**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





(Mark
      One)





**T**  ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2006





 ̈ TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR
      THE
      TRANSITION PERIOD FROM __________ TO __________




COMMISSION
      FILE NUMBER: 000-25659





**ROO
      GROUP, INC.**


(Name
      of
      small business issuer in its charter)





**DELAWARE**
              (State
                or other jurisdiction of incorporation or organization)
            **11-3447894**
              (I.R.S.
                Employer Identification No.)




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


(Address
      of principal executive offices) (Zip Code)





Issuer’s
      telephone Number: **(212)
      661-4111**





Securities
      registered under Section 12(b) of the Exchange Act: None.





Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, $.0001 par
      value





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  ̈





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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB.  ̈





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





State
      issuer’s revenues for its most recent fiscal year. $9,768,000





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates, computed by reference to the average bid and asked price of
      such
      common equity as of March 30, 2007, was $34,036,396.65





As
      of
      March 31, 2007, the issuer had 28,074,812 outstanding shares of Common
      Stock.





**DOCUMENTS
      INCORPORATED BY REFERENCE: NONE**





Transitional
      Small Business Disclosure Format (check one): Yes  ̈ No **T**









**TABLE
      OF CONTENTS**




**Page****PART
                  I**Item
                  1.
              Description
                  of Business
              1Item
                  2.
              Description
                  of Property
              11Item
                  3.
              Legal
                  Proceedings
              11Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              11**PART
                  II**Item
                  5.
              Market
                  for Common Equity and Related Stockholder Matters
              11Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation
              12Item
                  7.
              Financial
                  Statements
              18Item
                  8.
              Changes
                  In and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              18Item
                  8A.
              Controls
                  and Procedures
              18Item
                  8B.
              Other
                  Information
              18**PART
                  III**Item
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance With
                  Section
                  16(a) of the Exchange Act
              19Item
                  10.
              Executive
                  Compensation
              21Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              23Item
                  12.
              Certain
                  Relationship and Related Transactions
              26Item
                  13.
              Exhibits
              28Item
                  14.
              Principal
                  Accountant Fees and Services
              30**SIGNATURES**
              
              31




**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS.**




**BACKGROUND**





ROO
      Group, Inc. was incorporated on August 11, 1998 under the laws of the State
      of
      Delaware as Virilitec Industries, Inc. We were formed to license and distribute
      a line of bioengineered virility nutritional supplements designed to enhance
      human male sperm count and potency. We were not successful in implementing
      our
      business plan, and after looking at other possible products to expand our
      product line, our management determined that it was in the best interests of
      our
      shareholders to attempt to acquire an operating company. As a result, we
      terminated all of our existing contracts and were inactive until we acquired
      ROO
      Media Corporation, a Delaware corporation.




**ACQUISITION
      OF ROO MEDIA CORPORATION**




On
      December 2, 2003, Virilitec Industries, VRLT Acquisition Corp., a Delaware
      corporation and wholly-owned subsidiary of Virilitec Industries, ROO Media,
      Jacob Roth and Bella Roth, entered into an Agreement and Plan of Merger. Upon
      the terms and subject to the conditions set forth in the Agreement and Plan
      of
      Merger, VRLT Acquisition Corp. was merged with and into ROO Media. As a result
      of the merger, Virilitec Industries, through VRLT Acquisition Corp., acquired
      100% of the capital stock of ROO Media. All of the issued and outstanding shares
      of capital stock of ROO Media held by the stockholders of ROO Media were
      cancelled and converted into the right to receive an aggregate of 2,960,000
      shares of common stock of Virilitec Industries. The separate corporate existence
      of VRLT Acquisition Corp. ceased, and ROO Media continued as the surviving
      corporation in the merger, as a wholly owned subsidiary of Virilitec
      Industries.





In
      connection with the merger, we agreed to cause the resignation of all of the
      members of our Board of Directors and appoint new Directors as designated by
      the
      Chairman of the Board of Directors of ROO Media. As additional consideration
      for
      the 2,960,000 shares of common stock of Virilitec Industries, (1) ROO Media
      paid
      to Virilitec Industries $37,500 cash prior to the execution of the Agreement
      and
      Plan of Merger, (2) ROO Media paid an aggregate of $100,000 of Virilitec
      Industries' total $162,500 of liabilities as reflected on Virilitec Industries'
      balance sheet on the closing date of the merger, and (3) ROO Media paid
      Virilitec Industries' $62,500 debt to Jacob Roth, Virilitec Industries' former
      Chief Executive Officer. In connection with the $62,500 payment to Mr. Roth,
      ROO
      Media entered into an agreement to pay such debt within 90 days after the
      effective date of the merger, which was December 3, 2003. The $62,500 debt
      to
      Jacob Roth was paid during the first quarter of 2004.





**OTHER
      ACQUISITIONS: REALITY GROUP PTY LTD., UNDERCOVER MEDIA PTY LTD. BICKHAMS MEDIA,
      INC., FACTORY 212 PTY LTD., AND MYVIDEODAILY.**





**REALITY
      GROUP PTY LTD.**





On
      April
      30, 2004, we purchased 80 shares of the common stock of Reality Group Pty Ltd
      ("Reality Group") which represented 80% of the issued and outstanding common
      stock of Reality Group, a corporation formed under the laws of Australia, from
      the shareholders of Reality Group. The consideration for the Reality Group
      common shares was the issuance of an aggregate of 167,200 shares of our common
      stock. As additional consideration for the Reality Group shares, we paid an
      aggregate of 200,000 Australian Dollars to the Reality Group shareholders.
      Further, the Reality Group shareholders agreed to cause Reality Group to
      increase the number of directors on its Board of Directors to allow us to
      appoint up to four nominees to its Board.




The
      Reality Group shareholders also agreed to grant us an option to purchase the
      remaining 20 shares of the issued and outstanding common stock of Reality Group
      over the next two years. The terms of the option shall be negotiated in good
      faith. Notwithstanding this, the option is exercisable by us on July 30, 2004,
      January 30, 2005, July 30, 2005 and January 30, 2006, and shall expire on March
      5, 2006. On October 28, 2005 the terms of the Purchase Agreement were amended
      as
      further described on page 3 of this report.




Pursuant
      to the purchase agreement, we guaranteed that the Reality Group shareholders
      will be able to sell the shares of our common stock that they received, subject
      to the requirements of Rule 144, for greater than or equal to $15.00 per share
      for a period of twelve months after the Reality Group shareholders have
      satisfied the Rule 144 requirements. The foregoing guarantee was predicated
      upon
      the assumption that the Reality Group shareholders will be able to sell the
      greater of (a) 1/4 of their respective exchange shares per quarter of the
      guarantee period or (b) such maximum number of exchange shares permissible
      under
      Rule 144 per quarter of the guarantee period. If the Reality Group shareholders
      do not sell their quarterly allotment during any one quarter of the guarantee
      period, the guarantee shall not be effective for the number of shares not sold
      during that quarter.




1




During
      the guarantee period, the Reality Group shareholders have the option to buy
      back
      an aggregate of 29 Reality Group shares, or such number of shares as shall
      decrease our ownership percentage in Reality Group to 51%. The consideration
      for
      such buy-back shares shall be 2,280 shares of our common stock for each share
      of
      Reality Group common stock. The earliest date for exercising this buy-back
      provision is September 1, 2004. On October 28, 2005 the terms of the Purchase
      Agreement were amended as further described on page 3 of this
      report.




In
      the
      event that the Reality Group shareholders are not able to sell their shares
      of
      our common stock for greater than or equal to $15.00 per share during the
      guarantee period, a share variance shall be determined based on the difference
      between (a) the number of exchange shares to be sold multiplied by $15.00 per
      share and (b) the number of exchange shares to be sold multiplied by the closing
      sale price of the exchange shares on the trading day immediately prior to the
      day that a Reality Group shareholder notifies us of its enforcement of the
      guarantee. In the event that a Reality Group shareholder enforces the guarantee,
      we, in our sole discretion, may pay the share variance to the Reality Group
      shareholder in one of the following ways: (1) in cash; (2) we shall authorize
      the escrow agent (as defined in the purchase agreement) to return to the Reality
      Group shareholders on a pro rata basis that amount of shares, based on a share
      valuation of $20,900 per Reality Group ordinary share, that shall constitute
      the
      share variance; or (3) if mutually agreeable to the Reality Group shareholders,
      in shares of our common stock based on the average closing sale price of shares
      of our common stock during the previous 15 trading days. To ensure the
      guarantee, we agreed to not offer or negotiate, either in writing or orally,
      the
      sale of the Reality Group shares or any Reality Group option shares acquired
      by
      us with any other party during the guarantee period.





If
      during
      the guarantee period: (a) we undergo a voluntary or involuntary dissolution,
      liquidation or winding up; (b) our shares of common stock cease trading for
      more
      than 15 business days; or (c) the quotation of our common stock is removed
      or
      suspended from the Over-the-Counter Bulletin Board for a continuous period
      of
      greater than 30 days (other than as a consequence of the quotation of our
      securities on an internationally recognized stock exchange), then the following
      shall occur: (1) the Reality Group shares shall revert back to the Reality
      Group
      shareholders; (2) the shares of our common stock exchanged for 80% of the
      Reality Group shares shall revert back to us; (3) the option shall be revoked;
      and (4) our nominees to the Reality Group's Board of Directors shall immediately
      resign.




Pursuant
      to the terms of the purchase agreement, each Reality Group shareholder agreed
      to
      not, unless permitted by our Board of Directors, sell more than 25% of their
      exchange shares during any three-month period for a period of two years after
      the effective date of the purchase agreement. Furthermore, each Reality Group
      shareholder granted to us a right of first refusal with respect to the purchase
      of the Reality Group shareholders' exchange shares for a period of one year
      after the first date on which the exchange shares are eligible for sale by
      the
      Reality Group shareholders in accordance with Rule 144 or any other applicable
      legislation, regulation or listing rule. If we elect to purchase the shares,
      such shares shall be purchased at the highest closing sale price for the period
      commencing on the trading day immediately prior to our receipt of notice of
      intent to sell from the Reality Group shareholders until the trading day
      immediately prior to the date on which we give notice to the selling Reality
      Group shareholder of its election to purchase.




Reality
      Group provides integrated communication solutions, including direct marketing,
      Internet advertising and sales promotion. Reality Group was formed as a result
      of the change in direction of marketing with the advent of the Internet and
      a
      need for more accountable, integrated advertising. Reality Group believes that
      it is a pioneer of integrated communication, with an emphasis on web-based
      solutions and customer relationship management systems built to manage the
      inquiries generated through their web based campaigns. Its clients include
      Saab
      Automobile Australia, BP Australia, Bob Jane T-Marts, Tontine, Dennis Family
      Corporation, Tabaret, Superannuantion Trust of Australia, Federal Hotels &
Resorts, and CityLink.




To
      help
      identify the most effective way to communicate with each client's audience,
      Reality Group created a proprietary management tool that provides specific
      costs
      per response for each media channel. The management tool allows Reality Group
      to
      focus on effective media channels and eliminate the rest by identifying the
      parts of a client's budget that are working.





**AMENDMENT
      TO REALITY GROUP PURCHASE AGREEMENT**





On
      October 28, 2005, we entered into an amendment (the "Amendment") to the Stock
      Purchase Agreement (the "Reality Purchase Agreement") dated as of March 11,
      2004
      among the Company and the shareholders of Reality Group Pty Ltd. ("Reality
      Group"). Pursuant to the Amendment, the Reality Group shareholders agreed to
      exercise their buyback option effective January 1, 2006 at which date the
      Company returned 29% of the shares in Reality Group to Reality Group
      shareholders reducing the Company's ownership of Reality Group to 51% in
      exchange for 66,200 shares of the common stock of the Company (the “exchange
      shares”). The Reality Group shareholders further agreed that the Share Variance
      (as defined in the Reality Purchase Agreement and as described in a Form 8-K
      filed by the Company on May 17, 2004) shall be calculated based upon a closing
      sale price of $2.50 and the Share Variance equals $1,263,500.




2




We
      paid
      $200,000 of the $1,263,500 Share Variance in cash and issued 425,400 shares
      (the
      "Variance Shares") of common stock as payment of the remaining $1,063,500 based
      on a stock price of $2.50 per share. We guaranteed (the "Variance Guarantee")
      the Reality Group shareholders that they will be able to sell their Exchange
      Shares (as defined in the Reality Purchase Agreement and as described in a
      Form
      8-K filed by the Company on May 17, 2004) and Variance Shares for a price equal
      to or greater than $2.50 per share for a period of 14 days after the earliest
      date that the Reality Group shareholders can publicly sell their shares of
      our
      common stock (the "Variance Guarantee Period"). In the event the Reality Group
      shareholders are unable to sell any of the Exchange Shares or the Variance
      Shares for a price equal to or greater than $2.50 per share during the Variance
      Guarantee Period, then we must issue them such number of shares of common stock
      equal to: (x) the applicable number of Variance and/or Exchange Shares
      multiplied by $2.50, less (y) the applicable number of Variance and/or Exchange
      Shares multiplied by the average closing sale price of our common stock on
      the
      OTC Bulletin Board during the Variance Guarantee Period, divided by (z) the
      average closing sale price of our common stock on the OTC Bulletin Board during
      the Variance Guarantee Period. Notwithstanding the above agreements, if at
      any
      time during the Variance Guarantee Period an offer is presented to a Reality
      Group shareholder to purchase their Variance Shares for a price equal to or
      greater than $2.50 per share and such shareholder does not accept the offer,
      then our obligations pursuant to the Variance Guarantee shall be automatically
      terminated with respect to such shareholder. We agreed to prepare and file
      a
      registration statement providing for the resale of 359,280 of the Variance
      Shares by November 27, 2005. The variance guarantee in the amendment to the
      Reality Group Purchase Agreement has been satisfied.





**ACQUISITION
      OF COOEE MELBOURNE PTY LTD.**





On
      October 1, 2006, Reality Group and the shareholders of Cooee Melbourne Pty
      Ltd.
      (“Cooee”) entered into an agreement, pursuant to which Reality Group acquired
      the business and assets of Cooee. Cooee is a provider of integrated
      communication solutions, including direct marketing, internet advertising and
      sales promotion. As consideration for the business and assets of Cooee, Reality
      Group will make a cash payment monthly for a period of 21 months to the
      shareholders of Cooee, subject to adjustment as follows. For the first six
      months, a payment of approximately $20,000 will be paid to Cooee at the
      conclusion of the month. After every six months, the amount due and payable
      to
      Cooee will be reconciled against revenue earned and paid from Cooee’s clients.
      At the end of each six month period, a reconciliation statement will be prepared
      and provided by Reality Group to Cooee. In the event that revenue from the
      six
      month period exceeds $394,000 (based on the pro rata expectation of a $788,000
      annualized revenue) or is less than $394,000, the variance percentage between
      the expected $394,000 revenue shall be either adjusted by way of deduction
      or an
      increase in respect of the fee paid in the following six month period in equal
      installments.





**UNDERCOVER
      MEDIA PTY LTD.**





On
      May
      26, 2004, we entered into an asset purchase agreement to purchase the business
      and business assets of Undercover Media Pty Ltd. ("Undercover"), a Victorian,
      Australia corporation. The purchase price for Undercover's assets consisted
      of
      20,000 shares of our common stock. We also agreed to issue additional shares
      of
      our common stock upon Undercover attaining performance milestones as follows:
      (a) upon the commercial launch of a broadband music portal suitable for
      operation as a stand alone site that is capable of worldwide syndication, the
      issuance of that number of shares of common stock that is equal to the quotient
      of (x) $75,000 divided by (y) the average closing sale price of the shares
      of
      common stock for the five trading days prior to such commercial launch; (b)
      upon
      the execution of an agreement for the supply and worldwide syndication of music
      videos with an aggregate of four mutually acceptable major music labels, the
      issuance of that number of shares of common stock that is equal to the quotient
      of (x) $75,000 divided by (y) the closing sale price prior to the execution
      of
      the last of the four of such agreements; (c) upon the generation of at least
      $30,000 per month in revenues for three consecutive months attributable to
      the
      company's music subdivision, the issuance of that number of shares of common
      stock that is equal to the quotient of (x) $75,000 divided by (y) the closing
      sale price prior to the determination that such revenues have been achieved;
      and
      (d) upon obtaining an aggregate of thirty video interviews with mutually
      acceptable recognized artists; the issuance of that number of shares of common
      stock that is equal to the quotient of (x) $75,000 divided by (y) the closing
      sale price prior to the last of the thirty interviews. On November 21, 2006,
      we
      issued 100,000 shares of common stock in full and final settlement of the
      milestones detailed in the Undercover Purchase Agreement. The shares were valued
      at $260,000, based on the closing trading value of the shares on the previous
      day.




Included
      in the purchase is the www.undercover.com.au web site, which at time of purchase
      served over 500,000 visitors per month with 55% from the United States, 18%
      from
      Europe, 7% from Asia and 20% from other countries throughout the world. The
      Undercover website, through its relationship with HMV, clearly displays the
      link
      between music content and the sale of music; the user reads the article or
      interview and can then click through to purchase the artist's CD from HMV's
      web
      site.




3




At
      the
      time of the acquisition, Undercover features included original music content
      ranging from raw interview footage to propriety editorial content combined
      with
      industry released footage. Undercover has served both the music industry and
      music community with daily music news, reviews and editorial bulletins.
      Undercover's clients included Telstra Corporation, AAP and Coca Cola, and its
      distribution partners include Google, VH1, Nova, Artist Direct and News Now.
      In
      addition, Undercover had a strategic online partnership with HMV for online
      music sales.




**BICKHAMS
      MEDIA, INC.**





On
      September 10, 2004, we entered into an agreement to purchase all of the
      outstanding shares of common stock of Bickhams Media, Inc. ("Bickhams") from
      Avenue Group, Inc. pursuant to a Stock Purchase Agreement dated September 10,
      2004. The only business of Bickhams is its ownership interest in VideoDome.com
      Networks, Inc. ("VideoDome"), a California corporation. In consideration for
      the
      purchase, we agreed to: (1) pay Avenue Group $300,000 cash; (2) issue Avenue
      Group 80,000 shares of our common stock; and (3) guaranty all of the obligations
      of VideoDome under a promissory note of VideoDome that was issued to Avenue
      Group in October 2003 in the principal amount of $290,000. In addition, we
      agreed to issue Avenue Group 60,000 shares of our common stock in consideration
      for a termination letter which shall serve to terminate a Registration Rights
      Agreement dated as of November 28, 2003.




As
      of
      November 1, 2004, we entered into an agreement with Bickhams and Daniel and
      Vardit Aharonoff for Bickhams to purchase 50% of the outstanding common stock
      of
      VideoDome. Prior to November 1, 2004, Bickhams already owned the other 50%
      of
      the outstanding common stock of VideoDome. As a result of this transaction,
      Bickhams now owns 100% of the outstanding common stock of VideoDome. Under
      the
      agreement, we agreed to: (1) issue 100,000 shares of our common stock to Daniel
      Aharonoff on the closing date; (2) issue an additional 60,000 shares of our
      common stock to Daniel Aharonoff upon meeting jointly agreed milestones; and
      (3)
      pay up to $220,000 in cash to Daniel Aharonoff upon meeting jointly agreed
      milestones.




