      and distribution partners to alleviate potential overloading and delayed
      response times;




·
            a
      decision by merchant advertisers to spend more of their marketing dollars
      in offline areas;




·
            increased
      governmental regulation and taxation;
and




·
            actual
      or perceived lack of security or privacy
  protection.




In
addition, websites have experienced interruptions in their service as a result
of outages and other delays occurring throughout the Internet network
infrastructure, and as a result of sabotage, such as electronic attacks designed
to interrupt service on many websites.  The Internet could lose its
viability as a commercial medium due to reasons including increased governmental
regulation or delays in the development or adoption of new technologies required
to accommodate increased levels of Internet activity.  If use of the
Internet does not continue to grow, or if the Internet infrastructure does not
effectively support our growth, our revenue and results of operations could be
materially and adversely affected.




RISKS
RELATED TO OUR COMMON STOCK




You
may have difficulty trading our common stock as there is a limited public market
for shares of our common stock.




Our
common stock is currently quoted on the NASD’s OTC Bulletin Board under the
symbol “BWAV.OB.” Our common stock is not actively traded and there is a limited
public market for our common stock.  As a result, a stockholder may
find it difficult to dispose of, or to obtain accurate quotations of the price
of, our common stock.  This severely limits the liquidity of our
common stock, and would likely have a material adverse effect on the market
price for our common stock and on our ability to raise additional
capital.  An active public market for shares of our common stock may
not develop, or if one should develop, it may not be sustained.


21


Applicable
SEC rules governing the trading of “penny stocks” may limit the trading and
liquidity of our common stock which may affect the trading price of our common
stock.




Our
common stock is currently quoted on the NASD’s OTC Bulletin Board.  On
March 27, 2009, the closing bid price of our common stock was $0.15 per
share.  Stocks such as ours which trade below $5.00 per share are
generally considered “penny stocks” and subject to SEC rules and regulations
which impose limitations upon the manner in which such shares may be publicly
traded.  These regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks.  Under these regulations,
certain brokers who recommend such securities to persons other than established
customers or certain accredited investors must make a special written
suitability determination regarding such a purchaser and receive such
purchaser’s written agreement to a transaction prior to sale.  These
regulations have the effect of limiting the trading activity of our common stock
and reducing the liquidity of an investment in our common stock.




There
is a limited public market for shares of our common stock, which may make it
difficult for investors to sell their shares.




There is
a limited public market for shares of our common stock.  An active
public market for shares of our common stock may not develop, or if one should
develop, it may not be sustained.  Therefore, investors may not be
able to find purchasers for their shares of our common stock.




The
price of our common stock has been and is likely to continue to be highly
volatile, which could lead to losses by investors and costly securities
litigation.




The
trading price of our common stock has been and is likely to continue to be
highly volatile and could fluctuate in response to factors such as:




·
            actual
      or anticipated variations in our operating
  results;




·
            announcements
      of technological innovations by us or our
  competitors;




·
            announcements
      by us or our competitors of significant acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;




·
            adoption
      of new accounting standards affecting our
  industry;




·
            additions
      or departures of key personnel;




·
            introduction
      of new services by us or our
competitors;




·
            sales
      of our common stock or other securities in the open
  market;




·
            conditions
      or trends in the Internet and online commerce industries;
    and




·
            other
      events or factors, many of which are beyond our
  control.




The stock
market has experienced significant price and volume fluctuations, and the market
prices of stock in technology companies have been highly volatile.  In
the past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been initiated against
the Company.  Litigation initiated against us, whether or not
successful, could result in substantial costs and diversion of our management’s
attention and resources, which could harm our business and financial
condition.


22


We
do not anticipate dividends to be paid on our common stock, and stockholders may
lose the entire amount of their investment.




A
dividend has never been declared or paid in cash on our common stock, and we do
not anticipate such a declaration or payment for the foreseeable
future.  We expect to use future earnings, if any, to fund business
growth.  Therefore, stockholders will not receive any funds absent a
sale of their shares.  We cannot assure stockholders of a positive
return on their investment when they sell their shares, nor can we assure that
stockholders will not lose the entire amount of their investment.




Securities
analysts may not initiate coverage or continue to cover our common stock, and
this may have a negative impact on our market price.




The
trading market for our common stock will depend, in part, on the research and
reports that securities analysts publish about us and our
business.  We do not have any control over these
analysts.  There is no guarantee that securities analysts will cover
our common stock.  If securities analysts do not cover our common
stock, the lack of research coverage may adversely affect its market
price.  If we are covered by securities analysts, and our stock is
downgraded, our stock price would likely decline.  If one or more of
these analysts ceases to cover us or fails to publish regular reports on us, we
could lose visibility in the financial markets, which could cause our stock
price or trading volume to decline.




You
may experience dilution of your ownership interests because of the future
issuance of additional shares of our common stock and our preferred
stock.




In the
future, we may issue our authorized but previously unissued equity securities,
resulting in the dilution of the ownership interests of our present
stockholders.  We are currently authorized to issue an aggregate of
410,000,000 shares of capital stock consisting of 400,000,000 shares of common
stock, par value $0.001 per share, and 10,000,000 shares of “blank check”
preferred stock, par value $0.001 per share, of which we have designated
8,003,000 of such shares of Series A preferred stock.  As of March 27,
2009, there were: (i) 29,229,284 shares of common stock outstanding; (ii)
7,065,293 shares of Series A preferred stock outstanding; (iii) 103,533,331
shares reserved for issuance upon the exercise of outstanding options under our
2004 stock plan, our 2006 equity incentive plan, our 2007 non-qualified stock
option plan and our 2008 stock incentive plan; and (iv) 67,351,020 shares
reserved for issuance upon the exercise of outstanding warrants.




We may
also issue additional shares of our common stock or other securities that are
convertible into or exercisable for common stock in connection with hiring or
retaining employees or consultants, future acquisitions, future sales of our
securities for capital raising purposes, or for other business
purposes.  The future issuance of any such additional shares of our
common stock or other securities may create downward pressure on the trading
price of our common stock.  There can be no assurance that we will not
be required to issue additional shares, warrants or other convertible securities
in the future in conjunction with hiring or retaining employees or consultants,
future acquisitions, future sales of our securities for capital raising purposes
or for other business purposes, including at a price (or exercise prices) below
the price at which shares of our common stock are currently quoted on the OTC
Bulletin Board.




Even
though we are not a California corporation, our common stock could still be
subject to a number of key provisions of the California General Corporation
Law.




Under
Section 2115 of the California General Corporation Law (the “CGCL”),
corporations not organized under California law may still be subject to a number
of key provisions of the CGCL.  This determination is based on whether
the corporation has significant business contacts with California and if more
than 50% of its voting securities are held of record by persons having addresses
in California.  In the immediate future, we will continue the business
and operations of GoFish Technologies Inc. and a majority of our business
operations, revenue and payroll will be conducted in, derived from, and paid to
residents of California.  Therefore, depending on our ownership, we
could be subject to certain provisions of the CGCL.  Among the more
important provisions are those relating to the election and removal of
directors, cumulative voting, standards of liability and indemnification of
directors, distributions, dividends and repurchases of shares, shareholder
meetings, approval of certain corporate transactions, dissenters’ and appraisal
rights, and inspection of corporate records.


23


Panorama
Capital, L.P., Rembrandt Venture Partners Fund Two, L.P., Rembrandt Venture
Partners Fund Two-A, L.P. and Rustic Canyon Ventures III, L.P., whose interests
may not be aligned with yours, collectively control approximately 65.97% of our
company, which could result in actions of which you or other stockholders do not
approve.




In two
closings that occurred on December 3, 2008 and December 12, 2008, we completed a
$22.5 million preferred stock financing pursuant to the terms of a securities
purchase agreement dated December 3, 2008 that we entered into with Panorama
Capital, L.P. (“Panorama”), Rembrandt Venture Partners Fund Two, L.P.
(“Rembrandt Fund Two”), Rembrandt Venture Partners Fund Two-A, L.P. (“Rembrandt
Fund Two-A” and, together with Rembrandt Fund Two, “Rembrandt”) and Rustic
Canyon Ventures III, L.P. (“Rustic” and, together with Panorama and Rembrandt,
the “Lead Investors”).  The Lead Investors currently own,
collectively, approximately 65.97% of our outstanding shares of common stock,
assuming the conversion of Series A preferred stock.  Prior to the
December 2008 financing, the Lead Investors did not own any shares of our common
stock.




In
addition, pursuant to the investors’ rights agreement we entered into with the
Lead Investors in connection with the December 2008 financing, we granted the
following rights: (i) Panorama has the right to designate one board member for
so long as Panorama shall own not less than 16,666,667 shares of common stock
issued or issuable upon conversion of Series A preferred stock, (ii) Rustic has
the right to designate one board member for so long as Rustic shall own not less
than 12,500,000 shares of common stock issued or issuable upon conversion of
Series A preferred stock, (iii) Rembrandt has the right to designate one board
member for so long as Rembrandt shall own not less than 8,333,333 shares of
common stock issued or issuable upon conversion of Series A preferred stock and
(iv) Internet Television Distribution, Inc. and its affiliates have the right to
appoint one board member for so long as Internet Television Distribution, Inc.
shall own not less than 3,088,240 shares of common stock issued or issuable upon
conversion of Series A preferred stock.  The investors’ rights
agreement also provides that each investor party to the investors’ rights
agreement shall take all actions necessary within its control so that for as
long as Panorama owns at least 16,666,667 shares of common stock issued or
issuable upon conversion of Series A preferred stock, (i) the compensation
committee of the board of directors shall consist of three members, at least two
of which shall be directors appointed by the Lead Investors as stated above, and
(ii) each committee of the board of directors shall include, at the option of
Panorama, the member of the board of directors designated by
Panorama.




As a
result of the foregoing, the Lead Investors, collectively, are able, without
approval of any other stockholder, to materially influence our management and
operations and control the outcome of certain significant matters that our
stockholders vote upon, including the election of directors, amendments to our
certificate of incorporation, and mergers or other business
combinations.  The Lead Investors’ interests may not coincide with the
interests of other holders of our common stock.  Such concentration of
ownership could also have the effect of delaying, deterring or preventing a
change in control of our company that might otherwise be beneficial to minority
stockholders and may also discourage acquisition bids for the company and limit
the amount certain investors may be willing to pay for shares of our common
stock.




ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS.




Not
applicable.




ITEM
      2.
              PROPERTIES.




Our
executive offices are located at 706 Mission Street, 10th Floor,
San Francisco, California 94103, and our telephone number is (415)
738-8706.  Our executive offices in San Francisco consist of
approximately 10,000 square feet, and we currently lease the facilities for
$17,968 per month under a lease expiring in April 2010.  Our monthly
rental payment will increase to $20,010 beginning in April 2009.  Our
New York office is located at 34 West 22nd Street,
5th.  Floor, New York, New York.  The New York office
consists of approximately 2,300 square feet, and we currently lease it for
$8,625 per month under a lease expiring in October 2011.  We have an
office in Los Angeles at 4571 Wilshire Blvd. 3rd.  Floor, Los Angeles,
California.  The office is approximately 1,500 square feet plus
common areas, and we lease it for approximately $2,900 per month on a
month-to-month basis.  We also have an office in Chicago at 221 North
LaSalle Street.  The office is approximately 871 square feet and we
currently lease the facilities for $1,350 per month under a lease expiring in
February 2010.


24


ITEM
      3.
                LEGALPROCEEDINGS.




From time
to time we may be named in claims arising in the ordinary course of
business.  Currently, no legal proceedings, government actions,
administrative actions, investigations or claims are pending against us or
involve us that, in the opinion of our management, would reasonably be expected
to have a material adverse effect on our business and financial
condition.




In
December 2008, Sunrise Equity Partners, L.P. (“Sunrise”) brought an action
against us in the United States District Court in the Southern District of New
York on behalf of itself and all other purchasers of our securities in our 2006
private placement.  In the complaint, Sunrise alleged, among other
things, that we breached the representation in the subscription agreement for
the 2006 private placement which provided that no purchaser in the private
placement had an agreement or understanding on terms that differed substantially
from those of any other investor.  Sunrise claimed that we breached
this representation because Mr. Zehil’s entities received certificates without
any restrictive legend while all other investors in the private placement
received certificates with such restrictive legends.  Sunrise
dismissed this suit without prejudice in February 2009.  Although it
is possible that Sunrise may refile the lawsuit in state or federal court, in
the opinion of our management, we do not reasonably expect this case to have a
material adverse effect on our business and financial condition.




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




On
December 11, 2008, holders of a majority of the then outstanding shares of our
capital stock approved by written consent (i) an amendment and restatement of
our articles of incorporation to, among other things, increase the number of
authorized shares of our common stock from 300,000,000 to 400,000,000 and (ii)
the adoption of the 2008 stock incentive plan, as amended through such
date.




PART
II




ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES.




Our
common stock is quoted on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc. under the symbol “BWAV.OB.” From July 3, 2006 until
mid-September 2006 our stock was quoted under the symbol “UBIO.” From
mid-September 2006 to February 26, 2009, our stock was quoted under the symbol
“GOFH.OB.” From February 27, 2009 to the present, our stock has been quoted
under the symbol “BWAV.OB.” The following table sets forth, for the fiscal
quarters indicated, the high and low closing bid prices per share of our common
stock as reported by the National Association of Securities Dealers composite
feed or other qualified interdealer quotation medium.  Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.  Where applicable, the
prices set forth below give retroactive effect to our 8.333334-for-1 forward
stock split which was effected on October 9, 2006.




Quarter Ended
                        
                        High Bid
                        
                        
                        Low BidMarch
      31, 2007
                        
                        $
                        5.95
                        
                        
                        $
                        3.65June
      30, 2007
                        
                        $
                        4.30
                        
                        
                        $
                        1.04September
      30, 2007
                        
                        $
                        1.11
                        
                        
                        $
                        0.26December
      31, 2007
                        
                        $
                        0.55
                        
                        
                        $
                        0.16March
      31, 2008
                        
                        $
                        0.57
                        
                        
                        $
                        0.23June
      30, 2008
                        
                        $
                        0.42
                        
                        
                        $
                        0.20September
      30, 2008
                        
                        $
                        0.37
                        
                        
                        $
                        0.18December
      31, 2008
                        
                        $
                        0.32
                        
                        
                        $
                        0.08March
      31, 2009 (through March 27, 2009)
                        
                        $
                        0.24
                        
                        
                        $
                        0.10


25




As of
December 31, 2008, there were 29,229,284 shares of our common stock issued and
outstanding.




As of
December 31, 2008, there were 90 holders of record of shares of our common
stock.




Dividend
Policy




We have
never declared or paid dividends.  We intend to retain earnings, if
any, to support the development of the business and therefore does not
anticipate paying cash dividends for the foreseeable future.  Payment
of future dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including current financial
condition, operating results and current and anticipated cash
needs.




Securities
Authorized for Issuance Under Equity Compensation Plans




As of
December 31, 2008, we had the following securities authorized for issuance under
(i) the 2004 stock plan, which was the stock option plan that was adopted by
GoFish Technologies, Inc. prior to the merger in 2006 merger, (ii) the 2006
equity incentive plan, (iii) the 2007 non-qualified stock option plan (as
hereinafter defined) and (iv) the 2008 stock incentive plan (as hereinafter
defined):




Plan category
                                        
                                        Number of securities to be
                                          issued upon exercise of
                                          outstanding options,
                                          warrants and rights
                                          (a)
                                        
                                        Weighted-average
                                          exercise price of
                                          outstanding options,
                                          warrants and rights
                                          (b)
                                        
                                        Number of securities
                                          remaining available for
                                          future issuance under
                                          equity compensation plans
                                          (excluding securities
                                          reflected in column (a))
                                          (c)Equity
      compensation plans approved by security holders
                                        
                                        3,207,799
                                        
                                        $
                                        0.23
                                        
                                        16,498,084Equity
      compensation plans not approved by security holders
                                        
                                        76,839,697
                                        
                                        $
                                        0.41
                                        
                                        (6,833,750
                                        )Total
                                        
                                        80,047,496
                                        
                                        $
                                        0.41
                                        
                                        9,664,334




2004
Stock Plan




In 2004,
the board of directors of GoFish Technologies, Inc. adopted the 2004 stock
plan.  The 2004 stock plan authorized the board of directors to grant
incentive stock options and non-statutory stock options to employees, directors,
and consultants for up to 2,000,000 shares of common stock.  Under the
plan, incentive stock options and nonqualified stock options were to be granted
at a price that is no less than 100% of the fair value of the stock at the date
of grant.  Options will be vested over a period according to the
option agreement, and are exercisable for a maximum period of ten years after
date of grant.




In May
2006, GoFish Technologies increased the shares reserved for issuance under the
2004 stock plan from 2,000,000 to 4,588,281.  Upon completion of the
merger in 2006, we decreased the shares reserved under the 2004 stock plan from
4,588,281 to 804,188 and suspended the 2004 stock plan. At December 31, 2008,
716,354 options remain outstanding.




2006
Equity Incentive Plan




Immediately
prior to the merger in 2006, our board of directors and a majority of our
stockholders approved and adopted the 2006 equity incentive
plan.  Initially a total of 2,000,000 shares of our common stock was
reserved for issuance under the 2006 equity incentive plan.  On
October 30, 2006, in accordance with the terms of the 2006 equity incentive
plan, our board of directors increased the number of shares reserved under the
2006 equity incentive plan to 4,000,000 shares, subject to approval by our
stockholders within one year of such date.  In March 2008, our board
of directors suspended 3,370,966 shares, leaving 629,034 shares reserved
in the 2006 equity incentive plan.




26


2007
Non-Qualified Stock Option Plan




On
October 24, 2007, our board of directors approved and adopted the 2007
non-qualified stock option plan.  Initially, a total of 3,600,000
shares of our common stock was reserved for issuance under the 2007
non-qualified stock option plan.  In accordance with the terms of the
2007 non-qualified stock option plan, on October 31, 2007, our board of
directors increased the number of shares reserved under the 2007 non-qualified
stock option plan to 4,000,000; on December 18, 2007, our board of directors
increased the number of shares reserved under the 2007 non-qualified stock
option plan to 5,500,000 shares; on February 5, 2008, our board of directors
further increased the number of shares reserved under the 2007 non-qualified
stock option plan to 10,500,000; on June 4, 2008, our board of directors further
increased the number of shares reserved under the 2007 non-qualified stock
option plan to 16,500,000; on December 2, 2008, our board of directors increased
the number of shares reserved under the 2007 non-qualified stock option plan to
69,141,668; and on January 16, 2009, our board of directors increased the number
of shares reserved under the 2007 non-qualified stock option plan to 82,963,169
shares.  If an incentive award granted under the 2007 non-qualified
stock option plan expires, terminates, is unexercised or is forfeited, or if any
shares are surrendered to us in connection with an incentive award, the shares
subject to such award and the surrendered shares will become available for
further awards under the 2007 non-qualified stock option plan.




Administration.Our
board of directors (or any committee composed of members of our board of
directors appointed by our board of directors to administer the 2007
non-qualified stock option plan), administers the 2007 non-qualified stock
option plan.  The administrator has the authority to, among other
things, (i) select the employees, consultants and directors to whom options may
be granted, (ii) grant options, (iii) determine the number of shares underlying
option grants, (iv) approve forms of option agreements for use under the 2007
non-qualified stock option plan, (v) determine the terms and conditions of the
options and (vi) subject to certain exceptions, amend the terms of any
outstanding option granted under the 2007 non-qualified stock option
plan.




The 2007
non-qualified stock option plan also contains provisions governing: (i) the
treatment of options under the 2007 non-qualified stock option plan upon the
occurrence of certain corporate transactions (including merger, consolidation,
sale of all or substantially all the assets of the Company, or complete
liquidation or dissolution of the Company) and changes in control of the
Company, (ii) transferability of options and (iii) tax withholding upon the
exercise or vesting of an option.




Grants.The 2007
non-qualified stock option plan authorizes grants of nonqualified stock options
to eligible employees, directors and consultants.  The term of each
option under the 2007 non-qualified stock option plan may be no more than ten
years from the date of grant.  Options granted under the 2007
non-qualified stock option plan entitle the grantee, upon exercise, to purchase
a specified number of shares from us at a specified exercise price per
share.  The exercise price for an Option is determined by the
administrator, but it cannot be less than the fair market value of our common
stock on the date of grant unless agreed to otherwise at the time of the
grant.




Duration, Amendment, and
Termination.The 2007 non-qualified stock option plan will
continue in effect for a term of ten years, unless sooner
terminated.  Our board of directors may at any time amend, suspend or
terminate the 2007 non-qualified stock option plan.




2008
Stock Incentive Plan




On March
31, 2008, in connection with the suspension of our 2006 equity incentive plan,
our board of directors adopted the 2008 stock incentive plan.  As
originally adopted, the 2008 stock incentive plan provided for the issuance of
up to 2,400,000 shares of common stock pursuant to awards granted thereunder, up
to 2,200,000 of which may be issued pursuant to incentive stock options granted
thereunder.  On June 4, 2008, our board of directors adopted an
amendment to the 2008 stock incentive plan to (i) decrease the maximum aggregate
number of shares of common stock that may be issued pursuant to awards granted
under the plan from 2,400,000 shares to 1,500,000 shares and (ii) decrease the
maximum aggregate number of shares that may be issued pursuant to incentive
stock options granted under the plan from 2,200,000 shares to 1,500,000
shares.  On December 2, 2008, our board of directors adopted an
amendment to the 2008 stock incentive plan to increase the maximum aggregate
number of shares of common stock that may be issued pursuant to awards granted
under the plan from 1,500,000 shares to 19,224,774 shares.  On
December 11, 2008, holders of a majority of the outstanding shares of our
capital stock adopted the 2008 stock incentive plan, as amended through such
date.


27





Purpose.  The
purpose of the 2008 stock incentive plan is to provide our employees (including
officers), consultants and directors, whose present and potential contributions
are important to our success, an incentive, through ownership of common stock,
to continue in service to us, and to help us compete effectively with other
enterprises for the services of qualified individuals.




Administration.  The
2008 stock incentive plan is administered, with respect to grants to employees,
directors, officers, and consultants, by the plan administrator (the
“Administrator”), defined as our board of directors or one or more committees
designated by the board.




Terms and Conditions of
Awards.  The 2008 stock incentive plan provides for the grant
of stock options, restricted stock, restricted stock units, and stock
appreciation rights (collectively referred to as “awards”).  Stock
options granted under the 2008 stock incentive plan may be either incentive
stock options under the provisions of Section 422 of the Internal Revenue Code
of 1986, as amended, or nonqualified stock options.  Incentive stock
options may be granted only to employees.  Awards other than incentive
stock options may be granted to our employees, directors and consultants or to
employees, directors and consultants of our related entities.  Each
award granted under the 2008 stock incentive plan shall be designated in an
award agreement.




Subject
to applicable laws, the Administrator has the authority, in its discretion, to
select employees, directors and others to whom awards may be granted from time
to time, to determine whether and to what extent awards are granted, to
determine the number of shares of common stock or the amount of other
consideration to be covered by each award (subject to the limitations set forth
above under “Shares Reserved for Issuance under the 2008 Stock Incentive Plan”),
to approve award agreements for use under the 2008 stock incentive plan, to
determine the terms and conditions of any award (including the vesting schedule
applicable to the award), to amend the terms of any outstanding award granted
under the 2008 stock incentive plan, to construe and interpret the terms of the
2008 stock incentive plan and awards granted, to establish additional terms,
conditions, rules or procedures to accommodate the rules or laws of applicable
non-U.S. jurisdictions and to take such other action not inconsistent with the
terms of the 2008 stock incentive plan, as the Administrator deems
appropriate.




The 2008
stock incentive plan provides that stockholder approval is required in order to
(i) reduce the exercise price of any option or the base appreciation amount of
any stock appreciation right awarded under the 2008 stock incentive plan or (ii)
cancel any option or stock appreciation right awarded under the 2008 stock
incentive plan in exchange for another award at a time when the exercise price
exceeds the fair market value of the underlying shares unless the cancellation
and exchange occurs in connection with a Corporate Transaction (defined
below).  However, canceling an option or stock appreciation right in
exchange for another option, stock appreciation right, restricted stock or other
award, with an exercise price, purchase price or base appreciation amount (as
applicable) that is equal to or greater than the exercise price or base
appreciation amount (as applicable) of the original option or stock appreciation
right will not require stockholder approval.




Change in
Capitalization.  Subject to any required action by our
stockholders, the number of shares of common stock covered by outstanding
awards, the number of shares of common stock that have been authorized for
issuance under the 2008 stock incentive plan, the exercise or purchase price of
each outstanding award, the maximum number of shares of common stock that may be
granted subject to awards to any participant in a calendar year, and the like,
shall be proportionally adjusted by the Administrator in the event of (i) any
increase or decrease in the number of issued shares of common stock resulting
from a stock split, stock dividend, combination or reclassification or similar
event affecting common stock, (ii) any other increase or decrease in the number
of issued shares of common stock effected without receipt of consideration by
the Company or (iii) any other transaction with respect to common stock
including a corporate merger, consolidation, acquisition of property or stock,
separation (including a spin-off or other distribution of stock or property),
reorganization, liquidation (whether partial or complete), distribution of cash
or other assets to stockholders other than a normal cash dividend, or any
similar transaction; provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been “effected without
receipt of consideration.”


28


Corporate Transaction or Change in
Control.  Effective upon the consummation of a Corporate
Transaction (as defined in the 2008 stock incentive plan), all outstanding
awards shall terminate.  However, all such awards shall not terminate
to the extent the contractual obligations represented by the awards are assumed
by the successor entity.  Except as provided in an individual award
agreement, the Administrator shall have the authority to provide for the full or
partial automatic vesting and exercisability of one or more outstanding unvested
awards under the 2008 stock incentive plan and the release from restrictions on
transfer and repurchase or forfeiture rights of such awards in connection with a
Corporate Transaction or Change in Control (as defined in the 2008 stock
incentive plan), on such terms and conditions as the Administrator may
specify.




Under the
2008 stock incentive plan, a Corporate Transaction is generally defined
as:




·
            acquisition
      of 50% or more of our stock by any individual or entity including by
      tender offer or a reverse merger;




·
            a
      sale, transfer or other disposition of all or substantially all of the
      assets of the Company;




·
            a
      merger or consolidation in which the Company is not the surviving entity;
      or




·
            a
      complete liquidation or
dissolution.




Under the
2008 stock incentive plan, a Change in Control is generally defined
as:




·
            acquisition
      of 50% or more of the Company’s stock by any individual or entity which a
      majority of our board members (who have served on our board for at least
      twelve months) do not recommend our stockholders accept;
  or




·
            a
      change in the composition of our board of directors over a period of
      twelve months or less such that a majority of our board members ceases, by
      reason of one or more contested elections for board membership, to be
      comprised of individuals who have either been board members continuously
      for a period of at least twelve months or have been board members for less
      than twelve months and were elected or nominated for election by at least
      a majority of board members who have served on our board of directors for
      at least twelve months.




Amendment, Suspension or Termination
of the 2008 Stock Incentive Plan.  Our board of directors may
at any time amend, suspend or terminate the 2008 stock incentive
plan.  The 2008 stock incentive plan will be for a term of ten years
unless sooner terminated by the board.  To the extent necessary to
comply with applicable provisions of federal securities laws, state corporate
and securities laws, the Internal Revenue Code of 1986, as amended, the rules of
any applicable stock exchange or national market system, and the rules of any
non-U.S. jurisdiction applicable to awards granted to residents therein, we
shall obtain stockholder approval of any such amendment to the 2008 stock
incentive plan in such a manner and to such a degree as is
required.


29


Recent
Sales of Unregistered Securities




In two
closings that occurred on December 3, 2008 and December 12, 2008, we completed a
financing in which we raised approximately $22.5 million in gross proceeds and
cancelled indebtedness representing an aggregate principal amount of
approximately $5.4 million in exchange for the issuance of shares of our
Series A preferred stock and warrants to purchase our common
stock.  The December 2008 financing was completed pursuant to the
terms of a securities purchase agreement dated December 3, 2008 that we entered
into with Panorama Capital, L.P. (“Panorama”), Rembrandt Venture Partners Fund
Two, L.P. (“Rembrandt Fund Two"), Rembrandt Venture Partners Fund Two-A, L.P.
(“Rembrandt Fund Two-A”) and Rustic Canyon Ventures III, L.P.
(“Rustic”).  The cancelled indebtedness was (a) our 6% senior
convertible notes due June 7, 2010 issued under the terms of that certain
purchase agreement, dated as of June 7, 2007, that we entered into with such
investors, and (b) our unsecured convertible 15% original issue discount notes
due June 8, 2010 that we issued under the terms of that certain subscription
agreement dated April 18, 2008 and that certain accession agreement dated June
30, 2008.  The Series A preferred stock and warrants were sold as
units at a purchase price of $4.00 per unit, with each unit consisting of (i)
one share of Series A preferred stock and (ii) a warrant to purchase eight
shares of common stock.  We sold an aggregate of (i) 7,065,293 shares
of our Series A preferred stock, which shares are convertible into 141,305,860
shares of our common stock, and (ii) warrants to purchase 56,522,344 shares of
our common stock, at an exercise price of $0.20 per share, with a term of five
years.  In connection with the December 2008 financing, we entered
into an investors’ rights agreement with Panorama, Rembrandt Fund Two, Rembrandt
Fund Two-A and Rustic, pursuant to which, among other things, we granted the
following rights: (i) Panorama has the right to designate one board member for
so long as Panorama shall own not less than 16,666,667 shares of common stock
issued or issuable upon conversion of Series A preferred stock, (ii) Rustic has
the right to designate one board member for so long as Rustic shall own not less
than 12,500,000 shares of common stock issued or issuable upon conversion of
Series A preferred stock, (iii) Rembrandt has the right to designate one board
member for so long as Rembrandt shall own not less than 8,333,333 shares of
common stock issued or issuable upon conversion of Series A preferred stock and
(iv) Internet Television Distribution, Inc. and its affiliates have the right to
appoint one board member for so long as Internet Television Distribution, Inc.
shall own not less than 3,088,240 shares of common stock issued or issuable upon
conversion of Series A preferred stock.  The investors’ rights
agreement also provides that each investor party to the investors’ rights
agreement take all actions necessary within its control so that for as long as
Panorama owns at least 16,666,667 shares of common stock issued or issuable upon
conversion of Series A preferred stock, (i) the compensation committee of the
board of directors shall consist of three members, at least two of which shall
be directors appointed by the Lead Investors as stated above, and (ii) each
committee of the board of directors shall include, at the option of Panorama,
the member of the board of directors designated by Panorama.  Qatalyst
Partners LP acted as our financial advisor in connection with the December 2008
financing.  In accordance with the terms of our engagement letter with
Qatalyst, we issued to Qatalyst warrants to purchase 6,665,343 shares of our
common stock as compensation for its services to us, and we paid Qatalyst a cash
fee in accordance with the terms of the engagement letter.  The
issuances of securities described above are exempt from the registration
requirements of the Securities Act pursuant to Section 4(2)
thereof.




ITEM
      6.
              SELECTED
      FINANCIAL DATA.




Not
applicable.




ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.




This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations provides information that we believe is relevant to an assessment and
understanding of our financial condition and results of
operations.  This Management’s Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
audited consolidated financial statements and related notes thereto included in
this Annual Report on Form 10-K beginning on page F-1.




This
Annual Report on Form 10-K, including this Management’s Discussion and Analysis
of Financial Condition and Results of Operations, contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions.  Any statements that are not statements of historical fact
are forward-looking statements.  When used, the words “believe,”
“plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like,
and/or future-tense or conditional constructions (e.g., “will,” “may,” “could,”
“should,” etc.) or similar expressions identify certain of these forward-looking
statements.  See “Cautionary Note Regarding Forward-Looking
Statements.”




These
forward-looking statements are subject to risks and uncertainties that could
cause actual results or events to differ materially from those expressed or
implied by the forward-looking statements in this Annual Report on Form
10-K.  Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this Annual Report on Form
10-K, and in particular, the risks discussed under the heading “Risk Factors” in
Item 1A of this Annual Report on Form 10-K and those discussed in other
documents we file with the SEC.  We undertake no obligation to revise
or publicly release the results of any revision to these forward-looking
statements.  Given these risks and uncertainties, readers are urged
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Annual Report on Form 10-K.


30


Overview




Betawave
is a young and rapidly growing company that operates an attention-based digital
media company.  We have assembled some of the leading immersive casual
gaming, virtual world, social play and entertainment websites into a network of
sites (the “Betawave Network”).  We generate revenue by selling
innovative, accountable and attention-grabbing advertising campaigns on those
sites to brand advertisers.




During
most of fiscal year 2008, the Company sold advertising on a network of websites
focused on children ages 6-17 and their co-viewing parents.




In
December 2008, the Company completed a preferred stock financing in which it
raised approximately $22.5 million in gross proceeds and cancelled indebtedness
representing an aggregate principal amount of approximately $5.4 million in
exchange for the issuance of shares of the Company’s Series A preferred stock
and warrants to purchase the Company’s common stock.




In
January 2009, the Company changed its name from GoFish Corporation to Betawave
Corporation and launched a rebranding campaign and changed its focus to selling
advertising and providing content for websites in high attention
environments.




In March
2009, the Company entered into a loan and security agreement with Silicon Valley
Bank that provides for a secured revolving credit arrangement to provide
advances in an aggregate principal amount of up to $4 million (based upon a
percentage of certain eligible billed and unbilled accounts receivable). See
Note 17 to our audited consolidated financial statements included in this Annual
Report on Form 10-K.


Results
of Operations




The
following discussion of the results of our operations and financial condition
should be read in conjunction with our audited consolidated financial statements
and related notes thereto included in this Annual Report on Form 10-K beginning
on page F-1.




Summary
of 2008 Results




Our total
revenues for the year ended December 31, 2008 were approximately $7.7 million,
increasing 270% from the prior year amount of approximately $2.1
million.  The increase reflects higher sales from advertising that was
sold across the Betawave Network.  According to comScore Media Metrix,
the Betawave Network reached roughly 25 million unique U.S. users per month at
the end of 2008 compared to just under 20 million unique U.S. users per
month at the end of 2007.




Total
costs of revenues and expenses for the year ended December 31, 2008 were
approximately $22.5 million, increasing 30% from the prior year amount of
approximately $17.3 million.  This increase was primarily due to
direct payments to publishers for revenue share on advertising revenues,
compensation related expenses and loss on debt extinguishment.




Our
operating loss for the year ended December 31, 2008 was
approximately $14.8 million, decreasing 3% from the prior year amount of
approximately $15.2 million in 2007. This decrease in operating loss was
primarily the result of the increase in total revenues, which was
partly offset by higher total cost of revenues and expenses.




Our net
loss for the year ended December 31, 2008 was approximately $17.0 million,
increasing 3.6% from the prior year amount of approximately $16.4 million. This
increase in net loss was primarily the result of increased interest expense,
which was not fully offset by interest income and miscellaneous income,
notwithstanding the increase in total revenues.






2009
Outlook




We expect
that revenue will increase in fiscal 2009 as a result of our planned continued
expansion of the Betawave Network’s reach, scale and scope.  We also
expect to incur additional expenses for the development and expansion of our
publisher network.  In addition, we anticipate gains in operating
efficiencies as a result of the increase to our sales and marketing
organization.  Our revenue expectations are based on certain
assumptions and subject to certain risk factors and uncertainties that could
cause actual results to differ materially from those
expectations.  Our revenue expectations assume that we will continue
in operation for the foreseeable future.  As discussed under the
heading “Risk Factors,” our auditors have indicated that our inability to
generate sufficient revenue raises substantial doubt as to our ability continue
as a going concern.  In addition, our revenues fluctuate from quarter
to quarter and are unpredictable.  We expect that our revenues will
continue to fluctuate in the future due to a number of factors, some of which
are beyond our control.  Accordingly, it is difficult for us to
accurately forecast our revenues.  Factors causing fluctuations in our
revenues include: (i) our ability to attract quality publishers to the Betawave
Network; (ii) the ability of our publishers to increase the number of visitors
to their sites; (iii) the amount and timing of costs relating to the expansion
of our operations, including sales and marketing expenditures; (iv) our ability
to control our gross margins; and (v) our ability to generate revenue through
third-party advertising and our ability to be paid fees for advertising on the
Betawave Network.


31


We expect
to continue to experience an operating loss in fiscal year 2009, despite the
anticipated increase in revenue as we incur additional expenses for the
development and expansion of the Betawave Network and operational
infrastructure.  However, we anticipate these losses will decrease
from current levels as we continue to grow and develop.




Revenue




We derive
almost entirely all of our revenues from fees we receive from our
advertisers.  We believe an opportunity exists to provide advertisers
with a platform to engage consumers through effecitve and targeted advertising
initiatives that provide the reach of a portal with the engagement of niche
sites.  Factors that we believe will influence the success of our
advertising programs include:




•
            growth
      in the number of users populating the websites on the Betawave
      Network;




•
            growth
      in the amount of time spent per user on the websites on the Betawave
      Network;




•
            the
      number of advertisers and the variety of products
    available;




•
            advertisers’
      return on investment and the efficacy of click-through
      conversions;




•
            enhanced
      ad vehicles, products, services and sponsorships;
  and




•
            our
      fees and rates.




We
believe that Internet advertising currently represents a small segment of the
overall advertising market and that the growth in Internet usage and consumers’
behavioral changes will eventually lead to a dramatic shift in ad revenues from
traditional media to the Internet.  To take advantage of this, the
main focus of our advertising programs is to provide usefulness to our
advertisers, and relevancy to our users.  We are continuing to take
steps to increase our revenue by offering a comprehensive solution for
advertising across the Betawave Network.  We also intend to broaden
our reach through syndication opportunities brought about by the launch of
Betawave TV.  Through this commitment to premium content, scaled
distribution, and scope, we hope to broaden our appeal to the advertising
community, which we believe will ultimately drive both the quality and quantity
of constituents looking to advertise through the Betawave Network.




The
following table presents our revenues for the periods presented:




Revenues
— Comparison of the Years Ended December 31, 2008 and 2007




Year
                        
                        
                        YearEnded
                        
                        
                        EndedDecember
      31,
                        
                        
                        December
      31,
                        
                        Percent2008
                        
                        
                        2007
                        
                        ChangeRevenues
                        
                        $
                        7,701,599
                        
                        
                        $
                        2,081,182
                        
                        
                        
                        270
                        %




Our
revenues increased $5,620,417 in 2008 from 2007.  The increase in 2008
reflects higher sales from advertising that was sold across our network of owned
and affiliate publisher websites.  Revenues in both periods consisted
of advertising fees, primarily from banner and text-based ads.  As we
begin to add publisher websites into the Betawave Network, we have been able to
generate a greater number of user impressions for our
advertisers.  Additionally, these sales reflect the build out of our
sales organization, which grew from 9 to 14 throughout the
year.  These sales personnel were primarily responsible for the
corresponding increase in revenue over the prior year.


32


Cost
of Revenues — Comparison of the Years Ended December 31, 2008 and
2007




Year
                  
                  
                  YearEnded
                  
                  
                  EndedDecember
      31,
                  
                  
                  December
      31,
                  
                  Percent2008
                  
                  
                  2007
                  
                  ChangeCost
      of Revenues
                  
                  $
                  6,551,870
                  
                  
                  $
                  2,437,047
                  
                  
                  
                  169
                  %




Cost of
revenues consist primarily of direct payments to publishers on advertising
revenues, costs associated with hosting our websites, ad serving costs for
impressions delivered in connection with advertising revenues and production
costs for Betawave TV.




Cost of
revenues increased $4,114,823 in 2008 from 2007.  The increase
included $4,213,395 of payments to publishers, $275,313 for ad serving costs,
$90,513 for licensing expenses, $84,107 for share-based compensation related to
SFAS No, 123(R), $75,569 for advergame development costs and $15,714 for
development of custom media player.  These increases were partly
offset by a reduction in video production costs of $540,335 and a reduction in
web hosting costs of $99,453.




Sales
and Marketing — Comparison of the Years Ended December 31, 2008 and
2007




Year
                  
                  
                  YearEnded
                  
                  
                  EndedDecember
      31,
                  
                  
                  December
      31,
                  
                  Percent2008
                  
                  
                  2007
                  
                  ChangeSales
      and Marketing
                  
                  $
                  6,480,550
                  
                  
                  $
                  6,174,158
                  
                  
                  
                  5
                  %




Sales and
marketing expenses consist primarily of advertising and other marketing related
expenses, compensation related expenses, sales commissions, and travel
costs.




Sales and
marketing expenses increased $306,392 in 2008 from 2007.  The increase
was attributable to a $1,832,046 increase in personnel and other benefits
related costs, including a $238,813 increase in share-based compensation
expenses related to SFAS No. 123(R), a $168,134 increase in travel expenses and
a $450,320 increase in allocation of facilities, IT and other operating
expenses.  These increases were partly offset by a $1,410,055 decrease
in advertising and other marketing related expenses and a $734,053 decrease in
professional services for public relations and related development research
expense.  The growth in direct sales personnel was responsible for the
increases in personnel and other benefit related costs.  The reduction
in advertising, other marketing expenses, public relations and related
development research expenses correlated to the refinement of our strategic
focus and a reduced need for advertising campaigns.




Employees
in sales and marketing at December 31, 2008 and 2007 were 34 and 20,
respectively.




Product
Development — Comparison of the Years Ended December 31, 2008 and
2007




Year
                  
                  
                  YearEnded
                  
                  
                  EndedDecember
      31,
                  
                  
                  December
      31,
                  
                  Percent2008
                  
                  
                  2007
                  
                  ChangeProduct
      Development
                  
                  $
                  713,964
                  
                  
                  $
                  2,261,481
                  
                  
                  
                  (68
                  )%




Product
development expenses consist primarily of compensation related expenses incurred
for the development of, and enhancement to systems that enable us to drive and
support revenue generating activities across our network of
websites.


33


Product
development expenses decreased $1,547,517 in 2008 from 2007.  The
decrease was attributed primarily to a decrease in compensation related expenses
of $1,356,922 including a $194,552 decrease in share-based compensation expenses
related to SFAS No. 123(R), and the reduction in the allocation of approximately
$190,595 of facilities, IT and other operating expenses.  The decrease
in expenses reflects the scaleback of product development projects which
resulted in a reduction of employees from 14 at the beginning of 2007 to 5 at
the end of 2008.




Employees
in product development at December 31, 2008 and 2007 were 5 and 5,
respectively.




General
and Administrative — Comparison of the Years Ended December 31, 2008 and
2007




Year
                  
                  
                  YearEnded
                  
                  
                  EndedDecember
      31,
                  
                  
                  December
      31,
                  
                  Percent2008
                  
                  
                  2007
                  
                  ChangeGeneral
      and Administrative
                  
                  $
                  6,024,801
                  
                  
                  $
                  5,186,981
                  
                  
                  
                  16
                  %




General
and administrative expenses consist primarily of compensation related expenses
(including stock-based compensation expenses) related to our executive
management, finance and human resource organizations and legal, accounting,
insurance, investor relations and other operating expenses to the extent not
otherwise allocated to other functions.




General
and administrative expenses increased $837,820 in 2008 from 2007.  The
increase was attributable to a $1,401,236 increase in compensation related
expenses including a $1,422,503 increase in share-based compensation expenses
related to SFAS No. 123(R) and a $190,015 increase in the amortization of
deferred financing costs related to the debt issuance costs of the June 2007
Notes and the 2008 Notes.  These increases were partly offset by
$567,112 decrease  in legal, accounting, D&O insurance, investor
relations and other professional services, a $108,901 decrease in travel
expenses and a $77,418 decrease in unallocated facilities, IT and other
operating expenses.  The issuance of employee options was primarily
responsible for the increase in share-based compensation.




Employees
in general and administrative at December 31, 2008 and 2007 were 7 and 5,
respectively.




Loss
on debt extinguishment — Comparison of the Years Ended December 31, 2008 and
2007




Year
                  
                  
                  YearEnded
                  
                  
                  EndedDecember
      31,
                  
                  
                  December
      31,
                  
                  Percent2008
                  
                  
                  2007
                  
                  ChangeLoss
      on debt extinguishment
                  
                  $
                  2,736,832
                  
                  
                  $
                  —
                  
                  
                  
                  N/A




In
December 2008, we used proceeds from our $22.5 million preferred stock financing
to repurchase the remaining, unconverted portion of our outstanding convertible
debt and related detachable warrants.  The repurchase occurred with a
combination of cash payments and exchanges of convertible debt and warrants for
either new Series A preferred stock and warrants or common stock.  The
transaction resulted in a loss on the extinguishment of debt.


34


Acquisition
Costs — Comparison of the Years Ended December 31, 2008 and 2007




Year
                  
                  
                  YearEnded
                  
                  
                  EndedDecember
      31,
                  
                  
                  December
      31,
                  
                  Percent2008
                  
                  
                  2007
                  
                  ChangeAcquisition
      Costs
                  
                  $
                  —
                  
                  
                  $
                  1,270,348
                  
                  
                  
                  N/A
                  %




In fiscal
year 2007, we incurred costs during the second quarter of 2007 associated with
our previously proposed acquisition of Bolt Media, which was terminated in
August 2007.  During the period from February 2007 to September 2007,
the Company advanced Bolt $1,020,338.  The Company only had a secured
interest in Bolt’s trade accounts receivables of $600,000.  As a
result, the Company recorded an allowance for doubtful accounts of
$420,338.  In addition, the Company incurred $850,010 of direct
acquisition costs.  The total related acquisition costs of $1,270,348
for the year ended December 31, 2007 was expensed.




Other
Income and Expenses — Comparison of the Years Ended December 31, 2008 and
2007




Year
                    
                    YearEnded
                    
                    EndedDecember
      31,
                    
                    December
      31,
                    
                    Percent2008
                    
                    2007
                    
                    ChangeInterest
      income
                    
                    $
                    23,238
                    
                    
                    $
                    147,007
                    
                    
                    
                    (84
                    )%Miscellaneous
      income
                    
                    
                    278,740
                    
                    
                    
                    536
                    
                    
                    
                    51,904
                    %Interest
      expense
                    
                    
                    (2,465,545
                    )
                    
                    
                    (1,276,568
                    )
                    
                    
                    93
                    %Total other income
      (expense)
                    
                    $
                    (2,163,567
                    )
                    
                    $
                    (1,129,025
                    )
                    
                    
                    92
                    %




Other
expense increased $1,034,542 in 2008 from 2007.  The increase was a
result of increased interest expense, which was not fully offset by interest
income and miscellaneous income.




Interest
income is derived primarily from short-term interest earned on operating cash
balances.




Miscellaneous
income represents income from the settlement of a dispute with a third party
service provider.




The
increase in interest expense during fiscal year 2008 as compared to fiscal year
2007 is as a result of the payment of interest during 2008 on both the 2007
Notes and the 2008 Notes. Interest expense during fiscal year 2007 included only
the payment of interest for a partial year on the 2007 Notes.






Liquidity
and Capital Resources




To date,
we have funded our operations primarily through private sales of securities and
borrowings.  As of December 31, 2008, we had $11,863,121 in cash and
cash equivalents.  We may need to raise additional capital in the
future, which may not be available on reasonable terms or at all.  The
raising of additional capital may dilute our current stockholders’ ownership
interests.




Net cash
used in operating activities was $7,077,358 and $13,550,034 for the years ended
December 31, 2008 and 2007, respectively.  For the year ended December
31, 2008, the cash used in operating activities was primarily due to a net loss
of $8,804,358, which is net of non cash expenses of $8,165,627 and a change in
working capital of $1,727,000.  The non cash expense items included
loss on debt extinguishment of $2,736,832, loss on disposal of fixed assets of
$1,959, depreciation and amortization of $260,028, amortization of convertible
note fees of $474,618, stock-based compensation of $2,723,377, and non cash
interest expense of $1,866,537 and non cash cost of revenues of
$102,000.  For the year ended December 31, 2007, the primary use of
cash was due to a net loss of $13,402,032, which is net of non cash expenses of
$2,975,826 and a negative change in working capital of $148,002.  The
non cash expense items included depreciation and amortization of $224,784,
amortization of convertible note fees of $273,714, stock-based compensation of
$1,172,506 and non cash interest expense of $884,484 and write off of
acquisition advances of $420,338.


35




Net cash
used in investing activities was $41,118 for the year ended December 31, 2008
and net cash provided provided by investing activities was $692,846 for the year
ended December 31, 2007.  For the year ended December 31, 2008, net
cash used in investing activities consisted of the purchase of property and
equipment in the amount of $41,118 and funds of $550,000 held as restricted cash
which were equally offset by release of such funds from restricted
cash.  For the year ended December 31, 2007, net cash provided by
investing activities consisted of payment of acquisition advances of $600,000,
an additional $1,728,728 of funds released from restricted cash from the sale of
our common stock and write off of $17,216 advances to founder and stockholder,
and cash used in investing activities consisted of acquisition advances of
$1,020,338, the purchase of property and equipment in the amount of $524,781 and
funds held as deposits of $107,979.




Net cash
provided by financing activities was $17,872,763 and $10,596,480 for the years
ended December 31, 2008 and 2007, respectively.  The net cash provided
by financing activities for the year ended December 31, 2008 was derived from
the proceeds from the issuance of Series A Preferred Stock of $21,022,438 (net
of issuance cost of $1,477,562), advances of $610,000 from a shareholder,
proceeds from issuance of unsecured convertible original issue discount notes in
the amount of $3,188,700, repayment to shareholder of $400,000, repayment of
convertible notes in the amount of $6,414,187 and purchase of warrants in the
amount of $134,188.  The net cash provided by financing activities for
the year ended December 31, 2007 was derived from the proceeds from the issuance
of our senior convertible notes and related warrants in the amount of
$9,219,707, proceeds from the issuance of common stock in the amount of
$1,761,566, repayment of amounts due to a stockholder of $384,793, and
repayments of notes payable which were equally off set against proceeds from the
issuance of such notes payable.




Critical
Accounting Policies




Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these consolidated financial statements
requires us to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities.  We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.  Actual results may
differ from these estimates.




An
accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimate that are reasonably
likely to occur, could materially impact the consolidated financial
statements.  We believe that the following critical accounting
policies reflect the more significant estimates and assumptions used in the
preparation of the consolidated financial statements.




Revenue
Recognition




We
recognize revenue from the display of graphical advertisements on the websites
of the publishers in Betawave’s Network as “impressions” are delivered up to the
amount contracted for by the advertiser.  An “impression” is delivered
when an advertisement appears in pages viewed by users.  Arrangements
for these services generally have terms of less than one year.




We
recognize these revenues as such because the services have been provided, and
the other criteria set forth under Staff Accounting Bulletin Topic 13: Revenue Recognition have been
met, namely, the fees charged by the Company are fixed or determinable, the
advertisers understand the specific nature and terms of the agreed-upon
transactions and collectability is reasonably assured.  In accordance
with Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as Principal
Versus Net as an Agent (“EITF 99-19”), Betawave reports revenues on a
gross basis principally because the Company is the primary obligor to the
advertisers.


36


Costs
of Revenues and Expenses




Cost of
revenue and expenses primarily consist of payments to publishers in the Betawave
Network, personnel-related costs, including payroll, recruitment and benefits
for executive, technical, corporate and administrative employees, in addition to
professional fees, insurance and other general corporate expenses.  We
believe the key element to the execution of our strategy is the hiring of
personnel in all areas that are vital to our business.  Our
investments in personnel include business development, sales and marketing,
advertising, service and general corporate marketing and
promotions.




Accounting
for Stock Based Compensation




Prior to
January 1, 2006, we used the intrinsic value method to record stock-based
compensation for employees, which requires that deferred stock based
compensation be recorded for the difference between an option’s exercise price
and the fair value of the underlying common stock on the grant date of the
option.




Effective
January 1, 2006, we adopted the fair value recognition provisions of FASB
Statement No. 123, Share-Based
Payment, (“SFAS 123(R)”) using the modified prospective transition
method.  Under that transition method, compensation cost recognized
for the periods ended December 31, 2008 and 2007 includes: (a) compensation cost
for all share-based payments granted prior to, but not yet vested as of January
1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), and (b) compensation cost for all share-based
payments granted or modified subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of SFAS
123(R).




Share-based
compensation expense for performance-based options granted to non-employees is
determined in accordance with SFAS 123(R) and Emerging Issues Task Force Issue
No. 96-18, Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF
96-18”), at the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably
measured.  The fair value of options granted to non-employees is
measured as of the earlier of the performance commitment date or the date at
which performance is complete (“measurement date”).  When it is
necessary under generally accepted accounting principles to recognize the cost
for the transaction prior to the measurement date, the fair value of unvested
options granted to non-employees is remeasured at the balance sheet
date.




We
currently use the Black-Scholes option pricing model to determine the fair value
of stock options.  The determination of the fair value of stock based
payment awards on the date of grant using an option-pricing model is affected by
our stock price as well as by assumptions regarding a number of complex and
subjective variables.  These variables include our expected stock
price volatility over the term of the awards, actual and projected employee
stock option exercise behaviors, risk-free interest rate and expected
dividends.  We estimate the volatility of our common stock at the date
of the grant based on a combination of the implied volatility of publicly traded
options on our common stock and our historical volatility rate.  The
dividend yield assumption is based on historical dividend
payouts.  The risk-free interest rate is based on observed interest
rates appropriate for the term of our employee options.  We use
historical data to estimate pre-vesting option forfeitures and record
share-based compensation expense only for those awards that are expected to
vest.  For options granted, we amortize the fair value on a
straight-line basis.  All options are amortized over the requisite
service periods of the awards, which are generally the vesting
periods.  If factors change we may decide to use different assumptions
under the Black-Scholes option model and stock-based compensation expense may
differ materially in the future from that recorded in the current
periods.


37


The
following table presents share-based compensation expense included in the
Consolidated Statements of Operations related to employee and non-employee stock
options, restricted shares and warrants as follows as of December 31, 2008 and
2007:




December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007Cost
      of revenue
                      
                      $
                      84,106
                      
                      
                      $
                      —Sales
      and marketing
                      
                      
                      700,340
                      
                      
                      
                      461,526Product
      development
                      
                      
                      18,501
                      
                      
                      
                      213,053General
      and administrative
                      
                      
                      1,920,430
                      
                      
                      
                      497,927Total
      share-based compensation
                      
                      $
                      2,723,377
                      
                      
                      $
                      1,172,506




Share-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the service period,
generally the vesting period of the equity grant.




The fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes valuation model with the following assumptions (weighted average)
at December 31, 2008 and 2007:




December
      31,
                    
                    
                    December
      31,2008
                    
                    
                    2007Risk
      free interest rate
                    
                    
                    2.16
                    %
                    
                    
                    4.08
                    %Expected
      lives
                    
                    5.91 Years
                    
                    
                    5.95 YearsExpected
      volatility
                    
                    
                    75.84
                    %
                    
                    
                    68.33
                    %Dividend
      yields
                    
                    
                    0
                    %
                    
                    
                    0
                    %




The
weighted-average grant date fair value of the options granted during the years
ended December 31, 2008 and 2007 were $0.14 and $0.81,
respectively.




At
December 31, 2008, there was $7,365,758 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
plans.  This cost is expected to be recognized over the weighted
average period of 2.79 years.




Basic net
loss per share to common stockholders is calculated based on the
weighted-average number of shares of common stock outstanding during the period
excluding those shares that are subject to repurchase by the Company. Diluted
net loss per share attributable to common shareholders would give effect to the
dilutive effect of potential common stock consisting of stock options, warrants,
convertible debt and preferred stock. Dilutive securities have been excluded
from the diluted net loss per share computations as they have an antidilutive
effect due to the Company’s net loss for the years ended December 31, 2008 and
2007.


38


The
following outstanding stock options, warrants, convertible debt and preferred
stock (on an as-converted into common stock basis) were excluded from the
computation of diluted net loss per share attributable to holders of common
stock as they had an antidilutive effect as of December 31, 2008 and
2007:




December
      31,
                    
                    
                    December
      31,2008
                    
                    
                    2007Shares
      issuable upon exercise of employee and non-employee stock
      options
                    
                    
                    4,717,067
                    
                    
                    
                    7,194,770Shares
      issuable upon exercise of warrants
                    
                    
                    5,744,335
                    
                    
                    
                    7,598,899Shares
      issuable upon conversion of notes
                    
                    
                    —
                    
                    
                    
                    6,412,500Shares
      issuable upon conversion of Series A preferred stock
                    
                    
                    7,355,648
                    
                    
                    
                    —Total
                    
                    
                    17,817,050
                    
                    
                    
                    21,206,169




Property
and Equipment




Property
and equipment are recorded at cost less accumulated depreciation and
amortization.  Major improvements are capitalized, while repair and
maintenance costs that do not improve or extend the lives of the respective
assets are expensed as incurred. Depreciation and amortization charges are
calculated using the straight-line method over the following estimated useful
lives:




Estimated Useful LifeComputer
      equipment and software
                    3
      yearsFurniture
      and fixtures
                    5
      yearsLeasehold
      improvements
                    Shorter
      of estimated useful Life or lease
term




Upon
retirement or sale, the cost and related accumulated depreciation are removed
from the balance sheet and the resulting gain or loss is reflected in operating
expenses.  If factors change we may decide to use shorter or longer
estimated useful lives and depreciation and amortization expense may differ
materially in the future from that recorded in the current periods.