The
      jointly agreed milestones are as follows: (1) upon the commercial launch of
      VideoDome's embedded player and music player, we agreed to pay Mr. Aharonoff
      $100,000 cash and issue Mr. Aharonoff 20,000 shares of our common stock; (2)
      upon the commercial launch of a combined ROO Media and VideoDome Media Manager
      platform, we agreed to pay Mr. Aharonoff $100,000 cash and issue Mr. Aharonoff
      40,000 shares of our common stock; and (3) after the combined platform has
      delivered a minimum of 50,000,000 video views for two consecutive months
      excluding mini player views, we agreed to pay Mr. Aharonoff $20,000 cash. On
      December 21, 2004 the first milestone was reached and we issued 20,000 shares
      of
      common stock and $100,000 in cash to Mr. Aharonoff. On May 9, 2005 the
      requirements of the second milestone was reached and we issued 40,000 shares
      of
      common stock and $100,000 in cash to Mr. Aharonoff. On April 11, 2006, the
      third
      and final milestone payment of $20,000 in cash was paid to Mr.
      Aharonoff




In
      connection with the agreement, Mr. Aharonoff agreed not to directly or
      indirectly agree or offer to sell, grant an option for the purchase or sale
      of,
      transfer, pledge, assign, hypothecate, distribute or otherwise encumber or
      dispose of the shares of our common stock acquired by him under the agreement
      until the earlier of: (a) two years from the respective issuance(s) of such
      shares; or (b) the date that holders (the "Holders") of certain Callable Secured
      Convertible Notes (the "Notes") and Stock Purchase Warrants (the "Warrants"),
      issued by us on September 10, 2004, no longer hold the Notes and the Warrants
      and no longer beneficially own any shares of our common stock issuable upon
      conversion or exercise of the Notes or the Warrants, without the prior written
      consent of such Holders of the Notes and the Warrants. The Holders agreed to
      waive any adjustment that otherwise would have been required to the conversion
      and exercise prices of the Notes and the Warrants due to the issuance of shares
      of common stock to Mr. Aharonoff.




VideoDome
      was a Los Angeles based company that provides a range of Media Management
      solutions through its flagship 5th generation ASP application, VideoDome Media
      Manager(R). VideoDome customers had direct access to their individual accounts,
      media inventory, customized media delivery method and style, as well as the
      ability to add, edit, delete, schedule and track streaming media from any
      Internet enabled browser. Some of VideoDome's clients included Kenneth Cole,
      L'Oreal Cosmetics, Redken, and Stanley Tools. VideoDome provided its media
      management application to these customers which allowed them the ability to
      manage and publish video on their web sites. The VideoDome Publishing Platform
      was a database driven, web-based application that allowed clients to upload,
      organize and publish streaming media through unified interface.




The
      most
      current version of VideoDome Media Manager \was Media Manager 4.0, which offered
      VideoDome customers direct access to their individual accounts, media inventory,
      customized media delivery method and style, as well as the ability to add,
      edit,
      delete, schedule & track streaming media from any Internet enabled
      browser.





The
      features of Media Manager 4.0 included:





·
            VideoDome
                Tracker(R) - Generate colorful user reports/statistics and find out
                what
                your viewing audience is
                experiencing.




4




·
            VideoDome
                Scheduler(R) - Schedule when you would like certain media to be available
                on your web site.·
            VideoDome
                AutoSense(R) - AutoSense technology automatically takes the guess
                work out
                of the equation by detecting installed media player & available
                bandwidth across all media formats.·
            VideoDome
                Skin Wizard(R) - Create a compelling branded media player or video
                portal
                within minutes using our skin wizard system.·
            VideoDome
                Syndication Manager(R) - Powerful syndication module allows you to
                replicate then syndicate streaming content to your partners in a
                completely controlled environment.





Since
      the
      acquisition of Videodome, we have made significant enhancements to the original
      Videodome software which has included the integration of ROO’s technology and
      the combined platform is now the primary video platform for ROO.





**FACTORY
      212 PTY LTD.**





On
      October 28, 2005, we entered into an agreement with ROO Broadcasting Limited
      ("ROO Broadcasting"), a wholly owned subsidiary of the Company, and the
      shareholders of Factory 212 Pty Ltd. ("Factory212"), pursuant to which ROO
      Broadcasting acquired 51% of the outstanding ordinary shares of Factory212.
      Factory212 is an Australian based interactive marketing agency.


As
      consideration for the ordinary shares of Factory212, we issued 10,000 shares
      (the "Initial Shares") of common stock to the Factory212 shareholders. Subject
      to the conditions described below, we may issue additional shares ("Additional
      Shares") of common stock to the Factory212 shareholders, issuable after December
      31, 2007, calculated as follows:




51%
      of
      [(1 * Factory212 Revenue) + (4 * Factory212 Earnings)]


Average
      ROO Share Price





where:
      "Factory212 Revenue" means the billings less all media and third party supplier
      costs of Factory212 for the twelve month period ending December 31, 2007;
      "Factory212 Earnings" means the earnings of Factory212 before tax and after
      deduction of interest and all other expenses for the twelve month period ending
      December 31, 2007; and "Average ROO Share Price" means the average price of
      our
      common stock during the final five trading days of December 2007.





If
      we do
      not issue the maximum number of Additional Shares, ROO Broadcasting’s 51%
      ownership of Factory212 will be reduced on a pro rata basis by the difference
      between the maximum number of Additional Shares and the actual number of
      Additional Shares issued. If we do not issue any Additional Shares, ROO
      Broadcasting will relinquish all of its 51% ownership of Factory212. However,
      if
      the Factory212 Earnings are greater than 15% of the Factory212 Revenue and
      the
      number of Additional Shares to be issued are less than 4.9% of the then current
      outstanding shares of our common, we must proceed with issuing the maximum
      number of Additional Shares in accordance with the above formula.





The
      acquisition of Factory212 was conditioned upon the parties entering into the
      Amendment described above under "Amendment to Reality Group Purchase Agreement."
      If we fail to meet our material obligations under the terms of the Amendment,
      then the Company and ROO Broadcasting agreed that the Factory212 shareholders
      may in their sole discretion require ROO Broadcasting to relinquish all of
      its
      ownership of Factory212. In such event, we agreed that the Factory212
      shareholders shall be entitled to retain ownership of their Initial
      Shares.





**ACQUISITION
      OF SPUTNIK AGENCY PTY LTD.**





On
      October 1, 2006, Factory 212 Pty Ltd. (“Factory212”), our 51% owned subsidiary,
      and the shareholders of Sputnik Agency Pty Ltd. (“Sputnik”) entered into an
      agreement, pursuant to which Factory212 acquired the business and assets of
      Sputnik. Sputnik is an Australian based interactive marketing agency. As
      consideration for the business and assets of Sputnik, Factory212 issued shares
      representing 24.5% of the issued shares in Factory212 to the shareholders of
      Sputnik. These shares shall be issued through the reduction in the shareholding
      of all shareholders other than ROO Broadcasting, our wholly owned subsidiary.
      Also, a cash amount of $250,000 is payable by ROO Broadcasting to the
      shareholders of Sputnik. In addition to this amount, 50% of any further payment
      of Additional Shares, as described in the agreement between Factory212 and
      ROO
      Broadcasting, will be made to the shareholders of Sputnik less the cash amount
      of $250,000. Factory212 acknowledges and agree to such payment and that
      accordingly, they will receive 50% less than originally provided in Additional
      Shares. The cash payment of $250,000 was made in December 2006.




5




**MYVIDEODAILY**





On
      January 22, 2007, we entered into an Asset Purchase Agreement with RJM Price
      & Company, Inc. (“RJM”) and Robertson Price. Pursuant to the Agreement, we
      acquired all of the properties, rights and assets constituting the business
      of
      RJM, which operates under the name MyVideoDaily (“MVD”). The Agreement provides
      for a consideration of up to an aggregate of $1,350,000 payable as follows:
      (i)
      $250,000 paid upon the execution of the Agreement, (ii) $1,000,000 in shares
      of
      our common stock will be paid to Mr. Price in equal quarterly installments
      upon
      the achievement of certain milestones at a price per share which will be equal
      to equal to the average closing price of our common stock over the final 20
      trading days of the quarterly period in which the milestone is achieved; (iii)
      $100,000 payable upon the second anniversary of the closing of the acquisition.
      The milestones include: (i) the full integration of MVD’s keyword generation and
      search marketing engine into our operations; (ii) Robertson Price utilizing
      his
      best efforts to increase organic traffic to our properties by 50%; (iii)
      Robertson Price use of MVD in our best interests, which determination shall
      be
      made by us; (iv) **** Robertson
      Price **** leading
      and delivering product development initiative to provide the most profitable
      customer /consumer traffic driven feature for our 2007 product offering,
      including community and user generated content modules; (v) Robertson Price assisting
      in traffic driving recommendations initiatives for key clients leading to
      increased revenues over and above original customer projections ;
      (vi) continued employment of Robertson
      Price for a full year; provided that if his employment is terminated by (a)
      Robertson Price due to a breach by us of the APA or the employment agreement,
      which breach is not cured within the permitted cure-period, or (b) us for any
      reason other than for “Cause” (as defined in the Employment Agreement), then
      Robertson Price will, as of the date of termination, automatically be deemed
      to
      have been employed for a full year.





Pursuant
      to the terms of the Agreement, the Company has entered into an Employment
      Agreement with Robertson Price, a principal of RJM pursuant to which Mr. Price
      will be retained by ROO Media Corporation as Senior Vice President of Product
      & Network Management.




**STRATEGIC
      RELATIONSHIPS**





**NEWS
      CORPORATION**





On
      January 25, 2007, we entered into an agreement with News Corporation (“News
      Corp”). The Agreement provides for the issuance of 2,000,000 shares of our
      common stock upon execution of the Agreement, which shall be held in escrow and
      released to News Corp. on January 1, 2008, upon the achievement of certain
      milestones. The Agreement provides that if the milestones are not met, we shall
      issue to News Corp warrants to purchase 2,000,000 shares of our common stock
      which shall be exercisable for a term of two years at a price of $3.00 per
      share
      or such lesser price per share that is the closing price per share of our common
      stock on any date that is within ten days prior to the date of the Agreement.
      The Agreement provides for the release of the shares to News Corp upon a change
      of control as defined in the Agreement, if certain conditions exist.





We
      also
      agreed to issue an additional 2,000,000 shares of its common stock to News
      Corp
      upon the achievement of certain milestones. Further, we agreed that if the
      milestones are not timely achieved, we shall issue to News Corp warrants to
      purchase 2,000,000 shares of our common stock which shall be exercisable for
      a
      term of two years at a price of $3.00 per share or such lesser price per share
      that is the closing per share of our common stock on any date that is within
      ten
      days prior to the date of the Agreement.





We
      have
      granted News Corp piggy back registration rights in connection with shares
      issuable to News Corp pursuant to the Agreement.





**OVERVIEW
      OF OUR BUSINESS**





We,
      through our operating subsidiaries, are a digital media company in the business
      of providing products and solutions that enable the broadcast of topical video
      content from our customers' Internet websites. This includes providing the
      technology and content required for video to be played on computers via the
      Internet as well as emerging broadcasting platforms such as set top boxes and
      wireless devices (i.e., mobile phones and PDAs). Our core activities include
      the
      aggregation of video content, media management, traditional and online
      advertising, hosting, and content delivery. We also operate a global network
      of
      individual destination portals under the brand ROO TV that enables end users
      in
      different regions around the world to view video content over the Internet
      that
      is topical, informative, up to date, and specific to the region in which they
      live. In conjunction with our subsidiaries, we currently provide the video
      solution for over 150 web sites in the United States, United Kingdom, and
      Australia. Comscore, an independent research company that tracks the video
      streams sent to users per month placed us as the 9th largest broadcaster of
      video in the world in it’s most recent Deccember 2006 report.




6




**HISTORY
      OF THE DEVELOPMENT OF OUR BUSINESS**





Our
      consolidated financial statements include the accounts of ROO Group, Inc.,
      its
      wholly owned subsidiary ROO Media Corporation, its wholly owned subsidiary
      Bickhams and its 51% owned subsidiary Reality Group. Included in the
      consolidation with ROO Media Corporation are ROO Media Corporation's wholly
      owned subsidiary ROO Media (Australia) Pty Ltd. and ROO Media (Australia) Pty
      Ltd.'s wholly owned subsidiary Undercover, its 100%-owned subsidiary ROO Media
      Europe Pty Ltd, its wholly owned subsidiary ROO Broadcasting Limited, its 51%
      owned subsidiary Factory212 and its wholly owned subsidiary ROO TV Pty Ltd.
      Included in the consolidation with Bickhams is Bickhams' wholly owned subsidiary
      VideoDome. ROO Media Europe Pty Ltd. was 76% owned by ROO Media Corporation
      until January 27, 2006 when ROO Media Corporation purchased the remaining 24%
      of
      ROO Media Europe Pty Ltd. for $90,000. We provide topical video content,
      including news, business, entertainment, fashion, video games, movies, music,
      sport and travel video, and associated services for broadcasting video over
      the
      Internet to a global base of clients. ROO Media's delivery platform supports
      worldwide syndication and television-style advertising. During 2001 and 2002,
      ROO Media focused on developing and refining its products and solutions, and
      commenced the commercial selling of its solutions in late 2003. ROO Media
      developed a technology platform specifically designed to provide a cost
      effective, robust, and scaleable solution to manage and syndicate video content
      over the Internet.




Our
      media
      operations management and updating functions are partially based in Australia
      and partially in the United States and United Kingdom. The time differences
      between the eastern and western hemispheres allow daily media content to be
      processed during the evening in the United States and the United Kingdom and
      during the daytime in Australia. As a result, we believe we have a strategic
      cost benefit over our competitors.




Our
      business plan is to develop a worldwide network of websites that utilize our
      technology and content to broadcast video from individual websites. The network
      of websites includes third party websites that license our technology and
      content as well as our own network of websites, which are branded as ROO TV.
      The
      network is designed to be similar to traditional satellite or cable networks
      that distribute content throughout the world, with the difference being it
      is
      broadcasted over the Internet rather than via television. Our technology
      platform allows access to over 20,000 videos that can be viewed on a daily
      basis
      by computer users. The video content available for viewing includes topical
      content such as news, business, entertainment, fashion, music, movies and
      travel. We update the video content and distribute the content to websites
      receiving our services on a daily basis. We generate revenue from fees paid
      by
      the websites for our content and technology services and, like traditional
      media
      companies, from TV style ads which play before the topical videos across our
      network of websites. We also generate revenue through the sale of online and
      traditional advertising.





**OPERATIONS
      STRATEGY**





Our
      operations strategy for the next twelve months is broken into the following
      core
      areas:


·
            Expanding
                content database and developing new products based on our existing
                pool of
                video content for emerging technologies such as wireless and
                IPTV;


·
            Increase
                market deployment of the ROO VX Platform among large enterprise clients
                in
                the United States, Europe, Asia and
                Australia;


·
            Expanding
                the network of websites in which we provide content and technology
                by
                expanding the ROO branded network of websites to more countries,
                and
                activating new customers to our content solutions using our direct
                sales
                force and resellers of our products and services in markets in the
                United
                States, Australia, United Kingdom, Continental Europe and
                Asia;


·
            Increase
                revenue through the sale and rental of movies, TV shows and music
                online;


·
            Acquiring
                commercially viable companies or businesses that have the potential
                for
                accelerating or enhancing our business
                model;


·
            Investing
                in research and development of products, platform and technology
                to offer
                a wider range of video content and improved user experience for users
                viewing videos from our platform;
                and


·
            Developing
                awareness and relationships with advertising agencies and advertisers
                of
                the benefits of advertising on our network of websites for traditional
                and
                creative online solutions.




The
      implementation of our operational strategies will depend on our capital and
      we
      cannot be sure that such operational strategies will be achieved. See "Item
      6.
      Management's Discussion and Analysis or Plan of Operation" beginning on page
      14
      of this report.





**SALES
      AND MARKETING**





Our
      products and services are sold by our direct sales force and appointed
      resellers. Our syndication and video solutions products are sold by our direct
      sales force based in the United States, Asia Pacific Australia and Europe,
      our
      online and traditional advertising is sold by our direct sales force and through
      appointed interactive online advertising agencies.




7




Our
      direct sales force targets the following market segments for our content
      syndication products: (1) media and newspaper chains; (2) Internet service
      providers; and (3) dedicated vertical websites such as entertainment websites
      that are potential purchasers of entertainment video content. Through our direct
      sales force and third party advertising agencies, we target potential
      advertisers to advertise on our network of websites. We manage our sales
      database through a customer relationship management system, which allows for
      access and tracking from any ROO Media sales staff connected to the Internet.
      Marketing of our products and services is done through traditional public
      relations, print media and web-based marketing.





**TECHNOLOGY**





Our
      proprietary technology platform and infrastructure is largely based in the
      United States and is designed to be accessed and maintained from satellite
      offices anywhere in the world via a Virtual Private Network (VPN) over the
      Internet. The technology platform has been specifically designed to provide
      a
      robust, scaleable solution to manage and syndicate video content over the
      Internet. The platform architecture allows for the flexible use of third party
      software, hardware and internally developed applications. Components forming
      the
      platform are housed with various third party service providers located within
      the United States, Europe and Australia.





The
      key
      features of our technology platform include:





·
            Full
                screen video viewing;


·
            Viewing
                of all content via either a narrowband (Dial up) or broadband
                connection;


·
            Platform
                supporting Microsoft Windows Media, Flash and Real Networks
                formats;


·
            Global
                delivery and hosting allowing for video viewing throughout the world
                by
                anyone connected to the Internet;


·
            Ability
                to program video commercials to be played before selected videos
                on
                selected web sites;


·
            Secure
                storage and protection of media
                files;


·
            Full
                reporting on videos viewed by type, date, country, web site,
                etc.;


·
            The
                ability to present the videos in players and templates which match
                the
                branding of the multiple web sites on which the content is syndicated;
                and


·
            Central
                technology platform allowing videos to be automatically updated across
                the
                multiple web sites in which they are
                displayed.




**INTELLECTUAL
      PROPERTY**





We
      have
      obtained a service mark of the name "ROO" (Reg. No. 3095622) from the U.S.
      Patent and Trademark Office. We have applied for a trademark of the name "ROO"
      in both the European Union (European Community Application No. 004758488) and
      in
      Australia (Australian Trademark Application Serial No. 1110843). Both
      applications are pending.




We
      depend
      on a portion of technology licensed to us by third parties and a portion owned
      and developed by us. We license technology from third parties, including
      software that is integrated with internally developed software and used in
      our
      products to perform key functions. We anticipate that we will continue to
      license technology from third parties in the future. Although we do not believe
      that we are substantially dependent on any individual licensed technology,
      some
      of the software that we license from third parties could be difficult for us
      to
      replace. The effective implementation of our products depends upon the
      successful operation of third-party licensed products in conjunction with our
      products, and therefore any undetected errors in these licensed products could
      prevent the implementation of our products, impair the functionality of our
      products, delay new product introductions, and/or damage our
      reputation.