Impairment
of Long-Lived Assets




We
continually evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of long-lived assets may not be
recoverable.  When factors indicate that long-lived assets should be
evaluated for possible impairment, we typically make various assumptions about
the future prospects the asset relates to, consider market factors and use an
estimate of the related undiscounted future cash flows over the remaining life
of the long-lived assets in measuring whether they are
recoverable.  If the estimated undiscounted future cash flows exceed
the carrying value of the asset, a loss is recorded as the excess of the asset’s
carrying value over its fair value.  There have been no such
impairments of long-lived assets through December 31, 2008.




Assumptions
and estimates about future values are complex and often
subjective.  They can be affected by a variety of factors, including
external factors such as industry and economic trends, and internal factors such
as changes in our business strategy and our internal
forecasts.  Although we believe the assumptions and estimates we have
made in the past have been reasonable and appropriate, different assumptions and
estimates could materially affect our reported financial
results.  More conservative assumptions of the anticipated future
benefits could result in impairment charges, which would increase net loss and
result in lower asset values on our balance sheet.  Conversely, less
conservative assumptions could result in smaller or no impairment charges, lower
net loss and higher asset values.


39


Income
Taxes




We are
subject to income taxes, federal and state, in the United States of
America.  We use the asset and liability approach to account for
income taxes.  This methodology recognizes deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax base of assets and liabilities and
operating loss and tax carryforwards.  We then record a valuation
allowance to reduce deferred tax assets to an amount that more likely than not
will be realized.  In evaluating our ability to recover our deferred
income tax assets we consider all available positive and negative evidence,
including our operating results, ongoing tax planning and forecasts of future
taxable income.  Through December 31, 2008, we have provided a
valuation allowance of approximately $15.8 million against our entire net
deferred tax asset, primarily consisting of net operating loss
carryforwards.  In the event we were to determine that we would be
able to realize our deferred income tax assets in the future in excess of their
net recorded amount, we would make an adjustment to the valuation allowance
which would reduce the provision for income taxes.




Advertising
and Promotion Costs




Expenses
related to advertising and promotions of products are charged to expense as
incurred.  Advertising and promotional costs totaled $129,414 and
$1,731,170 for the years ended December 31, 2008 and 2007.




Recent
Accounting Pronouncements




In
December 2007, the Financial Accounting Standards Board (FASB) issued (SFAS) No.
141 (Revised 2007) (SFAS 141R),Business
Combinations.  This statement will significantly change the
accounting for business acquisitions both during the period of the acquisition
and in subsequent periods.  SFAS 141R provides companies with
principles and requirements on how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, liabilities assumed, and
any noncontrolling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination.  SFAS 141R
also requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business
combination.  SFAS 141R will be effective January 1, 2009 for the
Company and will be applied to all business combinations occurring on or after
that date.
 
 Concurrent
with the issuance of SFAS No. 141R, the FASB issued SFAS No. 160 (“SFAS
160”),Noncontrolling
Interests in Consolidated Financial Statements—An Amendment of ARB No.
51.  SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  SFAS 160 will also be effective for
the Company effective January 1, 2009.  Early adoption is not
permitted.  The Company does not currently expect the adoption of SFAS
160 to have any impact on its financial statements.
 
 In March
2008, the FASB issued SFAS No. 161 (“SFAS 161”),Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.  SFAS 161 intends to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial
position, financial performance, and cash flows.  SFAS 161 also
requires disclosure about an entity’s strategy and objectives for using
derivatives, the fair values of derivative instruments and their related gains
and losses.  SFAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008, and will be applicable to the Company
in the first quarter of fiscal 2009.  The Company does not currently
expect the adoption of SFAS 161 to have any impact on its financial
statements.
 
 In May
2008, the FASB issued SFAS 162 (“SFAS 162”), The Hierarchy of Generally Accepted
Accounting Principles.  SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that presented
in conformity with generally accepted accounting principles in the United States
of America.  SFAS 162 will be effective 60 days following the SEC’s
approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.  The
Company does not believe SFAS 162 will have a significant impact on the
Company’s consolidated financial statements.
 
 In June
2008, the FASB issued Staff Position FSP EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities:
(“FSP EITF 03-6-1”).  FSP EITF 03-6-1 provides that unvested
shares-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earning per share pursuant to the
two-class method.  EITF 03-6-1 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years.  Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including any amounts
related to interim periods, summaries of earnings and selected financial data)
to conform to the provisions in EITF 03-6-1.  Early application of FSP
EITF 03-6-1 is prohibited.  The adoption of FSP EITF 03-6-1 is not
anticipated to have a material effect on the Company’s consolidated financial
statements.


40


Off-Balance
Sheet Arrangements




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




ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.




Not
applicable.




ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY
DATA.




Our
audited consolidated financial statements for the fiscal year ended December 31,
2008, along with the report of our independent registered public accounting firm
thereon, are included in this Annual Report on Form 10-K beginning on page F-1
and are incorporated herein by reference.




ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.




None.




ITEM
      9A.
            CONTROLS
      AND PROCEDURES.




Evaluation
of Disclosure Controls and Procedures




As of the
end of the period covered by this Annual Report on Form 10-K, management
performed, with the participation of our Chief Executive Officer and Chief
Accounting Officer, an evaluation of the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act.  Our disclosure controls and procedures are designed to
reasonably ensure that information required to be disclosed in the report we
file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s forms, and that such
information is accumulated and communicated to our management including our
Chief Executive Officer and our Chief Accounting Officer, to allow timely
decisions regarding required disclosures.  Based on the evaluation and
the identification of the material weaknesses in our internal control over
financial reporting described below, our Chief Executive Officer and our Chief
Accounting Officer concluded that, as of December 31, 2008, our disclosure
controls and procedures were not effective.




Management’s
Report on Internal Control Over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act.  Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with United States
Generally Accepted Accounting Principles (“U.S. GAAP”).  Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projection of any evaluation
of effectiveness to future periods is subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.


41


Management
has conducted, with the participation of our Chief Executive Officer and our
Chief Accounting Officer (“CAO”), an assessment, including testing of the
effectiveness, of our internal control over financial reporting as of December
31, 2008.  Management’s assessment of internal control over financial
reporting was conducted using the criteria in Internal Control over Financial
Reporting - Guidance for Smaller Public Companies issued by COSO.




A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis by our internal
controls.  In connection with our assessment of our internal control
over financial reporting as required under Section 404 of the Sarbanes-Oxley Act
of 2002, we identified the following material weaknesses in our internal control
over financial reporting as of December 31, 2008:




•
            Our
      control environment did not sufficiently promote effective internal
      control over financial reporting resulting in recurring material
      weaknesses which were not remediated during
  2008.




•
            Our
      board of directors has not established adequate financial reporting
      monitoring activities to mitigate the risk of management override,
      specifically:




-
            a
      majority of our board of directors is not
  independent;




-
            no
      financial expert on our board of directors has been
      designated;




-
            no
      formally documented financial analysis is presented to our board of
      directors, specifically fluctuation, variance, trend analysis or business
      performance reviews;




-
            delegation
      of authority has not been formally
communicated;




-
            an
      effective whistleblower program has not been
  established;




-
            there
      is insufficient oversight of external audit specifically related to fees,
      scope of activities, executive sessions, and monitoring of results;
      and




-
            there
      is insufficient oversight of accounting principle
      implementation.




•
            Due
      to an insufficient number of personnel in our accounting group there have
      been material audit adjustments to the annual financial
      statements.




•
            We
      have not maintained sufficient competent evidence to support the effective
      operation of our internal controls over financial reporting, specifically
      related to our board of directors oversight of quarterly and annual SEC
      filings; and management’s review of SEC filings, journal entries, account
      analyses and reconciliations, and critical spreadsheet
      controls.




•
            We
      have not sufficiently restricted access to data or adequately divided, or
      compensated for, incompatible functions among personnel to reduce the risk
      that a potential material misstatement of the financial statements would
      occur without being prevented or detected.  Specifically we have
      not divided the authorizing of transactions, recording of transactions,
      reconciling of information, and maintaining custody of assets within the
      financial closing and reporting, revenue and accounts receivable,
      purchases and accounts payable, and cash receipts and disbursements
      processes.




Because
of the material weaknesses noted above, management has concluded that we did not
maintain effective internal control over financial reporting as of December 31,
2008, based on Internal
Control over Financial Reporting – Guidance for Smaller Public Companies
issued by (“COSO”).




Remediation
of Material Weaknesses in Internal Control Over Financial Reporting




We are in
the process of implementing remediation efforts with respect to our control
environment and the material weaknesses noted above as follows:




•
            We
      plan, over the course of the next year, to evaluate the composition of our
      board of directors and to determine whether to add independent directors
      or to replace an inside director with an independent director, in both
      cases, in order to have a majority of our board of directors become
      independent.  We will determine whether any of its current
      directors is a financial expert and, if not, will ensure that one of the
      new directors is a financial
expert.




42


•
            We
      plan on drafting quarterly financial statement variance analysis of actual
      versus budget with relevant explanations of variances for distribution to
      our board of directors.




•
            We
      are currently working on formally documenting the delegation of
      authority.  There will be a document that specifies exactly what
      requires board approval.  Other than the specific items that our
      board of directors must authorize, all other authority will be delegated
      to the CAO and point to the further delegation from the CAO to
      employees.




•
            We
      are in the process of developing, documenting, and communicating a formal
      whistleblower program to employees.  We expect to post the
      policy on the web site in the governance section and in the common areas
      in the office.  We plan on providing a 1-800 number for
      reporting complaints and will hire a specific 3rd party whistleblower
      company to monitor the hotline and provide monthly reports of activity to
      our board of directors.




•
            Management
      intends to continue to provide SEC and US GAAP training for employees
      and retain external consultants with appropriate SEC and US GAAP
      expertise to assist in financial statement review, account analysis
      review, review and filing of SEC reports, policy and procedure compilation
      assistance, and other related advisory
services.




•
            We
      intend on developing an internal control over financial reporting evidence
      policy and procedures which contemplates, among other items, a listing of
      all identified key internal controls over financial reporting, assignment
      of responsibility to process owners within the Company, communication of
      such listing to all applicable personnel, and specific policies and
      procedures around the nature and retention of evidence of the operation of
      controls.




•
            We
      intend on undertaking a restricted access review to analyze all financial
      modules and the list of persons authorized to have edit access to
      each.  We will remove or add authorized personnel as appropriate
      to mitigate the risks of management or other
  override.




•
            We
      plan to re-assign roles and responsibilities in order to improve
      segregation of duties.




We
believe the foregoing efforts will enable us to improve our internal control
over financial reporting.  Management is committed to continuing
efforts aimed at improving the design adequacy and operational effectiveness of
its system of internal controls.  The remediation efforts noted above
will be subject to our internal control assessment, testing, and evaluation
process.




Changes
in Internal Control Over Financial Reporting




There
have been no changes in our internal control over financial reporting during the
fourth quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




ITEM
      9B.
            OTHER
      INFORMATION.




None.


43




PART
III




ITEM 10.
              DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE.




Set forth
below is certain information regarding our directors, executive officers and key
personnel.




Name
              
              Age
              
              PositionMatt
      Freeman
              
              39
              
              Chief
      Executive Officer and DirectorJames
      Moloshok
              
              59
              
              Executive
      Chairman and DirectorTabreez
      Verjee
              
              33
              
              President
      and DirectorLennox
      L. Vernon
              
              62
              
              Chief
      Accounting Officer and Director of OperationsJohn
      Durham
              
              57
              
              DirectorMichael
      Jung
              
              39
              
              DirectorRichard
      Ling
              
              47
              
              DirectorMark
      Menell
              
              44
              
              DirectorRiaz
      Valani
              
              32
              
              Director




Our
directors and officers hold office until the earlier of their death,
resignation, or removal or until their successors have been duly elected and
qualified.  There are no family relationships among our directors and
executive officers.  Our above-listed officers and directors have
neither been convicted in any criminal proceeding during the past five years nor
parties to any judicial or administrative proceeding during the past five years
that resulted in a judgment, decree or final order enjoining them from future
violations of, or prohibiting activities subject to, federal or state securities
laws or a finding of any violation of federal of state securities laws or
commodities laws.  Similarly, no bankruptcy petitions have been filed
by or against any business or property of any of our directors or officers, nor
has bankruptcy petition been filed against a partnership or business association
in which these persons were general partners or executive officers.




Matt
Freeman, Chief Executive Officer and Director




Matt
Freeman is the former founder and Chief Executive Officer of Tribal DDB
Worldwide, an interactive agency that is a part of Omnicom Group’s DDB
Worldwide.  Prior to joining the Company and since 1998, Mr. Freeman
served as chief executive officer of Tribal DDB Worldwide, where he helped grow
the company from $5 million in annual revenue to over 1,500 employees and $250
million in annual revenue while building a global network of 45 offices spanning
28 countries.  Prior to that, from 1997 to 1998, he served as
executive creative director for Modem Media/Poppe Tyson, where he helped with
the merger integration between Modem Media and Poppe Tyson (since then acquired
by Digitas, Inc.; now a Division of Publicis Group).  Previously, from
1995 to 1997, he was partner and executive creative director for Poppe Tyson
(formerly a division of True North, now Interpublic Group), where he helped
shape and scale one of the industry’s first and largest interactive
agencies.  In January 2006, AdWeek named Tribal DDB Worldwide its
Interactive Agency of the Year and in January 2008 Adverting Age awarded it
Global Agency Network of the Year.  Both publications cited Freeman’s
leadership as a critical factor in Tribal’s enduring success.  Mr.
Freeman, a graduate of Dartmouth College and the NY School of Visual Arts, has
been inducted into the American Advertising Federation Hall of Achievement; is
the Founder of the Interactive Agency Board of the IAB, is an active Board
member of the Advertising Club and the American Association of Advertising
Agencies (4As) and is a member of the Marketing Advisory Board of the Modern
Museum of Art (MOMA).


44


James
Moloshok, Executive Chairman and Director




James
Moloshok joined us as our Executive Chairman and a director on December 18,
2007.  Prior to joining us, from 2005 to 2007, Mr. Moloshok was
President of Digital Initiatives for HBO Network, where Mr. Moloshok was
responsible for exploring new opportunities for the company, focusing on
innovative content and fast-changing technology.  Prior to that, from
2001 to 2005, Mr. Moloshok served in various positions with Yahoo! Inc., serving
most recently as Senior Vice President, Entertainment and Content Relationships,
during which he helped build partnerships with movie studios, TV networks and
producers.  Prior to that, Mr. Moloshok was a co-founder of Windsor
Digital, an entertainment and investment company.  From 1999 to 2000,
Mr. Moloshok served as president of Warner Bros.  Online and president
and CEO of Entertaindom.com, an original entertainment destination for Time
Warner.  From 1989 to 1999, Mr. Moloshok served as Senior Vice
President of Marketing at Warner Bros. and previously held the same position at
Lorimar Telepictures, a television distribution company, which was formed when
Lorimar merged with Telepictures in 1986 where he was also responsible for
marketing to consumers, broadcasters and advertisers.  Mr. Moloshok
also serves on the board of directors of SpectrumDNA, Inc.




Tabreez
Verjee, President and Director




Tabreez
Verjee has served as Betawave’s President since February 26, 2007 and has served
as a director since October 27, 2006.  Mr. Verjee is currently a
General Partner at Global Asset Capital, LLC, which directed more than $500
million in committed assets from leading global institutional investors across
two venture capital funds and over 40 portfolio companies in the United States
and Europe.  Prior to that, Mr. Verjee co-headed IMDI/Sonique and
successfully negotiated its sale to Lycos.  Sonique was one of the
most popular consumer internet music applications with approximately four
million unique users and status as the fifth most downloaded application on the
Internet in 1999.  Mr. Verjee also brings media finance expertise to
Betawave from his prior role as managing director of Global Entertainment
Capital, which was a pioneer in media asset securitizations with $150 million in
committed capital.  Mr. Verjee began his career as a strategy
consultant at Bain & Company.  Mr. Verjee received his bachelor of
science in Engineering with honors at the University of California at Berkeley.
He is currently on the board of directors of kiva.org and is a charter member of
TiE.




Lennox
L. Vernon, Chief Accounting Officer & Director of Operations




Lennox
Vernon joined Betawave as its Chief Accounting Officer and Director of
Operations on October 30, 2006.  Mr. Vernon brings over 25 years of
successful financial and operations experience to Betawave.  Prior to
joining Betawave and since 2004, Mr. Vernon was Controller of Moderati Inc., a
provider of high-impact mobile content to consumers and wireless
carriers.  Previously, from 2003 to 2004, Mr. Vernon was the
Controller of Optiva Inc. and from 2002 to 2003, he was the Controller of
PaymentOne Corporation.  From 2000 through 2002, Mr. Vernon was a
financial consultant whereby he managed financial accounting and economic
projects, and completed year end reports, annual reports and proxy
statements.  Mr. Vernon has also worked for many years at various
software companies including Fair Isaac, as Acting CFO, at Macromedia, a
developer of software tools for web publishing, multimedia and graphics, as Vice
President Controller and at Pixar, a high-tech graphics and animation studio, as
Corporate Controller.  Mr. Vernon graduated from San Jose State
University with a Bachelor of Science, and is a certified public accountant in
the State of California.




John
Durham, Director




John
Durham joined our board of directors on November 1, 2007.  Mr. Durham
is currently CEO and Managing Partner at Catalyst, which specializes in
connecting emerging technology companies, publishers and brand marketers
facilitating the integration of paid media, non-paid media and emerging
media.  Mr. Durham was previously President of Sales & Marketing
for Jumpstart Automotive Media since August 2006 and on the board of directors
of Jumpstart Automotive Media since 2004.  From 2004 to 2006, Mr.
Durham had served as the Executive Vice President, Business Strategy at Carat
Fusion.  Prior to that, he was a founder of Pericles
Communication.  Before the launch of Pericles Communication, Mr.
Durham had served as Chief Operating Officer of Interep
Interactive.  Prior to that, he was with Winstar Interactive/Interep
Interactive, which he joined in March 1998 as Vice President of Advertising
Sales.  Mr. Durham has been teaching advertising and marketing classes
since 1992 and currently teaches advertising in the MBA program at the
University of San Francisco.  He also founded and is the president of
the Bay Area Interactive Group, an Internet industry networking
group.  Mr. Durham also serves on the board of directors of ZVUE
Corporation.


45


Michael
Jung, Director




Michael
Jung joined our board of directors on December 3, 2008.  Mr. Jung is a
partner at Panorama Capital.  Mr. Jung was part of the founding team
at Panorama Capital in late 2005 and became a partner in November
2008.  Panorama is the successor to the venture capital program of
JPMorgan Partners, which Mr. Jung joined in 2003.  Prior to working in
venture capital, he was vice president of corporate strategy and development at
the Exigen Group, an enterprise software and services company where he managed
the company’s day-to-day business development activities.  He also
served as vice president of strategic corporate development at Ask Jeeves,
leading the company’s mergers and acquisitions and strategic partnership
efforts.  Early in his career, Mr. Jung advised a variety of high
technology companies both as an investment banker with BancBoston Robertson
Stephens and as an attorney with Gunderson Dettmer.  He holds a JD and
an MBA from the University of Michigan and bachelor’s degree in political
economy of industrial societies from the University of California,
Berkeley.




Richard
Ling, Director




Richard
Ling joined our board of directors on December 12, 2008.  Mr. Ling
founded Rembrandt Venture Partners in 2004.  Prior to co-founding
Rembrandt, Mr. Ling was the founding CEO and Chairman of MetaLINCs Inc., an
e-mail search and analytics company acquired by Seagate in
2007.  Prior to MetaLINCs Mr. Ling was the co-founder, President and
CEO of AlterEgo Networks Inc., a wireless infrastructure company, acquired by
Macromedia Inc. in March 2002.  Before AlterEgo, Mr. Ling led the
e-Commerce product organization at Inktomi, where he was responsible for
overseeing all areas of the group’s engineering and operations, including site
and network operations and product development.  Mr. Ling was a
co-founder, VP of Products and Engineering, and acting CTO at Impulse Buy
Networks Inc., leading the development, operations and product management
groups.  Impulse Buy Networks was acquired by Inktomi in
1998.




Mark
Menell, Director




Mark
Menell joined our board of directors on December 12, 2008.  Mr. Menell
has been a partner at Rustic Canyon since January 2000.  From August
1990 to January 2000, Mr. Menell was an investment banker at Morgan Stanley
& Co.  Incorporated, including as principal and co-head of Morgan
Stanley’s Technology Mergers and Acquisitions Group, in Menlo Park,
CA.  Mr. Menell is a member of the board of directors of GSI Commerce,
Inc. (NASDAQGS:  GSIC).




Riaz
Valani, Director




Riaz
Valani joined our board of directors on October 27, 2006.  Mr. Valani
is currently a General Partner at Global Asset Capital, LLC, where he has worked
since 1997.  He previously served as Chairman of Viventures Partners
SA and President of IMDI/Sonique.  Mr. Valani was a Managing Director
of Global Entertainment Capital and was with Gruntal & Co. focused on
private equity and asset securitizations.  Mr. Valani was one of the
two investment bankers that engineered the acclaimed “David Bowie Bonds” which
was awarded Euromoney’s Deal of the Year in 1997.  Mr. Valani also
privatized Quorum Growth Capital, one of Canada’s leading publicly traded
venture capital firms in a successful management led
buyout.  Cumulatively he has several billion dollars of transactional
expertise across structured finance, real estate, and private
equity.  He has overseen portfolios of over fifty venture investments
in technology, media, and telecom companies, and real estate investments in over
twenty office and hospitality properties.  He currently serves as a
director of Maritz Properties, Inc., Avex Funding Corporation and is a Charter
Member of TiE.





Board
of Directors




Our board
of directors consists of eight members: John Durham, Matt Freeman, Michael Jung,
Richard Ling, Mark Menell, James Moloshok, Riaz Valani and Tabreez
Verjee.  Mr. Jung, Mr. Ling and Mr. Menell were appointed to our board
of directors pursuant to the terms of the investors’ rights agreement that we
entered into in connection with the December 2008 financing.  Mr. Jung
was appointed by Panorama Capital, L.P., Mr. Ling was appointed by Rembrandt
Venture Partners Fund Two, L.P. and Rembrandt Venture Partners Fund Two-A, L.P.
and Mr. Menell was appointed by Rustic Canyon Ventures III, L.P.  See
“Investors’ Rights Agreement” below.


46


Board
Committees




The board
of directors has established a compensation committee, which sets the
compensation for officers of the Company, reviews management organization and
development, reviews significant employee benefit programs and establishes and
administers executive compensation programs.  The compensation
committee currently consists of Mr. Jung, Mr. Menell and Mr.
Durham.  The board of directors has also established an audit
committee, which oversees the Company’s accounting and financial reporting
processes and the audit of the Company’s financial statements.  The
audit committee currently consists of Mr. Menell and Mr. Durham.




We have
not formally designated a nominating committee.




Our board
of directors intends to appoint such persons and form such committees as may be
required to meet the corporate governance requirements imposed by Sarbanes-Oxley
Act of 2002.  Therefore, we intend that a majority of our directors
will eventually be independent directors and at least one director will qualify
as an “audit committee financial expert” within the meaning of Item 407(d)(5) of
Regulation S-B, as promulgated by the SEC.  Additionally, our board of
directors is expected to appoint a nominating committee and to adopt a charter
relative to such committee.  Until further determination by our board
of directors, the full board of directors will undertake the duties of the
nominating committee.  We do not currently have an “audit committee
financial expert.”




Investors’
Rights Agreement




In
connection with the December 2008 financing, we entered into an investors’
rights agreement with Panorama Capital, L.P. (“Panorama”), Rembrandt Venture
Partners Fund Two, L.P. (“Rembrandt Fund Two”), Rembrandt Venture Partners Fund
Two-A, L.P. (“Rembrandt Fund Two-A” and, together with Rembrandt Fund Two,
“Rembrandt”) and Rustic Canyon Ventures III, L.P. (“Rustic”).  The
investors’ rights agreement includes the following provisions relating to the
composition of our board of directors and our board committees:




·
            each
      investor party to the investors’ rights agreement is required to take all
      actions necessary within its control and to vote all of its shares to
      ensure that the size of our board of directors shall be set and remain at
      eight directors;




·
            each
      investor party to the investors’ rights agreement is required to take all
      actions necessary within its control so as to elect the following
      individuals to our board of
directors:




-
            Four
      representatives designated by holders of a majority of the outstanding
      shares of common stock issuable or issued upon conversion of the Series A
      preferred stock (the “Investor Directors”), (i) one of whom shall be
      designated by Panorama for so long as Panorama shall own not less than
      16,666,667 shares of the common stock issued or issuable upon conversion
      of Series A preferred stock, (ii) one of whom shall be designated by
      Rustic for so long as Rustic shall own not less than 12,500,000 shares of
      the common stock issued or issuable upon conversion of Series A preferred
      stock, (iii) one of whom shall be designated by Rembrandt for so long as
      Rembrandt shall own not less than 8,333,333 shares of the common stock
      issued or issuable upon conversion of Series A preferred stock and (iv)
      one of whom shall be designated by Internet Television Distribution, Inc.
      and its affiliates (“ITD”) for so long as ITD shall own not less than
      3,088,240 shares of the common stock issued or issuable upon conversion of
      Series A preferred stock.




-
            Two
      representatives of Company management (the “Common Directors”), one of
      whom shall be our then-current Chief Executive Officer (currently Matt
      Freeman) and the other of whom shall be our then-current President
      (currently Tabreez Verjee).




-
            Two
      individuals who, subject to certain exceptions, are not then one of our
      officers or employees and who are not affiliated with holders of shares of
      Series A preferred stock or our management, and who are designated with
      the mutual agreement (in good faith) of both the Common Directors and a
      majority of the Investor Directors.




47


·
            each
      investor party to the investors’ rights agreement is required to take all
      actions necessary within its control so that for as long as Panorama owns
      at least 16,666,667 shares of common stock issued or issuable upon
      conversion of Series A preferred stock (i) the compensation committee of
      the board shall consist of three members, at least two of which shall be
      Investor Directors; and (ii) each committee of the board shall include, at
      the option of Panorama, the member of the board designated by
      Panorama.




Section
16(a) Beneficial Ownership Reporting Compliance




We are
not subject to Section 16(a) of the Exchange Act.




Code
of Ethics




We have
adopted a Code of Ethics that applies to all of our employees and officers,
including our principal executive, financial and accounting officers, and our
directors and employees.  We have posted the Code of Ethics on our
Internet website at
http://www.gofishcorp.com/roller/corp/category/investors/code%20of%20conduct.  We
recently amended our Code of Ethics to reflect our name change to Betawave
Corporation.  We intend to make all required disclosures concerning
any amendments to, or waivers from, our Code of Ethics that, in each case, apply
to our principal executive officer, principal financial officer, principal
accounting officer or controller or persons performing similar functions, on our
Internet website.




Material
Changes to Procedures to Nominate Directors




We did
not make any material changes to the procedures by which security holders may
recommend nominees to our board of directors.




Stockholder
Communication




Stockholders
desiring to send a communication to our board of directors, or to a specific
director, may do so by delivering a letter to the Secretary of the Company at
706 Mission Street, 10th Floor,
San Francisco, California 94103.  The mailing envelope must contain a
clear notation indicating that the enclosed letter is a “stockholder-board
communication” or “stockholder-director communication.”  All such
letters must identify the author as a stockholder and clearly state whether the
intended recipients of the letter are all members of our board of directors or
certain specified individual directors.  The Secretary will circulate
such letters to the appropriate director or directors of Betawave.




ITEM
      11.
              EXECUTIVE
      COMPENSATION.




Summary
Compensation Table for Fiscal Year 2008




The
following table summarizes all compensation recorded by us in each of the fiscal
years ended December 31, 2008 and 2007 for (i) all individuals serving as our
principal executive officer and our principal financial officer during
fiscal year ended December 31, 2008, and (ii) our two most highly
compensated executive officers other than our principal executive officer, each
of whom was serving as one of our executive officers at the end of the fiscal
year ended December 31, 2008 and whose total compensation for the fiscal year
ended December 31, 2008 exceeded $100,000.  Such officers are referred
to herein as our “Named Executive Officers.”


48




Summary
Compensation Table for Fiscal Year 2008




Name and Principal Position
                                Fiscal
                                  Year
                                
                                Salary
      ($)
                                
                                
                                Bonus
      ($)
                                
                                
                                Stock
                                  Awards
                                  ($)
                                
                                
                                Option
                                  Awards
                                  ($)(1)
                                
                                
                                Non-Equity
                                  Incentive
      Plan
                                  Compensation
                                  ($)
                                
                                
                                Change
      in
                                  Pension
                                  Value
      and
                                  Nonqualified
                                  Deferred
                                  Compensation
                                  Earnings
                                  ($)
                                
                                
                                All
      Other
                                  Compensation
                                  ($)
                                
                                
                                Total
                                  ($)Matt
      Freeman (2)
                                2008
                                
                                $
                                250,131
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                3,258,678
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                3,508,809Chief
      Executive Officer (Principal Executive Officer)Michael
      Downing (3)
                                2008
                                
                                $
                                88,566
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                100,000
                                
                                
                                $
                                188,566Former
      Chief Executive Officer (Former Principal Executive
    Officer)
                                2007
                                
                                $
                                175,000
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                175,000Lennox
      L. Vernon
                                2008
                                
                                $
                                160,000
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                72,632
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                232,632Chief
      Accounting Officer and Director of Operations (Principal Financial
      Officer)
                                2007
                                
                                $
                                160,000
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                13,117
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                173,117James
      Moloshok (4)
                                2008
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                432,023
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                240,000
                                
                                
                                $
                                672,023Executive
      ChairmanTabreez
      Verjee
                                2008
                                
                                $
                                175,000
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                2,139,078
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                2,244,676President
                                2007
                                
                                $
                                148,264
                                
                                
                                $
                                100,000
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                248,264





(1)
            The
      amounts shown in this column represent the compensation costs of stock
      options for financial reporting purposes for fiscal years 2008 and 2007
      under FAS 123(R), rather than an amount paid to or realized by the named
      executive officer. The FAS 123(R) value as of the grant date for options
      is spread over the number of months of service required for the grant to
      become non-forfeitable. The FAS 123(R) value as of the grant date for
      options is spread over the number of months of service required for the
      grant to become non-forfeitable. Compensation costs shown in this column
      reflect ratable amounts expensed for grants that were made in fiscal years
      2008 and 2007. There can be no assurance that the FAS 123(R) amounts will
      ever be realized.




(2)
            Mr.
      Freeman was appointed as our Chief Executive Officer on June 4, 2008. Mr.
      Freeman was not one of our Named Executive Officers for fiscal year
      2007.




(3)
            Mr.
      Downing resigned as our Chief Executive Officer on June 4, 2008. Mr.
      Downing continues to provide limited consulting services to us under his
      independent contractor agreement. The $100,000 appearing under "All Other
      Compensation" for fiscal year 2008 reflects the amount earned by Mr.
      Downing during such fiscal year under his independent contractor
      agreement dated as of June 4, 2008, pursuant to which he agreed to provide
      limited consulting services to us for a period of one year in exchange for
      a total of $120,000, payable in monthly installments through February 1,
      2009.




(4)
            Mr.
      Moloshok was not one of our Named Executive Officers for fiscal year 2007.
      The $240,000 appearing under "All Other Compensation" reflects the
      amount earned by Mr. Moloshok during fiscal year 2008 under his
      consulting agreement dated as of December 18,
  2007.







49


Outstanding
Equity Awards at Fiscal Year-End for Fiscal Year 2008




The following table
sets forth the stock option and stock awards of each of our Named Executive
Officers outstanding at the end of fiscal year 2008.




Outstanding
Equity Awards at Fiscal Year-End for Fiscal Year 2008




Option Awards
                                                                                                              
                                                                                                              Stock AwardsNumber of
                                                                                                                Securities
                                                                                                                Underlying
                                                                                                                Unexercised
                                                                                                                Options
                                                                                                                (#)
                                                                                                              
                                                                                                              
                                                                                                              Number of Securities
                                                                                                                Underlying
                                                                                                                Unexercised Options
                                                                                                                (#)
                                                                                                              
                                                                                                              
                                                                                                              Equity
                                                                                                                Incentive
                                                                                                                Plan
                                                                                                                Awards:
                                                                                                                Number of
                                                                                                                Securities
                                                                                                                Underlying
                                                                                                                Unexercised
                                                                                                                Unearned
                                                                                                                Options
                                                                                                              
                                                                                                              
                                                                                                              Option
                                                                                                                Exercise
                                                                                                                Price
                                                                                                              
                                                                                                              Option
                                                                                                                Expiration
                                                                                                              
                                                                                                              Number
                                                                                                                of
                                                                                                                Shares
                                                                                                                or Units
                                                                                                                of Stock
                                                                                                                That
                                                                                                                Have
                                                                                                                Not
                                                                                                                Vested
                                                                                                              
                                                                                                              
                                                                                                              Market
                                                                                                                Value of
                                                                                                                Shares or
                                                                                                                Units of
                                                                                                                Stock That
                                                                                                                Have Not
                                                                                                                Vested
                                                                                                              
                                                                                                              
                                                                                                              Equity
                                                                                                                Incentive
                                                                                                                Plan
                                                                                                                Awards:
                                                                                                                number
                                                                                                                of
                                                                                                                Unearned
                                                                                                                Shares,
                                                                                                                Units or
                                                                                                                Other
                                                                                                                Rights
                                                                                                                That
                                                                                                                Have Not
                                                                                                                Vested
                                                                                                              
                                                                                                              
                                                                                                              Equity
                                                                                                                Inventive
                                                                                                                Plan
                                                                                                                Awards:
                                                                                                                Market
                                                                                                                or Payout
                                                                                                                Value of
                                                                                                                Unearned
                                                                                                                Shares,
                                                                                                                Units or
                                                                                                                Other
                                                                                                                Rights
                                                                                                                That
                                                                                                                Have Not
                                                                                                                VestedName
                                                                                                              
                                                                                                              Exercisable
                                                                                                              
                                                                                                              
                                                                                                              Unexercisable
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (#)
                                                                                                              
                                                                                                              
                                                                                                              ($)
                                                                                                              
                                                                                                              Date
                                                                                                              
                                                                                                              
                                                                                                              (#)
                                                                                                              
                                                                                                              
                                                                                                              ($)
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (#)
                                                                                                              
                                                                                                              
                                                                                                              ($)Matt
      Freeman
                                                                                                              
                                                                                                              
                                                                                                              416,667
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,083,333
                                                                                                              (1)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.23
                                                                                                              
                                                                                                              6/5/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —416,667
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,083,333
                                                                                                              (2)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.80
                                                                                                              
                                                                                                              6/5/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              21,795,024
                                                                                                              (3)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.20
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (4)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.60
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (5)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.80
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (6)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.00
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (7)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.20
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (8)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.40
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —Michael
      Downing
                                                                                                              
                                                                                                              
                                                                                                              150,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              150,000
                                                                                                              (9)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.23
                                                                                                              
                                                                                                              6/4/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —James
      Moloshok
                                                                                                              
                                                                                                              
                                                                                                              881,250
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              618,750
                                                                                                              (10)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.23
                                                                                                              
                                                                                                              12/18/2017
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —906,323
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,718,970
                                                                                                              (11)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.20
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              253,713
                                                                                                              (12)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.60
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              253,713
                                                                                                              (13)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.80
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              253,713
                                                                                                              (14)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.00
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              253,713
                                                                                                              (15)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.20
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              253,713
                                                                                                              (16)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.40
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —Tabreez
      Verjee
                                                                                                              
                                                                                                              
                                                                                                              1,296,296
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,203,704
                                                                                                              (17)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.35
                                                                                                              
                                                                                                              2/1/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —3,364,763
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              10,094,289
                                                                                                              (18)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.20
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (19)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.60
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (20)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.80
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (21)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.00
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (22)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.20
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,076,092
                                                                                                              (23)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.40
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —Lennox
      L. Vernon
                                                                                                              
                                                                                                              
                                                                                                              33,854
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              28,646
                                                                                                              (24)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.50
                                                                                                              
                                                                                                              10/30/2016
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —31,250
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              43,750
                                                                                                              (25)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.37
                                                                                                              
                                                                                                              10/24/2017
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              599,363
                                                                                                              (26)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.20
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              38,548
                                                                                                              (27)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.60
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              38,548
                                                                                                              (28)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              0.80
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              38,548
                                                                                                              (29)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.00
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              38,548
                                                                                                              (30)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.20
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              ——
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              38,548
                                                                                                              (31)
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.40
                                                                                                              
                                                                                                              12/2/2018
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              —





(1)
            These
      stock options vest monthly from June 2008 through June
    2011.




(2)
            These
      stock options vest monthly from June 2008 through June
    2011.




(3)
            These
      stock options vest monthly from January 2009 through June
      2012.




(4)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.


50




(5)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(6)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(7)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(8)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(9)
            These
      stock options vest monthly from June 2008 through June
    2009.




(10)
            These
      stock options vest monthly from December 2007 through December
      2009.




(11)
            These
      stock options vest monthly from January 2009 through June
      2012.




(12)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(13)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(14)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(15)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(16)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(17)
            These
      stock options vest monthly from February 2008 through February
      2011.




(18)
            These
      stock options vest monthly from January 2009 through June
      2012.




(19)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(20)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.


51




(21)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(22)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(23)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(24)
            These
      stock options vest monthly from October 2006 through October
      2010.




(25)
            These
      stock options vest monthly from October 2007 through October
      2010.




(26)
            These
      stock options vest monthly from January 2009 through June
      2012.




(27)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(28)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(29)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(30)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




(31)
            These
      stock options vest only upon the earlier of a liquidation event or a
      firmly underwritten public offering of our common stock at a price per
      share equal to or greater than $0.40 and pursuant to which all of our
      common stock issuable upon conversion of the Series A preferred stock and
      upon exercise of the warrants held by the investors party to the December
      3, 2008 securities purchase agreement will be
  sold.




52




Director
Compensation for Fiscal Year 2008




The
compensation paid by us to non-employee directors for fiscal year 2008 is set
forth in the table below:




Director
Compensation for Fiscal Year 2008





Name
                  
                  Fees Earned
                      or Paid in
                      Cash
                      ($)
                  
                  
                  Stock
                      Awards
                      ($)
                  
                  
                  Option
                      Awards (1)
                      ($)
                  
                  
                  Non-Equity
                      Incentive Plan
                      Compensation
                      ($)
                  
                  
                  Nonqualified
                      Deferred
                      Compensation
                      Earnings
                      ($)
                  
                  
                  All Other
                      Compensation
                      ($)
                  
                  
                  Total
                      ($)John
      Durham (2)
                  
                  $
                  29,625
                  
                  
                  $
                  —
                  
                  
                  $
                  23,492
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  53,117Peter
      Guber
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  257,832
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  257,832Michael
      Jung
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Richard
      Ling
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Mark
      Menell
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Riaz
      Valani (3)
                  
                  $
                  88,000
                  
                  
                  $
                  —
                  
                  
                  $
                  179,800
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  267,800




(1)
            The
      amounts shown in this column represent the compensation costs of stock
      options for financial reporting purposes for fiscal years 2008 and 2007
      under FAS 123(R), rather than an amount paid to or realized by the
      director.  The FAS 123(R) value as of the grant date for options
      is spread over the number of months of service required for the grant to
      become non-forfeitable.  The FAS 123(R) value as of the grant
      date for options is spread over the number of months of service required
      for the grant to become non-forfeitable.  Compensation costs
      shown in the column “Option Awards” reflect ratable amounts expensed for
      grants that were made in fiscal years 2008 and 2007.  There can
      be no assurance that the FAS 123(R) amounts will ever be
      realized.




(2)
            Represents
      compensation paid to Catalyst Strategy, Inc., a corporation that is an
      affiliate of Mr. Durham, pursuant to a services agreement between our
      company and Catalyst.




(3)
            Mr.
      Valani earned fees and was granted stock options pursuant to a consulting
      agreement entered into with our company dated February 1,
      2008.




Employment
Agreements with Our Named Executive Officers




Matt
Freeman




Mr.
Freeman entered into a new employment agreement, dated as of December 3, 2008,
which supersedes his prior employment agreement dated June 5,
2008.  His employment agreement provides for a salary at the monthly
rate of $50,000, less standard payroll deductions and tax
withholdings.  In addition, under the terms of the employment
agreement, in connection with the closings of our December 2008 financing, Mr.
Freeman will receive a bonus payment of $75,000 if he remains with the Company
until the one-year anniversary of his start date.  Mr. Freeman is
eligible to receive incentive compensation of up to $150,000 per year,
contingent upon attainment of performance targets to be mutually agreed upon
with the Board.




The term
of Mr. Freeman’s employment as our Chief Executive Officer is indefinite,
subject to termination by either party in accordance with the terms of the
employment agreement.  We may terminate Mr. Freeman at any time,
without notice, for any reason or no reason at all.  Pursuant to the
terms of his employment agreement, in the event that Mr. Freeman’s employment is
terminated by us other than for cause, death or disability, Mr. Freeman is
eligible to receive, among other things, severance payments, in the form of a
salary continuation, equal to one year’s base salary (subject to reduction to
six months if Mr. Freeman finds subsequent employment prior to the expiration of
the twelve month period) and an additional twelve months of vesting on the
options granted to Mr. Freeman from the date of termination, which, to the
extent unexercised, will expire on the earlier of three years after such
termination or the expiration date as set forth in the applicable stock option
agreement.  If Mr. Freeman’s employment is terminated by death or
disability, Mr. Freeman is entitled to receive an additional twelve months of
vesting on the options granted to Mr. Freeman from the date of termination,
which, to the extent unexercised, will expire upon the earlier of three years
after such termination or the expiration date set forth in the applicable stock
option agreement.  In the event of a “change of control,” 50% of any
unvested options granted to Mr. Freeman shall become fully vested immediately
prior to the occurrence of the change of control.  In addition, if
there is a “change of control” before Mr. Freeman’s service terminates and if
Mr. Freeman’s employment is terminated without cause or resigns for good reason
within 12 months of the “change of control,” then in addition to the foregoing
vesting of any unvested options, any remaining unvested options shall vest
immediately prior to the termination of employment.  Mr. Freeman shall
have 36 months from such separation of employment to exercise his vested options
(provided that no such exercise period shall extend beyond the maximum term
specified in the applicable stock option agreement).




53


James
Moloshok




On
December 10, 2008, we entered into an employment agreement with James
Moloshok.  Mr. Moloshok had previously served as a consultant to us
since December 18, 2007.  Under the terms of the employment agreement,
Mr. Moloshok is required to devote an average of 30 hours per week to his work
for us for an indefinite term, subject to termination by either party in
accordance with the terms of the employment agreement.  We may
terminate Mr. Moloshok at any time without notice, for any reason or no reason
at all.




The
employment agreement provides that Mr. Moloshok will be paid a base monthly
salary of $20,000, less standard payroll deductions and tax
withholdings.  Under the employment agreement, Mr. Moloshok will also
be eligible to (i) receive incentive compensation of $100,000 per year,
contingent upon attainment of performance targets to be agreed to with our board
of directors and (ii) participate in an incentive compensation plan to be
established by our board of directors under which Mr. Moloshok will be eligible
to receive up to 150,000 fully vested shares of restricted stock per year,
contingent upon attainment of performance targets to be agreed to with our board
of directors.  In the event Mr. Moloshok’s employment is terminated by
us other than for cause, death or disability, or if Mr. Moloshok resigns for
good reason, the employment agreement provides for a severance payment of
$120,000 and an additional six months of vesting on any options, restricted
stock or restricted stock units awarded to Mr. Moloshok.  In the event
of a “change of control” before Mr. Moloshok’s service terminates, any unvested
options, restricted stock, and restricted stock unit awards granted to Mr.
Moloshok will immediately become fully vested.




Tabreez
Verjee




On
December 3, 2008, we entered into an amended and restated employment agreement
with Tabreez Verjee, which supersedes and replaces his prior employment
agreement dated February 26, 2007.  Mr. Verjee’s employment agreement
provides that Mr. Verjee will devote 95% of his time to the performance of his
duties to us as President for a salary at the monthly rate of $17,500, less
standard payroll deductions and tax withholdings.  Mr. Verjee will
also be eligible to receive incentive compensation of up to $100,000 per year,
contingent upon attainment of performance targets to be mutually agreed upon
with the Board.




The term
of Mr. Verjee’s employment as our President is indefinite, subject to
termination by either party in accordance with the terms of the amended and
restated employment agreement.  We may terminate Mr. Verjee at any
time, without notice, for any reason or no reason at all.  Pursuant to
the terms of his amended and restated employment agreement, in the event that
Mr. Verjee’s employment is terminated by us other than for cause, death or
disability, Mr. Verjee is eligible to receive, among other things, severance
payments, in the form of a salary continuation, equal to one year’s base salary
(subject to reduction to six months if Mr. Verjee finds subsequent employment
prior to the expiration of the twelve month period) and any unvested options
awarded to Mr. Verjee will fully and immediately vest, which, to the extent
unexercised, will expire on the earlier of three years after such termination or
the expiration date as set forth in the applicable stock option
agreement.  If Mr. Verjee’s employment is terminated by death or
disability, Mr. Verjee’s unvested options will become fully vested which, to the
extent unexercised, will expire upon the earlier of three years after such
termination or the expiration date as set forth in the applicable stock option
agreement.  In the event of a “change of control,” 50% of any unvested
options granted to Mr. Verjee shall become fully vested immediately prior to the
occurrence of the change of control.  In addition, if there is a
“change of control” before Mr. Verjee’s service terminates and if Mr. Verjee’s
employment is terminated without cause or resigns for good reason within 12
months of the “change of control,” then in addition to the foregoing vesting of
any unvested options, any remaining unvested options shall vest immediately
prior to the termination of employment.  Mr. Verjee shall have 36
months from such separation of employment to exercise his vested options
(provided that no such exercise period shall extend beyond the maximum term
specified in the applicable stock option agreement).




54


Lennox
L. Vernon




On
December 10, 2008, we entered into an amended and restated employment agreement
with Lennox L. Vernon, which supersedes and replaces his previous employment
agreement dated October 30, 2006.  His amended and restated employment
agreement provides that Mr. Vernon will serve as our Chief Accounting Officer
and Director of Operations at an annual base salary of $160,000, less standard
payroll deductions and tax withholdings.  Mr. Vernon is also eligible
to receive annual bonus payments of up to 15% of his base salary, contingent
upon meeting certain goals determined by the CEO.  Subsequently, Mr.
Vernon’s annual base salary was increased to $168,000.




The term
of Mr. Vernon’s employment as our Chief Accounting Officer and Director of
Operations is indefinite, subject to termination by either party in accordance
with the terms of the amended and restated employment agreement.  We
may terminate Mr. Vernon at any time upon 30 days’ notice, for any reason or no
reason at all.  Pursuant to the terms of his amended and restated
employment agreement, in the event that Mr. Vernon’s employment is terminated by
us other than for cause, death or disability, Mr. Vernon is eligible to receive,
among other things, severance payments in the form of a salary continuation
equal to three months’ base salary.  Generally, if Mr. Vernon’s
employment is terminated by us for or without cause, by Mr. Vernon with or
without good reason, or by death or disability, Mr. Vernon’s unvested options
will immediately expire.  If there is a “change of control” before Mr.
Vernon’s service terminates, and if Mr. Vernon’s employment is terminated
without cause or if Mr. Vernon resigns for good reason within 12 months of the
“change of control,” any unvested options granted to Mr. Vernon will immediately
become fully vested.  Any unexercised vested options will expire one
month after the termination of Mr. Vernon’s employment.




Michael
Downing




On
October 27, 2006, we entered into an employment agreement with Michael Downing
pursuant to which Mr. Downing served as our President and Chief Executive
Officer.  Mr. Downing’s employment agreement provided for a term of
four years, subject to annual renewal thereafter, with an annual base salary of
$175,000 and a bonus subject to our achieving our target performance levels as
approved by our board of directors or the compensation committee
thereof.  Pursuant to the employment agreement, on October 27, 2006
Mr. Downing received an option grant from our 2006 equity incentive plan, to
acquire 500,000 shares of our common stock at a price of $1.50 per share, which
was the fair market value of our common stock on the date of
grant.  One-third (1/3) of the options vest upon the first anniversary
of the date of grant.  An additional one-thirty sixth (1/36) of the
options vest on the last day of each month thereafter.  Under the
agreement, Mr. Downing was subject to traditional non-competition and employee
non-solicitation restrictions while he was employed by us.  Mr.
Downing and his spouse and dependents were entitled to participate in our
benefit plans in substantially the same manner, including but not limited to
responsibility for the cost thereof, and at substantially the same levels as we
make such opportunities available to all of our managerial or salaried executive
employees and their dependents.




On
February 26, 2007, in conjunction with Mr. Downing’s resignation as president,
we and Mr. Downing entered into an amendment to his employment
agreement.  The amendment clarified that Mr. Downing was no longer our
President but continued to serve as our Chief Executive Officer.  The
amendment also provided that the appointment of Tabreez Verjee as our president
did not constitute good reason for Mr. Downing to terminate his employment with
us under his employment agreement.




Mr.
Downing’s employment was terminated effective as of June 4, 2008.  As
a result, the above option was canceled.




In
connection with Mr. Downing’s resignation as our Chief Executive Officer and a
director, on June 4, 2008, we and Mr. Downing entered into a Separation
Agreement and Mutual Release pursuant to which, among other things: (i) we
agreed to pay Mr. Downing all accrued salary and all accrued and unused vacation
benefits earned through June 4, 2008, subject to standard payroll deductions,
withholding taxes and other obligations; (ii) we agreed to forgive outstanding
debt in the amount of $17,876.05 owed by Mr. Downing to us; (iii) the parties
agreed to cancel an outstanding stock option previously granted to Mr. Downing
to purchase 500,000 shares of our common stock; and (iv) the parties agreed to
terminate Mr. Downing’s existing employment agreement and to release each other
from any and all claims that they may have against each other.




55


ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.




The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 27, 2009.  The table sets
forth the beneficial ownership of each person who, to our knowledge,
beneficially owns more than 5% of the outstanding shares of common stock, each
of our directors and executive officers, and all of our directors and executive
officers as a group.  The address of each director and executive
officer is c/o Betawave Corporation, 706 Mission Street, 10 th Floor,
San Francisco, California 94103.




Beneficial
      Owner
                    
                    Shares
      of
                      Common
                      Stock
                      Beneficially
                      Owned
                    
                    
                    Percentage
      of Class of
                      Shares
      Beneficially
                      Owned(1)Tabreez
      Verjee
                    
                    
                    34,097,937
                    (2)
                    
                    
                    59.1
                    %Riaz
      Valani
                    
                    
                    28,729,706
                    (3)
                    
                    
                    55.0
                    %James
      Moloshok
                    
                    
                    4,799,479
                    (4)
                    
                    
                    14.4
                    %Matt
      Freeman
                    
                    
                    4,247,737
                    (5)
                    
                    
                    12.7
                    %Michael
      Jung
                    
                    
                    70,000,000
                    (6)
                    
                    
                    70.5
                    %Richard
      Ling
                    
                    
                    35,000,000
                    (7)
                    
                    
                    54.5
                    %Mark
      Menell
                    
                    
                    52,500,000
                    (8)
                    
                    
                    64.2
                    %John
      Durham
                    
                    
                    288,109
                    (9)
                    
                    
                    0.9
                    %Lennox
      L. Vernon
                    
                    
                    156,830
                    (10)
                    
                    
                    0.5
                    %Executive
      Officers and Directors as Group (9 persons)
                    
                    
                    201,880,113
                    
                    
                    
                    89.7
                    %




(1)
            Beneficial
      ownership percentages are calculated based on 29,229,284 shares of common
      stock issued and outstanding as of March 27, 2009.  Beneficial
      ownership is determined in accordance with Rule 13d-3 of the Exchange
      Act.  The number of shares beneficially owned by a person
      includes shares underlying options, warrants or other convertible
      securities held by that person that are currently exercisable (or
      convertible) or exercisable (or convertible) within 60 days of March 27,
      2009.  The shares issuable pursuant to the exercise of those
      options, warrants or other convertible securities are deemed outstanding
      for computing the percentage ownership of the person holding those
      options, warrants or other convertible securities, but are not deemed
      outstanding for the purposes of computing the percentage ownership of any
      other person.  The persons and entities named in the table have
      sole voting and sole investment power with respect to the shares set forth
      opposite that person’s name, subject to community property laws, where
      applicable, unless otherwise noted in the applicable
    footnote.




(2)
            Includes
      (i) 6,158,257 shares underlying stock options exercisable within 60 days
      of March 27, 2009 held by Mr. Verjee, (ii) 5,553,744 shares of common
      stock, 9,264,700 shares of common stock issuable upon conversion of Series
      A preferred stock and 3,705,880 shares of common stock issuable upon
      exercise of warrants exercisable within 60 days of March 27, 2009 held by
      Internet Television Distribution LLC, of which Mr. Verjee is a member and
      over which Mr. Verjee and Mr. Valani have shared voting and investment
      power; and (iii) 82,032 shares of common stock, 6,666,660 shares of common
      stock issuable upon conversion of Series A preferred stock and 2,666,664
      shares of common stock issuable upon exercise of warrants exercisable
      within 60 days of March 27, 2009 held by Technology Credit Partners LLC,
      of which Mr. Verjee is a member and over which Mr. Verjee and Mr. Valani
      have shared voting and investment power.  Excludes 13,432,851
      shares underlying stock options not exercisable within 60 days of March
      27, 2009 and held by Mr. Verjee.




(3)
            Includes
      (i) 46,805 shares of common stock held by Mr. Valani, (ii) 743,221 shares
      underlying stock options exercisable within 60 days of March 27, 2009 held
      by Mr. Valani, (iii) 5,553,744 shares of common stock, 9,264,700 shares of
      common stock issuable upon conversion of Series A preferred stock and
      3,705,880 shares of common stock issuable upon exercise of warrants
      exercisable within 60 days of March 27, 2009 held by Internet Television
      Distribution LLC, of which Mr. Valani is a member and over which Mr.
      Valani and Mr. Verjee have shared voting and investment power; and (iv)
      82,032 shares of common stock, 6,666,660 shares of common stock issuable
      upon conversion of Series A preferred stock and 2,666,664 shares of common
      stock issuable upon exercise of warrants exercisable within 60 days of
      March 27, 2009 held by Technology Credit Partners LLC, of which Mr. Valani
      is a member and over which Mr. Valani and Mr. Verjee have shared voting
      and investment power.  Excludes 210,000 shares underlying stock
      options not exercisable within 60 days of March 27, 2009 and held by Mr.
      Valani.




56




(4)
            Includes
      (i) 274,845 shares of common stock held by Mr. Moloshok, (ii) 2,259,938
      shares underlying stock options exercisable within 60 days of March 27,
      2009 held by Mr. Moloshok, (iii) 1,617,640 shares of common stock issuable
      upon conversion of Series A preferred stock held by Mr. Moloshok, and (iv)
      647,056 shares issuable upon exercise of warrants exercisable within 60
      days of March 27, 2009.  Excludes 3,675,738 shares underlying
      stock options not exercisable within 60 days of March 27, 2009 and held by
      Mr. Moloshok.




(5)
            Includes
      4,247,737 shares underlying stock options exercisable within 60 days of
      March 27, 2009 held by Mr. Freeman.  Excludes 25,333,174 shares
      underlying stock options not exercisable within 60 days of March 27, 2009
      held by Mr. Freeman.




(6)
            Includes
      50,000,000 shares of common stock issuable upon conversion of Series A
      preferred stock and 20,000,000 shares of common stock issuable upon
      exercise of warrants exercisable within 60 days of March 27, 2009 held by
      Panorama Capital, L.P.  Mike Jung serves as a Member of Panorama
      Capital Management, LLC, the general partner of Panorama Capital,
      L.P.  He shares voting control and dispositive power over the
      shares but disclaims beneficial ownership, except to the extent of his
      proportionate pecuniary interest
therein.




(7)
            Includes
      25,000,000 shares of common stock issuable upon conversion of Series A
      preferred stock and 10,000,000 shares of common stock issuable upon
      exercise of warrants exercisable within 60 days of March 27, 2009 held by
      Rembrandt Venture Partners Fund Two, L.P. and Rembrandt Venture Partners
      Fund Two-A, L.P.  Richard Ling serves as a Member of Rembrandt
      Venture Partners Fund Two, LLC, the general partner of Rembrandt Venture
      Fund Two, L.P. and Rembrandt Venture Fund Two-A, L.P.  He shares
      voting control and dispositive power over the shares but disclaims
      beneficial ownership, except to the extent of his proportionate pecuniary
      interest therein




(8)
            Includes
      37,500,000 shares of common stock issuable upon conversion of Series A
      preferred stock and 15,000,000 shares of common stock issuable upon
      exercise of warrants exercisable within 60 days of March 27, 2009 held by
      Rustic Canyon Ventures III, L.P.  Mark Menell serves as a Member
      of Rustic Canyon GP III, LLC, the general partner of Rustic Canyon
      Ventures III, L.P.  He shares voting control and dispositive
      power over the shares but disclaims beneficial ownership, except to the
      extent of his proportionate pecuniary interest
  therein.