**OUR
      PRODUCTS**





Our
      products and services, including those of our subsidiaries, are broken into
      the
      following core areas:




ROO
      VIDEO
      SOLUTIONS. We utilize our expertise in video broadcasting over the Internet
      to
      build customized video solutions for specific customers or industry segments.
      Our platform has been designed to be flexible in accommodating various
      opportunities for activating video for broadcast over the Internet and
      accommodating emerging technologies such as wireless devices (i.e., mobile
      phones and PDAs) and IPTV. The same platform, or components thereof, used by
      us
      to run our network of websites can be adapted to suit the individual needs
      of
      clients with specific objectives in mind. As our profile within the market
      segment increases, organizations have increasingly approached us to aid them
      in
      addressing a variety of individual Internet broadcasting requirements. An
      example is The Street, an online provider of financial markets information
      at
      www.thestreet.com. We generally get paid a per stream fee when we provide the
      video enabling technology.




8




ROO
      SYNDICATION OF LICENSED VIDEO CONTENT. We provide a turnkey solution for
      customers located throughout the world to activate licensed topical video
      content on their web sites. ROO Media supplies our wholesale clients with a
      cost-effective turnkey solution whereby the client receives the licensed video
      content it selects, such as news, business, music, fashion, entertainment,
      travel, etc., the technology to integrate the video into its website, daily
      management and updating of the content, and regular reporting on which content
      is being viewed. We generally receive a fee based on the number of times the
      syndicated video has been streamed month from the client. An example of a
      website that streams ROO syndicated content is www.thesun.co.uk ,
      a
      newspaper in the United Kingdom owned by News Corp..




ROO'S
      ONLINE ADVERTISING NETWORK. Through our clients, we have developed a network
      of
      web sites across which we can sell advertising inventory. Specifically, we
      have
      developed and implemented an advertising platform specifically designed to
      provide advertisers with a targeted demographic The advertising solutions we
      provide include traditional banner ads and television-style 15 second and 30
      second commercials, which can be programmed to play before and after topical
      video clips that are most likely to be viewed by the advertisers' chosen
      demographic. The platform has also been designed to allow for two to three
      minute advertorials to be included on a wholesale client's website, or as a
      standalone clip within certain content categories of our content bank.
      Advertising inventory across our network of web sites is sold by our direct
      sales force and through appointed interactive online advertising agents. Revenue
      is generated for us every time an advertising clip is streamed. Our clients
      can
      receive a percentage of the advertising revenue generated on their websites
      by
      our online advertising.





Our
      platform provides the ability to:





·
            Program
                an advertisement to run only on selected web sites in selected
                countries;


·
            Program
                a commercial to run a specific amount of times or between a selected
                range
                of dates;


·
            Program
                a commercial to run within a selected content category;
                and


·
            Provide
                reports on how many times the advertisement was
                viewed.





Recent
      advertisers over our network of websites utilizing our in-stream advertising
      have included General Motors, Ford, Nikon, Discovery Channel, Showtime and
      Sony.





Through
      our partially owned subsidiaries Reality Group and Factory212 based in
      Australia, we also offer a range of specialized online and offline marketing
      solutions.





**INDUSTRY**





We
      focus
      on providing technology and content solutions to the emerging and growing
      segment of broadcasting video over the Internet and emerging broadcasting
      platforms such as wireless and IPTV. Through technology advancements and the
      expansion of broadband services worldwide, the Internet now enables the viewing
      of video from a computer connected to the Internet. This creates a fundamental
      change in the way people can view media and transforms the Internet into a
      broadcasting platform similar to television and radio platforms. Internet access
      and audio and video steaming over the Internet have grown substantially over
      the
      past twelve months as residential broadband access expands.





**COMPETITION**





The
      provisioning and streaming of digital media content over the Internet is rapidly
      becoming a competitive industry. The key barriers to new firms to enter and
      compete against existing companies within the digital media segment are (1)
      the
      timeframe and costs to develop a commercially robust, feature rich media
      delivery platform, and (2) the time involved to build a digital media data
      base
      of licensed videos. While there are only a few industry participants similar
      to
      us that provide a full suite of associated products and services, there are
      a
      number of traditional content syndicators who have entered the industry by
      providing their own content for streaming over their own portals. For example,
      Disney, Time Warner and CNN all provide access to their own content in digital
      format over their own destination Internet portals. There are also a number
      of
      smaller operations that provide wholesale syndication services such as The
      FeedRoom ( www.feedroom.com ),
      as
      well as Maven Networks ( www.maven.net )
      and
      Brightcove (www.brightcove.com), which provide a range of online broadcasting
      solutions. Other competitors on select products of ROO Media include: Real
      Networks, Inc., a global provider of network-delivered digital media service
      and
      the technology that enables digital media creation, distribution and
      consumption; and Loudeye Corporation, a service provider facilitating the use
      of
      digital media for live and on-demand applications for enterprise communication,
      marketing and entertainment. We believe that as the market segment continues
      to
      grow, new competitors will enter the market and compete directly with us. We
      compete with these firms and emerging competitors by offering competitive
      pricing, unique products, flexible business models for our customers to generate
      revenue, and continually developing and adding new functionality to our media
      management platform. We also compete by continuing to expand our media database
      and the amount of content categories and videos available.




9




**GOVERNMENT
      REGULATION**





We
      are
      subject to risks associated with governmental regulation and legal
      uncertainties. Few existing laws or regulations specifically apply to the
      Internet, other than laws and regulations generally applicable to businesses.
      Many laws and regulations, however, are pending and may be adopted in the United
      States, individual states and local jurisdictions and other countries with
      respect to the Internet. These laws may relate to many areas that impact our
      business, including content issues (such as obscenity, indecency and
      defamation), caching of content by server products, sweepstakes, promotions,
      and
      the convergence of traditional communication services with Internet
      communications, including the future availability of broadband transmission
      capability and wireless networks. These types of regulations are likely to
      differ between countries and other political and geographic divisions. Other
      countries and political organizations are likely to impose or favor more and
      different regulation than that which has been proposed in the United States,
      thus furthering the complexity of regulation. In addition, state and local
      governments may impose regulations in addition to, inconsistent with, or
      stricter than federal regulations. The adoption of such laws or regulations,
      and
      uncertainties associated with their validity, interpretation, applicability
      and
      enforcement, may affect the available distribution channels for and costs
      associated with our products and services, and may affect the growth of the
      Internet. Such laws or regulations may harm our business. Our products and
      services may also become subject to investigation and regulation of foreign
      data
      protection authorities, including those in the European Union. Such activities
      could result in additional product and distribution costs for us in order to
      comply with such regulation.





There
      is
      uncertainty regarding how existing laws governing issues such as illegal or
      obscene content and retransmission of media apply to the Internet. The vast
      majority of such laws were adopted before the advent of the Internet and related
      technologies and do not address the unique issues associated with the Internet
      and related technologies. Most of the laws that relate to the Internet have
      not
      yet been interpreted. In addition to potential legislation from local, state
      and
      federal governments, labor guild agreements and other laws and regulations
      that
      impose fees, royalties or unanticipated payments regarding the distribution
      of
      media over the Internet may directly or indirectly affect our business. While
      we
      and our customers may be directly affected by such agreements, we are not a
      party to such agreements and have little ability to influence the degree such
      agreements favor or disfavor Internet distribution or our business
      models.




The
      Child
      Online Protection Act and the Child Online Privacy Protection Act impose civil
      and criminal penalties on persons distributing material harmful to minors (e.g.,
      obscene material) over the Internet to persons under the age of 17, or
      collecting personal information from children under the age of 13. We do not
      knowingly distribute harmful materials to minors or collect personal information
      from children under the age of 13. The manner in which these Acts may be
      interpreted and enforced cannot be fully determined, and future legislation
      similar to these Acts could subject us to potential liability if we were deemed
      to be non-compliant with such rules and regulations, which in turn could harm
      our business.





**RESEARCH
      AND DEVELOPMENT**





We
      continue to pursue opportunities to improve and expand our products and services
      and have dedicated resources which continue to review and enhance our technology
      platform and the products and solutions we offer. Currently, research and
      development is conducted internally as well as through outsourcing agreements.
      We plan to consider opportunities to expand our current content categories
      to
      offer specific lifestyle, children's content, sport, science and educational
      content. We also plan to explore opportunities to further enhance our
      distribution and technological infrastructures to maintain our competitive
      position. We cannot assure you, however, that we will achieve our research
      and
      development goals.





**EMPLOYEES**





As
      of
      January 31, 2007, we had 140 full time employees based in Australia, Europe
      and
      the United States. We consider our relations with our employees to be
      good.




10





**ITEM
      2. DESCRIPTION OF PROPERTY.**





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





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





Our
      second New York office is located at 222 East 44 th Street,
      8 th Floor,
      New York, NY 10017. This office consists of 4,030 square feet of office space.
      The related sublease agreement expires on March 30, 2008. Rent on the premises
      is $11,754 per month through the end of the term.





Our
      Los
      Angeles office is located at 10 Universal City Plaza, Universal City, CA 91608.
      These premises consist of 6,694 square feet of office space. The lease is on
      a
      month-to-month basis. Rent on the premises is $19,413.




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





We
      have
      another Australian office located at 116 - 122 Chapel Street, Windsor 3181,
      Victoria, Australia. These premises consist of 8,611 square feet of office
      space. The lease period commenced for us on October 1, 2006 to coincide with
      the
      purchase of Sputnik and schedules to expire on June 30, 2013. Rent on these
      premises is (Australian dollars) 7,667 per month.





Our
      London office is a serviced office at 131-151 Great Tichfield Street London
      W1W5BB. Rent for the office is (pound) £6,250 per month. This lease is on a
      month-to-month basis.





**ITEM
      3. LEGAL PROCEEDINGS.**





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





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





No
      matter
      was submitted to a vote of security holders during the fourth quarter of the
      fiscal year covered by this report.





**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS.**





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





Fiscal
                2006
            
            Fiscal
                2005
            
            Fiscal
                2004Quarter
                Ended (1)
            
            
            High
            
            
            Low
            
            
            High
                (2)
            
            
            Low
                (2)
            
            
            High
                (2)
            
            
            Low
                (2)March
                31
            
            $
            3.65
            
            $
            2.35
            
            $
            4.00
            
            $
            2.50
            
            $
            12.50
            
            $
            3.50June
                30
            
            $
            3.76
            
            $
            1.95
            
            $
            3.00
            
            $
            2.00
            
            $
            17.50
            
            $
            3.50September
                30
            
            $
            3.43
            
            $
            1.35
            
            $
            2.50
            
            $
            0.50
            
            $
            12.00
            
            $
            3.00December
                31
            
            $
            3.42
            
            $
            1.35
            
            $
            4.20
            
            $
            0.60
            
            $
            4.00
            
            $
            2.50





(1)
            On
                January 23, 2004, we changed our fiscal year end from July 31 to
                December
                31.


(2)
            Prices
                adjusted to reflect a one-for-50 reverse stock split effective October
                3,
                2005.




11




As
      of
      March 30, 2007, our shares of common stock were held by approximately 290
      stockholders of record. The number of record holders was determined from the
      records of our transfer agent and does not include beneficial owners common
      stock whose shares are held in the names of various securities brokers, dealers
      and registered clearing agencies. The transfer agent of our common stock is
      Continental Stock Transfer and Trust Company.





**DIVIDENDS**





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





**RECENT
      SALES OF UNREGISTERED SECURITIES**





We
      sold
      the following equity securities during the fiscal year ended December 31, 2006
      that were not registered under the Securities Act of 1933, as amended (the
      "Securities Act").





On
      August
      18, 2006, we sold 4,420,000 shares of common stock and 2,210,000 warrants to
      purchase shares of common stock to accredited investors. The shares of common
      stock were sold at a price of $1.25 per share, resulting in $5,525,000 of gross
      proceeds. Each investor was issued warrants to purchase a number of shares
      of
      common stock equal to 50% of the number of shares of common stock purchased.
      The
      warrants have an exercise price of $2.00 per share and a term of five years.
      We
      also issued an aggregate of 801,369 warrants to the placement agents in
      connection with the sale of the Company’s common stock. The warrants issued to
      the placement agents have an exercise price of $1.25 per share and a term of
      five years. These securities were sold pursuant to the exemption from
      registration requirements provided by Section 4(2) of the Securities Act and
      Rule 506 promulgated thereunder.




On
      November 16, 2006, we sold 8,378,377 shares of common stock and 2,513,513
      warrants to purchase shares of common stock to accredited investors. The shares
      of common stock were sold at a price of $1.85 per share, resulting in
      $15,500,000 of gross proceeds. Each investor was issued warrants to purchase
      a
      number of shares of common stock equal to 30% of the number of shares of common
      stock purchased. The warrants have an exercise price of $3.00 per share and
      a
      term of five years. We also issued an aggregate of 326,757 warrants to the
      placement agents in connection with the sale of the Company’s common stock. The
      warrants issued to the placement agents have an exercise price of $3.00 per
      share and a term of five years. These securities were sold pursuant to the
      exemption from registration requirements provided by Section 4(2) of the
      Securities Act and Rule 506 promulgated thereunder.




On
      November 21, 2006, we issued 100,000 shares of common stock to Cashmere Family
      Trust in settlement of the milestones achieved pursuant to the asset purchase
      agreement with Undercover Media Pty. Ltd.





For
      each
      of the above transactions exempt from registration requirements under Rule
      506,
      the individuals and entities to whom we issued securities are unaffiliated
      with
      us. For each of such sales, no advertising or general solicitation was employed
      in offering the securities. The offerings and sales were made to a limited
      number of persons, all of whom were accredited investors, business associates
      of
      ours or our executive officers, and transfer was restricted by us in accordance
      with the requirements of the Securities Act. Each of such persons represented
      to
      us that they were accredited or sophisticated investors, that they were capable
      of analyzing the merits and risks of their investment, and that they understood
      the speculative nature of their investment. Furthermore, all of the
      above-referenced persons had access to our Securities and Exchange Commission
      filings.





**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION.**





**FORWARD-LOOKING
      STATEMENTS**





The
      information in this report contains forward-looking statements. All statements
      other than statements of historical fact made in this report are forward
      looking. In particular, the statements herein regarding industry prospects
      and
      future results of operations or financial position are forward-looking
      statements. Forward-looking statements reflect management's current expectations
      and are inherently uncertain. Our actual results may differ significantly from
      management's expectations.





The
      following discussion and analysis should be read in conjunction with the
      consolidated financial statements of ROO Group, Inc., included herewith. This
      discussion should not be construed to imply that the results discussed herein
      will necessarily continue into the future, or that any conclusion reached herein
      will necessarily be indicative of actual operating results in the future. Such
      discussion represents only the best present assessment of our
      management.




12




**GENERAL**




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




Set
      forth
      below is a discussion of the financial condition and results of operations
      of
      ROO Group, Inc. and its consolidated subsidiaries (the "Company," "we," "us,"
      or
      "our") for the twelve months ended December 31, 2006 and 2005. The consolidated
      financial statements include the accounts of ROO Group, Inc., its wholly owned
      subsidiary ROO Media Corporation, its wholly owned subsidiary Bickhams and
      its
      51% owned subsidiary Reality Group. Included in the consolidation with ROO
      Media
      Corporation are ROO Media Corporation's wholly owned subsidiary ROO Media
      (Australia) Pty Ltd. and ROO Media (Australia) Pty Ltd.'s wholly owned
      subsidiary Undercover, its wholly owned subsidiary ROO Media Europe Pty Ltd,
      its
      wholly owned subsidiary ROO Broadcasting Limited, its 51% owned subsidiary
      Factory212 Pty. Ltd. and its wholly owned subsidiary ROO TV Pty Ltd. Included
      in
      the consolidation with Bickhams is Bickhams' wholly owned subsidiary
      VideoDome.com Networks, Inc. ROO Media Europe Pty Ltd. was 76% owned by ROO
      Media Corporation until January 27, 2006 when ROO Media Corporation purchased
      the remaining 24% of ROO Media Europe Pty Ltd. for $90,000. The following
      discussion should be read in conjunction with the information set forth in
      the
      consolidated financial statements and the related notes thereto appearing
      elsewhere in this annual report.





**RESULTS
      OF OPERATIONS - YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER
      31, 2005**





**NET
      REVENUE**





Total
      revenue increased by $3,149,000 from $6,619,000 for the year ended December
      31,
      2005 to $9,768,000 for the year ended December 31, 2006, an increase of 48%.
      The
      increase is principally from the increasing sales revenue from operations and
      the inclusion of revenue of acquisitions not included for the full prior year
      financial results.





**EXPENSES**





OPERATIONS .
      Operating expenses increased by $4,065,000 from $4,465,000 for the year ended
      December 31, 2005 to $8,530,000 for the year December 31, 2006, an increase
      of
      91%. The increases were due to the increasing costs associated with increased
      revenue generation. These costs include content costs, salaries, web hosting
      and
      content delivery.





RESEARCH
      AND DEVELOPMENT .
      Research and development expenses consist primarily of salaries and related
      personnel costs, and consulting fees associated with product development.
      Research and development expenses increased by $1,539,000 from $601,000 for
      the
      year ended December 31, 2005 to $2,140,000 for the year ended December 31,
      2006,
      an increase of 256%. The increases were due primarily to the increase in
      development activities associated with enhancements to our technology platform.





SALES
      AND MARKETING. Sales
      and marketing expenses consist primarily of expenses for sales and marketing
      personnel, expenditures for advertising, and promotional activities and expenses
      to bring our products to market. These expenses increased by $3,101,000 from
      $2,217,000 for the year ended December 31, 2005 to $5,318,000 for the year
      ended
      December 31, 2006, an increase of 140%. These increases were primarily due
      to an
      increase in sales and marketing personnel.





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





GENERAL
      AND ADMINISTRATIVE .
      General
      and administrative expenses consist primarily of expenses for management,
      finance and administrative personnel, legal, accounting, consulting fees, and
      facilities costs. These expenses increased by $3,344,000 from $5,351,000 for
      the
      year ended December 31, 2005 to $8,695,000 for the year December 31, 2006,
      an
      increase of 62%. The increase of $3,344,000 was due to the increase in non-cash
      costs of $686,000, which consists of stock based compensation expense on stock
      options of $2,404,000 less a decrease in the valuation on stock and warrants
      for
      services of $832,000 and a decrease in the valuation of preferred stock of
      $886,000, plus $2,658,000 that is primarily due to an increase in salaries
      for
      administrative support related to our increased operations.





REDEMPTION
      PREMIUM ON CONVERTIBLE NOTE. On May
      19, 2005, we applied $200,000 of the $600,000 gross proceeds from a loan from
      Mr. Petty to redeem $143,000 principal amount of the Company's outstanding
      $3,000,000 principal amount of callable secured convertible notes. The
      difference between the amount paid and the principal amount redeemed of $57,000
      was expensed as a redemption premium on the callable secured convertible notes.
      On August 23, 2005 the Company repaid all outstanding amounts due pursuant
      to
      the callable secured convertible notes. As part of the payment to the
      noteholders $744,000 was paid as a redemption premium. The total amount of
      redemption premium paid for the year ended December 31, 2005 was
      $801,000.




13




INTEREST
      INCOME .
      Interest income increased by $159,000 from $7 for the year ended December 31,
      2005 to $166,000 for the year ended December 31, 2006. This increase was
      primarily due to an increase in our cash and cash equivalents.




INTEREST
      EXPENSE, RELATED PARTY. Interest
      expense, related party, includes interest charges on our indebtedness to Robert
      Petty, our Chairman and Chief Executive Officer. The expense decreased from
      $143,000 for the year ended December 31, 2005 to $0 for the year ended December
      31, 2006. The outstanding balance from loans from Mr. Petty as of December
      31,
      2005 was $0.





INTEREST
      EXPENSE, OTHER. Interest
      expense, other, decreased by $110,000 from $188,000 for the year ended December
      31, 2005 to $78,000 for the year ended December 31, 2006. Interest expense,
      other, primarily included the interest payable to callable secured convertible
      note holders in 2005. On August 23, 2005 we repaid all outstanding amounts
      due
      pursuant to the callable secured convertible notes.





NET
      LOSS .
      As a
      result of the factors described above, we reported a net loss of $14,625,000
      for
      the year ended December 31, 2006, compared to $8,957,000 for the year ended
      December 31, 2005, an increase of $5,668,000 or 63%.





**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of
      December 31, 2006, we had working capital of approximately $11,793,000 with
      a
      cash balance of $11,937,000. Management believes that there will be an increase
      in overall expenses to expand the Company’s operations on a global basis during
      2007. Although revenues are expected to increase, it is unclear whether
      additional cash resources will be required during the next twelve months. We
      may
      undertake additional debt or equity financings if needed to better enable us
      to
      grow and meet our future operating and capital requirements. However, we cannot
      guarantee that any additional equity or debt financing will be available in
      sufficient amounts or on acceptable terms when needed. If such financing is
      not
      available in sufficient amounts or on acceptable terms, our results of
      operations and financial condition may be adversely affected. In addition,
      equity financing may result in dilution to existing stockholders and may involve
      securities that have rights, preferences, or privileges that are senior to
      our
      common stock, and any debt financing obtained must be repaid regardless of
      whether or not we generate profits or cash flows from our business
      activities.





Net
      cash
      used in operating activities was 12,426,000 for the year ended December 31,
      2006, compared to $4,917,000 for the year ended December 31, 2005, an increase
      of $7,509,000 or 153%. The increase in net cash used in operating activities
      is
      primarily the result of our net loss.





Net
      cash
      used in investing activities was $822,000 for the year ended December 31, 2006,
      compared to net cash used in investing activities for the year ended December
      31, 2005 of $714,000, an increase of $108,000 or 15%. The net cash used in
      investing activities increased primarily due to the investment in ROO Media

      Europe of approximately $90,000, the investment in Factory 212 of 197,000,
      and a
      $119,000 increase in equipment purchased, offset by the decrease in investment
      in Bickhams/VideoDome of $80,000 and Reality of $200,000. On January 27, 2006
      ROO Media Corporation purchased 24% of ROO Media Europe Limited for $90,000.
      ROO
      Media Europe is now a wholly owned subsidiary of ROO Media
      Corporation.





Net
      cash
      provided by financing activities was $19,903,000 for the year ended December
      31,
      2006 compared to net cash provided by financing activities of $10,597,000 for
      the year ended December 30, 2005, an increase in net cash provided by financing
      activities of $9,306,000 or 88%.





Below
      is
      a description of significant financings we completed during the fiscal year
      ended December 31, 2006.





**AUGUST
      2006 FINANCING**





On
      August
      18, 2006, we entered into a Common Stock Purchase Agreement pursuant to which
      we
      sold an aggregate of 4,420,000 of shares of common stock and 2,210,000 warrants
      to purchase shares of common stock to 28 accredited investors (the “August 2006
      Financing”). The shares of common stock were sold at a price of $1.25 per share
      or an aggregate of $5,525,000. Each investor was issued warrants to purchase
      a
      number of shares of common stock equal to 50% of the number of shares of common
      stock purchased. The warrants have an exercise price of $2.00 per share and
      a
      term of five years.




14




The
      Company agreed to prepare and file a registration statement with the Securities
      and Exchange Commission registering the resale of the shares of common stock
      sold in the private placement on or prior to 30 days following the closing
      date.
      If the registration statement is not filed within such time or if the
      registration statement is not declared effective within 120 days following
      the
      closing date, the Company must pay liquidated damages to the investors equal
      to
      1% of the dollar amount of their investment for each calendar month or portion
      thereof that the registration statement is not filed or declared effective.
      The
      Company failed to fulfill its obligations to timely file the Registration
      Statement and owes approximately $166,000 in liquidated damages to the
      investors. The Registration Statement was declared effective on December 27,
      2006.





Savvian
      LLC (“Savvian”), Burnham Hill Partners, a division of Pali Capital, Inc.
      ("Burnham Hill") and Brimberg & Co. financial advisors ("Brimberg"),
      registered broker-dealers, acted as placement agents for the sale of the
      Company’s common stock. In connection with the closing, the Company paid the
      placement agents a cash fee equal to 6% of the gross proceeds. In addition,
      the
      Company issued to the placement agents 801,369 warrants to purchase shares
      of our common stock with an exercise price of $1.25 per share exercisable for
      a
      period of five years. In connection with the August 2006 Financing, we received
      net proceeds of $4,985,000 after payment of placement agent fees of $461,000,
      legal fees of $74,000 and escrow agent fees of $5,000. None of the investors
      are
      affiliates of the Company.





**NOVEMBER
      2006 FINANCING**





On
      November 14, 2006, we entered into a Securities Purchase Agreement pursuant
      to
      which we sold an aggregate of 8,378,377 shares of common stock and warrants
      to
      purchase 2,513,513 shares of common stock to 20 accredited investors (the
“November 2006 Financing”). The offering closed on November 16, 2006. The shares
      of common stock were sold at a price of $1.85 per share or an aggregate of
      $15,500,000. Each investor was issued warrants to purchase a number of shares
      of
      common stock equal to 30% of the number of shares of common stock purchased
      .
      The warrants have an exercise price of $3.00 per share and a term of five
      years.





The
      Company agreed to prepare and file a registration statement with the Securities
      and Exchange Commission registering the resale of the shares of common stock
      sold in the private placement on or prior to 30 days following the closing
      date.
      If the registration statement is not filed within such time, the Company must
      pay liquidated damages to the investors equal to 1% of the dollar amount of
      their investment for each calendar month or portion thereof that the
      registration statement is not filed, up to a maximum of 10%. Also, if the
      registration statement is not declared effective within 120 days following
      the
      closing date, the Company must pay liquidated damages to the investors equal
      to
      1% of the dollar amount of their investment for each calendar month or portion
      thereof that the registration statement is declared effective, up to a maximum
      of 10%. The Company failed to fulfill its obligations to timely file the
      Registration Statement and owe approximately $16,000 in liquidated damages
      to
      the investors. The Registration Statement was declared effective on December
      27,
      2006





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




In
      connection with the November 2006 Financing, we received net proceeds of
      $14,493,000 after payment of placement agent fees of $930,000, legal fees and
      expenses of $72,000, and escrow agent fees of $5,000.




**MARKET
      RISKS**




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




We
      are exposed to foreign exchange rate fluctuations as the financial results
      of
      foreign subsidiaries are translated into U.S. dollars in consolidation and
      as
      our foreign currency consumer receipts are converted into U.S. dollars. Our
      exposure to foreign exchange rate fluctuations also arises from payables and
      receivables to and from our foreign subsidiaries, vendors and customers. Foreign
      exchange rate fluctuations did not have a material impact on our financial
      results in the years ended December 31, 2006 and 2005.




15




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






Concentrations
      of credit risk with respect to trade accounts receivable are limited due to
      the
      wide variety of customers who are dispersed across many geographic regions.
      As
      of December 31, 2006, one customer accounted for approximately 11% of our trade
      accounts receivable portfolio. We routinely assess the financial strength of
      customers and, based upon factors concerning credit risk, we establish an
      allowance for uncollectible accounts. Management believes that accounts
      receivable credit risk exposure beyond such allowance is limited.





**GOING
      CONCERN**




The
      accompanying consolidated financial statements have been prepared assuming
      that
      we will continue as a going concern, which contemplates the realization of
      assets and the satisfaction of liabilities in the normal course of business. Since
      ROO Group's inception, we have incurred losses, had an accumulated deficit,
      and
      have experienced negative cash flows from operations. We expect this trend
      to
      continue. The expansion and development of our business will likely require
      additional capital. This condition raises substantial doubt about our ability
      to
      continue as a going concern. We expect cash flows from operating activities
      to
      improve, primarily as a result of an increase in revenues, although there can
      be
      no assurance thereof. The accompanying consolidated financial statements do
      not
      include any adjustments that might be necessary should we be unable to continue
      as a going concern. If we fail to generate positive cash flows or obtain
      additional financing when required, we may have to modify, delay or abandon
      some
      or all of our business and expansion plans.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





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





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





The
      policies discussed below are considered by our management to be critical to
      an
      understanding of our financial statements because their application places
      the
      most significant demands on our management's judgment, with financial reporting
      results relying on estimation about the effect of matters that are inherently
      uncertain. Specific risks for these critical accounting policies are described
      below. For these policies, our management cautions that future events rarely
      develop as forecast, and that best estimates may routinely require
      adjustment.




The
      SEC
      has issued cautionary advice to elicit more precise disclosure about accounting
      policies management believes are most critical in portraying our financial
      results and in requiring management's most difficult subjective or complex
      judgments.




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      judgments and estimates. On an on-going basis, we evaluate our estimates, the
      most significant of which include establishing allowances for doubtful accounts
      and determining the recoverability of our long-lived assets. The basis for
      our
      estimates are historical experience and various assumptions that are believed
      to
      be reasonable under the circumstances, given the available information at the
      time of the estimate, the results of which form the basis for making judgments
      about the carrying values of assets and liabilities that are not readily
      available from other sources. Actual results may differ from the amounts
      estimated and recorded in our financial statements.




We
      believe the following critical accounting policies affect our more significant
      judgments and estimates used in the preparation of our consolidated financial
      statements.




Revenue
      Recognition: Revenues are derived principally from professional services,
      digital media management and advertising. Revenue is recognized when service
      has
      been provided. We may enter into agreements whereby we guarantee a minimum
      number of advertising impressions, click-throughs or other criteria on our
      websites or products for a specified period. To the extent these guarantees
      are
      not met, we may defer recognition of the corresponding revenue until guaranteed
      delivery levels are achieved.




16




Allowance
      for Doubtful Accounts: We maintain an allowance for doubtful accounts for
      estimated losses resulting from our customers not making their required
      payments. Based on historical information, we believe that our allowance is
      adequate. Changes in general economic, business and market conditions could
      result in an impairment in the ability of our customers to make their required
      payments, which would have an adverse effect on cash flows and our results
      of
      operations. The allowance for doubtful accounts is reviewed monthly and changes
      to the allowance are updated based on actual collection experience. We use
      a
      combination of the specific identification method and analysis of the aging
      of
      accounts receivable to establish an allowance for losses on accounts
      receivable.




Goodwill
      and Intangible Asset Impairment: In assessing the recoverability of our goodwill
      and other intangibles we must make assumptions regarding estimated future cash
      flows and other factors to determine the fair value of the respective assets.
      This impairment test requires the determination of the fair value of the
      intangible asset. If the fair value of the intangible asset is less than its
      carrying value, an impairment loss will be recognized in an amount equal to
      the
      difference. If these estimates or their related assumptions change in the
      future, we may be required to record impairment charges for these assets. We
      adopted Statement of Financial Accounting Standards No. 142, "Goodwill and
      Other
      Intangible Assets," (FAS 142) effective January 1, 2002, and are required to
      analyze goodwill and indefinite lived intangible assets for impairment on at
      least an annual basis.




**RECENTLY
      ISSUED ACCOUNTING STANDARDS**




In
      December 2006, the Financial Accounting Standards
      Board ("FASB") issued FASB Staff Position EITF 00-19-2 ("FSP ETF 00-19-2")
      that
      addresses an issuer's accounting for registration payment arrangements. EITF
      00-19-2 specifies that the contingent obligation to make future payments or
      otherwise transfer consideration under a registration payment arrangement,
      whether issued as a separate agreement or included as a provision of a financial
      instrument or other agreement, should be separately recognized and measured
      in
      accordance with FASB Statement No. 5, *"Accounting
      for Contingencies".*The
      guidance in EITF 00-19-2 amends FASB Statements No. 133,*"Accounting
      for Derivative Instruments and Hedging Activities*,
      No.
      150,*Accounting
      for Certain Financial Instruments with Characteristics of Both Liabilities
      and
      Equity,*and
      FASB
      Interpretation No. 45,*Guarantor's
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others,*to
      include scope exceptions for registration payment arrangements. This
      pronouncement further clarifies that a financial instrument subject to a
      registration payment arrangement should be accounted for in accordance with
      other applicable generally accepted accounting principles (GAAP) without regard
      to the contingent obligation to transfer consideration pursuant to the
      registration payment arrangement. Under FSP 00-19-2, the contingent obligation
      to make future payments or otherwise transfer consideration under a registration
      payment arrangement shall be recognized and measured separately in accordance
      with Statement 5 and FASB Interpretation No. 14,*Reasonable
      Estimation of the Amount of a Loss*.
      FSP
      EITF 00-19-2 is effective immediately for registration payment arrangements
      entered into after December 21, 2006 and for financial statements issued for
      fiscal years beginning after December 15, 2006, and interim periods within
      those
      fiscal years.




In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”),
      which provides interpretive guidance on the consideration of the effects of
      prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. SAB 108 is effective for us as of December
      31, 2007. We have not completed our evaluation of the possible impact on our
      financial position, if any, related to implementation of SAB 108.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS
      157”). FAS 157 defines fair value and establishes a framework for measuring fair
      value in accordance with generally accepted accounting principles. This
      Statement also applies to other accounting pronouncements that require or permit
      a fair value measure. As defined by this Statement, the fair value of an Asset
      or Liability would be based on an “exit price” basis rather than an “entry
      price” basis. Additionally, the fair value should be market-based and not an
      entity-based measurement. SFAS 157 is effective for fiscal years beginning
      after
      November 15, 2007. The implementation of SFAS 157 is not expected to have a
      material impact on our consolidated financial statements.




In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements. This Interpretation prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      Specifically, FIN 48 requires the recognition in financial statements of the
      impact of a tax position, if that position is more likely than not of being
      sustained on audit, based on the technical merits of the position. Additionally,
      FIN 48 provides guidance on the de-recognition of previously recognized deferred
      tax items, classification, accounting for interest and penalties, and accounting
      in interim periods related to uncertain tax positions, as well as, requires
      expanded disclosures. FIN 48 is effective for fiscal years beginning after
      December 15, 2006, with the cumulative effect of the change in accounting
      principle recorded as an adjustment to opening retained earnings. We have not
      completed our evaluation of adopting FIN 48.




17




In
        March
        2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
        Assets - an amendment of FASB Statement No. 140” (“SFAS 156”). This Statement
        amends FASB Statement No. 140, “Accounting for Transfers and Servicing of
        Financial Assets and Extinguishments of Liabilities,” with respect to accounting
        for separately recognized servicing assets and servicing liabilities. This
        Statement clarifies when servicing rights should be separately accounted
        for,
        requires companies to account for separately recognized servicing rights
        initially at fair value, and gives companies the option of subsequently
        accounting for those servicing rights at either fair value or under the
        amortization method. SFAS 156 is effective for fiscal years beginning after
        September 15, 2006. The implementation of SFAS 156 is not expected to have
        a
        material impact on our consolidated financial statements.
  In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments - an amendment to FASB Statements No. 133 and 140” (“SFAS
        155”). SFAS155 simplifies the accounting for certain hybrid financial
        instruments containing embedded derivatives. SFAS 155 allows fair value
        measurement for any hybrid financial instrument that contains an embedded
        derivative that otherwise would require bifurcation under SFAS 133. In addition,
        it amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose
        entity from holding a derivative financial instrument that pertains to a
        beneficial interest other than another derivative financial instrument. SFAS
        155
        is effective for all financial instruments acquired, issued, or subject to
        a
        re-measurement (new basis) event occurring after the beginning of an entity's
        first fiscal year that begins after September 15, 2006. The implementation
        of
        SFAS 155 is not expected to have a material impact on our consolidated financial
        statements.


**ITEM
      7. FINANCIAL STATEMENTS.**





All
      financial information required by this Item is attached hereto at the end of
      this report beginning on page F-1 and is hereby incorporated by reference.





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





On
      January 30, 2004, Mark Cohen C.P.A., was dismissed as approved by our Board
      of
      Directors. Mark Cohen's report on the financial statements for either of the
      past two years did not contain an adverse opinion or disclaimer of opinion,
      and
      was not modified as to uncertainty, audit scope, or accounting principles.
      During the fiscal years ended July 31, 2003 and 2002, the reports by Mark Cohen
      on our financial statements contained a going concern opinion. During our two
      most recent fiscal years and subsequent period up to January 30, 2004, there
      were no disagreements with Mark Cohen on any matter of accounting principles
      or
      practices, financial statement disclosure, or auditing scope or procedure,
      which
      disagreements, if not resolved to Mark Cohen's satisfaction, would have caused
      it to make reference to the subject matter of the disagreement in connection
      with its report.





On
      January 30, 2004, subsequent to approval of our Board of Directors, we engaged
      Moore Stephens, P.C. to serve as our independent auditors. During the two fiscal
      years prior to 2004, and during any subsequent period through January 30, 2004,
      we did not consult with Moore Stephens on any accounting or auditing issues.





**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES.**





As
      of the
      end of the period covered by this report, we conducted an evaluation, under
      the
      supervision and with the participation of our chief executive officer and chief
      financial officer of our disclosure controls and procedures (as defined in
      Rule
      13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
      our chief executive officer and chief financial officer concluded that our
      disclosure controls and procedures are effective to ensure that information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is: (1) accumulated and communicated to our management, including
      our chief executive officer and chief financial officer, as appropriate to
      allow
      timely decisions regarding required disclosure; and (2) recorded, processed,
      summarized and reported, within the time periods specified in the Commission's
      rules and forms. There was no change to our internal controls or in other
      factors that could affect these controls during our last fiscal quarter that
      has
      materially affected, or is reasonably likely to materially affect, our internal
      control over financial reporting.





**ITEM
      8B.**  **OTHER
      INFORMATION.**





None.




18




**PART
      III**





**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
      WITH
      SECTION 16(A) OF THE EXCHANGE ACT.**





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




**Name**
            
            
            **Age**
            
            
            **Position**Robert
                Petty
            
            
            42
            
            
            Chief
                Executive Officer, President and Chairman of the Board of
                DirectorsLou
                Kerner
            
            
            45
            
            
            Chief
                Financial OfficerRobin
                Smyth
            
            
            53
            
            
            Executive
                Director and DirectorDouglas
                M. Chertok
            
            
            38
            
            
            Director





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





LOU
      KERNER. Mr. Kerner was appointed as Chief Financial Officer on December 4,
      2006.
      Mr. Kerner served as President and Chief Operating Officer of Bolt Media from
      May 2003 through August 2006, where he was responsible for day-to-day management
      of the corporation including strategy, finance, sales, marketing and business
      development. Prior to Bolt Mr. Kerner was as an equity analyst at Mark Asset
      Management from April 2002 through August 2002 where he followed media
      companies. From February 2000 through February 2002, Mr. Kerner was Chief
      Executive Officer of The .tv Corporation, where he built a successful, global
      organization to commercialize the top level domain .tv. The .tv Corporation
      was
      acquired by Verisign. Mr. Kerner holds a Bachelor of Arts degree from U.C.L.A
      and an MBA from Stanford University.