(9)
            Includes
      (i) 2,800
      shares of common stock held by Mr. Durham, (ii) 235,304 shares
      underlying stock options exercisable within 60 days of March 27, 2009 held
      by Mr. Durham and (iii) 50,000 shares of common stock issuable upon
      exercise of a warrant exercisable within 60 days of March 27, 2009 held by
      Catalyst SF, of which Mr. Durham is a member and over which he has shared
      voting and investment power. Excludes 338,884 shares underlying stock
      options not exercisable within 60 days of March 27, 2009 held by Mr.
      Durham.




(10)
            Includes
      156,830 shares underlying stock options exercisable within 60 days of
      March 27, 2009 held by Mr. Vernon.  Excludes 697,984 shares
      underlying stock options not exercisable within 60 days of March 27, 2009
      held by Mr. Vernon.




57


ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.




Transactions
with Riaz Valani




Effective
as of February 1, 2008, we entered into another one-year consulting agreement
with Mr. Valani under which Mr. Valani is to provide us with business and
corporate development consulting services and devote an average of 20% of his
working time to provide such services.  Pursuant to the terms of the
consulting agreement, on February 5, 2008, our board of directors granted to Mr.
Valani, non-qualified stock options under our 2007 non-qualified stock option
plan to purchase 440,000 shares of common stock, with an exercise price of $0.31
per share, which was the closing price per share of our common stock on the OTC
Bulletin Board on the date of grant.  Thirty-three percent of the
total amount of such options granted to Mr. Valani vested on the date of the
grant and the remainder of the options granted to Mr. Valani vest monthly at the
rate of 1/24thper
month, provided that Mr. Valani continues to provide services to
us.  In addition, the consulting agreement provides for us to pay to
Mr. Valani a fee consisting of cash compensation of $8,000 per month, the
payment of which is deferred until (i) our board of directors elects to pay the
cash compensation in its discretion, (ii) the occurrence of a change in control,
(iii) two years after the effective date of the consulting agreement or (iv) the
date when Mr. Valani ceases to provide services to us and is no longer a member
of our board of directors.  In connection with the closings under the
securities purchase agreement in December 2008, we terminated the consulting
agreement.




Transactions
with Internet Television Distribution LLC and Technology Credit Partners,
Affiliates of Tabreez Verjee and Riaz Valani




In
connection with the closings under the securities purchase agreement in December
2008, Internet Television Distribution LLC (“ITD”), which is an affiliate of Mr.
Verjee and Mr. Valani, exchanged (i) Subordinated Notes held by ITD in the
aggregate principal amount of $1,852,941 into 463,235 shares of Series A
preferred stock and related warrants to purchase 3,705,880 shares of our common
stock, and (ii) warrants held by ITD to purchase 1,798,973 shares of common
stock at an exercise price of $1.75 per share into 1,574,102 shares of common
stock.  ITD previously purchased the Subordinated Notes and warrants
from us in April and June 2008 for an aggregate purchase price of
$1,575,000.




In
addition, in connection with the closings under the securities purchase
agreement, Technology Credit Partners (“TCP”), which is also an affiliate of Mr.
Verjee and Mr. Valani, exchanged (i) Senior Notes held by TCP in the aggregate
principal amount of $1,000,000 into 333,333 shares of Series A preferred stock
and related warrants to purchase 2,666,664 shares of our common stock, and (ii)
warrants held by TCP to purchase 93,750 shares of common stock at an exercise
price of $1.75 per share into 82,032 shares of common stock.  TCP
purchased the Senior Notes and warrants from various prior holders of such
securities during 2008.




Transactions
with James Moloshok




In
connection with the closings under the securities purchase agreement in December
2008, Mr. Moloshok exchanged (i) Subordinated Notes held by Mr. Moloshok in the
aggregate principal amount of $323,529.41 into 80,882 shares of Series A
preferred stock and related warrants to purchase 647,056 shares of our common
stock, and (ii) warrants held by Mr. Moloshok to purchase 314,108 shares of
common stock at an exercise price of $1.75 per share into 274,845 shares of
common stock.  Mr. Moloshok previously purchased the Subordinated
Notes and warrants from us in April and June 2008 for an aggregate purchase
price of $275,000.




Transactions
with Catalyst Strategy, Inc., an affiliate of John Durham




In
connection with a services agreement between the Company and Catalyst Strategy,
Inc. (“Catalyst”), a corporation that is an affiliate of Mr. Durham, on February
28, 2008 we issued to Catalyst a warrant to purchase 50,000 shares of our common
stock for a period of five years at an exercise price of $1.75 per
share.  The exercise price of the warrant has subsequently been
adjusted to $0.20 per share, pursuant to its exercise price adjustment
provisions.  Both the services agreement and the terms of the warrant
grant were approved by our board of directors following disclosure of Mr.
Durham’s relationship with Catalyst.




Director
Independence




Our board
of directors uses the definition of “independent director” as set forth in
NASDAQ Marketplace Rule 4200(a)(15) in determining whether members of our board
of directors are independent.  Our board of directors has
affirmatively determined that Mr. Durham, Mr. Mennell, Mr. Jung and Mr. Ling is
each an “independent director” as that term is set forth in NASDAQ Marketplace
Rule 4200(a)(15).  Our board of directors did not consider any
transactions, relationships or arrangements not disclosed pursuant to this Item
13, “Certain Relationships and Related Transactions, and Director Independence”
of this Annual Report on Form 10-K in making its subjective determination that
each of these directors is an “independent director” as that term is set forth
in NASDAQ Marketplace Rule 4200(a)(15).




58


ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.




Set forth
below is a summary of aggregate fees billed by Rowbotham & Company LLP, our
independent registered public accounting firm, for services in the fiscal years
ended December 31, 2008 and 2007.  In determining the independence of
Rowbotham & Company LLP, our board of directors acting as the audit
committee considered whether the provision of non-audit services is compatible
with maintaining Rowbotham & Company LLP’s independence.


2008
                        
                        
                        2007Audit
      Fees(1)(2)
                        
                        $
                        179,614
                        
                        
                        $
                        326,323Audit-Related
      Fees
                        
                        
                        —
                        
                        
                        
                        —Tax
      Fees
                        
                        
                        32,837
                        
                        
                        
                        —All
      Other Fees
                        
                        
                        —
                        
                        
                        
                        —Total
      Fees
                        
                        $
                        212,451
                        
                        
                        $
                        326,323


_________________________


(1)
            The
      total amount of audit fees and reimbursement of expenses billed by
      Rowbotham & Company LLP for the fiscal year ended December 31, 2008
      was $179,614 for the audits performed during such fiscal year, the reviews
      of the quarterly financial statements and audit services provided in
      connection with other statutory or regulatory
  filings.


(2)
            The
      total amount of audit fees and reimbursement of expenses billed by
      Rowbotham & Company LLP for the fiscal year ended December 31, 2007
      was $326,323 for the audits performed during such fiscal year, the reviews
      of the quarterly financial statements and audit services provided in
      connection with other statutory or regulatory
  filings.




PART
IV




ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.




The
exhibits filed as part of this Annual Report on Form 10-K are listed in the
Exhibit Index immediately preceding such exhibits, which Exhibit Index is
incorporated herein by reference.




59


SIGNATURES




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




BETAWAVE
      CORPORATIONBy:
                  /s/
      Matt FreemanMatt
      FreemanChief
      Executive OfficerDate:
      March 30, 2009




POWER
OF ATTORNEY




Each of
the undersigned officers and directors of Betawave Corporation, a Nevada
corporation, does hereby make, constitute and appoint Tabreez Verjee the
undersigned’s true and lawful attorney-in-fact, with power of substitution, for
the undersigned and in the undersigned’s name, place and stead, to sign and file
with the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended, this Annual Report on Form 10-K for the year ended December
31, 2008, any and all amendments and exhibits to such Annual Report on Form 10-K
and any and all applications, instruments, and other documents to be filed with
the Securities and Exchange Commission pertaining to such Annual Report on Form
10-K or any amendments thereto, granting unto said attorneys-in-fact, and either
of them, full power and authority to do and perform any and all acts necessary
or incidental to the performance and execution of the powers herein expressly
granted.




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




Signature
                                        
                                        Title
                                        
                                        Date/s/
      Matt Freeman
                                        
                                        Chief
      Executive Officer and Director
                                        
                                        March
      30, 2009Matt
      Freeman
                                        
                                        (Principal
      Executive Officer)/s/
      Tabreez Verjee
                                        
                                        President
      and Director
                                        
                                        March
      30, 2009Tabreez
      Verjee/s/
      Lennox L. Vernon
                                        
                                        Chief Accounting Officer and Director of Operations
                                        
                                        March
      30, 2009Lennox
      L. Vernon
                                        
                                        (Principal
      Financial and Accounting Officer)/s/
      James Moloshok
                                        
                                        Executive
      Chairman and Director
                                        
                                        March
      30, 2009James
      Moloshok/s/
      John Durham
                                        
                                        Director
                                        
                                        March
      30, 2009John
      Durham/s/
      Michael Jung
                                        
                                        Director
                                        
                                        March
      30, 2009Michael
      Jung/s/
      Richard Ling
                                        
                                        Director
                                        
                                        March
      30, 2009Richard
      Ling/s/ Mark
      Menell
                                        
                                        Director
                                        
                                        March
      31, 2009Mark
      Menell/s/
      Riaz Valani
                                        
                                        Director
                                        
                                        March
      30, 2009Riaz
      Valani




S-1


BETAWAVE
CORPORATION




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




Audited
      Financial Statements
                            
                            PageReport
      of Independent Registered Public Accounting Firm
                            
                            
                            F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                            
                            
                            F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
                            
                            
                            F-3Consolidated
      Statements of Stockholders’ Equity (Deficit) for the Years Ended December
      31, 2008 and 2007
                            
                            
                            F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
                            
                            
                            F-5Notes
      to the Consolidated Financial Statements
                            
                            
                            F-6







Report
of Independent Registered Public Accounting Firm




The Board
of Directors and Stockholders of


Betawave
Corporation




We have
audited the accompanying consolidated balance sheets of Betawave Corporation and
subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity (deficit), and cash
flows for the years then ended.  These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis of designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial positions of the Company as of December
31, 2008 and 2007, and the results of their operations and their cash flows for
the years then ended, in conformity with United States generally accepted
accounting principles.




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 1
to the consolidated financial statements, the Company has incurred net loss
since its inception, has experienced liquidity problems, negative cash flows
from operations, and a working
capital deficit at December 31, 2008, that raise substantial doubt about the
Company’s ability to continue as a going concern.  Management’s plans
in regards to these matters are described in Note 1.  The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




/s/
Rowbotham & Company LLP




San
Francisco, California


March 30,
2009


F–1


Betawave
Corporation


Consolidated
Balance Sheets


As
of December 31, 2008 and 2007





December
      31,
                        
                        
                        December
      31,2008
                        
                        
                        2007AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        11,863,121
                        
                        
                        $
                        1,108,834Trade
      accounts receivable, net of allowance for doubtful accounts of none and
      $17,216 at December 31, 2008 and 2007, respectively
                        
                        
                        3,108,136
                        
                        
                        
                        1,604,209Prepaid
      expenses
                        
                        
                        961,829
                        
                        
                        
                        503,792Total
      current assets
                        
                        
                        15,933,086
                        
                        
                        
                        3,216,835Property
      and equipment, net
                        
                        
                        236,448
                        
                        
                        
                        457,317Convertible
      note fees, net amortization of none and $273,714 at December 31, 2008 and
      2007, respectively
                        
                        
                        —
                        
                        
                        
                        1,189,486Deposits
                        
                        
                        113,029
                        
                        
                        
                        117,979Total
      assets
                        
                        $
                        16,282,563
                        
                        
                        $
                        4,981,617Liabilities
      and Stockholders’ Equity (Deficit)Current
      liabilities:Accounts
      payable
                        
                        $
                        4,085,886
                        
                        
                        $
                        1,398,262Accrued
      liabilities
                        
                        
                        1,601,840
                        
                        
                        
                        714,693Deferred
      revenue
                        
                        
                        109,243
                        
                        
                        
                        —Total
      current liabilities
                        
                        
                        5,796,969
                        
                        
                        
                        2,112,955Convertible
      notes, net discount of none and $4,039,718 at December 31, 2008 and 2007,
      respectively
                        
                        
                        —
                        
                        
                        
                        6,260,282Commitments
      and contingencies
                        
                        
                        —
                        
                        
                        
                        —Stockholders’
      equity (deficit):Preferred Stock: $0.001 par value; 10,000,000 shares authorized;
      7,065,293 and zero
      shares issued and outstanding at December 31, 2008
      and 2007, respectively (liquidation value of $28,261,172 and zero at
      December 31, 2008 and 2007, respectively)
                        
                        
                        7,065
                        
                        
                        
                        —Common Stock: $0.001 par value; 400,000,000 shares authorized;
      29,229,284 and 25,169,739
      shares issued and outstanding at December 31, 2008
      and 2007, respectively
                        
                        
                        29,230
                        
                        
                        
                        25,171Notes
      receivable from stockholders
                        
                        
                        (18,910
                        )
                        
                        
                        (18,910
                        )Additional
      paid-in capital
                        
                        
                        51,563,483
                        
                        
                        
                        20,727,408Accumulated
      deficit
                        
                        
                        (41,095,274
                        )
                        
                        
                        (24,125,289
                        )Total
      stockholders’ equity (deficit)
                        
                        
                        10,485,594
                        
                        
                        
                        (3,391,620
                        )Total
      liabilities and stockholders’ equity (deficit)
                        
                        $
                        16,282,563
                        
                        
                        $
                        4,981,617




The
accompanying notes are an integral part of these consolidated financial
statements.


F–2


Betawave
Corporation


Consolidated
Statements of Operations


For
the Years Ended December 31, 2008 and 2007





December
      31,
                            
                            
                            December
      31,2008
                            
                            
                            2007Revenues
                            
                            $
                            7,701,599
                            
                            
                            $
                            2,081,182Cost
      of revenues and expenses:Cost
      of revenue
                            
                            
                            6,551,870
                            
                            
                            
                            2,437,047Sales
      and marketing
                            
                            
                            6,480,550
                            
                            
                            
                            6,174,158Product
      development
                            
                            
                            713,964
                            
                            
                            
                            2,261,481General
      and administrative
                            
                            
                            6,024,801
                            
                            
                            
                            5,186,981Loss
      on debt extinguishment
                            
                            
                            2,736,832
                            
                            
                            
                            —Acquisition
      costs
                            
                            
                            —
                            
                            
                            
                            1,270,348Total
      costs of revenues and expenses
                            
                            
                            22,508,017
                            
                            
                            
                            17,330,015Operating
      loss
                            
                            
                            (14,806,418
                            )
                            
                            
                            (15,248,833
                            )Other
      income (expense):Interest
      income
                            
                            
                            23,238
                            
                            
                            
                            147,007Miscellaneous
      income
                            
                            
                            278,740
                            
                            
                            
                            536Interest
      expense
                            
                            
                            (2,465,545
                            )
                            
                            
                            (1,276,568
                            )Total
      other income (expense)
                            
                            
                            (2,163,567
                            )
                            
                            
                            (1,129,025
                            )Net
      loss before provision for income taxes
                            
                            
                            (16,969,985
                            )
                            
                            
                            (16,377,858
                            )Provision
      for income taxes
                            
                            
                            —
                            
                            
                            
                            —Net
      loss
                            
                            $
                            (16,969,985
                            )
                            
                            $
                            (16,377,858
                            )Net
      loss per share - basic and diluted
                            
                            $
                            (0.66
                            )
                            
                            $
                            (0.68
                            )Shares
      used to compute net loss per share - basic and diluted
                            
                            
                            25,707,208
                            
                            
                            
                            24,024,966




The
accompanying notes are an integral part of these consolidated financial
statements.


F–3


Betawave
Corporation


Consolidated
Statements of Stockholders’ Equity (Deficit)


For
the Years Ended December 31, 2008 and 2007




NotesReceivable
                                                                      
                                                                      
                                                                      AdditionalPreferred
      Stock
                                                                      
                                                                      
                                                                      Common
      Stock
                                                                      
                                                                      
                                                                      From
                                                                      
                                                                      
                                                                      Paid-in
                                                                      
                                                                      
                                                                      AccumulatedShares
                                                                      
                                                                      
                                                                      Amount
                                                                      
                                                                      
                                                                      Shares
                                                                      
                                                                      
                                                                      Amount
                                                                      
                                                                      
                                                                      Stockholders
                                                                      
                                                                      
                                                                      Capital
                                                                      
                                                                      
                                                                      Deficit
                                                                      
                                                                      
                                                                      TotalBalances
      at January 1, 2007
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      $
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      23,099,230
                                                                      
                                                                      
                                                                      $
                                                                      23,100
                                                                      
                                                                      
                                                                      $
                                                                      (18,910
                                                                      )
                                                                      
                                                                      $
                                                                      12,288,298
                                                                      
                                                                      
                                                                      $
                                                                      (7,747,431
                                                                      )
                                                                      
                                                                      $
                                                                      4,545,057Issuance
      of Common Stock in January for cash upon exercise of
    warrants
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,000,000
                                                                      
                                                                      
                                                                      
                                                                      1,000
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,749,000
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,750,000Issuance
      of Common Stock in January for cash upon exercise of
    options
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      25,879
                                                                      
                                                                      
                                                                      
                                                                      25
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,475
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,500Issuance
      of Common Stock in April for cash upon exercise of options
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      5,167
                                                                      
                                                                      
                                                                      
                                                                      6
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      7,772
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      7,778Issuance
      of warrants in June
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      5,298,493
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      5,298,493Nonemployee
      stock-based compensation charge
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      227,883
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      227,883Stock-based
      compensation charge
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      944,623
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      944,623Issuance
      of Common Stock in November for cash upon exercise of
    options
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      39,463
                                                                      
                                                                      
                                                                      
                                                                      40
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      2,248
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      2,288Issuance
      of Common Stock in December for license, distribution and marketing
      agreement
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,000,000
                                                                      
                                                                      
                                                                      
                                                                      1,000
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      199,000
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      200,000Discount
      on investor warrant
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      8,616
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      8,616Net
      loss
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (16,377,858
                                                                      )
                                                                      
                                                                      
                                                                      (16,377,858
                                                                      )Balances
      at December 31, 2007
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      25,169,739
                                                                      
                                                                      
                                                                      
                                                                      25,171
                                                                      
                                                                      
                                                                      
                                                                      (18,910
                                                                      )
                                                                      
                                                                      
                                                                      20,727,408
                                                                      
                                                                      
                                                                      
                                                                      (24,125,289
                                                                      )
                                                                      
                                                                      
                                                                      (3,391,620
                                                                      )Issuance
      of Common Stock in February to publisher for representation
      rights
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      300,000
                                                                      
                                                                      
                                                                      
                                                                      300
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      101,700
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      102,000Beneficial
      conversion on 2007 warrants
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      772,500
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      772,500Conversion
      of  6% senior convertible note in June into common
      stock
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      25,000
                                                                      
                                                                      
                                                                      
                                                                      25
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      39,975
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      40,000Issuance
      of Series A preferred stock for cash, net of issuance
costs
                                                                      
                                                                      
                                                                      5,625,000
                                                                      
                                                                      
                                                                      
                                                                      5,625
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      21,016,813
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      21,022,438Conversion
      of 15% unsecured convertible original discount notes in
      December
                                                                      
                                                                      
                                                                      1,029,406
                                                                      
                                                                      
                                                                      
                                                                      1,029
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      4,116,595
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      4,117,624Exchange
      of  15% unsecured convertible original issue discount notes
      warrants in December for common stock
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      3,498,013
                                                                      
                                                                      
                                                                      
                                                                      3,498
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      556,401
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      559,899Conversion
      of 6% senior convertible  in December for preferred
      stock
                                                                      
                                                                      
                                                                      410,887
                                                                      
                                                                      
                                                                      
                                                                      411
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,643,138
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,643,549Purchase
      of warrants associated with 6% Senior convertible notes
      in  December
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (134,188
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (134,188
                                                                      )Exchange
      of 6% senior note warrants in December for common stock
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      82,032
                                                                      
                                                                      
                                                                      
                                                                      82
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (82
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —Exchange
      of placement agents warrants in December for common stock
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      154,500
                                                                      
                                                                      
                                                                      
                                                                      154
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (154
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —Nonemployee
      stock-based compensation charge
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      127,623
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      127,623Stock-based
      compensation charge
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      2,595,754
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      2,595,754Net
      loss
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (16,969,985
                                                                      )
                                                                      
                                                                      
                                                                      (16,969,985
                                                                      )Balances
      at December 31, 2008
                                                                      
                                                                      
                                                                      7,065,293
                                                                      
                                                                      
                                                                      $
                                                                      7,065
                                                                      
                                                                      
                                                                      
                                                                      29,229,284
                                                                      
                                                                      
                                                                      $
                                                                      29,230
                                                                      
                                                                      
                                                                      $
                                                                      (18,910
                                                                      )
                                                                      
                                                                      $
                                                                      51,563,483
                                                                      
                                                                      
                                                                      $
                                                                      (41,095,274
                                                                      )
                                                                      
                                                                      $
                                                                      10,485,594




The
accompanying notes are an integral part of these consolidated financial
statements.


F–4


Betawave
Corporation


Consolidated
Statements of Cash Flows


For
the Years Ended December 31, 2008 and 2007




December
      31,
                          
                          
                          December
      31,2008
                          
                          
                          2007Cash
      flows from operating activities:Net
      loss
                          
                          $
                          (16,969,985
                          )
                          
                          $
                          (16,377,858
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Loss
      on debt extinguishment
                          
                          
                          2,736,832
                          
                          
                          
                          —Loss
      on disposal of fixed assets
                          
                          
                          1,959
                          
                          
                          
                          —Depreciation
      and amortization of property and equipment
                          
                          
                          260,028
                          
                          
                          
                          224,784Amortization
      of convertible note fees
                          
                          
                          474,618
                          
                          
                          
                          273,714Stock-based
      compensation
                          
                          
                          2,723,377
                          
                          
                          
                          1,172,506Non
      cash interest expense
                          
                          
                          1,866,813
                          
                          
                          
                          884,484Non
      cash cost of revenues
                          
                          
                          102,000
                          
                          
                          
                          —Write-off
      of acquisition advances
                          
                          
                          —
                          
                          
                          
                          420,338Changes
      in operating assets and liabilities:Trade
      accounts receivable
                          
                          
                          (1,503,927
                          )
                          
                          
                          (1,599,057
                          )Prepaid
      expenses
                          
                          
                          (458,037
                          )
                          
                          
                          (158,917
                          )Deferred
      direct acquisition costs
                          
                          
                          —
                          
                          
                          
                          66,040Other
      assets
                          
                          
                          4,950
                          
                          
                          
                          —Accounts
      payable
                          
                          
                          2,687,625
                          
                          
                          
                          902,180Accrued
      liabilities
                          
                          
                          887,146
                          
                          
                          
                          641,752Deferred
      revenue
                          
                          
                          109,243
                          
                          
                          
                          —Net
      cash used in operating activities
                          
                          
                          (7,077,358
                          )
                          
                          
                          (13,550,034
                          )Cash
      flows from investing activities:Acquisition
      advances
                          
                          
                          —
                          
                          
                          
                          (1,020,338
                          )Payment
      of acquisition advances
                          
                          
                          —
                          
                          
                          
                          600,000Funds
      held as restricted cash
                          
                          
                          (550,000
                          )
                          
                          
                          —Funds
      released from restricted cash
                          
                          
                          550,000
                          
                          
                          
                          1,728,728Funds
      held as deposits
                          
                          
                          —
                          
                          
                          
                          (107,979
                          )Advances
      to founder and stockholder
                          
                          
                          —
                          
                          
                          
                          17,216Purchase
      of property and equipment
                          
                          
                          (41,118
                          )
                          
                          
                          (524,781
                          )Net
      cash provided by (used in) investing activities
                          
                          
                          (41,118
                          )
                          
                          
                          692,846Cash
      flows from financing activities:Proceeds
      from issuance of Series A Preferred Stock, net of issuance cost of
      $1,477,562
                          
                          
                          21,022,438
                          
                          
                          
                          —Proceeds
      from issuance of common stock, net of issuance cost
                          
                          
                          —
                          
                          
                          
                          1,761,566Proceeds
      from issuance of due to stockholder
                          
                          
                          610,000
                          
                          
                          
                          —Repayment
      of due to stockholder
                          
                          
                          (400,000
                          )
                          
                          
                          (384,793
                          )Proceeds
      from issuance of notes payable
                          
                          
                          —
                          
                          
                          
                          200,000Repayment
      of notes payable
                          
                          
                          —
                          
                          
                          
                          (200,000
                          )Proceeds
      from issuance of unsecured convertible original issue discount notes due
      June 2010 and related warrants, net of fees of $101,300
                          
                          
                          3,188,700
                          
                          
                          
                          —Repayment
      of convertible promissory notes
                          
                          
                          (6,414,187
                          )
                          
                          
                          —Purchase
      of warrants
                          
                          
                          (134,188
                          )
                          
                          
                          —Proceeds
      from issuance of convertible notes and related warrants, net of fees of
      $1,080,293
                          
                          
                          —
                          
                          
                          
                          9,219,707Net
      cash provided by financing activities
                          
                          
                          17,872,763
                          
                          
                          
                          10,596,480Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          10,754,287
                          
                          
                          
                          (2,260,708
                          )Cash
      and cash equivalents at beginning of the year
                          
                          
                          1,108,834
                          
                          
                          
                          3,369,542Cash
      and cash equivalents at the end of the year
                          
                          $
                          11,863,121
                          
                          
                          $
                          1,108,834




The
accompanying notes are an integral part of these consolidated financial
statements.


F–5


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




1.
            The
      Company




General -
Unibio Inc. was incorporated in the state of Nevada on February 2,
2005.  On September 14, 2006, Unibio Inc. changed its name to GoFish
Corporation.  In January 2009, GoFish Corporation changed its name to
Betawave Corporation and launched a rebranding campaign focused on
attention-based digital media.




Betawave
Corporation (the “Company”) is the industry’s first attention-based media
company.  The Company delivers quality advertising and content to
large audiences of highly-engaged users through innovative ad
formats.  The Company has assembled a platform of some of the leading
immersive casual gaming, virtual world, social play and entertainment websites
into a network of sites (the “Betawave Network”).  The Company
generates revenue by selling innovative, accountable and attention-grabbing
advertising campaigns on those sites to brand advertisers.




Management’s Plan
- The Company has incurred operating losses and negative cash flows since
inception.  Management expects that revenues will increase as a result
of its planned continued expansion of Betawave’s Network’s reach, scale and
scope.  The Company also expects to incur additional expenses for the
development and expansion of its publisher network, marketing campaigns for a
number of its programming launches and the continuing integration of its
businesses.  In addition, the Company also anticipates gains in
operating efficiencies as a result of the increase to its sales and marketing
organization.  However, the Company expects that operating losses and
negative cash flows will continue for the foreseeable future but anticipates
that losses will decrease from current levels to the extent that the Company
continues to grow and develop.  These Company’s expectations are
subject to risks and uncertainties that could cause actual results or events to
differ materially from those expressed or implied by such
expectations.  While the Company believes that it will be able to
expand operations, gain market share, and raise additional funds, there can be
no assurance that in the event the Company requires additional financing, such
financing would be available on terms which are favorable or at
all.  Failure to generate sufficient cash flows from operations or
raise additional capital would have a material adverse effect on the Company’s
ability to achieve its intended business objectives.  These factors
raise substantial doubt about the Company’s ability to continue as a going
concern.




Going Concern -The Company’s consolidated financial statements have been presented on a
basis that contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.  The Company continues
to face significant risks associated with the successful execution of its
strategy given the current market environment for similar
companies.  The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.




2.
            Summary
      of Significant Accounting Policies




Basis of
Presentation -The accompanying consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America.




Principles of
Consolidation - The consolidated financial statements include the
financial statements of Betawave Corporation and its wholly-owned
subsidiaries.  All significant transactions and balances between the
Betawave Corporation and its subsidiaries have been eliminated in
consolidation.