ROBIN
      SMYTH. Mr. Smyth currently serves as Executive Director of the Company. Mr.
      Smyth served as our Chief Financial Officer from December 2003 through December
      2006. Mr. Smyth was appointed as a Director on December 3, 2003, the effective
      date of the merger with ROO Media Corporation. Mr. Smyth became involved with
      ROO Media Corporation in 2002 and was appointed a Director in 2003. Since 1998
      Mr. Smyth was a partner at Infinity International, a consulting and IT
      recruitment operation. During the period from 1990 to 1998 Mr. Smyth worked
      for
      three years as EVP of Computer Consultants International in the U.S. and for
      five years in London as CEO of Computer Consultants International's European
      operations. Mr. Smyth was Secretary and a Director of the All-States group
      of
      companies involved in merchant banking operations, where he was responsible
      for
      corporate banking activities. Mr. Smyth is also on the Board of Directors of
      Reality Group Pty Ltd, Undercover Media Pty Ltd ROO Media (Australia) Pty Ltd,
      ROO Media Europe Ltd, Bickhams Media Inc, ROO Broadcasting Ltd, Factory 212
      Pty
      Ltd, ROO TV Pty Ltd, VideoDome.com Networks Inc, and Corporate Advice Pty
      Ltd.




DOUGLAS
      M. CHERTOK. Mr. Chertok was appointed as a Director on July 13, 2003. From
      March
      2000 through February 2006, Mr. Chertok served in various capacities with Hudson
      Management Associates LLC, a venture capital firm based in New York City. Since
      March 2006, Mr. Chertok has served as a General Partner of Archer Martin
      Ventures, a venture capital and advisory firm with offices in New York City
      and
      San Francisco.  Mr. Chertok also serves as a director of Daylife, Inc. and
      NMD Interactive, Inc.  Mr. Chertok holds a Bachelor of Science degree from
      Cornell University and Juris Doctorate (J.D) from New York
      University.





**BOARD
      COMPOSITION**





At
      each
      annual meeting of our stockholders, all of our directors are elected to serve
      from the time of election and qualification until the next annual meeting of
      stockholders following election. The exact number of directors is to be
      determined from time to time by resolution of the board of
      directors.




Each
      officer is elected by, and serves at the discretion of the board of directors.
      Each of our officers and employee directors devotes his full time to our
      affairs.




19




**AUDIT
      COMMITTEE FINANCIAL EXPERT**





We
      do not
      have an audit committee financial expert as that term is defined in Item 401
      of
      Regulation S-B. We have not been able to identify a suitable nominee to serve
      as
      an audit committee financial expert.





**CODE
      OF ETHICS**





We
      have
      adopted a Code of Ethics that applies to our Chief Executive Officer and Chief
      Financial Officer. The Code of Ethics has been filed with our amended annual
      report for the fiscal year ended December 31, 2003 on Form 10-KSB/A as Exhibit
      14.1, filed with the Securities and Exchange Commission on March 2, 2004. Upon
      request, we will provide to any person without charge a copy of our Code of
      Ethics. Any such request should be made to Attn: Lou Kerner, ROO Group, Inc.,
      228 East 45th Street, 8th Floor, New York, NY 10017.





**SECTION
      16(A) BENEFICIAL OWNERSHIP COMPLIANCE**





Section
      16(a) of the Securities Exchange Act of 1934 requires our directors and
      executive officers and persons who beneficially own more than ten percent of
      a
      registered class of our equity securities to file with the SEC initial reports
      of ownership and reports of change in ownership of common stock and other equity
      securities of our company. Officers, directors and greater than ten percent
      stockholders are required by SEC regulations to furnish us with copies of all
      Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4
      and
      amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year
      ended December 31, 2006, we believe that during the year ended December 31,
      2006, our executive officers, directors and all persons who own more than ten
      percent of a registered class of our equity securities complied with all Section
      16(a) filing requirements, except Mssrs. Chertok and Kerner did not timely
      file
      Form 3s.




20




**ITEM
      10.**  **EXECUTIVE
      COMPENSATION.**





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




**Executive
        Compensation Table**
  Name
                  & Principal Position
              
              Year
              
              
              Salary($)
              
              
              Bonus($)
              
              
              StockAwards($)
              
              
              Option
                  Awards($)
              
              
              Non-Equity
                  Incentive Plan Compensation ($)
              
              
              Change
                  in Pension Value and Non-Qualified Deferred Compensation Earnings
                  ($)
              
              
              All
                  Other Compensation ($)
              
              
              Total
                  ($)Robert
                  Petty (1)
              
              2006
              
              $
              310,766
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              310,766Chief
                  Executive Officer
              
              2005
              
              $
              253,846
              
              
              
              
              $
              600,000(4
              )
              
              
              
              
              
              
              
              
              
              
              
              
              $
              853,846President
                  and Chairman of the Board
              
              2004
              
              $
              192,051
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              192,051Robin
                  Smyth (2)
              
              2006
              
              $
              207,164
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              207,164Chief
                  Financial Officer
              
              2005
              
              $
              152,307
              
              
              
              
              $
              150,000(5
              )
              
              
              
              
              
              
              
              
              
              $
              5,000
              
              $
              307,307Secretary,
                  Treasurer, Principal Accounting Officer
              
              2004
              
              $
              101,619
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              101,619Lou
                  Kerner (3)
              
              2006
              
              $
              16,025
              
              $
              25,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              41,025Chief
                  Financial Officer, Principal Accounting Officer


(1)
            Mr.
                Petty became our Chief Executive Officer, President and Chairman
                on
                December 3, 2003.


(2)
            Mr.
                Smyth became our Chief Financial Officer, Secretary, Treasurer, Principal
                Accounting Officer and a Director on December 3, 2003.


(3)
            Mr.
                Kerner became our Chief Financial Officer and Principal Accounting
                Officer
                on November 17, 2006.


(4)
            On
                March 17, 2005, we issued 6,000,000 shares of Series A Preferred
                Stock to
                Robert Petty as a performance bonus. These shares have been valued
                at the
                equivalent of common shares valued as at the issue
                date.


(5)
            On
                March 17, 2005, we issued 1,500,000 shares of Series A Preferred
                Stock to
                Robin Smyth as a performance bonus. These shares have been valued
                at the
                equivalent of common shares valued as at the issue
                date




21




**Options
      Grant Table**





The
      following table sets forth information with respect to the named executive
      officers concerning the grant of stock options during the fiscal year ended
      December 31, 2006. We did not have during such fiscal year, and currently do
      not
      have, any plans providing for the grant of stock appreciation rights ("SARs").





**Option/SAR
                Grants in Last Fiscal Year****Individual
                Grants****(a)**
            
            **(b)**
            
            **(c)**
            
            **(d)**
            
            **(e)****Name**
            
            **Number
                of Securities Underlying Options/ SARs Granted
                (#)**
            
            **%
                of Total Options/ SARs Granted to Employees in Fiscal
                Year**
            
            **Exercise
                or Base Price ($/Sh)**
            
            **Expiration
                Date**Robert
                Petty
            
            
            600,000
            
            
            14
            %
            $
            2.20
            
            
            Nov.
                2010Robin
                Smyth
            
            
            450,000
            
            
            11
            %
            $
            2.20
            
            
            Nov.
                2010Lou
                Kerner
            
            
            500,000
            
            
            12
            %
            $
            2.20
            
            
            Nov.
                2010Doug
                Chertok
            
            
            100,000
            
            
            2
            %
            $
            2.10
            
            
            June
                2008Doug
                Chertok
            
            
            350,000
            
            
            8
            %
            $
            2.20
            
            
            Nov.
                2010




**AGGREGATE
      OPTION EXERCISES IN LAST FISCAL YEAR**





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





**COMPENSATION
      OF DIRECTORS**





With
      the
      exceptions of Robert Petty and Robin Smyth pursuant to their employment
      agreements described below, Doug Chertok receives a quarterly cash compensation
      of $20,000 for service as a Director. All directors are reimbursed for their
      reasonable out-of-pocket expenses incurred in connection with their duties
      to
      us.





**EMPLOYMENT
      AGREEMENTS**





On
      April
      1, 2004, we entered into an employment agreement with Robert Petty. Under the
      agreement, Mr. Petty agreed to serve as our President, Chief Executive Officer
      and Chairman of our Board of Directors. The expiration date of the agreement
      is
      March 31, 2006, but will automatically be extended for two additional years
      unless at least 90 days prior to such time either party notifies the other
      party
      that the term will not be extended. Mr. Petty's base salary under the agreement
      is $200,000 annually and will increase 10% each year. Mr. Petty's base salary
      will also be reviewed at least annually for merit increases and may, by action
      and in the discretion of the Board, be increased at any time or from time to
      time. Mr. Petty is entitled to receive bonus payments or incentive compensation
      as may be determined by our Board of Directors. In addition, Mr. Petty was
      granted an incentive stock option to purchase 120,000 shares of our common
      stock, which is exercisable at $2.00 per share and expires on August 23, 2007,
      as amended.




On
      November 1, 2004, we entered into an employment agreement with Robert Petty
      that
      supersedes the April 1, 2004 employment agreement except as it relates to the
      options that were issued to Mr. Petty. This agreement is also for the employment
      of Mr. Petty as our President, Chief Executive Officer and Chairman of our
      Board
      of Directors. The expiration of the agreement is October 31, 2007, but will
      automatically be extended for two additional years unless at least 90 days
      prior
      to such time either party notifies the other party that the term will not be
      extended. Mr. Petty's base salary under the agreement is $250,000 annually
      and
      will increase 10% each year. Mr. Petty's base salary will also be reviewed
      against milestones set by our Board of Directors, and be increased in line
      with
      these milestones at any time or from time to time. The agreement provides that
      we will provide Mr. Petty with the use of a motor vehicle and we will contribute
      10% of Mr. Petty's base salary to a 401K or similar plan. In addition, Mr.
      Petty
      is entitled to receive bonus payments or incentive compensation as may be
      determined by our Board of Directors.




On
      April
      1, 2004, we entered into an employment agreement with Robin Smyth. Under the
      agreement, Mr. Smyth agreed to serve as our Chief Financial Officer. The
      expiration date of the agreement is March 31, 2006, but will automatically
      be
      extended for two additional years unless at least 90 days prior to such time
      either party notifies the other party that the term will not be extended. Mr.
      Smyth's base salary under the agreement is $120,000 annually and will increase
      10% each year. Mr. Smyth's base salary will also be reviewed at least annually
      for merit increases and may, by action and in the discretion of the Board,
      be
      increased at any time or from time to time. Mr. Smyth is entitled to receive
      bonus payments or incentive compensation as may be determined by our Board
      of
      Directors. In addition, Mr. Smyth was granted an incentive stock option to
      purchase 60,000 shares of our common stock, which is exercisable at $2.00 per
      share and expires on August 23, 2007, as amended.




22




On
      November 1, 2004, we entered into an employment agreement with Robin Smyth
      that
      supersedes the April 1, 2004 employment agreement except as it relates to the
      options that were issued to Mr. Smyth. This agreement is also for the employment
      of Mr. Smyth as our Chief Financial Officer. The expiration of the agreement
      is
      October 31, 2007, but will automatically be extended for two additional years
      unless at least 90 days prior to such time either party notifies the other
      party
      that the term will not be extended. Mr. Smyth's base salary under the agreement
      is $150,000 annually and will increase 10% each year. Mr. Smyth's base salary
      will also be reviewed against milestones set by our Board of Directors, and
      be
      increased in line with these milestones at any time or from time to time. The
      agreement provides that we will provide Mr. Smyth with the use of a motor
      vehicle and we will contribute 10% of Mr. Smyth's base salary to a 401K or
      similar plan. In addition, Mr. Smyth is entitled to receive bonus payments
      or
      incentive compensation as may be determined by our Board of Directors.





On
      December 4, 2006, we entered into an employment agreement with Mr. Kerner.
      The
      agreement may be terminated by either party upon two weeks written notice.
      Mr.
      Kerner’s base salary under the agreement is $3,846.15 per week. Mr. Kerner’s
      base salary will be reviewed at least annually and the Company may determine
      at
      such time to vary the base salary. Pursuant to the terms of the agreement,
      Mr.
      Kerner shall receive a $25,000 bonus per calendar quarter, with the first
      quarter’s bonus paid upon execution of the agreement. In addition, Mr. Kerner
      was granted an incentive stock option to purchase 500,000 shares of our common
      stock, which is exercisable at $2.20 per share, and expires on November 16,
      2010.





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





The
      following table sets forth information regarding the beneficial ownership of
      our
      common stock as of March 28, 2007. The information in this table provides the
      ownership information for: each person known by us to be the beneficial owner
      of
      more than 5% of our common stock; each of our directors; each of our executive
      officers; and our executive officers and directors as a group.





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


Name
                  and Address
                of
                  Beneficial Owner
              
              Common
                  Stock
                Beneficially
                  Owned (1)
              
              Percentage
                  of
                Common
                  Stock (1)
              
              Series
                  A Preferred Stock Beneficially Owned (2)
              
              Percentage
                  of Series A Preferred Stock
              
              Percentage
                  of Total Vote (1) (2)Robert
                  Petty
              
              
              2,416,507
                  (3
              )
              
              8.6
              %
              
              6,000,000
              
              
              60
              %
              
              48.5
              %Robin
                  Smyth
              
              
              522,740
                  (4
              )
              
              1.9
              %
              
              1,500,000
              
              
              15
              %
              
              12.1
              %Douglas
                  Chertok
              
              
              139,315
                  (5
              )
              
              <1
              %
              
              
              
              
              
              
              
              <
                  1
              %Stephen
                  Quinn
              
              
              509,247
                  (6
              )
              
              1.8
              %
              
              500,000
              
              
              5
              %
              
              4.3
              %Lou
                  Kerner
              
              
              131,507
              
              
              <
                  1
              %
              
              0
              
              
              0
              
              
              <
                  1
              %Cobble
                  Creek Consulting, Inc.445
                  Central Ave.Cedarhurst,
                  NY 11516
              
              
              40,000
                  (7
              )
              
              <
                  1
              %
              
              1,000,000
              
              
              10
              %
              
              7.8
              %Rubin
                  Irrevocable Family Trust25
                  Highland Blvd.Dix
                  Hills, NY 11746
              
              
              60,000
                  (8
              )
              
              <
                  1
              %
              
              1,000,000
              
              
              10
              %
              
              7.8
              %Paul
                  Tudor Jones, IIc/o
                  Tudor Investment Corp.1275
                  King streetGreenwich,
                  CT 06831
              
              
              4,216,216(9
              )
              
              15.0
              %
              
              0
              
              
              0
              
              
              3.3
              %Ashford
                  Capital Partners, L.POne
                  Walkers Mill Rd.Wilmington,
                  DE 19807
              
              
              3,524,451(10
              )
              
              12.5
              %
              
              0
              
              
              0
              
              
              2.8
              %033
                  Asset Management
              
              
              1,922,455(11
              )125
                  High Street, Suite 1405Boston,
                  MA 02110Gotham
                  Holdings, L.PRLA
                  Management Co., LLCRussell
                  L. Anmuth650
                  Fifth Avenue, 6thFloorNew
                  York, NY 10019
              
              
              1,200,000(12
              )
              
              4.3
              %
              
              0
              
              
              0
              
              
              <1
              %Lewis
                  Asset Management, Corp.45
                  Rockefeller Plaza, Suite 2570New
                  York, NY 10111
              
              
              1,377,233(13
              )
              
              4.9
              %
              
              0
              
              
              0
              
              
              <1
              %All
                  Directors and Executive Officers as a Group (3 persons)
              
              
              3,210,068
              
              
              11.4
              %
              
              7,500,000
              
              
              75
              %
              
              60.8
              %
  23


(1)
            Applicable
                percentage ownership is based on 28,107,953 shares of common stock
                outstanding as of March 28, 2007, together with securities exercisable
                or
                convertible into shares of common stock within 60 days of March 28,
                2007
                for each stockholder. Beneficial ownership is determined in accordance
                with the rules of the Securities and Exchange Commission and generally
                includes voting or investment power with respect to securities. Shares
                of
                common stock that are currently exercisable or exercisable within
                60 days
                of March 28, 2007 are deemed to be beneficially owned by the person
                holding such securities for the purpose of computing the percentage
                of
                ownership of such person, but are not treated as outstanding for
                the
                purpose of computing the percentage ownership of any other
                person.


(2)
            Holders
                of Series A Preferred Stock are entitled to vote on all matters submitted
                to shareholders of the Company and are entitled to ten votes for
                each
                share of Series A Preferred Stock owned. Holders of shares of Series
                A
                Preferred Stock vote together with the holders of common stock on
                all
                matters and do not vote as a separate class. As of March 28, 2007
                there
                were 10,000,000 outstanding shares of Series A Preferred
                Stock.


(3)
            Represents:
                (a) 1,360,000 shares of common stock; (b) 120,000 shares of common
                stock
                issuable upon the exercise of vested stock options with an exercise
                price
                of $2.00 per share and an expiration date of August 23, 2007; (c)
                400,000
                shares of common stock issuable upon the exercise of vested stock
                options
                with an exercise price of $2.00 per share and an expiration date
                of August
                23, 2007; (d) 600,000 share of common stock issuable upon the exercise
                of
                stock options of which 157,808 will be vested within the next 60
                days with
                an exercise price of $2.20 per share and an expiration date of November
                16, 2010; and (e) 1,250,000 share of common stock issuable upon the
                exercise of stock options of which 138,699 will be vested within
                the next
                60 days with an exercise price of $4.50 per share and an expiration
                date
                of March 7, 2011; and (f) 240,000 shares of common stock issuable
                upon the
                conversion of outstanding shares of Series A Preferred
                Stock.


(4)
            Represents:
                (a) 32,000 shares of common stock owned directly by Mr. Smyth; (b)
                8,000
                shares of common stock owned indirectly through the Smyth Family
                Superannuation Fund; (c) 60,000 shares of common stock issuable upon
                the
                exercise of vested stock options with an exercise price of $2.00
                per share
                and an expiration date of August 23, 2007; (d) 200,000 shares of
                common
                stock issuable upon the exercise of vested stock options with an
                exercise
                price of $2.00 per share and an expiration date of August 23, 2007;
                (e)
                450,000 share of common stock issuable upon the exercise of stock
                options
                of which 118,356 will be vested within the next 60 days with an exercise
                price of $2.20 per share and an expiration date of November 16, 2010;
                (f)
                400,000 share of common stock issuable upon the exercise of stock
                options
                of which 44,384 will be vested within the next 60 days with an exercise
                price of $4.50 per share and an expiration date of March 7, 2011and
                (g)
                60,000 shares of common stock issuable upon the conversion of outstanding
                shares of Series A Preferred Stock.


(5)
            Represents
                (a) 100,000 shares of common stock issuable upon the exercise of
                stock
                options of which 47,260 will be vested within the next 60 days with
                an
                exercise price of $2.50 and an expiration date of June 15, 2008;
                and (b)
                350,000 share of common stock issuable upon the exercise of stock
                options
                of which 92,055 will be vested within the next 60 days with an exercise
                price of $2.20 and an expiration date of November 16, 2010.