Use of Estimates
- The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts and disclosures.  Accordingly, actual results could differ
from those estimates.




F–6


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




Fair Value of
Financial Instruments -The carrying amounts of
cash and cash equivalents, accounts receivable, prepaid expenses, accounts
payable, and accrued liabilities, approximate fair value due to the short-term
maturities of these instruments.




Cash and Cash
Equivalents - For purposes of reporting cash flows, the Company considers
all short-term, interest-bearing deposits with original maturities of three
months or less to be cash equivalents.  Cash and cash equivalents
include a certificate of deposit account.




Concentration of
Credit Risk -Financial instruments that potentially subject the Company
to significant concentrations of credit risk, consist principally of cash and
cash equivalents and accounts receivable.  The Company’s credit risk
is managed by investing its cash in a certificate of deposit
account.  The receivables credit risk is controlled through credit
approvals, credit limits and monitoring procedures.




The
Company places its cash in banks.  Cash in excess of federally insured
limits totaled $11,613,121 and $1,008,834 at December 31, 2008 and 2007,
respectively.




AccountsReceivable- The Company generally requires no collateral from its customers.  An
allowance for doubtful accounts will be recorded based on a combination of
historical experience, aging analysis, and information on specific
accounts.  Account balances will be written off against the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote.  The Company has recorded an allowance against
its receivables of none and $17,216 at December 31, 2008 and 2007,
respectively.




Accounts
Receivable Concentrations -At December 31, 2008, three customers
accounted for 26%, 13% and 7%, respectively, of accounts
receivable.  At December 31, 2007, three customers accounted for 27%,
21% and 9%, respectively, of accounts receivable.




Revenue
Concentrations - The Company’s revenue is generated mainly from
advertisers who purchase inventory in the form of graphical, text-based or video
ads on the Company’s Network of websites.  These advertisers’
respective agencies facilitate the purchase of inventory on behalf of their
advertisers.  For the year ended December 31, 2008, four customers
accounted for 22%, 9%, 8% and 5%, respectively, of total
revenues.  For the year ended December 31, 2007, four customers
accounted for 24%, 20%, 7% and 7%, respectively, of total
revenues.




Propertyand Equipment -Property and equipment are stated at cost less accumulated depreciation
and amortization.  Major improvements are capitalized, while repair
and maintenance costs that do not improve or extend the lives of the respective
assets are expensed as incurred. Depreciation and amortization charges are
calculated using the straight-line method over the useful lives of the assets,
generally three years.  Upon retirement or sale, the cost and related
accumulated depreciation are removed from the balance sheet and the resulting
gain or loss is reflected in operating expenses.




Impairment of
Long-Lived Assets -The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long-lived assets may warrant revision or that the remaining balance of
long-lived assets may not be recoverable.  When factors indicate that
long-lived assets should be evaluated for possible impairment, the Company
typically makes various assumptions about the future prospects the asset relates
to, considers market factors and uses an estimate of the related undiscounted
future cash flows over the remaining life of the long-lived assets in measuring
whether they are recoverable.  If the estimated undiscounted future
cash flows are less than the carrying value of the asset, a loss is recorded as
the excess of the asset’s carrying value over its fair value.  There
have been no such impairments of long-lived assets through December 31, 2008 and
2007.




F–7


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




Income Taxes -Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax basis, and operating
loss carry-forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in the tax rates is recognized in income in the period that includes the
enactment date.  A valuation allowance is recorded for loss
carryforwards and other deferred tax assets where it is more likely than not
that such loss carryforwards and deferred tax assets will not be
realized.




Revenue
Recognition -Revenues are recognized from the display of graphical
advertisements on the websites of the publishers in the Company Network as
“impressions” are delivered up to the amount contracted for by the
advertiser.  An “impression” is delivered when an advertisement
appears in pages viewed by users.  Arrangements for these services
generally have terms of less than one year.  These revenues are
recognized as such because the services have been provided, and the other
criteria set forth under Staff Accounting Bulletin Topic 13: Revenue Recognition have been
met, namely, the fees charged by the Company are fixed or determinable, the
advertisers understand the specific nature and terms of the agreed-upon
transactions and collectability is reasonably assured.  In accordance
with Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as Principal
Versus Net as an Agent (“EITF 99-19”), Betawave reports revenues on a
gross basis principally because the Company is the primary obligor to the
advertisers.




Expense
Recognition -Expenses are charged to
expense as incurred.




AdvertisingandPromotionCosts - Expenses
related to advertising and promotions of products are charged to expense as
incurred. Advertising and promotional costs totaled $129,414 and $1,731,170 for
the years ended December 31, 2008 and 2007, respectively.




Research and
Development -Research and development costs are charged to operations as
incurred.




Stock-Based
Compensation -Effective January 1, 2006, the Company adopted the fair
value recognition provisions of FASB Statement No. 123, Share-Based Payment, (“SFAS
123(R)”) using the modified prospective transition method.  Under that
transition method, compensation cost recognized for the periods ended December
31, 2008 and 2007 includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of FASB
Statement No. 123, Accounting
for Stock-Based Compensation(“SFAS 123”), and (b) compensation cost for
all share-based payments granted or modified subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123(R).




Share-based
compensation expense for performance-based options granted to non-employees is
determined in accordance with SFAS 123(R) and Emerging Issues Task Force Issue
No. 96-18, Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services(EITF 96-18”), at the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured.  The fair value of
options granted to non-employees is measured as of the earlier of the
performance commitment date or the date at which performance is complete
(“measurement date”).  When it is necessary under generally accepted
accounting principles to recognize the cost for the transaction prior to the
measurement date, the fair value of unvested options granted to non-employees is
remeasured at the balance sheet date.




F–8


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




The
Company currently uses the Black-Scholes option pricing model to determine the
fair value of stock options.  The determination of the fair value of
stock-based payment awards on the date of grant using an option-pricing model is
affected by our stock price as well as by assumptions regarding a number of
complex and subjective variables.  These variables include our
expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate and
expected dividends.  We estimate the volatility of our common stock at
the date of the grant based on a combination of the implied volatility of
publicly traded options on our common stock and our historical volatility
rate.  The dividend yield assumption is based on historical dividend
payouts.  The risk-free interest rate is based on observed interest
rates appropriate for the term of our employee options.  We use
historical data to estimate pre-vesting option forfeitures and record
share-based compensation expense only for those awards that are expected to
vest.  For options granted, we amortize the fair value on a
straight-line basis.  All options are amortized over the requisite
service periods of the awards, which are generally the vesting
periods.  If factors change we may decide to use different assumptions
under the Black-Scholes option model and stock-based compensation expense may
differ materially in the future from that recorded in the current
periods.




Included
in cost of revenues and expenses is $2,723,377 and $1,172,506 of stock-based
compensation for the years ended December 31, 2008 and 2007,
respectively.  At December 31, 2008, this amount includes $36,820 of
stock-based compensation related to non-employees, $2,595,755 related to
employees, $66,000 related to restricted stock and $24,802 related to warrants.
At December 31, 2007, this amount includes $86,216 of stock-based compensation
related to non-employees, $944,623 related to employees and $141,667 related to
the warrants.




The
Company estimates the fair value of stock options using the Black-Scholes
valuation model.  Key input assumptions used to estimate the fair
value of stock options include the exercise price of the award, expected option
term, expected volatility of the stock over the option’s expected term,
risk-free interest rate over the option’s expected term, and the expected annual
dividend yield.  The Company believes that the valuation technique and
approach utilized to develop the underlying assumptions are appropriate in
calculating the fair values of the stock options granted during the years ended
December 31, 2008 and 2007.




Loss Per
Share- Basic
net loss per share to common stockholders is calculated based on the
weighted-average number of shares of common stock outstanding during the period
excluding those shares that are subject to repurchase by the Company. Diluted
net loss per share attributable to common shareholders would give effect to the
dilutive effect of potential common stock consisting of stock options, warrants,
convertible debt and preferred stock. Dilutive securities have been excluded
from the diluted net loss per share computations as they have an antidilutive
effect due to the Company’s net loss for the years ended December 31, 2008 and
2007.




The
following outstanding stock options, warrants, convertible debt and preferred
stock (on an as-converted into common stock basis) were excluded from the
computation of diluted net loss per share attributable to holders of common
stock as they had an antidilutive effect as of December 31, 2008 and
2007:




December
      31,
                    2008
                  
                  
                  December
      31,
                    2007Shares
      issuable upon exercise of employee and non-employee stock
      options
                  
                  
                  4,717,067
                  
                  
                  
                  7,194,770Shares
      issuable upon exercise of warrants
                  
                  
                  5,744,335
                  
                  
                  
                  7,598,899Shares
      issuable upon conversion of notes
                  
                  
                  —
                  
                  
                  
                  6,412,500Shares
      issuable upon conversion of Series A preferred stock
                  
                  
                  7,355,648
                  
                  
                  
                  —Total
                  
                  
                  17,817,050
                  
                  
                  
                  21,206,169




F–9


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




Comprehensive
Loss -The
Company has no components of comprehensive loss other than its net loss and,
accordingly, comprehensive loss is the same as the net loss for all periods
presented.


Segments -
Segments are defined as components of the Company’s business for which separate
financial information is available that is evaluated by the Company’s chief
operating decision maker (its CEO) in deciding how to allocate resources and
assess performance.  The Company has only one overall operating
segment.
  Recent Accounting
Pronouncements -In December 2007, the Financial Accounting Standards
Board (FASB) issued (SFAS) No. 141 (Revised 2007) (SFAS 141R),Business
Combinations.  This statement will significantly change the
accounting for business acquisitions both during the period of the acquisition
and in subsequent periods.  SFAS 141R provides companies with
principles and requirements on how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, liabilities assumed, and
any noncontrolling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination.  SFAS 141R
also requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business
combination.  SFAS 141R will be effective January 1, 2009 for the
Company and will be applied to all business combinations occurring on or after
that date.
 Concurrent
with the issuance of SFAS No. 141R, the FASB issued SFAS No. 160 (“SFAS 160”),
Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No.
51.  SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  SFAS 160 will also be effective for
the Company effective January 1, 2009.  Early adoption is not
permitted.  The Company does not currently expect the adoption of SFAS
160 to have any impact on its financial statements.
 In March
2008, the FASB issued SFAS No. 161 (“SFAS 161”),Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.  SFAS 161 intends to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial
position, financial performance, and cash flows.  SFAS 161 also
requires disclosure about an entity’s strategy and objectives for using
derivatives, the fair values of derivative instruments and their related gains
and losses.  SFAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008, and will be applicable to the Company
in the first quarter of fiscal 2009.  The Company does not currently
expect the adoption of SFAS 161 to have any impact on its financial
statements.
 In May
2008, the FASB issued SFAS 162 (“SFAS 162”), The Hierarchy of Generally Accepted
Accounting Principles.  SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that presented
in conformity with generally accepted accounting principles in the United States
of America.  SFAS 162 will be effective 60 days following the SEC’s
approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.  The
Company does not believe SFAS 162 will have a significant impact on the
Company’s consolidated financial statements.
 In June
2008, the FASB issued Staff Position FSP EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities:
(“FSP EITF 03-6-1”).  FSP EITF 03-6-1 provides that unvested
shares-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earning per share pursuant to the
two-class method.  EITF 03-6-1 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years.  Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including any amounts
related to interim periods, summaries of earnings and selected financial data)
to conform to the provisions in EITF 03-6-1.  Early application of FSP
EITF 03-6-1is prohibited.  The adoption of FSP EITF 03-6-1 is not
anticipated to have a material effect on the Company’s consolidated financial
statements.
 F–10




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




During
the first quarter of fiscal 2008, the Company adopted the following accounting
standards:




In
February 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting
Standard (FAS) 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Its Related Interpretive Accounting
Pronouncements That Address Leasing Transactions, (“FSP FAS 157-1”) and
FSP FAS 157-2, Effective Date
of FASB Statement No. 157(“FSP FAS 157-2”).  FSP FAS 157-1
removes leasing from the scope of SFAS No. 157, “Fair Value Measurements.” FSP
FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, at least annually.




In
September 2006, the FASB finalized SFAS No. 157 which became effective January
1, 2008 except as amended by FSP FAS 157-1 and FSP FAS 157-2 as described
above.  This Statement defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements;
however, it does not require any new fair value measurements.  The
adoption of this Statement did not have any effect on the Company’s consolidated
financial statements.


In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”),The Fair Value Option for Financial
Assets and Financial Liabilities, which permits entities to elect to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value.  This
election is irrevocable.  SFAS 159 was effective in the first quarter
of fiscal 2008.  The Company has not elected to apply the fair value
option to any of its financial instruments.




3.
            Fair
      Value




The
Company adopted the provisions of SFAS No. 157 as amended by FSP FAS 157-1 and
FSP FAS 157-2 on January 1, 2008.  Pursuant to the provisions of FSP
FAS 157-2, the Company will not apply the provisions of SFAS No. 157 until
January 1, 2009 for the following major categories of nonfinancial assets and
liabilities from the consolidated balance sheet: property and
equipment.  The Company recorded no change to its opening balance of
accumulated deficit as of January 1, 2008 as it did not have any financial
instruments requiring retrospective application per the provisions of SFAS No.
157.




Fair
Value Hierarchy - SFAS No. 157 specifies a hierarchy of valuation techniques
based upon whether the inputs to those valuation techniques reflect assumptions
other market participants would use based upon market data obtained from
independent sources (observable inputs) or reflect the company’s own assumptions
of market participant valuation (unobservable inputs).  In accordance
with SFAS No. 157, these two types of inputs have created the following fair
value hierarchy:




·
            Level
      1 - Quoted prices in active markets that are unadjusted and accessible at
      the measurement date for identical, unrestricted assets or
      liabilities;




·
            Level
      2 - Quoted prices for identical assets and liabilities in markets that are
      not active, quoted prices for similar assets and liabilities in active
      markets or financial instruments for which significant inputs are
      observable, either directly or
indirectly;




·
            Level
      3 - Prices or valuations that require inputs that are both significant to
      the fair value measurement and
unobservable.




F–11


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




SFAS No.
157 requires the use of observable market data if such data is available without
undue cost and effort.




Measurement
of Fair Value - The Company measures fair value as an exit price using the
procedures described below for all assets and liabilities measured at fair
value.  When available, the company uses unadjusted quoted market
prices to measure fair value and classifies such items within Level
1.  If quoted market prices are not available, fair value is based
upon internally developed models that use, where possible, current market-based
or independently-sourced market parameters such as interest rates and currency
rates.  Items valued using internally generated models are classified
according to the lowest level input or value driver that is significant to the
valuation.  Thus, an item may be classified in Level 3 even though
there may be inputs that are readily observable.  If quoted market
prices are not available, the valuation model used generally depends on the
specific asset or liability being valued.




Credit
risk adjustments are applied to reflect the Company’s own credit risk when
valuing all liabilities measured at fair value.  The methodology is
consistent with that applied in developing counterparty credit risk adjustments,
but incorporates the Company’s own credit risk as observed in the credit default
swap market.




The
following table presents the Company’s assets and liabilities that are measured
at fair value on a recurring basis at December 31, 2008:




Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3
                        
                        
                        TotalCash
      and cash equivalents
                        
                        $
                        11,863,121
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        11,863,121




4.
            Property
      and Equipment, net




Property
and equipment, net consisted of the following at December 31, 2008 and
2007:




December
      31,
                    2008
                
                
                December
      31,
                    2007Computer
      equipment and software
                
                $
                652,877
                
                
                $
                614,009Leasehold
      improvements
                
                
                145,794
                
                
                
                145,794Furniture
      and fixtures
                
                
                7,737
                
                
                
                7,737Total
      property and equipment
                
                
                806,408
                
                
                
                767,540Less
      accumulated depreciation and amortization
                
                
                (569,960
                )
                
                
                (310,223
                )Property
      and equipment, net
                
                $
                236,448
                
                
                $
                457,317




Depreciation
and amortization expense totaled $260,028 and $224,748 for the years ended
December 31, 2008 and 2007, respectively.




F–12


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




5.
            Accrued
      Liabilities




Accrued
liabilities consisted of the following at December 31, 2008 and
2007:




December
      31,
                    2008
                
                
                December
      31,
                    2007Accrued
      vendor obligations
                
                $
                687,928
                
                
                $
                236,833Accrued
      compensation
                
                
                777,290
                
                
                
                182,253Accrued
      travel and entertainment
                
                
                —
                
                
                
                106,904Accrued
      legal expenses
                
                
                —
                
                
                
                91,878Accrued
      city and county taxes
                
                
                41,836
                
                
                
                53,182Accrued
      interest expenses
                
                
                —
                
                
                
                39,483Other
                
                
                94,786
                
                
                
                4,160Total
      accrued liabilities
                
                $
                1,601,840
                
                
                $
                714,693




6.
            Convertible
      Notes




In June
2007, the Company entered into a purchase agreement (the “Purchase Agreement”)
pursuant to which they sold the June 2007 Notes in the aggregate principal
amount of $10,300,000 and the June 2007 warrants to purchase an aggregate of
3,862,500 shares of common stock (the “June 2007 Warrants”)  in a
private placement transaction the “June 2007 Private Placement”). The June 2007
Notes were outstanding until their purchase by the Company on or before December
12, 2008.




The June
2007 Notes bore interest at a rate of 6% per annum.  The June 2007
Notes had maturity dates three years from the date of issuance and were
convertible into shares of the Company’s common stock at a conversion price of
$1.60 per share, subject to full-ratchet anti-dilution protection.




The
Purchase Agreement governing the June 2007 Notes contains various negative
covenants which are no longer applicable to the Company.




The June
2007 Warrants issued to the investors in the June 2007 Private Placement were
exercisable for a period of five years commencing one year after the date of
issuance at an exercise price of $1.75 per share.  Utilizing the
Black-Scholes valuation model and the following assumptions: estimated
volatility of 85%, a contractual life of six years, a zero dividend rate, 5.12%
risk free interest rate, and the fair value of common stock of $1.72 per share
at date of grant, the Company determined the allocated fair value of the warrant
to be $4,924,202.  The Company has recorded this amount as a debt
discount and is amortizing the debt discount over the term of the June 2007
Notes.  The amortization is being recorded as interest expense and
totaled $1,559,331 and $884,484 for the years ended December 2008 and 2007,
respectively.




On
November 28, 2007, one of the original holders of the June 2007 Notes sold its
right, title and interest in its June 2007 Note to a third party at a $42,500
discount.  The Company paid the original holder $42,500 and treated it
as a debt discount and is amortizing the debt discount over the term of the June
2007 Notes.  The amortization is being recorded as interest expense
and totaled $15,612 and $1,369 for the years ended December 31, 2008 and 2007,
respectively.


F–13


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




As part
of the June 2007 Private Placement, the Company paid placement agent fees equal
to 7% of the gross proceeds raised in the June 2007 Private Placement, $721,000,
and associated expenses of $367,909 for a total of $1,088,909.  In
addition, as part of the June 2007 Private Placement, the Company issued
placement agent warrants to purchase an aggregate of 309,000 shares of the
Company’s common stock (the “June 2007 Placement Agent Warrants”).  A
portion of the June 2007 Placement Agent Warrants that were exercisable for
193,125 of the Company’s  common stock were exercisable for a period
of five years commencing one year after issuance at an exercise price of $1.60
per share.  Utilizing the Black-Scholes option-pricing model and an
assumed estimated volatility of 85%, an assumed contractual life of five years,
an assumed zero dividend rate, an assumed 5.12% risk free interest rate, and an
assumed  fair value of the Company’s common stock of $1.72 per share
on the  date of issuance, the Company determined the allocated fair
value of this portion of the June 2007 Placement Agent Warrants that are
exercisable for 193,125 shares of the Company’s common stock to be
$235,722.  The remaining portion of the June 2007 Placement Agent
Warrants that are exercisable for 115,875 the Company’s common stock are
exercisable for a period of five years commencing one year after issuance at an
exercise price of $1.75 per share.  Utilizing the Black-Scholes
option-pricing model and an assumed estimated volatility of 85%, an assumed
contractual life of five years, an assumed zero dividend rate, an assumed 5.12%
risk free interest rate, and an assumed fair value of the Company’s common stock
of $1.72 per share on the date of issuance, the Company determined the allocated
fair value of this remaining portion of the June 2007 Placement Agent Warrants
that were exercisable for 115,875 shares of the Company’s common stock to be
$138,569.  The total convertible note fees were
$1,564,500.  These fees are being amortized to expense over the term
of the June 2007 Notes and amounted to $447,618 and $273,714 for the years ended
December 31, 2008 and 2007, respectively.




Also
embedded in the June 2007 Private Placement, is a nondetachable conversion
feature that is in-the-money at the commitment date.  Per EITF 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios” a beneficial conversion feature
allows the securities to be convertible into common stock at the lower of a
conversion rate fixed at the commitment date or a fixed discount to the market
price of the common stock at the date of conversion.  The embedded
beneficial conversion feature is recognized and measured by allocating a portion
of the proceeds equal to the intrinsic value of that feature to additional
paid-in capital.  That amount is calculated at the commitment date as
the difference between conversion price and the fair value of the common stock
or other securities into which the security is convertible, multiplied by the
number of shares into which the security is convertible (intrinsic
value).




The
beneficial conversion feature amounted to $772,500 and is recorded as a debt
discount and is amortizing over the term of the June 2007 Notes.  The
amortization is being recorded as interest expense and totaled $236,900 and $0
for the years ended December 31, 2008 and 2007, respectively.




In two
separate closings, on April 18, 2008 and June 30, 2008, the Company sold
unsecured convertible original issue discount notes due June 8, 2010 in the
aggregate principal amount of $4,117,647 (the “2008 Notes”) and detachable
warrants (the “2008 Warrants”) to purchase an aggregate of 3,997,723 shares of
the Company’s common stock, in a private placement transaction for an aggregate
purchase price of $3,500,000.  The 2008 Notes and 2008 Warrants were
outstanding until their conversion into stock of the Company on December 12,
2008. The 2008 Notes were discounted 15% from their respective principal
amounts, and will bear interest at a rate of 15% per annum beginning one year
from the date of issuance, payable on any conversion date or the maturity date
of the 2008 Notes in cash or shares of the Company’s common stock, at the
investor’s option.  The 2008 Notes had a maturity date on June 8, 2010
and were convertible into shares of our common stock, at a conversion price of
$2.06 per share, subject to full-ratchet anti-dilution
protection.  The Company has recorded $617,648 as a debt discount on
the 2008 Notes and is amortizing the debt discount over the term of the 2008
Notes.  The amortization is being recorded as interest expense and
totaled $163,207 for the year ended December 31, 2008.




The 2008
warrants were exercisable after 181 days from issuance until April 18, 2013 at
an exercise price of $1.75 per share.  Utilizing the Black-Scholes
option-pricing model and the following assumptions: estimated volatility of
64.9%, a contractual life of five years, a zero dividend rate, 3.34% risk free
interest rate, and the fair value of common stock of $1.75 per share at date of
grant, the Company determined the initial allocated fair value of the warrants
to be $276,858.  The Company has recorded $276,858 as a debt discount
and is amortizing the debt discount over the term of the 2008
Notes.  The amortization is being recorded as interest expense and
totaled $70,973 for the year ended December 31, 2008.  As part of the
issuance on April 18, 2008 and June 30, 2008, the Company paid legal and due
diligence fees of $101,300.  These fees are being amortized to expense
over the term of the 2008 Notes and amounted to $27,003 for the year ended
December 31, 2008.


F–14


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




The 2008
Warrants provided for a contingent cash settlement feature, as such, the initial
allocated fair value and subsequent re-measurements were classified as Warrant
Liability in the Company’s consolidated financial statements.  See
Note 11.




Interest
expense, including amortization of debt discount, totaled $2,465,545 and
$1,276,568 for the years ended December 31, 2008 and 2007,
respectively.  In December 2008, the Company issued 7,065,293 in
Series A Convertible Preferred Stock.  Of the total shares issued,
5,625,000 shares were issued for net cash proceeds of $21,022,438 with the
remaining shares issued in satisfaction of certain convertible notes and related
detachable warrants.  The Company utilized proceeds of $6,548,375 from
the issuance of the preferred stock to repay the remaining convertible notes and
reacquire related detachable warrants.  At December 31, 2008, all
convertible notes have been fully paid.  See Note 12.




7.
            Commitments
      and Contingencies




The
Company leases office space under non-cancelable operating leases with
expiration dates through 2011.  The future minimum rental payments
under these leases at December 31, 2008  are as follows:




Future MinimumYear
      Ending December 31:
                  
                  Lease Payments2009
                  
                  $
                  340,1162010
                  
                  
                  180,3882011
                  
                  
                  94,248$
                  614,752




Rent
expense totaled $363,122 and $244,452 for the years ended December 31, 2008 and
2007, respectively.




8.
            Stockholders’
      Equity




On
September 14, 2006, the Company increased its authorized capital stock from
75,000,000 shares of common stock, par value $0.001, to 300,000,000 shares of
common stock, par value $0.001, and 10,000,000 shares of preferred stock, par
value $0.001.  On December 11, 2008, pursuant to the approval of the
Company’s Board of Directors and holders of a majority of outstanding shares of
the Company’s capital stock, the Company increased its authorized shares of
common stock, par value $0.001, to 400,000,000.




In
December 2008, the Company exchanged certain equity classified warrants issued
in conjunction with 6% convertible notes for 236,532 shares of Company common
stock and $134,188 in cash.  As the warrants were classified in
equity, the net effect of these transactions was a reduction in additional
paid-in capital of $134,188.




Series
A Convertible Preferred Stock and Warrants




During
2008, the Company’s Board of Directors authorized 10,000,000 shares of Series A
Convertible Preferred Stock (“preferred stock”) with a par value of $.001 per
share.  On two separate closings in December 2008, the Company issued
to certain investors 5,625,000 shares of preferred stock along with warrants to
purchase 45,000,000 shares of the Company’s common stock in exchange for
$22,500,000.


F–15


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




The
Company issued an additional 1,440,293 shares of preferred stock with warrants
to purchase 11,522,344 shares of the Company’s common stock in exchange for
certain convertible notes and related detachable warrants.  The
preferred stock and warrants were issued as combined units valued at $4 per unit
with each unit consisting of 1 share of preferred stock with 1 warrant to
purchase 8 shares of common stock for $.20 per share.




Utilizing
the Black-Scholes option-pricing model and the following assumptions: estimated
volatility of 78.12%, a contractual life of five years, a zero dividend rate,
1.93% risk free interest rate, and the fair value of common stock on the grant
dates of $.20 on December 3, 2008 and $.16 on December 12, 2008, the Company
determined the fair value of the warrants to be $5,568,761.  The
Company has determined that the warrants meet the requirements for equity
classification contained within EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.  As such, the fair value of the warrants has been
recorded in additional paid-in capital and will not be revalued on each
reporting date.




The
Company incurred $1,477,562 in stock issuance costs related to the
transactions.  The stock issuance costs have been recorded as
reduction of the net proceeds from the sale.  The Company also issued
warrants to a placement agent as partial compensation for services related to
the issuance of the preferred stock units.  The warrants are for the
purchase of 6,665,343 shares of the Company’s common stock and are exercisable
for a period of 5 years at an exercise price of $.20 share.  Utilizing
the Black-Scholes option-pricing model and the following assumptions: estimated
volatility of 78.12%, a contractual life of five years, a zero dividend rate,
1.93% risk free interest rate, and the fair value of common stock on the grant
date of $.16 on December 12, 2008, the Company determined the fair value of the
warrants to be $632,391.  The Company has determined that the warrants
meet the requirements for equity classification contained within EITF
00-19.  However, the issuance of these warrants had no net impact on
the Company’s consolidated financial statements as the direct stock issuance
expenses deducted from issuance proceeds included in additional paid-in capital
are offset by the fair value of the equity classified warrants
issued.




Based on
the fair market value of the Company’s stock on December 3, 2008, the preferred
stock issued on that date contained a conversion feature that was
in-the-money.  Per EITF 98-5, a beneficial conversion feature allows
the securities to be convertible into common stock at the lower of a conversion
rate fixed at the commitment date or a fixed discount to the market price of the
common stock at the date of conversion.  The beneficial conversion
feature is recognized and measured by allocating a portion of the proceeds equal
to the intrinsic value of that feature to additional paid-in
capital.  That amount is calculated at the commitment date as the
difference between conversion price and the fair value of the common stock or
other securities into which the security is convertible, multiplied by the
number of shares into which the security is convertible (intrinsic
value).