(6)
            Represents
                (a) 100,000 shares of common stock issuable upon the exercise of
                stock
                options of which 60,274 will be vested within the next 60 days with
                and
                exercise price of $2.45 and an expiration date of February 15, 2010;
                (b)
                400,000 shares of common stock issuable upon the exercise of stock
                options
                of which 214,247 will be vested within the next 60 days with and
                exercise
                price of $3.00 and an expiration date of May 1, 2010; (c) 500,000
                shares
                of common stock issuable upon the exercise of stock options of which
                131,507 will be vested within the next 60 days with and exercise
                price of
                $2.20 and an expiration date of November 16, 2010; (d) 750,000 share
                of
                common stock issuable upon the exercise of stock options of which
                83,219
                will be vested within the next 60 days with an exercise price of
                $4.50 per
                share and an expiration date of March 7, 2011; and (e) 20,000 shares
                of
                common stock issuable upon the conversion of outstanding shares of
                Series
                A Preferred Stock.




24




(7)
            Represents
                40,000 shares of common stock issuable upon the conversion of outstanding
                shares of Series A Preferred Stock.


(8)
            Represents:
                (a) 20,000 shares of common stock; and (b) 40,000 shares of common
                stock
                issuable upon the conversion of outstanding shares of Series A Preferred
                Stock.


(9)
            As
                reported in a Schedule 13G filed with the Securities and Exchange
                Commission on November 22, 2006, Witches Rock Portfolio, Ltd. directly
                owns 2,597,374 shares of common stock and 779,212 warrants to purchase
                common stock of the Company. BVI Portfolio directly owns 419,815
                shares of
                common stock and 125,945 warrants. Tudor Investment Corporation provides
                investment advisory services to Witches Rock Portfolio and BVI Portfolio
                and may be deemed to beneficially own the securities held by Witches
                Rock
                Portfolio and BVI Portoflio, Ltd. TIC disclaims beneficial ownership
                of
                the securities held by Witches Rock Portfolio, LTD and BVI Portfolio,
                LTD.
                In addition, as the controlling shareholder of Tudor Investment
                Corporation and the indirect controlling shareholder of Tudor Proprietary
                Trading, L.L.C., Paul Tudor Jones, II may be deemed to be the beneficial
                owner of the shares of the Company held by Witches Portfolio, Ltd.,
                BVI
                Portfolio, Ltd., and Tudor Proprietary Trading, L.L.C. Tudor Proprietary
                Trading, L.L.C. owns 226,054 shares of common stock and 67,816 warrants
                to
                purchase shares of the Company’s common stock. Tudor Investment
                Corporation and Mr. Jones disclaims beneficial ownership of the securities
                held by Witches Rock Portfolio, Ltd, BVI Portfolio Ltd., and Tudor
                Proprietary Trading L.L.C...


(10)
            As
                reported in a Schedule 13G filed with the Securities and Exchange
                Commission on February 14, 2007, Represents 2,843,370 shares of common
                stock and 681,081 warrants. Theodore H. Ashford, President of Ashcap.
                Corp., the General Partner of Ashford Capital Partners, L.P. has
                voting
                and dispositive control over the securities held by Ashford Capital
                Partners, L.P.


(11)
            As
                reported in a Schedule 13G filed with the Securities and Exchange
                Commission on February 13, 2007, Represents 1,517,050 shares of common
                stock and 405,405 warrants.


(12)
            As
                reported in a Schedule 13G filed with the Securities and Exchange
                Commission on February 2, 2007. William A. Lewis has voting and
                dispositive control over the securities held by Lewis Opportunity
                Fund,
                LP.


(13)
            As
                reported in a Schedule 13G filed with the Securities and Exchange
                Commission on January 19, 2007, Gotham Holdings, RLA Management Co.
                LLC
                Russell Anmuth share power to vote and dispose of the 1,200,000 shares
                of
                common stock.




**SECURITIES
      AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**





The
      following table shows information with respect to each equity compensation
      plan
      under which the Company's common stock is authorized for issuance as of the
      fiscal year ended December 31, 2006. All common stock share amounts and exercise
      prices in this section have been adjusted to reflect a one-for-50 reverse split
      effective October 3, 2005.





**EQUITY
      COMPENSATION PLAN INFORMATION**





**Plan
                category**
            **Number
                of securities**
              **to
                be issued upon**
              **exercise
                of**
              **outstanding
                options,**
              **warrants
                and rights**
            **Weighted
                average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and rights**
            **Number
                of securities**
              **remaining
                available for future issuance under equity compensation plans (excluding
                securities reflected in column (a)****(a)**
            **(b)**
            **(c)****Equity
                compensation plans approved by security holders**
            -0-
            -0-
            -0-**Equity
                compensation plans not approved by security
                holders**
            6,135,000
            $2.32
            1,865,000**Total**
            6,135,000
            $2.32
            1,865,000




25




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





On
      November 16, 2006 our Board of Directors of ROO Group, Inc. increased the number
      of shares which may be issued under the 2004 Stock Option Plan to an aggregate
      of 8,000,000 shares of common stock.





As
      of
      December 31, 2006, the following options have been granted under our 2004 Stock
      Option Plan:


Exercise
                
                Date
                
                Vest
                
                ExpirationQuantity
                
                Price
                
                Granted
                
                Date
                
                DateRobert
                    Petty
                
                520,000
                
                $2.00
                
                August
                    23,2005
                
                August
                    23,2005
                
                August
                    23, 2007Robin
                    Smyth
                
                260,000
                
                $2.00
                
                August
                    23, 2005
                
                August
                    23, 2005
                
                August
                    23, 2007Robert
                    Petty
                
                600,000
                
                $2.20
                
                November
                    16, 2006
                
                November
                    16, 2008
                
                November
                    16, 2010Robin
                    Smyth
                
                450,000
                
                $2.20
                
                November
                    16, 2006
                
                November
                    16, 2008
                
                November
                    16, 2010Lou
                    Kerner
                
                500,000
                
                $2.20
                
                November
                    16, 2006
                
                November
                    16, 2008
                
                November
                    16, 2010Other
                    Staff
                
                110,000
                
                $2.00
                
                August
                    23, 2005
                
                August
                    23, 2005
                
                August
                    23, 2010Other
                    Staff
                
                611,000
                
                $2.00
                
                August
                    23, 2005
                
                August
                    23, 2007
                
                August
                    23, 2010Other
                    Staff
                
                200,000
                
                $2.45
                
                February
                    15, 2006
                
                February
                    15, 2008
                
                February
                    15, 2010Other
                    Staff
                
                545,000
                
                $3.00
                
                May
                    1, 2006
                
                May
                    1, 2008
                
                May
                    1, 2010Other
                    Staff
                
                60,000
                
                $2.00
                
                June
                    1, 2006
                
                June
                    1, 2008
                
                June
                    1, 2010Other
                    Staff
                
                226,000
                
                $2.40
                
                September
                    29, 2006
                
                September
                    29, 2008
                
                September
                    29, 2010Other
                    Staff
                
                1,073,000
                
                $2.40
                
                November
                    28, 2006
                
                November
                    28, 2008
                
                November
                    28, 2010Other
                    Staff
                
                50,000
                
                $3.05
                
                December
                    31, 2006
                
                December
                    31, 2008
                
                December
                    31, 2010


**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS.**





**LOANS
      FROM OUR CHIEF EXECUTIVE OFFICER/DIRECTOR**





On
      January 7, 2003, ROO Media entered into a new loan agreement with Mr. Petty
      to
      replace the loan agreement entered into with Mr. Petty dated July 29, 2001.
      The
      interest on the loan is 10% per annum and the outstanding balance as of December
      31, 2003 was $514,164. Mr. Petty has agreed that no demand for payment will
      be
      made to the company over the following 12 months and any principle repayment
      during any month above $20,000 will require board approval. The loan is secured
      by all of the assets of ROO Media. Our management believes that this loan is
      on
      terms at least as favorable as could have been obtained from an unrelated third
      party.





We
      have
      periodically received cash advances from Mr. Petty. These amounts are recorded
      as a loan payable. The interest on the loan is 10% per annum and the outstanding
      balance as of December 31, 2005 was $0. Interest expense for this loan amounts
      to $81 and $51 for the twelve months ended December 31, 2005 and 2004,
      respectively.





On
      May
      18, 2005, we entered into a note purchase agreement with Mr. Petty. As
      consideration for a loan of $600,000, we incurred a debt payable to Mr. Petty
      in
      the amount of $600,000. In connection with this loan, we paid transaction fees
      totaling $92,500, which includes a $60,000 placement agent fee in connection
      with the sale by Mr. Petty of $600,000 principal amount of secured convertible
      promissory notes (described below) and $32,500 in legal fees in connection
      with
      such transaction. As evidence of the $600,000 debt and a prior existing $500,000
      debt payable to Mr. Petty, we issued Mr. Petty a promissory note in the
      principal amount of $1,100,000. The principal sum of $1,100,000 plus interest
      at
      the rate of 10% per annum calculated beginning June 1, 2005 was due to be repaid
      on December 31, 2005. Our obligations under the promissory note were secured
      by
      a subordinated security interest in all of our assets. In October 2005, Mr.
      Petty converted $600,000 of the $1,100,000 principal amount promissory note
      into
      shares of our common stock at a price of $1.50 per share.




26




In
      connection with the May 18, 2005 loan from Mr. Petty, Mr. Petty personally
      sold
      an aggregate of $600,000 principal amount of secured convertible promissory
      notes to certain investors. The secured convertible promissory notes were
      convertible into common stock held by Mr. Petty at a price of $1.25 per share,
      as adjusted. Mr. Petty's obligations under the secured convertible promissory
      notes were secured by a security interest in the $1,100,000 principal amount
      promissory note payable by us to Mr. Petty. The secured convertible promissory
      notes bear interest at a rate of 8% per annum.





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





In
      connection with Mr. Petty's sale of the $600,000 principal amount secured
      convertible promissory notes Mr. Petty was personally obligated to issue
      warrants exercisable into shares of ROO Group, Inc. common stock owned by Mr.
      Petty to placement agents. On August 23, 2005 we assumed the liability for
      such
      warrants. This resulted in the issuance by us of warrants to purchase 48,000
      shares of our common stock exercisable for five years with an exercise price
      of
      $1.25 per share.





**ROO
      MEDIA**





Pursuant
      to the terms of an Agreement and Plan of Merger, dated December 2, 2003, between
      Virilitec, VRLT Acquisition Corp., a Delaware corporation and wholly-owned
      subsidiary of Virilitec, ROO Media, and Jacob Roth and Bella Roth, each an
      individual, ROO Media entered into an agreement to pay within 90 days after
      December 3, 2003, the effective date of the Merger, Virilitec's $62,500 debt
      to
      Jacob Roth, Virilitec's former Chief Executive Officer. The obligation to pay
      such debt is secured by the pledge of the 72,000,000 shares of the Virilitec
      Common Stock issued to Robert Petty, the Chief Executive Officer of ROO Media,
      after the merger. Our management believes that this agreement was on terms
      at
      least as favorable as could have been obtained from an unrelated third party.
      The final payment on this debt was made on May 10, 2004.





**BICKHAMS
      MEDIA, INC.**





On
      September 10, 2004, we entered into an agreement to purchase all of the
      outstanding shares of common stock of Bickhams Media, Inc. from Avenue Group,
      Inc. Avenue Group is a founding shareholder of ROO Group, Inc. and as of
      September 10, 2004 owned over 20% of our outstanding common stock. Also, in
      connection with the purchase of Bickhams, we agreed to guaranty all of the
      obligations of VideoDome under a promissory note of VideoDome that was issued
      to
      Avenue Group in October 2003 in the principal amount of $290,000. Our management
      believes that the terms of this transaction were at least as favorable as could
      have been obtained from an unrelated third party.





**SERIES
      A PREFERRED STOCK**





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




27




**ITEM
      13.**  **EXHIBITS.**




**ExhibitNumber**
            
            **Description**2.1
            
            Agreement
                and Plan of Merger dated as of December 2, 2003 by and among Virilitec
                Industries, Inc., ROO Media Corporation, VRLT Acquisition Corp.,
                and Jacob
                Roth and Bella Roth (Incorporated by reference to Form 8-K, filed
                with the
                Securities and Exchange Commission on December 18,
                2003)2.2
            
            Stock
                Purchase Agreement dated as of March 11, 2004 by and among the Company
                and
                the shareholders of Reality Group Pty Ltd (Incorporated by reference
                to
                Form 8-K, filed with the Securities and Exchange Commission on May
                17,
                2004)2.3
            
            Asset
                Purchase Agreement dated as of May 26, 2004 by and among the Company,
                Undercover Holdings Pty Ltd. and Undercover Media Pty Ltd. (Incorporated
                by reference to Form 8-K, filed with the Securities and Exchange
                Commission on June 16, 2004)2.4
            
            Stock
                Purchase Agreement dated as of September 10, 2004 by and among the
                Company
                and Avenue Group, Inc. in connection with the purchase of common
                stock of
                Bickhams Media, Inc. (Incorporated by reference to Form 8-K, filed
                with
                the Securities and Exchange Commission on September 22,
                2004)2.5
            
            Stock
                Purchase Agreementdated as of November 1, 2004 by and between Bickhams Media, Inc.,
                ROO
                Group, Inc., and Daniel and Vardit Aharonoff (Incorporated by reference
                to
                Form 8-K/A, filed with the Securities and Exchange Commission on
                November
                5, 2004)2.6
            
            Amendment
                No. 1 dated October 28, 2005 to Stock Purchase Agreement among ROO
                Group,
                Inc. and the shareholders of Reality Group Pty Ltd. (Incorporated
                by
                reference to Form 8-K/A, filed with the Securities and Exchange Commission
                on November 2, 2005)2.7
            
            Share
                Purchase Agreement dated October 28, 2005 by and among Roo Broadcasting
                Limited and the Sellers thereto (Incorporated by reference to Form
                8-K/A,
                filed with the Securities and Exchange Commission on November 2,
                2005)3.1
            
            Certificate
                of Incorporation of Virilitec Industries, Inc. (Incorporated by reference
                to Form 10-SB (File No. 000-25659), filed with the Securities and
                Exchange
                Commission on March 29, 1999)3.2
            
            Certificate
                of Amendment of Certificate of Incorporation of Virilitec Industries,
                Inc.
                filed with the State of Delaware on October 31, 2003 (Incorporated
                by
                reference to Form SB-2 (File No. 333-120605), filed with the Securities
                and Exchange Commission on November 18, 2004)3.3
            
            Certificate
                of Amendment to the Amended Certificate of Incorporation of Virilitec
                Industries, Inc. filed with the State of Delaware on February 18,
                2004
                (Incorporated by reference to Form SB-2 (File No. 333-120605), filed
                with
                the Securities and Exchange Commission on November 18,
                2004)3.4
            
            Certificate
                of Designation, Powers, Preferences and Rights of Series A Preferred
                Stock, filed with the State of Delaware on March 9, 2005 (Incorporated
                by
                reference to Form 8-K, filed with the Securities and Exchange Commission
                on March 14, 2005)3.5
            
            Certificate
                of Designation, Powers, Preferences and Rights of Series A Preferred
                Stock, filed with the State of Delaware on March 9, 2005 (Incorporated
                by
                reference to the Company’s Form 8-K filed with the Securities and Exchange
                Commission on March 14, 2005)3.6
            
            Amendment
                to the Certificate of Designation, Powers, Preferences and Rights
                of
                Series A Preferred Stock, filed with the State of Delaware on September
                30, 2005(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on October 4, 2005)3.7
            
            Certificate
                of Amendment to Amended Certificate of Incorporation, effective as
                of
                October 3, 2005 (Incorporated by reference to Form SB-2 (File No.
                333-131660), filed with the Securities and Exchange Commission on
                February
                8, 2006)3.8
            
            Bylaws
                (Incorporated by reference to Form 10-SB (File No. 000-25659), filed
                with
                the Securities and Exchange Commission on March 29,
                1999)4.1
            
            Stock
                Purchase Warrant issued to to AJW Offshore, Ltd., dated September
                10, 2004(Incorporated
                by reference to Form 8-K, filed with the Securities and Exchange
                Commission on September 16, 2004)4.2
            
            Stock
                Purchase Warrant issued to AJW Qualified Partners, LLC, dated September
                10, 2004(Incorporated
                by reference to Form 8-K, filed with the Securities and Exchange
                Commission on September 16, 2004)4.3
            
            Stock
                Purchase Warrant issued to AJW Partners, LLC, dated September 10,
                2004(Incorporated
                by reference to Form 8-K, filed with the Securities and Exchange
                Commission on September 16, 2004)4.4
            
            Stock
                Purchase Warrant issued to New Millennium Capital Partners II, LLC,
                dated
                September 10, 2004(Incorporated
                by reference to Form 8-K, filed with the Securities and Exchange
                Commission on September 16, 2004)4.5
            
            Stock
                Purchase Warrant issued to to AJW Offshore, Ltd., dated November
                23, 2004
                (Incorporated by reference to Form 8-K, filed with the Securities
                and
                Exchange Commission on November 30, 2004)4.6
            
            Stock
                Purchase Warrant issued to AJW Qualified Partners, LLC, dated November
                23,
                2004 (Incorporated by reference to Form 8-K, filed with the Securities
                and
                Exchange Commission on November 30, 2004)4.7
            
            Stock
                Purchase Warrant issued to AJW Partners, LLC, dated November 23,
                2004
                (Incorporated by reference to Form 8-K, filed with the Securities
                and
                Exchange Commission on November 30, 2004)4.8
            
            Stock
                Purchase Warrant issued to New Millennium Capital Partners II, LLC,
                dated
                November 23, 2004 (Incorporated by reference to Form 8-K, filed with
                the
                Securities and Exchange Commission on November 30,
                2004)4.9
            
            Stock
                Purchase Warrant issued to to AJW Offshore, Ltd., dated February
                3, 2005(Incorporated
                by reference to Form 8-K, filed with the Securities and Exchange
                Commission on February 15, 2005)




28




**Exhibit
                  Number**
              
              **Description**


4.10
            
            Stock
                Purchase Warrant issued to AJW Qualified Partners, LLC, dated February
                3,
                2005(Incorporated
                by reference to Form 8-K, filed with the Securities and Exchange
                Commission on February 15, 2005)4.11
            
            Stock
                Purchase Warrant issued to New Millennium Capital Partners II, LLC,
                dated
                February 3, 2005(Incorporated
                by reference to Form 8-K, filed with the Securities and Exchange
                Commission on February 15, 2005)4.12
            
            Promissory
                Note in the principal amount of $1,100,000 issued to Robert Petty
                (Incorporated by reference to the Company’s Form 8-K filed with the
                Securities and Exchange Commission on May 24, 2005)4.13
            
            Stock
                Purchase Warrant issued to to AJW Offshore, Ltd., dated July 18,
                2005(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on July 22, 2005)4.14
            
            Stock
                Purchase Warrant issued to AJW Qualified Partners, LLC, dated July
                18,
                2005(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on July 22, 2005)4.15
            
            Stock
                Purchase Warrant issued to AJW Partners, LLC, dated July 18, 2005(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on July 22, 2005)4.16
            
            Stock
                Purchase Warrant issued to New Millennium Capital Partners II, LLC,
                dated
                July 18, 2005(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on July 22, 2005)4.17
            
            Form
                of placement agent warrant in connection with August 2005 Equity
                Financing(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on August 25, 2005)4.18
            