The
beneficial conversion feature amounted to $1,007,250.  Because the
Company’s preferred stock is not mandatorily redeemable and may be converted to
common stock at any time, this beneficial conversion feature would normally be
reflected as a dividend to the preferred stockholders.  However,
because the Company has an accumulated deficit, such an adjustment would
necessarily reduce additional paid-in capital thus having no impact on the
Company’s consolidated financial statements.




Each
share of preferred stock is convertible into 20 shares of common stock, subject
to certain anti-dilution and other adjustments as set forth in the certificate
of designation of the preferred stock.  So long as 2,434,657 shares of
Series A preferred stock remain outstanding, holders of Series A preferred stock
shall be entitled to elect four directors to the Company’s board of
directors.  Holders of Series A preferred stock also shall have voting
rights and shall be entitled to vote, on an as converted basis as set forth in
the certificate of designation, together with the holders of common stock as a
single class with respect to any matter upon which holders of common stock have
the right to vote.


F–16


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




The
preferred stock will have a liquidation preference of $4.00 per share and shall
be entitled to receive dividends, prior and in preference to any declaration or
payment of any dividend on the common stock, at the rate of $0.32 per share per
annum, when and if any such dividends are declared by the board of directors of
the Company.  Any declared and unpaid dividends are not
cumulative.  So long as 2,434,657 shares of Series A preferred stock
remain outstanding, the Company will be required to obtain the consent of the
holders of at least two-thirds of the outstanding shares of Series A preferred
stock prior to taking certain actions.




9.
            Stock
      Options and Warrants




In 2004,
the Company’s Board of Directors adopted a 2004 Stock Plan (the “2004
Plan”).




The 2004
Plan authorized the Board of Directors to grant incentive stock options and
nonstatutory stock options to employees, directors, and consultants for up to
2,000,000 shares of common stock. Under the Plan, incentive stock options and
nonqualified stock options are to be granted at a price that is no less than
100% of the fair value of the stock at the date of grant. Options will be vested
over a period according to the Option Agreement, and are exercisable for a
maximum period of ten years after date of grant. Options granted to stockholders
who own more than 10% of the outstanding stock of the Company at the time of
grant must be issued at an exercise price no less than 110% of the fair value of
the stock on the date of grant.




In May
2006, the Company increased the shares reserved for issuance under the 2004 Plan
from 2,000,000 to 4,588,281. Upon completion of the Mergers, the Company
decreased the shares reserved under the 2004 Plan from 4,588,281 to 804,188 and
froze the 2004 Plan resulting in no additional options being available for grant
under the 2004 Plan.




In 2006,
the Company’s Board of Directors adopted a 2006 Stock Plan (the “2006
Plan”).




The 2006
Plan authorized the Board of Directors to grant incentive stock options and
nonstatutory stock options to employees, directors, and consultants for up to
2,000,000 shares of common stock. In October 2006, the Board of Directors
approved an additional issuance of 2,000,000 shares. Under the Plan, incentive
stock options and nonqualified stock options are to be granted at a price that
is no less than 100% of the fair value of the stock at the date of grant.
Options will be vested over a period according to the Option Agreement, and are
exercisable for a maximum period of ten years after date of grant. Options
granted to stockholders who own more than 10% of the outstanding stock of the
Company at the time of grant must be issued at an exercise price no less than
110% of the fair value of the stock on the date of grant. In March 2008, the
Board of Directors froze the 2006 Plan resulting in no additional options being
available for grant under the 2006 Plan.


F–17




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




On
October 24, 2007, the Company board of directors approved the Non-Qualified
Stock Option Plan (the “Non-Qualified Plan”). The purposes of the Non-Qualified
Plan are to attract and retain the best available personnel, to provide
additional incentives to employees, directors and consultants and to promote the
success of our business. The Non-Qualified Plan initially provided for a maximum
aggregate of 3,600,000 shares of our common stock that may be issued upon the
exercise of options granted pursuant to the Non-Qualified Plan. On November 1,
2007, the Company board of directors adopted an amendment to the Non-Qualified
Plan to increase the total number of shares of our common stock that may be
issued pursuant to the Non-Qualified Plan from 3,600,000 shares to 4,000,000
shares.  On December 18, 2007, the Company board of directors adopted
a further amendment to the Non-Qualified Plan to increase the total number of
shares of our common stock that may be issued pursuant to the Non-Qualified Plan
from 4,000,000 shares to 5,500,000 shares. On February 5, 2008, the Company’s
board of directors adopted an additional amendment to the Non-Qualified Plan to
increase the total plan shares that may be issued from 5,500,000 shares to
10,500,000 shares. On June 4, 2008, the Company’s board of directors further
increased the number of shares reserved under the 2007 Plan to
16,500,000.  On December 2, 2008, the board of directors increased the
number of shares reserved under the 2007 Plan to 69,141,668.  The
Company’s board of directors (or any committee composed of members of the
Company board of directors appointed by it to administer the Non-Qualified
Plan), has the authority to administer and interpret the Non-Qualified Plan. The
administrator has the authority to, among other things, (i) select the
employees, consultants and directors to whom options may be granted, (ii) grant
options, (iii) determine the number of shares underlying option grants, (iv)
approve forms of option agreements for use under the Non-Qualified Plan, (v)
determine the terms and conditions of the options and (vi) subject to certain
exceptions, amend the terms of any outstanding option granted under the
Non-Qualified Plan.  The Non-Qualified Plan authorizes grants of
nonqualified stock options to eligible employees, directors and
consultants.  The exercise price for an Option shall be determined by
the administrator.  The term of each option under the Non-Qualified
Plan shall be no more than ten years from the date of grant.  The
Non-Qualified Plan became effective upon its adoption by our board of directors,
and will continue in effect for a term of ten years, unless sooner
terminated.  The Company board of directors may at any time amend,
suspend or terminate the Non-Qualified Plan.  The Non-Qualified Plan
also contains provisions governing: (i) the treatment of options under the
Non-Qualified Plan upon the occurrence of certain corporate transactions
(including merger, consolidation, sale of all or substantially all the assets of
our company, or complete liquidation or dissolution of our company) and changes
in control of our company, (ii) transferability of options and (iii) tax
withholding upon the exercise or vesting of an option.




On March
31, 2008, the Board froze the 2006 Plan and adopted a new plan, the GoFish
Corporation 2008 Stock Incentive Plan (as amended, the “2008
Plan”).  The 2008 Plan is intended to replace the frozen 2006 Plan and
permits options and other equity compensation to be awarded to most California
employees.  As originally adopted, the 2008 Plan provided for the
issuance of up to 2,400,000 shares of the Company’s common stock pursuant to
awards granted thereunder, up to 2,200,000 of which may be issued pursuant to
incentive stock options granted thereunder.  However, no awards (as
defined in the 2008 Plan) were issued under the 2008 Plan.




On June
4, 2008, the Board adopted an amendment to the 2008 Plan to (i) decrease the
maximum aggregate number of shares of Common Stock that may be issued pursuant
to awards granted under the plan from 2,400,000 shares to 1,500,000 shares and
(ii) decrease the maximum aggregate number of shares the Company’s common stock
that may be issued pursuant to incentive stock options granted under the plan
from 2,200,000 shares to 1,500,000 shares.  On June 4, 2008, the Board
also granted initial awards under the 2008 Plan, which were granted to certain
non-officer employees and consultants of the Company.  On December 2,
2008, the Board increased the number of shares reserved under the Plan to a
maximum of 19,224,774.  The Board intends to solicit stockholder
approval for the 2008 Plan prior to March 31, 2009.  The 2008 Plan is
administered, with respect to grants to employees, directors, officers, and
consultants, by the plan administrator (the “Administrator”), defined as the
Board or one or more committees designated by the Board.  The 2008
Plan will initially be administered by the Board.  The Board froze the
2004 Plan on October 27, 2006 and the 2006 Plan on March 31, 2008.  As
of December 31, 2008, there were 297,737 shares under the 2004 Plan and
3,073,229 shares under the 2006 Plan that were unavailable for further
issuance.


F–18




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




A summary
of stock option transactions is as follows:




Options
                                                available for
                                                grant
                                              
                                              
                                              Number of
                                                options
                                              
                                              
                                              Weighted
                                                Average
                                                Exercise
                                                priceBalances
      at January 1, 2007
                                              
                                              
                                              1,176,000
                                              
                                              
                                              
                                              3,610,865
                                              
                                              
                                              $
                                              1.38Additional
      shares reserved
                                              
                                              
                                              5,500,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Options
      granted
                                              
                                              
                                              (6,476,400
                                              )
                                              
                                              
                                              6,476,400
                                              
                                              
                                              $
                                              1.40Options
      exercised
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (70,511
                                              )
                                              
                                              $
                                              0.17Options
      cancelled
                                              
                                              
                                              2,821,984
                                              
                                              
                                              
                                              (2,821,984
                                              )
                                              
                                              $
                                              2.68Balances
      at December 31, 2007
                                              
                                              
                                              3,021,584
                                              
                                              
                                              
                                              7,194,770
                                              
                                              
                                              $
                                              0.91Additional
      shares reserved
                                              
                                              
                                              82,866,442
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Shares
      frozen under the 2004 and 2006 Plans
                                              
                                              
                                              (3,370,966
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Options
      granted
                                              
                                              
                                              (75,606,727
                                              )
                                              
                                              
                                              75,606,727
                                              
                                              
                                              $
                                              0.39Options
      exercised
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Options
      cancelled
                                              
                                              
                                              2,754,001
                                              
                                              
                                              
                                              (2,754,001
                                              )
                                              
                                              $
                                              1.30Balances
      at December 31, 2008
                                              
                                              
                                              9,664,334
                                              
                                              
                                              
                                              80,047,496
                                              
                                              
                                              $
                                              0.41


F–19




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




The
following table summarizes information concerning outstanding options as of
December 31, 2008:




Options
      Outstanding
                                  
                                  Options
      ExercisableExercise
                                    price
                                  
                                  Number
      of
                                    Options
                                  
                                  
                                  Weighted
                                    Average
                                    Remaining
                                    Contractual
                                    Life
      (in
                                    Years)
                                  
                                  
                                  Aggregate
                                    Intrinsic
                                    Value
                                  
                                  Number
      of Options
                                  
                                  
                                  Weighted
                                    Average
                                    Remaining
                                    Contractual
                                    Life
      (inYears)
                                  
                                  
                                  Aggregate
                                    Intrinsic
                                    Value$
                                  0.06
                                  
                                  
                                  364,300
                                  
                                  
                                  
                                  5.43
                                  
                                  
                                  
                                  
                                  
                                  358,376
                                  
                                  
                                  
                                  5.41$
                                  0.19
                                  
                                  
                                  234,765
                                  
                                  
                                  
                                  9.89
                                  
                                  
                                  
                                  
                                  
                                  4,765
                                  
                                  
                                  
                                  9.89$
                                  0.20
                                  
                                  
                                  48,628,342
                                  
                                  
                                  
                                  9.92
                                  
                                  
                                  
                                  
                                  
                                  4,744,094
                                  
                                  
                                  
                                  9.92$
                                  0.23
                                  
                                  
                                  5,070,000
                                  
                                  
                                  
                                  9.29
                                  
                                  
                                  
                                  
                                  
                                  1,542,917
                                  
                                  
                                  
                                  9.18$
                                  0.24
                                  
                                  
                                  82,000
                                  
                                  
                                  
                                  9.42
                                  
                                  
                                  
                                  
                                  
                                  15,750
                                  
                                  
                                  
                                  9.42$
                                  0.25
                                  
                                  
                                  105,000
                                  
                                  
                                  
                                  9.58
                                  
                                  
                                  
                                  
                                  
                                  25,000
                                  
                                  
                                  
                                  9.58$
                                  0.27
                                  
                                  
                                  400,000
                                  
                                  
                                  
                                  8.83
                                  
                                  
                                  
                                  
                                  
                                  155,556
                                  
                                  
                                  
                                  8.83$
                                  0.29
                                  
                                  
                                  400,000
                                  
                                  
                                  
                                  9.24
                                  
                                  
                                  
                                  
                                  
                                  83,951
                                  
                                  
                                  
                                  9.24$
                                  0.35
                                  
                                  
                                  4,840,000
                                  
                                  
                                  
                                  9.08
                                  
                                  
                                  
                                  
                                  
                                  2,728,611
                                  
                                  
                                  
                                  9.08$
                                  0.37
                                  
                                  
                                  1,820,358
                                  
                                  
                                  
                                  8.79
                                  
                                  
                                  
                                  
                                  
                                  1,072,387
                                  
                                  
                                  
                                  8.80$
                                  0.42
                                  
                                  
                                  130,000
                                  
                                  
                                  
                                  9.02
                                  
                                  
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —$
                                  0.60
                                  
                                  
                                  2,998,324
                                  
                                  
                                  
                                  9.92
                                  
                                  
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —$
                                  0.80
                                  
                                  
                                  5,498,324
                                  
                                  
                                  
                                  9.70
                                  
                                  
                                  
                                  
                                  
                                  416,667
                                  
                                  
                                  
                                  9.43$
                                  1.00
                                  
                                  
                                  2,998,324
                                  
                                  
                                  
                                  9.92
                                  
                                  
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —$
                                  1.20
                                  
                                  
                                  2,998,324
                                  
                                  
                                  
                                  9.92
                                  
                                  
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —$
                                  1.40
                                  
                                  
                                  2,998,324
                                  
                                  
                                  
                                  9.92
                                  
                                  
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —$
                                  1.50
                                  
                                  
                                  116,840
                                  
                                  
                                  
                                  7.81
                                  
                                  
                                  
                                  
                                  
                                  88,200
                                  
                                  
                                  
                                  7.81$
                                  3.08
                                  
                                  
                                  50,000
                                  
                                  
                                  
                                  7.96
                                  
                                  
                                  
                                  
                                  
                                  29,167
                                  
                                  
                                  
                                  7.96$
                                  3.65
                                  
                                  
                                  64,271
                                  
                                  
                                  
                                  7.87
                                  
                                  
                                  
                                  
                                  
                                  64,271
                                  
                                  
                                  
                                  7.87$
                                  3.78
                                  
                                  
                                  15,000
                                  
                                  
                                  
                                  8.38
                                  
                                  
                                  
                                  
                                  
                                  5,938
                                  
                                  
                                  
                                  8.38$
                                  3.80
                                  
                                  
                                  65,000
                                  
                                  
                                  
                                  8.30
                                  
                                  
                                  
                                  
                                  
                                  27,083
                                  
                                  
                                  
                                  8.30$
                                  5.79
                                  
                                  
                                  170,000
                                  
                                  
                                  
                                  8.08
                                  
                                  
                                  
                                  
                                  
                                  81,042
                                  
                                  
                                  
                                  8.0880,047,496
                                  
                                  
                                  
                                  9.75
                                  
                                  $
                                  1,037,898
                                  
                                  
                                  11,443,775
                                  
                                  
                                  
                                  9.29
                                  
                                  $
                                  152,365




Included
in cost of revenues and expenses is $2,723,377 and $1,172,506 of stock-based
compensation for the years ended December 31, 2008 and 2007,
respectively.  At December 31, 2008, this amount includes $36,820 of
stock-based compensation related to non-employees, $2,595,755 related to
employees, $66,000 related to restricted stock and $24,802 related to
warrants.  At December 31, 2007, this amount includes $86,216 of
stock-based compensation related to non-employees, $944,623 related to employees
and $141,667 related to the warrants.






F–20




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007








December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007Cost
      of revenue
                      
                      $
                      84,106
                      
                      
                      $
                      —Sales
      and marketing
                      
                      
                      700,340
                      
                      
                      
                      461,526Product
      development
                      
                      
                      18,501
                      
                      
                      
                      213,053General
      and administrative
                      
                      
                      1,920,430
                      
                      
                      
                      497,927Total
      share-based compensation
                      
                      $
                      2,723,377
                      
                      
                      $
                      1,172,506




Share-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the service period,
generally the vesting period of the equity grant.




The fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes valuation model with the following assumptions (weighted-average)
at December 31, 2008 and 2007:




December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007Risk
      free interest rate
                      
                      
                      2.16
                      %
                      
                      
                      4.08
                      %Expected
      lives
                      
                      5.91
      Years
                      
                      
                      5.95
      YearsExpected
      volatility
                      
                      
                      75.84
                      %
                      
                      
                      68.33
                      %Dividend
      yields
                      
                      
                      0
                      %
                      
                      
                      0
                      %




The
weighted-average grant date fair value of the options granted during the years
ended December 31, 2008 and 2007 were $0.14 and $0.81,
respectively.




On
December 2, 2008, the Company granted (under the Non-Qualified Plan) certain
employees options to purchase 14,991,620 shares of Company common
stock.  These options will only vest with a change in control of the
Company, as defined in the option agreement.  As the condition for
vesting is not probable, the Company has not recognized any compensation expense
related to these options at December 31, 2008.  At December 31, 2008,
all of these options remain outstanding.




At
December 31, 2008, there was $7,365,758 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
plans.  This cost is expected to be recognized over the weighted
average period of 2.79 years.




During
2008 and 2007, the Company accelerated vesting for certain employees who
terminated their employment and modified the terms of other
options.  As a result, of these modifications the Company recognized
additional compensation expense of $202,865 and $153,900 for the years ended
December 31, 2008 and 2007, repectively.




The
Company did not realize any tax benefits from tax deductions of share-based
payment arrangements during the years ended December 31, 2008 and
2007.


F–21




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




Stock-based
compensation expense related to stock options granted to non-employees is
recognized as earned.  In accordance with EITF 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, the Company re-values the
non-employee stock-based compensation, at each reporting date, using the
Black-Scholes pricing model.  As a result, stock-based compensation
expense will fluctuate as the estimated fair market value of the Company’s
common stock fluctuates.  The Company recorded stock-based
compensation expense related to non-employees of $36,820 and $86,216 for the
years ended December 31, 2008 and 2007, respectively.




A summary
of outstanding Common Stock Warrants included those issued as non-employee
compensation as of December 31, 2008 is as follows:




Securities
      into which warrants are convertible and reference
                        
                        Shares
                        
                        
                        Exercise
                          Price
                        
                        Expiration
                          DateCommon
      Stock-Non-employee
      compensation
                        
                        
                        380,000
                        
                        
                        $
                        1.75
                        
                        February
      2013Common
      Stock-See note
      below
                        
                        
                        3,133,347
                        
                        
                        $
                        1.75
                        
                        October
      2011Common
      Stock-Series A preferred
      stock units.  See Note 7.
                        
                        
                        56,522,344
                        
                        
                        $
                        0.20
                        
                        December
      2013Common
      Stock-Non-employee
      compensation.  See Note 7.
                        
                        
                        6,665,343
                        
                        
                        $
                        0.20
                        
                        December
      2013Common
      Stock-Non-employee
      compensation
                        
                        
                        50,000
                        
                        
                        $
                        1.75
                        
                        November
      2013Common
      Stock-See note
      below
                        
                        
                        166,667
                        
                        
                        $
                        3.00
                        
                        January
      2012Total
                        
                        
                        66,917,701




In
October 2006, the Company assumed warrants exercisable into 4,133,333 shares of
Common Stock.  The warrants are immediately exercisable into shares of
Common Stock at a per share price of $1.75 and expire five years from the date
of issuance if unexercised and are callable by the Company under certain
circumstances. 2,000,000 of the Investor Warrants were exercised for the
purchase of 1,000,000 shares of the Company’s Common Stock in January
2007.




In
January 2007, in conjunction with a Strategic Alliance Agreement, the Company
issued warrants to purchase 500,000 shares of its common stock at an exercise
price of $3.00 per share to a company.  The warrants are exercisable
for a period of five years.  Utilizing the Black-Scholes valuation
model and the following assumptions: estimated volatility of 62%, a contractual
life of two and one-half -years, a zero dividend rate, 4.50% risk free interest
rate, and the fair value of the common stock of $3.70 per share, the Company
determined the fair value of the warrant to be $850,000.  In August
2007, the Strategic Alliance Agreement was modified and the number of warrants
was reduced from 500,000 to 166,667.  Utilizing the Black-Scholes
valuation model and the following assumptions: estimated volatility of 94%, a
contractual life of two and one-half -years, a zero dividend rate, 4.76% risk
free interest rate, and the fair value of the common stock of $0.34 per share at
date of grant, the Company determined the fair value of the warrant to be
$7,484.  Because this amount is not in excess of amounts previously
expensed, no addition stock-based compensation will be recognized.




F–22


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007


10.
              Income
      Taxes
  The
provision for income taxes consists of the following for the years ended
December 31, 2008 and 2007:
  December
      31,
                            
                            
                            December
      31,2008
                            
                            
                            2007Currently
      payable (refundable):Federal
                            
                            $
                            —
                            
                            
                            $
                            —State
                            
                            
                            —
                            
                            
                            
                            —Total
      current
                            
                            
                            —
                            
                            
                            
                            —Deferred:Federal
                            
                            
                            —
                            
                            
                            
                            —State
                            
                            
                            —
                            
                            
                            
                            —Total
      deferred
                            
                            
                            —
                            
                            
                            
                            —Provision
      for income taxes
                            
                            $
                            —
                            
                            
                            $
                            —


A
reconciliation of the provision for income taxes with the expected provision for
income taxes computed by applying the federal statutory income tax rate (34%) to
the net loss before provision for income taxes for the years ended December 31,
2008 and 2007 is as follows:
   December
      31,
                              
                              
                              December
      31,2008
                              
                              
                              2007Provision
      for income taxes at federal statutory rate
                              
                              $
                              (5,769,795
                              )
                              
                              $
                              (5,642,436
                              )Federal
      research tax credits
                              
                              
                              —
                              
                              
                              
                              146,576Expenses
      not deductible
                              
                              
                              150,665
                              
                              
                              
                              259,337Provision
      to return reconciliation
                              
                              
                              (234,301
                              )
                              
                              
                              (33,014
                              )Change
      in federal valuation allowance
                              
                              
                              5,853,431
                              
                              
                              
                              5,269,537Provision
      for income taxes
                              
                              $
                              —
                              
                              
                              $
                              —


F–23




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




As of
December 31, 2008, the Company had approximately $36,074,000 of federal and
$36,072,000 state operating loss carryforwards potentially available to offset
future taxable income.  These net operating loss carryforwards are
expected to expire as follows:




Year Ended:
                            
                            Federal
                            
                            
                            State2013
                            
                            $
                            —
                            
                            
                            $
                            21,0002014
                            
                            
                            —
                            
                            
                            
                            357,0002015
                            
                            
                            —
                            
                            
                            
                            1,804,0002016
                            
                            
                            —
                            
                            
                            
                            4,918,0002017
                            
                            
                            —
                            
                            
                            
                            15,014,0002018
                            
                            
                            —
                            
                            
                            
                            13,958,0002023
                            
                            
                            21,000
                            
                            
                            
                            —2024
                            
                            
                            366,000
                            
                            
                            
                            —2025
                            
                            
                            1,793,000
                            
                            
                            
                            —2026
                            
                            
                            4,920,000
                            
                            
                            
                            —2027
                            
                            
                            15,016,000
                            
                            
                            
                            —2028
                            
                            
                            13,958,000
                            
                            
                            
                            —$
                            36,074,000
                            
                            
                            $
                            36,072,000




The Tax
Reform Act of 1986 (the “Act”) provides for a limitation on the annual use of
net operating loss carryforwards following certain ownership changes (as defined
in the Act) that could limit the Company’s ability to utilize these
carryforwards.  Prior equity financings may significantly limit the
Company’s ability to utilize the net operating loss carryforwards.




The
components of the deferred tax assets as of December 31, 2008 and 2007 are as
follows:




December
      31,
                        
                        
                        December
      31,2008
                        
                        
                        2007Deferred
      tax assets:Net
      operating losses
                        
                        $
                        14,342,608
                        
                        
                        $
                        8,508,905Depreciation
      and amortization
                        
                        
                        70,424
                        
                        
                        
                        34,488Stock-based
      compensation
                        
                        
                        1,205,972
                        
                        
                        
                        176,900Debt
      discount
                        
                        
                        —
                        
                        
                        
                        352,290Reserves
      and accruals
                        
                        
                        146,597
                        
                        
                        
                        52,561Deferred
      revenue
                        
                        
                        45,513
                        
                        
                        
                        —Total
      deferred tax asset
                        
                        
                        15,811,114
                        
                        
                        
                        9,125,144Valuation
      allowance
                        
                        
                        (15,811,114
                        )
                        
                        
                        (9,125,144
                        )Net
      deferred tax assets
                        
                        $
                        —
                        
                        
                        $
                        —




Based on
the available objective evidence, management believes it is more likely than not
that the net deferred tax assets will not be fully realizable. Accordingly, the
Company has provided a full valuation allowance against its net deferred tax
assets.


F–24




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN48), which is applicable for
fiscal years beginning after December 15, 2006. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109,Accounting for Income
Taxes.  FIN 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position reported or expected to be reported on a tax return. FIN 48
also provides guidance on the recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. We adopted
the provisions of FIN 48 on January 1, 2007. Upon adoption of
FIN 48 and through December 31, 2007, we determined that we had no
liability for uncertain income taxes as prescribed by FIN 48. Our policy is
to recognize potential accrued interest and penalties related to the liability
for uncertain tax benefits, if applicable, in income tax expense. Net operating
loss carryforwards since inception remain open to examination by taxing
authorities, and will continue to remain open for a period of time post
utilization. The adoption of FIN 48 did not have an impact on the Company's
results of operations and financial position.




There are
no prior or current year tax returns under audit by taxing authorities, and
management is not aware of any impending audits.




The Tax
Reform Act of 1986 limits the use of net operating loss and tax credit
carryforwards in certain situations where changes occur in the stock ownership
of a company.  In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.




11.
            Warrant
      Liability




As
discussed in Note 6, in two separate closings, on April 18, 2008 and June 30,
2008, the Company sold the 2008 Notes and the 2008 Warrants.  The 2008
Warrants had a five-year term and were exercisable after 181 days from issuance
until April 18, 2013 at an exercise price of $1.75 per share. The 2008 Warrant
contained a net cash settlement feature, which was available to the warrant
holders at their option, in certain change of control circumstances. As a
result, under EITF 00-19, the warrants were required to be classified as a
liability at their current fair value estimated using the Black-Scholes
option-pricing model. Warrants that are classified as a liability are revalued
at each reporting date until the warrants are exercised or expire with changes
in the fair value reported as interest expense.  Accordingly, we
recorded a reduction in interest expense of $226,008 for the year ended December
31, 2008. The decrease represents the change in fair value of the warrant
liability from the date of issuance, April 18, 2008, through December 12, 2008,
the date the warrants were exchanged for Company common stock. See Note
6.  The aggregate fair value and the assumptions used for the
Black-Scholes option-pricing models as of December 12, 2008 were as
follows:




December
      12,2008Aggregate
      fair value
                    
                    $
                    97,437Expected
      volatility
                    
                    
                    78.12
                    %Weighted
      average remaining contractual term(years)
                    
                    
                    4.47Risk-free
      interest rate
                    
                    
                    1.93
                    %Expected
      dividend yield
                    
                    
                    0
                    %Common
      stock price
                    
                    $
                    0.16




12.
            Loss
      on Debt Extinguishment




In
December 2008, the Company repurchased all of its then outstanding convertible
debt and related detachable warrants.  The repurchase occurred with a
combination of cash payments totaling $6,548,316 and exchanges of convertible
debt and warrants for either new Series A preferred stock and warrants or common
stock.