            Form
                of placement agent warrant in connection with October 2005 Equity
                Financing (Incorporated by reference to the Company’s Form 8-K filed with
                the Securities and Exchange Commission on October 26,
                2005)4.19
            
            Form
                of investor warrant in connection with December 2005 Equity Financing
                (Incorporated by reference to the Company’s Form 8-K filed with the
                Securities and Exchange Commission on December 30,
                2005)4.20
            
            Form
                of placement agent warrantin
                connection with December 2005 Equity Financing (Incorporated by reference
                to the Company’s Form 8-K filed with the Securities and Exchange
                Commission on December 30, 2005)4.21
            
            Form
                of investor warrant in connection with August 2006 Equity Financing
                (Incorporated by reference to the Company’s Form 8-K filed with the
                Securities and Exchange Commission on August 28, 2006)4.22
            
            Form
                of warrant in connection with November 2006 Equity Financing (Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on November 20, 2006)5.1*
            
            Opinion
                and Consent of Sichenzia Ross Friedman Ference LLP10.1
            
            Employment
                Agreement with Robert Petty dated April 1, 2004 (Incorporated by
                reference
                to Form 10-QSB, filed with the Securities and Exchange Commission
                on
                August 16, 2004)10.2
            
            Employment
                Agreement with Robin Smyth dated April 1, 2004 (Incorporated by reference
                to Form 10-QSB, filed with the Securities and Exchange Commission
                on
                August 16, 2004)10.3
            
            Employment
                Agreement with Robert Petty dated November 1, 2004 (Incorporated
                by
                reference to Form SB-2 (File No. 333-120605), filed with the Securities
                and Exchange Commission on November 18, 2004)10.4
            
            Employment
                Agreement with Robin Smyth dated November 1, 2004 (Incorporated by
                reference to Form SB-2 (File No. 333-120605), filed with the Securities
                and Exchange Commission on November 18, 2004)10.5
            
            Sublease
                dated April 1, 2005 (Incorporated by reference to the Company’s Form 8-K
                filed with the Securities and Exchange Commission on June 13,
                2005)10.6
            
            AT&T
                Intelligent Content Distribution Service Agreement dated August 16,
                2001
                (Incorporated by reference to Form SB-2 (File No. 333-120605), filed
                with
                the Securities and Exchange Commission on November 18,
                2004)10.7
            
            Network
                Services Agreement with Speedera Networks, Inc. dated June 1, 2004
                (Incorporated by reference to Form SB-2 (File No. 333-120605), filed
                with
                the Securities and Exchange Commission on November 18,
                2004)10.8
            
            Securities
                Purchase Agreement, dated September 10, 2004, by and among ROO Group,
                Inc.
                andAJW
                Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and
                New
                Millennium Capital Partners II, LLC (Incorporated by reference to
                Form
                8-K, filed with the Securities and Exchange Commission on September
                16,
                2004)




29




**Exhibit
                  Number**
              
              **Description**


10.9
            
            Letter
                agreement dated May 12, 2005 between the Company,AJW
                Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and
                New
                Millennium Capital Partners II, LLC(Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on May 12, 2005)10.10
            
            Note
                Purchase Agreement made as of May 18, 2005 by and between ROO Group,
                Inc.
                and Robert Petty (Incorporated by reference to the Company’s Form 8-K
                filed with the Securities and Exchange Commission on May 24,
                2005)21.1
            
            Subsidiaries
                of the Company (Incorporated by reference to Form SB-2 (File No.
                333-131660), filed with the Securities and Exchange Commission on
                February
                8, 2006)31.1
            
            Certification
                by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act31.2
            
            Certification
                by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act32.1
            
            Certification
                by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code32.2
            
            Certification
                by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code




**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.**





**AUDIT
      FEES**





The
      aggregate fees billed for professional services rendered by our principal
      accountants for the audit of our financial statements, for the reviews of the
      financial statements included in our annual report on Form 10-KSB, and for
      other
      services normally provided in connection with statutory filings were $74,500
      and
      $70,765 for the years ended December 31, 2006 and December 31, 2005,
      respectively.





**AUDIT-RELATED
      FEES**





We
      incurred fees of $15,498 and $-0- for the years ended December 31, 2006 and
      December 31, 2005, respectively, for professional services rendered by our
      principal accountants that are reasonably related to the performance of the
      audit or review of our financial statements and not included in "Audit
      Fees."





**ALL
      OTHER FEES**





We
      did
      not incur any fees for other professional services rendered by our principal
      accountants during the years ended December 31, 2006 and December 31,
      2005.





**AUDIT
      COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES**





The
      board
      of directors acts as the audit committee, and consults with respect to audit
      policy, choice of auditors, and approval of out of the ordinary financial
      transactions.




30




**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**ROO
              GROUP,
              INC.**Dated:April
              2,
              2007
            By:
            /s/ Robert PettyRobert
              PettyChief
              Executive Officer




Dated:April
                2,
                2007
              By:
              /s/ Lou KernerLou
                KernerChief
                Financial Officer and Principal Accounting
                Officer


In
      accordance with the Exchange Act, 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/
                  Robert Petty
              
              Chief
                  Executive Officer, President and Chairman of the Board
              
              April
                  2, 2007Robert
                  Petty/s/
                  Lou Kerner
              
              Chief
                  Financial Officer and Principal Accounting Officer
              
              April
                    2, 2007Lou
                  Kerner/s/
                  Robin Smyth
              
              Executive
                  Director and Director
              
              April
                    2, 2007Robin
                  Smyth/s/
                  Douglas Chertok
              
              Director
              
              April
                    2, 2007Douglas
                  Chertok




31




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of


ROO
      Group, Inc. and Subsidiaries








We
      have
      audited the accompanying consolidated balance sheet of ROO Group, Inc. and
      Subsidiaries as of December 31, 2006, and the related consolidated statements
      of
      operations and comprehensive income (loss), stockholders' equity, and cash
      flows
      for each of the two years in the period 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 audit included consideration
      of
      internal control over financial reporting as a basis for 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 consolidated 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 position of ROO Group, Inc. and
      Subsidiaries as of December 31, 2006, and the results of their operations and
      their cash flows for each of the two years in the period then ended, in
      conformity with accounting principles generally accepted in the United States
      of
      America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 3 to the
      consolidated financial statements, the Company has suffered recurring losses
      and
      negative cash flows from operations that raise substantial doubt about its
      ability to continue as a going concern. Management's plans in regard to these
      matters are also discussed in Note 3. The consolidated financial statements
      do
      not include any adjustments that might result from the outcome of this
      uncertainty.





As
      discussed in Note 2 to the consolidated financial statements, effective January
      1, 2006, the Company adopted Statement of Financial Accounting Standards No.
      123
      (R), *"Share-Based
      Payment."*




MOORE
              STEPHENS, P. C.Certified Public Accountants.New
                York, New YorkMarch 26, 2007




F-1






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET AS OF DECEMBER 31, 2006**


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







***Assets:*****Current
                  assets:**Cash
                  and cash equivalents
              $11,937Accounts
                  receivable, net
              3,408Other
                  current assets
              1,151**Total
                  current assets**
              16,496Property
                  and equipment, net
              948Deferred
                  tax assets
              193Content,
                  net
              438Software,
                  net
              770Customer
                  list, net
              601Domain
                  names, net
              41Goodwill
              1,123**Total
                  assets**
              $20,610***Liabilities
                  and Stockholders' Equity:*****Current
                  liabilities:**Bank
                  overdraft and other obligations
              $634Accounts
                  payable
              1,773Accrued
                  expenses
              947Income
                  tax payable
              102Other
                  current liabilities
              1,247**Total
                  current liabilities**
              4,703**Capital
                  lease obligations**
              206**Total
                  liabilities**
              4,909**Commitments**
              --**Minority
                  interest**
              (89)**Stockholders'
                  Equity:**Series
                  A preferred shares, $0.0001 par value: authorized 10,000,000 shares;
                  issued and outstanding 10,000,000
              1Common
                  stock, $0.0001 par value: authorized 500,000,000 shares; issued
                  and
                  outstanding 26,074,813
              3Additional
                  paid-in capital
              44,738Accumulated
                  deficit
              (28,960)Accumulated
                  other comprehensive income
              8**Total
                  stockholders' equity**
              15,790**Total
                  liabilities and stockholders' equity**
              $20,610




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




F-2






**ROO
      GROUP, INC. AND SUBSIDIARIES**


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


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





**Years
                  endedDecember
                  31,****2006**
              
              **2005****Revenue**
              
              $
              9,768
              
              $
              6,619**Expenses:**Operations
              
              
              8,530
              
              
              4,465Research
                  and development
              
              
              2,140
              
              
              601Sales
                  and marketing
              
              
              5,318
              
              
              2,217General
                  and administrative (exclusive of non-cash compensation)
              
              
              6,098
              
              
              3,440Non-cash
                  compensation
              
              
              2,597
              
              
              1,911**Total
                  expenses**
              
              
              24,683
              
              
              12,634**(Loss)
                  from operations**
              
              
              (14,915
              )
              
              (6,015
              )Commission
                  on loan procurement
              
              
              --
              
              
              (60
              )Cost
                  of Omnibus Consent and Waiver agreement
              
              
              --
              
              
              (78
              )Redemption
                  premium on convertible notes
              
              
              --
              
              
              (801
              )Interest
                  income
              
              
              166
              
              
              7Interest
                  expense - related party
              
              
              --
              
              
              (81
              )Non-cash
                  interest expense - related party
              
              
              --
              
              
              (62
              )Interest
                  expense - other
              
              
              (78
              )
              
              (188
              )Financing
                  fees - convertible notes
              
              
              --
              
              
              (759
              )Registration
                  rights liquidated damages
              
              
              (70
              )
              
              (710
              )Loss
                  on sale of marketable securities
              
              
              --
              
              
              (18
              )**Net
                  (loss) before income taxes**
              
              
              (14,897
              )
              
              (8,765
              )**Income
                  tax benefit (expense)**
              
              
              92
              
              
              (124
              )**Net
                  (loss) before minority interest**
              
              
              (14,805
              )
              
              (8,889
              )**Minority
                  interest**
              
              
              180
              
              
              (68
              )**Deduct:**Preferred shares dividend
              
              
              --
              
              
              --**Net
                  (loss) available to common shareholders**
              
              $
              (14,625
              )
              $
              (8,957
              )**Basic
                  and diluted net (loss) per common share**
              
              $
              (0.92
              )
              $
              (1.40
              )**Weighted
                  average common shares outstanding**
              
              
              15,901,049
              
              
              6,403,458**Comprehensive
                  (loss):**Net
                  (loss)
              
              $
              (14,625
              )
              $
              (8,957
              )Foreign
                  currency translation
              
              
              42
              
              
              (38
              )Fair
                  market value adjustment for available for sale securities
              
              
              --
              
              
              10**Comprehensive
                  (loss)**
              
              $
              (14,583
              )
              $
              (8,985
              )


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




F-3





**ROO
      GROUP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


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





**Series
                  A**
                **Preferred
                  Shares**
              
              **Preferred**
                **Shares**
                **Par
                  Value**
              
              **Common**
                **Stock**
              
              **Common**
                **Stock**
                **Par
                  Value****Balance
                  January 1, 2005**
              
              
              --
              
              
              --
              
              
              3,911,683
              
              $
              --Issue
                  of stock in private placements
              
              
              --
              
              
              --
              
              
              7,034,834
              
              
              1Issue
                  of stock for registration rights liquidated damages
              
              
              --
              
              
              --
              
              
              236,667
              
              
              --Issue
                  of Series A Preferred shares for services
              
              
              2,000,000
              
              
              --
              
              
              --
              
              
              --Issue
                  of Series A Preferred shares as Performance Bonuses
              
              
              7,500,000
              
              
              1
              
              
              --
              
              
              --Issue
                  of stock for services
              
              
              --
              
              
              --
              
              
              5,818
              
              
              --Issue
                  of stock for share price guarantee related to Reality
                  Group
              
              
              --
              
              
              --
              
              
              359,280
              
              
              --Issue
                  of stock for achievement of milestones related to
                  Videodome
              
              
              --
              
              
              --
              
              
              40,000
              
              
              --Issue
                  of stock for the acquisition of Factory212
              
              
              --
              
              
              --
              
              
              10,000
              
              
              --Issue
                  of options for services
              
              
              --
              
              
              --
              
              
              --
              
              
              --Computed
                  discount on convertible debt
              
              
              --
              
              
              --
              
              
              --
              
              
              --Beneficial
                  conversion feature of convertible debt
              
              
              --
              
              
              --
              
              
              --
              
              
              --Issue
                  of stock on conversion of convertible debt
              
              
              --
              
              
              --
              
              
              1,178,154
              
              
              --Issue
                  of warrants on conversion of convertible debt
              
              
              --
              
              
              --
              
              
              --
              
              
              --Issue
                  of warrants for Omnibus Consent and Waiver agreement
              
              
              --
              
              
              --
              
              
              --
              
              
              --Issue
                  of stock upon conversion of stockholder loan payable
              
              
              --
              
              
              --
              
              
              400,000
              
              
              --Issue
                  of warrants for stockholder funding
              
              
              --
              
              
              --
              
              
              --
              
              
              --Issue
                  of warrants for services
              
              
              --
              
              
              --
              
              
              --
              
              
              --Foreign
                  currency translation adjustment
              
              
              --
              
              
              --
              
              
              --
              
              
              --Fair
                  market value adjustment for available for sale securities
              
              
              --
              
              
              --
              
              
              --
              
              
              --Net
                  (loss)
              
              
              --
              
              
              --
              
              
              --
              
              
              --**Balance
                  - December 31, 2005**
              
              
              9,500,000
              
              $
              1
              
              
              13,176,436
              
              $
              1Issue
                  of stock in private placements
              
              
              --
              
              
              --
              
              
              12,798,377
              
              
              2Stock-based
                  compensation
              
              
              --
              
              
              --
              
              
              --
              
              
              --Issue
                  of Series A Preferred shares as Performance Bonuses
              
              
              500,000
              
              
              --
              
              
              --
              
              
              --Buyback
                  of stock for share price guarantee related to Reality
                  Group
              
              
              --
              
              
              --
              
              
              --
              
              
              --Issue
                  of stock for achievement of milestones related to
                  Undercover
              
              
              --
              
              
              --
              
              
              100,000
              
              
              --Issue
                  of warrants for services
              
              
              --
              
              
              --
              
              
              --
              
              
              --Foreign
                  currency translation adjustment
              
              
              --
              
              
              --
              
              
              --
              
              
              --Net
                  (loss)
              
              
              --
              
              
              --
              
              
              --
              
              
              --**Balance
                  - December 31, 2006**
              
              
              10,000,000
              
              $
              1
              
              
              26,074,813
              
              $
              3


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




F-4






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]**


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





**Other**
                **Additional**
                **Paid-in**
                **Capital**
              
              
              **Accumulated**
                **(Deficit)**
              
              
              **Accumulated
                  Other**
                **Comprehensive**
                **Income**
                **(Loss)**
              
              
              **Total**
                **Shareholders’**
                **Equity****Balance
                  January 1, 2005**
              
              $
              6,930
              
              $
              (5,378
              )
              
              (7
              )
              $
              1,545Issue
                  of stock in private placements
              
              
              11,900
              
              
              --
              
              
              --
              
              
              11,901Issue
                  of stock for registration rights liquidated damages
              
              
              710
              
              
              --
              
              
              --
              
              
              710Issue
                  of Series A Preferred shares for services
              
              
              200
              
              
              --
              
              
              --
              
              
              200Issue
                  of Series A Preferred shares as Performance Bonuses
              
              
              749
              
              
              --
              
              
              --
              
              
              750Issue
                  of stock for services
              
              
              19
              
              
              --
              
              
              --
              
              
              19Issue
                  of stock for share price guarantee related to Reality
                  Group
              
              
              (200
              )
              
              --
              
              
              --
              
              
              (200
              )Issue
                  of stock for achievement of milestones related to
                  Videodome
              
              
              44
              
              
              --
              
              
              --
              
              
              44Issue
                  of stock for the acquisition of Factory212
              
              
              25
              
              
              --
              
              
              --
              
              
              25Issue
                  of options for services
              
              
              849
              
              
              --
              
              
              --
              
              
              849Computed
                  discount on convertible debt
              
              
              32
              
              
              --
              
              
              --
              
              
              32Beneficial
                  conversion feature of convertible debt
              
              
              351
              
              
              --
              
              
              --
              
              
              351Issue
                  of stock on conversion of convertible debt
              
              
              807
              
              
              --
              
              
              --
              
              
              807Issue
                  of warrants on conversion of convertible debt
              
              
              117
              
              
              --
              
              
              --
              
              
              117Issue
                  of warrants for Omnibus Consent and Waiver agreement
              
              
              78
              
              
              --
              
              
              --
              
              
              78Issue
                  of stock upon conversion of stockholder loan payable
              
              
              600
              
              
              --
              
              
              --
              
              
              600Issue
                  of warrants for stockholder funding
              
              
              62
              
              
              --
              
              
              --
              
              
              62Issue
                  of warrants for services
              
              
              93
              
              
              --
              
              
              --
              
              
              93Foreign
                  currency translation adjustment
              
              
              --
              
              
              --
              
              
              (38
              )
              
              (38
              )Fair
                  market value adjustment for available for sale securities
              
              
              --
              
              
              --
              
              
              10
              
              
              10Net
                  (loss)
              
              
              --
              
              
              (8,957
              )
              
              --
              
              
              (8,957
              )**Balance
                  - December 31, 2005**
              
              $
              23,366
              
              $
              (14,335
              )
              $
              (35
              )
              $
              8,998Issue
                  of stock in private placements
              
              
              19,476
              
              
              --
              
              
              --
              
              
              19,478Stock-based
                  compensation
              
              
              2,404
              
              
              --
              
              
              --
              
              
              2,404Issue
                  of Series A Preferred shares as Performance Bonuses
              
              
              64
              
              
              --
              
              
              --
              
              
              64Issue
                  of stock for share price guarantee related to Reality
                  Group
              
              
              (961
              )
              
              --
              
              
              --
              
              
              (961
              )Issue
                  of stock for achievement of milestones related to
                  Undercover
              
              
              260
              
              
              --
              
              
              --
              
              
              260Issue
                  of warrants for services
              
              
              129
              
              
              --
              
              
              --
              
              
              129Foreign
                  currency translation adjustment
              
              
              --
              
              
              --
              
              
              43
              
              
              43Net
                  (loss)
              
              
              --
              
              
              (14,625
              )
              
              --
              
              
              (14,625
              )**Balance
                  - December 31, 2006**
              
              $
              44,738
              
              $
              (28,960
              )
              $
              8
              
              $
              15,790


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




F-5






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Amounts
      in Thousands)**







**Years
                  ended December 31,****2006**
              
              **2005****Operating
                  Activities:**Net
                  (loss)
              
              $
              (14,625
              )
              $
              (8,957
              )Adjustments
                  to reconcile net (loss) to net cash (used) by operating
                  activities:Provision
                  for doubtful accounts
              