F–25




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




The
Company recorded the transaction in accordance with APB No. 26, Early
Extinguishment Debt and recognized a loss on the extinguishment as
follows:




Fair Value ofSeries A
                            
                            
                            Fair ValuePreferred
                            
                            
                            of CommonNet Carrying
                            
                            
                            Cash
                            
                            
                            Stock Units
                            
                            
                            Stock
                            
                            
                            Loss on DebtDescription
                            
                            Amount
                            
                            
                            Payment
                            
                            
                            Issued
                            
                            
                            Issued
                            
                            
                            ExtinguishmentConversion
      of 6% convertible  notes into 410,887 preferred  stock
      units
                            
                            $
                            1,135,221
                            
                            
                            $
                            —
                            
                            
                            $
                            (1,643,549
                            )
                            
                            $
                            —
                            
                            
                            $
                            (508,328
                            )Conversion
      of 15% convertible  notes into 1,029,406
      preferred  stock units
                            
                            
                            3,457,321
                            
                            
                            
                            —
                            
                            
                            
                            (4,117,624
                            )
                            
                            
                            —
                            
                            
                            
                            (660,303
                            )Exchange
      of liability  classified warrants for  common
      stock
                            
                            
                            97,437
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (559,682
                            )
                            
                            
                            (462,245
                            )Repurchase
      of 6%  convertible notes
                            
                            
                            6,124,399
                            
                            
                            
                            (6,414,187
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (289,788
                            )Write-off
      of unamortized  issuance costs
                            
                            
                            (816,168
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (816,168
                            )$
                            9,998,210
                            
                            
                            $
                            (6,414,187
                            )
                            
                            $
                            (5,761,173
                            )
                            
                            $
                            (559,682
                            )
                            
                            $
                            (2,736,832
                            )




13.
            Related
      Party Transactions




The
following is the activity between the Company and a founder and stockholder
related to amounts due from this individual as of December 31, 2008 and
2007:




December
      31,
                
                
                December
      31,2008
                
                
                2007Beginning
      balance
                
                $
                —
                
                
                $
                17,216Amounts
      advanced
                
                
                —
                
                
                
                660Allowance
      for doubtful account
                
                
                —
                
                
                
                (17,876
                )Due
      from founder and stockholder
                
                $
                —
                
                
                $
                —




The
following is the activity between the Company and stockholders related to
non-interest bearing notes receivable as of December 31, 2008 and
2007:




December
      31,
                
                
                December
      31,2008
                
                
                2007Beginning
      balance
                
                $
                18,910
                
                
                $
                18,910Notes
      receivable originally issued
                
                
                —
                
                
                
                —Notes
      receivable cancelled upon the repurchase of Common Stock
                
                
                —
                
                
                
                —Notes
      receivable from stockholders
                
                $
                18,910
                
                
                $
                18,910




F–26


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




The
following is the activity between the Company and a stockholder related to
amounts due to this individual as of December 31, 2008 and 2007:




December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Beginning balance
                  
                  $
                  —
                  
                  
                  $
                  384,793Amounts received by the Company
                  
                  
                  610,000
                  
                  
                  
                  —Amounts repaid by the Company
                  
                  
                  (400,000
                  )
                  
                  
                  (384,793
                  )Amounts
      converted to convertible original issue discount notes
                  
                  
                  (210,000
                  )
                  
                  
                  —Due to stockholder
                  
                  $
                  —
                  
                  
                  $
                  —




14.
            Cash
      Flow Information




Cash paid
during the years ended December 31, 2008 and 2007 is as follows:




December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Interest
                  
                  $
                  629,843
                  
                  
                  $
                  309,000Income
      taxes
                  
                  $
                  —
                  
                  
                  $
                  —


F–27




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




Supplemental
disclosure of non-cash investing and financing activities for the years ended
December 31, 2008 and 2007 is as follows:




December
      31,
                            
                            
                            December
      31,2008
                            
                            
                            2007Conversion
      of Convertible Promissory Notes into common stock
                            
                            $
                            40,000
                            
                            
                            $
                            —Issuance
      of common stock for warrants
                            
                            $
                            559,899
                            
                            
                            $
                            —Issuance
      of Series A preferred stock units for the extinguishment of
      debt
                            
                            $
                            5,761,173
                            
                            
                            $
                            —Issuance
      of common stock to a publisher
                            
                            $
                            102,000
                            
                            
                            $
                            —Convertible
      notes issued upon conversion of amounts due to stockholder
                            
                            $
                            210,000
                            
                            
                            $
                            —Beneficial
      conversion feature associated with convertible notes
                            
                            $
                            772,500
                            
                            
                            $
                            —Decrease
      in warrant liability
                            
                            $
                            115,147
                            
                            
                            $
                            —Issuance
      of common stock for warrants
                            
                            $
                            236
                            
                            
                            $
                            —Initial
      recording of warrant liability
                            
                            $
                            213,175
                            
                            
                            $
                            —Issuance
      of warrants with convertible notes
                            
                            $
                            —
                            
                            
                            $
                            4,924,202Issuance
      of warrants to placement agents
                            
                            $
                            —
                            
                            
                            $
                            374,291Issuance
      of common stock for license agreement
                            
                            $
                            —
                            
                            
                            $
                            200,000Issuance
      of warrants to investors
                            
                            $
                            —
                            
                            
                            $
                            8,616




15.
            Acquisitions




In
February 2007, the Company announced that it had entered into a merger
agreement, pursuant to which Bolt, Inc., a/k/a Bolt Media, Inc., a Delaware
corporation (“Bolt”), pursuant to which Bolt would merge with and in to a
wholly-owned subsidiary of the Company.  In August 2007, the Company
terminated the Bolt merger.




During
the period from February 2007 to September 2007, the Company advanced Bolt
$1,020,338.  The Company only has a secured interest in Bolt’s trade
accounts receivables of $600,000.  As a result, the Company recorded
an allowance for doubtful accounts of $420,338.  In addition, the
Company incurred $850,010 of direct acquisition costs.  The total
related acquisition costs of $1,270,348 for the year ended December 31, 2007
have been expensed.




The
accounts receivable of $600,000 has been repaid.


F–28


Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007




16.
            Quarterly
      Financial Data (Unaudited)




December 31, 2008First
                        
                        
                        Second
                        
                        
                        Third
                        
                        
                        FourthQuarter
                        
                        
                        Quarter
                        
                        
                        Quarter
                        
                        
                        QuarterRevenues
                        
                        $
                        657,150
                        
                        
                        $
                        1,282,439
                        
                        
                        $
                        2,786,139
                        
                        
                        $
                        2,975,871Cost
      of revenues and expenses
                        
                        
                        4,272,216
                        
                        
                        
                        4,200,764
                        
                        
                        
                        5,147,610
                        
                        
                        
                        8,887,427Operating
      loss
                        
                        
                        (3,615,066
                        )
                        
                        
                        (2,918,325
                        )
                        
                        
                        (2,361,471
                        )
                        
                        
                        (5,911,556
                        )Other
      income (expense):Interest
      income
                        
                        
                        4,525
                        
                        
                        
                        5,659
                        
                        
                        
                        5,662
                        
                        
                        
                        7,392Miscellaneous
      income
                        
                        
                        100
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        278,640Interest
      expense
                        
                        
                        (568,957
                        )
                        
                        
                        (649,386
                        )
                        
                        
                        (893,227
                        )
                        
                        
                        (353,975
                        )Total
      other income (expense)
                        
                        
                        (564,332
                        )
                        
                        
                        (643,727
                        )
                        
                        
                        (887,565
                        )
                        
                        
                        (67,943
                        )Net
      loss before provision for income taxes
                        
                        
                        (4,179,398
                        )
                        
                        
                        (3,562,052
                        )
                        
                        
                        (3,249,036
                        )
                        
                        
                        (5,979,499
                        )Provision
      for income taxes
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Net
      loss
                        
                        $
                        (4,179,398
                        )
                        
                        $
                        (3,562,052
                        )
                        
                        $
                        (3,249,036
                        )
                        
                        $
                        (5,979,499
                        )Net
      loss per share – basic and diluted
                        
                        $
                        (0.17
                        )
                        
                        $
                        (0.14
                        )
                        
                        $
                        (0.13
                        )
                        
                        $
                        (0.23
                        )Shares
      used to computenet
      loss per share – basic and diluted
                        
                        
                        25,298,310
                        
                        
                        
                        25,483,475
                        
                        
                        
                        25,494,739
                        
                        
                        
                        26,266,004


F–29




Betawave
Corporation


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and 2007





December 31, 2007First
                      
                      
                      Second
                      
                      
                      Third
                      
                      
                      FourthQuarter
                      
                      
                      Quarter
                      
                      
                      Quarter
                      
                      
                      QuarterRevenues
                      
                      $
                      24,074
                      
                      
                      $
                      31,686
                      
                      
                      $
                      485,812
                      
                      
                      $
                      1,539,610Cost
      of revenues and expenses
                      
                      
                      3,526,008
                      
                      
                      
                      5,836,555
                      
                      
                      
                      3,719,304
                      
                      
                      
                      4,248,148Operating
      loss
                      
                      
                      (3,501,934
                      )
                      
                      
                      (5,804,869
                      )
                      
                      
                      (3,233,492
                      )
                      
                      
                      (2,708,538
                      )Other
      income (expense):Interest
      income
                      
                      
                      33,839
                      
                      
                      
                      21,292
                      
                      
                      
                      65,471
                      
                      
                      
                      26,405Miscellaneous
      income
                      
                      
                      954
                      
                      
                      
                      (417
                      )
                      
                      
                      —
                      
                      
                      
                      (1
                      )Interest
      expense
                      
                      
                      —
                      
                      
                      
                      (97,067
                      )
                      
                      
                      (612,501
                      )
                      
                      
                      (567,000
                      )Total
      other income (expense)
                      
                      
                      34,793
                      
                      
                      
                      (76,192
                      )
                      
                      
                      (547,030
                      )
                      
                      
                      (540,596
                      )Net
      loss before provision for income taxes
                      
                      
                      (3,467,141
                      )
                      
                      
                      (5,881,061
                      )
                      
                      
                      (3,780,522
                      )
                      
                      
                      (3,249,134
                      )Provision
      for income taxes
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Net
      loss
                      
                      $
                      (3,467,141
                      )
                      
                      $
                      (5,881,061
                      )
                      
                      $
                      (3,780,522
                      )
                      
                      $
                      (3,249,134
                      )Net
      loss per share - basic and diluted
                      
                      $
                      (0.15
                      )
                      
                      $
                      (0.24
                      )
                      
                      $
                      (0.16
                      )
                      
                      $
                      (0.13
                      )Shares
      used to compute net loss per share - basic and diluted
                      
                      
                      23,811,698
                      
                      
                      
                      24,129,424
                      
                      
                      
                      24,130,276
                      
                      
                      
                      24,346,947


F–30


17.
                Subsequent
      Event
 On March
27, 2009, the Company entered into a Loan and Security Agreement (the “Loan and
Security Agreement”) with Silicon Valley Bank that provides for a secured
revolving credit arrangement to provide advances in an aggregate principal
amount of up to $4 million on the terms and conditions set forth in the Loan and
Security Agreement. The Loan and Security Agreement consists of a $4 million
credit facility with a $500,000 sublimit for stand-by letters of credit,
$500,000 sublimit for cash management services and a $500,000 sublimit for
foreign exchange contracts. The borrowings are secured based upon a percentage
of certain eligible billed and unbilled accounts receivables. The Company may
borrow, repay and reborrow under the line of credit facility at any time. As of
March 27, 2009, the advances under the line of credit facility shall accrue
interest at a per annum rate equal to 3.0% above the greater of (i) Silicon
Valley Bank’s announced prime rate or (ii) 7.0%. This interest rate shall be
adjusted upwards at times when the Company’s liquidity ratio (as described in
the Loan and Security Agreement) equals less than 2.25 to 1.00. The Company is
required to pay a termination fee if the Loan and Security Agreement is
terminated prior to March 27, 2011 (the “Maturity Date”) in an amount equal to
the interest that would have accrued on an advances of an aggregate principal
amount of $1 million through the Maturity Date.
 
 The
Company’s line of credit is collateralized by substantially all of the Company’s
assets and requires the Company to comply with customary affirmative and
negative covenants principally relating to liens, indebtedness, investments,
distributions to shareholders, use and disposition of assets, the satisfaction
of a liquidity ratio test and minimum tangible net worth requirements. In
addition, the Loan and Security Agreement contains customary events of default.
Upon the occurrence of an uncured event of default, among other things, Silicon
Valley Bank may declare that all amounts owing under the credit arrangement are
due and payable and the applicable interest rate shall become 4% above the rate
that would otherwise apply. The line of credit and facility expire on the
Maturity Date. As of March 30, 2009, there is no amount outstanding under this
revolving credit arrangement.
 
 In
connection with the execution of the Loan and Security Agreement, the Company
issued a warrant to Silicon Valley Bank on March 27, 2009, which allows Silicon
Valley Bank to purchase up to 600,000 shares of the Company’s common stock at a
warrant price of $0.20 per share. This warrant expires on the fifth anniversary
of its issue date, subject to earlier expiration in accordance with its
terms.




F–31


EXHIBIT
INDEX


Exhibit No.
              
              Description
              
              Reference2.1
              
              Agreement
      and Plan of Merger and
                Reorganization,
      dated as of October 27, 2006,
                by
      and among the Registrant, GF Acquisition
                Corp.,
      GoFish Technologies, Inc., ITD
                Acquisition
      Corp. and Internet Television
                Distribution
      Inc.
              
              Incorporated
      by reference to Exhibit 2.1 to
                Registrant’s
      Current Report on Form 8-K
                dated
      October 27, 2006 filed with the
                Securities
      and Exchange Commission on
                October
      31, 2006 (File No. 333-131651)3.1
              
              Amended
      and Restated Articles of
                Incorporation
      of the Registrant filed with the
                Nevada
      Secretary of State on December 12,
                2008
              
              Incorporated
      by reference to Exhibit 3.1 to
                Registrant’s
      Current Report on Form 8-K
                dated
      December 12, 2008 filed with the
                Securities
      and Exchange Commission on
                December
      18, 2008 (File No. 333-131651)3.2
              
              Certificate
      of Amendment to the Amended and
                Restated
      Articles of Incorporation of the
                Registrant
      filed with the Nevada Secretary of
                State
      on January 20, 2009
              
              Incorporated
      by reference to Exhibit 3.1 to
                Registrant’s
      Current Report on Form 8-K
                dated
      January 16, 2009 filed with the
                Securities
      and Exchange Commission on
                January
      21, 2009 (File No. 333-131651)3.3
              
              Bylaws
      of the Registrant
              
              Incorporated
      by reference to Exhibit 3.2 to
                Registrant’s
      Registration Statement on Form
                SB-2
      filed with the Securities and Exchange
                Commission
      on February 7, 2006 (File No.
                333-131651)3.4
              
              First
      Amendment to Bylaws of the Registrant
              
              Incorporated
      by reference to Exhibit 3.1 to
                Registrant’s
      Current Report on Form 8-K
                dated
      December 3, 2008 filed with the
                Securities
      and Exchange Commission on
                December
      9, 2008 (File No. 333-131651)4.1
              
              Form
      of Warrant of the Registrant issued in
                private
      offering completed October 27, 2006
              
              Incorporated
      by reference to Exhibit 4.1 to
                Registrant’s
      Current Report on Form 8-K
                dated
      October 27, 2006 filed with the
                Securities
      and Exchange Commission on
                October
      31, 2006 (File No. 333-131651)4.2
              
              Purchase
      Agreement, dated as of June 7, 2007,
                by
      and among the Registrant and the investors
                identified
      on the signature pages thereto
              
              Incorporated
      by referenced to Exhibit 4.1 to
                Registrant’s
      Current Report on Form 8-K
                dated
      June 7, 2007 filed with the Securities
                and
      Exchange Commission on June 8, 2007
                (File
      No. 333-131651)4.3
              
              Registration
      Rights Agreement dated as of June
                7,
      2007, by and among the Registrant and the
                investors
      identified on the signature pages
                thereto
              
              Incorporated by referenced to Exhibit 4.2 to
                Registrant’s Current Report on Form 8-K
                dated June 7, 2007 filed with the Securities
                and Exchange Commission on June 8, 2007
                (File No.
      333-131651)4.4
              
              Form of
      the June 2007 Notes
              
              Incorporated by referenced to Exhibit 4.3 to
                Registrant’s Current Report on Form 8-K
                dated June 7, 2007 filed with the Securities
                and Exchange Commission on June 8, 2007
                (File No.
      333-131651)
  
  4.5
              
              Form of
      the June 2007 Warrants
              
              Incorporated by referenced to Exhibit 4.4
                to Registrant’s Current Report on Form 8-K
                dated June 7, 2007 filed with the Securities
                and Exchange Commission on June 8, 2007
                (File No.
      333-131651)4.6
              
              Subscription
      Agreement, dated as of April 18,
                2008,
      by and among the Registrant and the
                subscribers
      identified on the signature page
                thereto
              
              Incorporated
      by referenced to Exhibit 4.1
                to
      Registrant’s Quarterly Report on Form
                10-Q
      filed with the Securities and
                Exchange
      Commission on August 14,
                20084.7
              
              Accession
      Agreement, dated as of June 30,
                2008,
      by and among the Registrant and the
                subscribers
      identified on the signature page
                thereto
              
              Incorporated
      by referenced to Exhibit 4.2
                to
      Registrant’s Quarterly Report on Form
                10-Q
      filed with the Securities and
                Exchange
      Commission on August 14,
                20084.8
              
              Form
      of the 2008 Notes
              
              Incorporated
      by referenced to Exhibit 4.3
                to
      Registrant’s Quarterly Report on Form
                10-Q
      filed with the Securities and
                Exchange
      Commission on August 14,
                20084.9
              
              Form
      of the 2008 Warrants
              
              Incorporated
      by referenced to Exhibit 4.4
                to
      Registrant’s Quarterly Report on Form
                10-Q
      filed with the Securities and
                Exchange
      Commission on August 14,
                20084.10
              
              Certificate
      of Designation of Rights,
                Preferences,
      Privileges and Restrictions of
                Series
      A Preferred Stock of the Registrant
              
              Incorporated
      by reference to Exhibit 4.1
                to
      Registrant’s Current Report on Form
                8-K
      dated December 3, 2008 filed with
                the
      Securities and Exchange Commission
                on
      December 9, 2008 (File No. 333-
                131651)10.1
              
              Split
      Off Agreement, dated as of October 27,
                2006,
      by and among the Registrant, Dianxiang
                Wu,
      Jianhua Xue, GoFish Technologies, Inc.
                and
      GF Leaseco, Inc.
              
              Incorporated
      by reference to Exhibit 10.4 to
                Registrant’s
      Current Report on Form 8-K
                dated
      October 27, 2006 filed with the
                Securities
      and Exchange Commission on
                October
      31, 2006 (File No. 333-131651)10.2†
              
              Form of Indemnity Agreement by and between
                the
      Registrant and Outside Directors of the
                Registrant
              
              Incorporated by reference to Exhibit 10.6 to
                Registrant’s Current Report on Form 8-K
                dated October 27, 2006 filed with the
                Securities and Exchange Commission on
                October 31, 2006 (File No.
      333-131651)10.3†
              
              2006 Equity Incentive
      Plan
              
              Incorporated by reference to Exhibit 10.7 to
                Registrant’s Current Report on Form 8-K
                dated October 27, 2006 filed with the
                Securities and Exchange Commission on
                October 31, 2006 (File No.
      333-131651)
 10.4†
              
              Form of Incentive Stock Option Agreement by
                and between the
      Registrant and participants
                under the 2006 Equity Incentive
      Plan
              
              Incorporated by reference to Exhibit 10.8 to
                Registrant’s Current Report on Form 8-K
                dated October 27, 2006 filed with the
                Securities and Exchange Commission on
                October 31, 2006 (File No.
      333-131651)10.5†
              
              Form of Non-Qualified Stock Option
                Agreement by and between the
      Registrant and
                participants under the 2006 Equity Incentive
                Plan
              
              Incorporated by reference to Exhibit 10.9 to
                Registrant’s Current Report on Form 8-K
                dated October 27, 2006 filed with the
                Securities and Exchange Commission on
                October 31, 2006 (File No.
      333-131651)10.6†
              
              Employment
      Agreement dated as of February
                26,
      2007 by and between the Registrant and
                Tabreez
      Verjee
              
              Incorporated
      by reference to Exhibit
                10.1
      to Registrant’s Current Report on
                Form
      8-K dated February 26, 2007 filed
                with
      the Securities and Exchange
                Commission
      on March 2, 2007 (File No.
                333-131651)10.7†
              
              Employment Agreement dated as of October
                30, 2006 by and between the
      Registrant and
                Lennox L.
      Vernon
              
              Incorporated by reference to Exhibit 10.2 to
                Registrant’s Current Report on Form 8-K
                dated October 30, 2006 filed with the
                Securities and Exchange Commission on
                November 3, 2006 (File No.
      333-131651)10.8
              
              Separation
      Agreement and Mutual Release
                dated
      as of June 4, 2008, by and between the
                Registrant
      and Michael Downing
              
              Incorporated
      by reference to Exhibit 10.1 to
                Registrant’s
      Current Report on Form 8-K
                dated
      June 4, 2008 filed with the Securities
                and
      Exchange Commission on June 9, 2008
                (File
      No. 333-131651)10.9
              
              Independent
      Contractor Agreement dated as of
                June
      4, 2008, by and between the Registrant
                and
      Michael Downing
              
              Incorporated
      by reference to Exhibit 10.2 to
                Registrant’s
      Current Report on Form 8-K
                dated
      June 4, 2008 filed with the Securities
                and
      Exchange Commission on June 9, 2008
                (File
      No. 333-131651)10.10†
              
              2007
      Non-Qualified Stock Option Plan (as
                amended
      through February 5, 2008)
              
              Incorporated
      by reference to Exhibit 10.29 to
                Registrant’s
      Annual Report on Form 10-KSB
                for
      the fiscal year ended December 31, 2007
                filed
      with the Securities and Exchange
                Commission
      on March 31, 2008 (File No.
                333-131651)10.11*
              
              Advertising
      Representation Agreement, dated
                as
      of December 10, 2007, between the
                Registrant
      and MiniClip
              
              Incorporated
      by reference to Exhibit 10.30 to
                Registrant’s
      Annual Report on Form 10-KSB
                for
      the fiscal year ended December 31, 2007
                filed
      with the Securities and Exchange
                Commission
      on March 31, 2008 (File No.
                333-131651)
 
 10.12*
              
              Amendment
      to Advertising Representation
                Agreement,
      dated as of November 12, 2008,
                between
      the Registrant and MiniClip
              
              Filed
      herewith10.13
              
              Stock
      and Warrant Issuance Agreement,
                dated
      as of December 10, 2007, between MiniClip
                Limited
      and the Registrant
              
              Incorporated
      by reference to Exhibit 10.31 to
                Registrant’s
      Amendment to Annual Report on
                Form
      10-KSB/A for the fiscal year ended
                December
      31, 2007 filed with the Securities
                and
      Exchange Commission on April 1, 2008
                (File
      No. 333-131651)10.14
              
              Stock
      Issuance and Participation Rights
                Agreement,
      dated as of December 12, 2007,
                between
      MTV Networks, a division of Viacom
                International
      Inc. and the Registrant
              
              Incorporated
      by reference to Exhibit 10.31 to
                Registrant’s
      Amendment to Annual Report on
                Form
      10-KSB/A for the fiscal year ended
                December
      31, 2007 filed with the Securities
                and
      Exchange Commission on April 1, 2008
                (File
      No. 333-131651)10.15†
              
              Consulting
      Agreement, dated as of December
                18,
      2007, between the Registrant and James
                Moloshok
              
              Incorporated
      by reference to Exhibit 10.33 to
                Registrant’s
      Annual Report on Form 10-KSB
                for
      the fiscal year ended December 31, 2007
                filed
      with the Securities and Exchange
                Commission
      on March 31, 2008 (File No.
                333-131651)10.16†
              
              2008
      Stock Incentive Plan
              
              Incorporated
      by reference to Exhibit 10.4 to
                Registrant’s
      Current Report on Form 8-K filed
                with
      the Securities and Exchange Commission
                on
      June 9, 200810.17†
              
              Form
      of Option Agreement by and between the
                Registrant
      and the participants under the 2008
                Stock
      Incentive Plan
              
              Incorporated
      by reference to Exhibit 10.23 to
                Registrant’s
      Registration Statement on Form
                S-1
      filed with the Securities and Exchange
                Commission
      on February 13, 2009 (File No.
                333-157352)10.18†
              
              Employment
      Agreement dated as of June 5,
                2008,
      by and between the Registrant and Matt
                Freeman
              
              Incorporated
      by reference to Exhibit 10.3 to
                Registrant’s
      Current Report on Form 8-K filed
                with
      the Securities and Exchange Commission
                on
      June 9, 200810.19
              
              Securities
      Purchase Agreement, dated as of
                December
      3, 2008, by and among the
                Registrant
      and the investors listed on Schedules
                A-1,
      A-2 and A-3 thereto
              
              Incorporated
      by reference to Exhibit 10.1 to
                Registrant’s
      Current Report on Form 8-K
                dated
      December 3, 2008 filed with the
                Securities
      and Exchange Commission on
                December
      9, 2008 (File No. 333-131651)10.20
              
              Form
      of Warrant to Purchase Common Stock
                issued
      in private offering completed December 12, 2008
              
              Incorporated
      by reference to Exhibit 10.2 to
                Registrant’s
      Current Report on Form 8-K
                dated
      December 3, 2008 filed with the
                Securities
      and Exchange Commission on
                December
      9, 2008 (File No. 333-131651)10.21
              
              Investors’
      Rights Agreement, dated as of
                December
      3, 2008, by and among the
                Registrant
      and the investors listed on Schedule
                A
      thereto
              
              Incorporated
      by reference to Exhibit 10.3 to
                Registrant’s
      Current Report on Form 8-K
                dated
      December 3, 2008 filed with the
                Securities
      and Exchange Commission on
                December
      9, 2008 (File No. 333-131651)
  
  10.22
              
              Form
      of Lock-Up Agreement entered into by
                the
      Company pursuant to the Securities
                Purchase
      Agreement dated as of December 3,
                2008,
      by and among the Registrant and the
                investors
      listed on Schedule A thereto
              
              Incorporated
      by reference to Exhibit 10.28 to
                Registrant’s
      Registration Statement on Form
                S-1
      filed with the Securities and Exchange
                Commission
      on February 13, 2009 (File No.
                333-157352)10.23†
              
              Employment
      Agreement dated as of December
                3,
      2008, by and between the Registrant and
                Matt
      Freeman
              
              Incorporated
      by reference to Exhibit 10.29 to
                Registrant’s
      Registration Statement on Form
                S-1
      filed with the Securities and Exchange
                Commission
      on February 13, 2009 (File No.
                333-157352)10.24†
              
              Amended
      and Restated Employment
                Agreement
      dated as of December 3, 2008, by
                and
      between the Registrant and Tabreez Verjee
              
              Incorporated
      by reference to Exhibit 10.30 to
                Registrant’s
      Registration Statement on Form
                S-1
      filed with the Securities and Exchange
                Commission
      on February 13, 2009 (File No.
                333-157352)10.25†
              
              Amended
      and Restated Employment
                Agreement
      dated as of December 10, 2008, by
                and
      between the Registrant and Lennox L.
                Vernon
              
              Incorporated
      by reference to Exhibit 10.31 to
                Registrant’s
      Registration Statement on Form
                S-1
      filed with the Securities and Exchange
                Commission
      on February 13, 2009 (File No.
                333-157352)10.26†
              
              Employment
      Agreement dated as of December
                10,
      2008, by and between the Registrant and
                James
      Moloshok
              
              Incorporated
      by reference to Exhibit 10.32 to
                Registrant’s
      Registration Statement on Form
                S-1
      filed with the Securities and Exchange
                Commission
      on February 13, 2009 (File No.
                333-157352)21.1
              
              Subsidiaries
      of the Registrant
              
              Incorporated
      by reference to Exhibit 21.1 to
                Amendment
      No. 2 to Registrant’s Registration
                Statement
      on Form SB-2 filed with the
                Securities
      and Exchange Commission on
                August
      24, 2007 (File No. 333-142460)23.1
              
              Consent of Rowbotham and Company LLP
              
              Filed herewith24.1
              
              Power of Attorney
      (included on the signature
                page
      to this Annual Report on Form 10-K)
              
              Filed
      herewith31.1
              
              Certification
      of the Principal Executive Officer
                required
      by Rule 13a-14(a) or Rule 15d-14(a)
                under
      the Securities Exchange Act of 1934, as
                amended,
      as adopted pursuant to Section 302 of
                the
      Sarbanes-Oxley Act of 2002
              
              Filed
      herewith31.2
              
              Certification
      of the Principal Financial Officer
                required
      by Rule 13a-14(a) or Rule 15d-14(a)
                under
      the Securities Exchange Act of 1934, as
                amended,
      as adopted pursuant to Section 302 of
                the
      Sarbanes-Oxley Act of 2002
              
              Filed
      herewith32.1
              
              Certification
      of the Principal Executive Officer
                required
      by Rule 13a-14(b) and Section 1350 of
                Chapter
      63 of Title 18 of the United States
                Code,
      as adopted pursuant to Section 906 of the
                Sarbanes-Oxley
      Act of 2002
              
              Filed
      herewith32.2
              
              Certification
      of the Principal Financial Officer
                required
      by Rule 13a-14(b) and Section 1350 of
                Chapter
      63 of Title 18 of the United States
                Code,
      as adopted pursuant to Section 906 of the
                Sarbanes-Oxley
      Act of 2002
              
              Filed
      herewith
 
 †
              
              Indicates
      management contract or compensatory plan.*
              
              Confidential
      treatment requested for certain portions of this exhibit, which portions
      are omitted and filed separately with the Securities and Exchange
      Commission.