              
              225
              
              
              31Depreciation
              
              
              173
              
              
              147Amortization
                  of intangible assets
              
              
              674
              
              
              581Non
                  cash cost of Omnibus Consent and Waiver agreement
              
              
              --
              
              
              78Non
                  cash stock based compensation
              
              
              2,404
              
              
              --Non
                  cash warrants and options for services
              
              
              129
              
              
              961Non
                  cash preferred stock for consulting services
              
              
              --
              
              
              200Non
                  cash preferred stock issued as performance bonuses
              
              
              64
              
              
              750Non
                  cash interest expense related party
              
              
              --
              
              
              62Non
                  cash stock for registration rights liquidated damages
              
              
              --
              
              
              710Non
                  cash interest on convertible note
              
              
              --
              
              
              759Loss
                  on sale of marketable securities
              
              
              --
              
              
              18Minority
                  interest in subsidiaries
              
              
              (183
              )
              
              68Changes
                  in assets and liabilities:(Increase)
                  decrease in:Accounts
                  receivable
              
              
              (2,134
              )
              
              (449
              )Other
                  assets
              
              
              (767
              )
              
              1Increase
                  (decrease) in:Accounts
                  payable
              
              
              673
              
              
              381Accrued
                  expenses
              
              
              297
              
              
              (96
              )Income
                  tax payable
              
              
              (198
              )
              
              54Other
                  liabilities
              
              
              842
              
              
              (217
              )Total
                  adjustments
              
              
              2,199
              
              
              4,040**Net
                  Cash (Used) By Operating Activities - Forward**
              
              
              (12,426
              )
              
              (4,917
              )**Investing
                  Activities:**Investment
                  Bickhams/Videodome
              
              
              (20
              )
              
              (100
              )Investment
                  in Reality Group
              
              
              --
              
              
              (200
              )Investment
                  in ROO Media Europe
              
              
              (90
              )
              
              --Cash
                  paid in Sputnik acquisition
              
              
              (197
              )
              
              --Net
                  cash received in acquisition of Factory212
              
              
              --
              
              
              9Proceeds
                  from sale of marketable securities
              
              
              --
              
              
              7Capitalization
                  of content
              
              
              (160
              )
              
              (194
              )Purchase
                  of equipment
              
              
              (355
              )
              
              (236
              )**NetCash(Used) By Investing Activities - Forward**
              
              $
              (822
              )
              $
              (714
              )


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




F-6





**ROO
      GROUP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Amounts
      in Thousands)**





**Years
                  ended December 31,****2006**
              
              **2005****Net
                  Cash (Used) By Operating Activities - Forwarded**
              
              $
              (12,426
              )
              $
              (4,917
              )**Net
                  Cash (Used) By Investing Activities - Forwarded**
              
              
              (822
              )
              
              (714
              )**Financing
                  Activities:**Proceeds
                  from private placements, net
              
              
              19,478
              
              
              11,901Bank
                  overdraft and other obligations
              
              
              445
              
              
              (260
              )Increase
                  in related party loans
              
              
              --
              
              
              225(Decrease)
                  in related party loans
              
              
              --
              
              
              (51
              )Convertible
                  note
              
              
              --
              
              
              1,465Repayment
                  of convertible note
              
              
              --
              
              
              (2,743
              )Increase
                  in stockholder loan
              
              
              --
              
              
              600(Decrease)
                  in stockholder loan
              
              
              --
              
              
              (500
              )(Decrease)
                  in capital leases
              
              
              (20
              )
              
              (40
              )**Net
                  Cash Provided By Financing Activities**
              
              
              19,903
              
              
              10,597**Effect
                  of Exchange Rate Changes on Cash**
              
              
              8
              
              
              (14
              )**Net
                  Increase in Cash**
              
              
              6,663
              
              
              4,952**Cash
                  - Beginning of Year**
              
              
              5,274
              
              
              322**Cash
                  - End of Year**
              
              $
              11,937
              
              $
              5,274**Supplemental
                  Disclosures of Cash Flow Information:**Cash
                  paid during the years for:Income
                  taxes
              
              $
              120
              
              $
              72Interest
              
              $
              78
              
              $
              279
 **Supplemental
        Disclosure of Non-Cash Investing and Financing
        Activities:**





During
      the year ended December 31, 2006, the Company acquired equipment under capital
      lease obligations of $211. During the year ended December 31, 2005 the Company
      issued 50,000 warrants at an exercise price of $3.00 to Brimberg & Co for
      investor relations services. These warrants were valued under the Black-Scholes
      method as $93. Also, during the year ended December 31, 2005, the Company issued
      5,818 shares of common stock to a Company for investor relations services for
      a
      value of $19. The directors believe that all the non-cash financing and
      investing activities were for fair value.




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




F-7







**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







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





ROO
      Group, Inc. ("we," "us," "our," the "Company" or "ROO Group"), through our
      operating subsidiaries, is a digital media company in the business of providing
      products and solutions that enable the broadcast of topical video content from
      our customers' Internet websites. We specialize in providing the technology
      and
      content required for video to be played on computers via the Internet as well
      as
      emerging broadcasting platforms such as wireless devices (e.g., mobile phones
      and PDAs). Our core activities include the aggregation of video content, media
      management, traditional and online advertising, hosting, and content delivery.
      We currently service websites based in Europe, Australia and the United States.
      We also generate revenues through the operation of Reality Group Pty. Ltd
      ("Reality Group") and Factory 212 Pty Ltd. (“Factory212”), our 51% owned
      subsidiaries. Reality Group and Factory212 are providers of integrated
      communication solutions, including direct marketing, internet advertising and
      sales promotion. Reality Group and Factory212 generate revenue through
      traditional and online services to their clients including strategy, creative
      and media placement.





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





***Principles
      of Consolidation -*** The
      consolidated financial statements include the accounts of ROO Group, Inc.,
      its
      wholly owned subsidiary ROO Media Corporation, its wholly owned subsidiary
      Bickhams Media, Inc. (“Bickhams”) and its 51% owned subsidiary Reality Group.
      Included in the consolidation with ROO Media Corporation are ROO Media
      Corporation’s wholly owned subsidiary ROO Media (Australia) Pty Ltd. and ROO
      Media (Australia) Pty Ltd.’s wholly owned subsidiary Undercover Media Pty Ltd.
      (“Undercover”), its wholly owned subsidiary ROO Media Europe Pty Ltd, its wholly
      owned subsidiary ROO Broadcasting Limited, its 51% owned subsidiary Factory212
      (included since November 1, 2005) and its wholly owned subsidiary ROO TV Pty
      Ltd. Included in the consolidation with Bickhams is Bickhams’ wholly owned
      subsidiary VideoDome.com Networks, Inc. (“VideoDome”).





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




F-8




**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







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





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





***Fair
      value of Financial Instruments -*** SFAS
      No.
      107, "Disclosures about Fair Value of Financial Instruments," defines the fair
      value of a financial instrument as the amount at which the instrument could
      be
      exchanged in a current transaction between willing parties. In assessing the
      fair value of our cash and cash equivalents, trade receivables, other current
      assets, accounts payables, and other current liabilities, management concluded
      that the carrying amount of these financial instruments approximates fair value
      because of their short maturities.





***Risk
      Concentrations -*** Financial
      instruments which potentially subject us to concentrations of credit risk
      consist principally of cash and cash equivalents and trade accounts receivable.
      We place our cash and cash equivalents with high credit quality institutions
      to
      limit credit exposure. We believe no significant concentration of credit risk
      exists with respect to these investments. The amount of cash beyond insured
      amounts as of December 31, 2006, was $11,837.





Concentrations
      of credit risk with respect to trade accounts receivable are limited due to
      the
      nature of our customers who are dispersed across many industries and geographic
      regions. The allowance for doubtful accounts as of December 31, 2006 was $243.
      As of December 31, 2006, one customer accounted for approximately 11% of our
      trade accounts receivable. We routinely assess the financial strength of
      customers and, based upon factors concerning credit risk, we establish an
      allowance for doubtful accounts. Management believes that accounts receivable
      credit risk exposure beyond such allowance is limited.





We
      generally do not require collateral for our financial instruments.





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




F-9






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







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





***Cash
      and Cash Equivalents -*** We
      consider all highly liquid investments with original maturities of ninety days
      or less when purchased to be cash and cash equivalents. Such investments are
      valued at quoted market prices. Cash equivalents amounted to $11,017 as of
      December 31, 2006.





***Property
      and Equipment -*** Property
      and equipment are stated at cost less accumulated depreciation. Depreciation
      is
      provided for using the straight-line and declining balance methods of accounting
      over the estimated useful lives of the assets [See Note 6].





Routine
      maintenance and repair costs are charged to expense as incurred and renewals
      and
      improvements that extend the useful life of the assets are capitalized. Upon
      sale or retirement, the cost and related accumulated depreciation are eliminated
      from the respective accounts and any resulting gain or loss is reported in
      the
      statement of operations.





***Income
      Taxes -*** Pursuant
      to SFAS No. 109, "Accounting for Income Taxes," income tax expense [or benefit]
      for the year is the sum of deferred tax expense [or benefit] and income taxes
      currently payable [or refundable]. Deferred tax expense [or benefit] is the
      change during the year in a company's deferred tax liabilities and assets.
      Deferred tax liabilities and assets are determined based on differences between
      financial reporting and tax bases of assets and liabilities, and are measured
      using the enacted tax rates and laws that will be in effect when the differences
      are expected to reverse.





***Intangible
      Assets -*** Intangible assets of the Company are recorded at cost less accumulated
      amortization. Amortization is computed using the straight-line method over
      the
      estimated useful lives of the assets, with periods of up to five years. All
      intangible assets are reviewed for impairment annually or more frequently if
      deemed necessary and no impairment write-offs were recorded in 2005 and 2006
      [See Note 8].





***Research
      and Development -*** Costs
      incurred in research and development are expensed as incurred. Software
      development costs are required to be capitalized when a product’s technological
      feasibility has been established through the date the product is available
      for
      general release to customers. The Company does not capitalize any software
      development costs, as technological feasibility is generally not established
      until a working model is completed, at which time substantially all development
      is complete.





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




F-10






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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





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





***Stock-Based
      Compensation -*** On
      January 1, 2006, we adopted SFAS No. 123R, " *Share-Based
      Payment* ,"
      or
      SFAS 123R, which is a revision of SFAS No. 123 " *Accounting
      For Stock-Based Compensation* ,"
      or
      SFAS 123, and supersedes APB No. 25, " *Accounting
      For Stock Issues To Employees,* "
      or APB
      25. Among other items, SFAS 123R requires companies to record compensation
      expense for share-based awards issued to employees and directors in exchange
      for
      services provided. The amount of the compensation expense is based on the
      estimated fair value of the awards on their grant dates and is recognized over
      the required service periods. Our share-based awards include stock options
      and
      restricted stock awards. Prior to our adoption of SFAS 123R, we applied the
      intrinsic value method set forth in APB 25 to calculate the compensation expense
      for share-based awards. Historically, we have generally set the exercise price
      for our stock options equal to the market value on the grant date. As a result,
      the options generally had no intrinsic value on their grant dates, and we did
      not record any compensation expense unless the terms of the options were
      subsequently modified. For restricted stock awards, the calculation of
      compensation expense under APB 25 and SFAS 123R is the same.





We
      adopted SFAS 123R using the modified prospective transition method, which
      requires the application of the accounting standard to all share-based awards
      issued on or after January 1, 2006 and any outstanding share-based awards that
      were issued but not vested as of January 1, 2006. Accordingly, our consolidated
      financial statements for the years ended December 31, 2005 have not been
      restated to reflect the impact of SFAS 123R. For the year ended December 31,
      2006, we recognized $2,597 of stock-based compensation expense in our
      consolidated financial statements. We recognized expense because we had (a)
      stock options granted prior to January 1, 2006 that had not yet vested as of
      January 1, 2006 and (b) stock options granted subsequent to January 1, 2006.





The
      estimated fair value underlying our calculation of compensation expense for
      stock options is based on the Black-Scholes pricing model. [See Note 12] SFAS
      123R requires forfeitures of share-based awards to be estimated at the time
      of
      grant and revised, if necessary, in subsequent periods if our estimates change
      based on the actual amount of forfeitures we have experienced. In the pro-forma
      information required under SFAS 123 for periods prior to January 1, 2006, we
      accounted for forfeitures as they occurred.





SFAS
      123R
      requires us to calculate the pool of excess tax benefits, or the APIC pool,
      available as of January 1, 2006, to absorb tax deficiencies recognized in
      subsequent periods, assuming we had applied the provisions of the standard
      in
      prior periods. Pursuant to the provisions of FASB Staff Position 123R-3,
      " *Transition
      Election Related To Accounting For The Tax Effects of Share-Based Payment
      Awards,"* we
      adopted the alternative method for determining the tax effects of share-based
      compensation, which, among other things, provides a simplified method for
      estimating the beginning APIC pool balance.





***Financing
      Fees Convertible Notes -*** Financing Fees Convertible Notes reclassifies non cash expenses relating to
      the
      issuance of various convertible notes to investors in the Company. All such
      convertible securities were retired prior to December 31, 2005.




F-11






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







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





***Net
      (Loss) Per Share -*** We
      compute net (loss) income per common share under the provisions of Statement
      of
      Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
      establishes standards for computing and presenting earnings per share. SFAS
      No.
      128 requires us to report both basic net (loss) income per share, which is
      based
      on the weighted average number of common shares outstanding during the period,
      and diluted net (loss) income per share, which is based on the weighted average
      number of common shares outstanding plus all potential dilutive common shares
      outstanding. All equivalent shares underlying options, warrants, and convertible
      Series A Preferred Stock were excluded from the calculation of diluted loss
      per
      share because the Company had net losses for all years presented and therefore
      equivalent shares would have an anti-dilutive effect.





***Restatement
      of Shares -*** Effective October 3, 2005, the Company amended its Certificate of Incorporation
      to effect a one-for-50 reverse split of the Company's issued and outstanding
      shares of common stock. All references to numbers or values of the Company's
      shares have been adjusted to reflect this one-for-50 reverse split. All option
      amounts and exercise prices have been adjusted to reflect the stock
      split.





***Reclassification
      -*** Certain
      prior period amounts have been reclassified to conform to the current
      presentation.




F-12




**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







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





***Recent
      Accounting Pronouncements -*** In
      December 2006, the Financial Accounting Standards Board ("FASB") issued FASB
      Staff Position EITF 00-19-2 ("FSP ETF 00-19-2") that addresses an issuer's
      accounting for registration payment arrangements. EITF 00-19-2 specifies that
      the contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as a
      separate agreement or included as a provision of a financial instrument or
      other
      agreement, should be separately recognized and measured in accordance with
      FASB
      Statement No. 5, *"Accounting
      for Contingencies".* The
      guidance in EITF 00-19-2 amends FASB Statements No. 133, *"Accounting
      for Derivative Instruments and Hedging Activities* ,
      No.
      150, *Accounting
      for Certain Financial Instruments with Characteristics of Both Liabilities
      and
      Equity,* and
      FASB
      Interpretation No. 45, *Guarantor's
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others,* to
      include scope exceptions for registration payment arrangements. This
      pronouncement further clarifies that a financial instrument subject to a
      registration payment arrangement should be accounted for in accordance with
      other applicable generally accepted accounting principles (GAAP) without regard
      to the contingent obligation to transfer consideration pursuant to the
      registration payment arrangement. Under FSP 00-19-2, the contingent obligation
      to make future payments or otherwise transfer consideration under a registration
      payment arrangement shall be recognized and measured separately in accordance
      with Statement 5 and FASB Interpretation No. 14, *Reasonable
      Estimation of the Amount of a Loss* .
      FSP
      EITF 00-19-2 is effective immediately for registration payment arrangements
      entered into after December 21, 2006 and for financial statements issued for
      fiscal years beginning after December 15, 2006, and interim periods within
      those
      fiscal years.





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”),
      which provides interpretive guidance on the consideration of the effects of
      prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. SAB 108 is effective for us as of December
      31, 2007. We have not completed our evaluation of the possible impact on our
      financial position, if any, related to implementation of SAB 108.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS
      157”). FAS 157 defines fair value and establishes a framework for measuring fair
      value in accordance with generally accepted accounting principles. This
      Statement also applies to other accounting pronouncements that require or permit
      a fair value measure. As defined by this Statement, the fair value of an Asset
      or Liability would be based on an “exit price” basis rather than an “entry
      price” basis. Additionally, the fair value should be market-based and not an
      entity-based measurement. SFAS 157 is effective for fiscal years beginning
      after
      November 15, 2007. The implementation of SFAS 157 is not expected to have a
      material impact on our consolidated financial statements.




F-13






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







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





***Recent
      Accounting Pronouncements (Continued)***





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements. This Interpretation prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      Specifically, FIN 48 requires the recognition in financial statements of the
      impact of a tax position, if that position is more likely than not of being
      sustained on audit, based on the technical merits of the position. Additionally,
      FIN 48 provides guidance on the de-recognition of previously recognized deferred
      tax items, classification, accounting for interest and penalties, and accounting
      in interim periods related to uncertain tax positions, as well as, requires
      expanded disclosures. FIN 48 is effective for fiscal years beginning after
      December 15, 2006, with the cumulative effect of the change in accounting
      principle recorded as an adjustment to opening retained earnings. We have not
      completed our evaluation of adopting FIN 48.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets - an amendment of FASB Statement No. 140” (“SFAS 156”). This Statement
      amends FASB Statement No. 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities,” with respect to accounting
      for separately recognized servicing assets and servicing liabilities. This
      Statement clarifies when servicing rights should be separately accounted for,
      requires companies to account for separately recognized servicing rights
      initially at fair value, and gives companies the option of subsequently
      accounting for those servicing rights at either fair value or under the
      amortization method. SFAS 156 is effective for fiscal years beginning after
      September 15, 2006. The implementation of SFAS 156 is not expected to have
      a
      material impact on our consolidated financial statements.





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment to FASB Statements No. 133 and 140” (“SFAS
      155”). SFAS155 simplifies the accounting for certain hybrid financial
      instruments containing embedded derivatives. SFAS 155 allows fair value
      measurement for any hybrid financial instrument that contains an embedded
      derivative that otherwise would require bifurcation under SFAS 133. In addition,
      it amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial instrument. SFAS
      155
      is effective for all financial instruments acquired, issued, or subject to
      a
      re-measurement (new basis) event occurring after the beginning of an entity's
      first fiscal year that begins after September 15, 2006. The implementation
      of
      SFAS 155 is not expected to have a material impact on our consolidated financial
      statements.




F-14






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(3)
      Going Concern***





The
      accompanying consolidated financial statements have been prepared assuming
      that
      we will continue as a going concern, which contemplates the realization of
      assets and the satisfaction of liabilities in the normal course of business.
      We
      have incurred substantial net operating losses and used substantial amounts
      of
      cash in our operating activities. Since ROO Group’s inception, we have incurred
      losses, had an accumulated deficit, and have experienced negative cash flows
      from operations. We expect this trend to continue. The expansion and development
      of our business will likely require additional capital. This condition raises
      substantial doubt about our ability to continue as a going concern. We expect
      cash flows from operating activities to improve, primarily as a result of an
      increase in revenue, although there can be no assurance thereof. The
      accompanying consolidated financial statements do not include any adjustments
      that might be necessary should we be unable to continue as a going concern.
      If
      we fail to generate positive cash flows or obtain additional financing when
      required, we may have to modify, delay or abandon some or all of our business
      and expansion plans.





***(4)
      Acquisitions***





Under
      the
      agreement related to the purchase of VideoDome by Bickhams the following
      milestones have been satisfied. In December 2004 the first milestone was reached
      and we issued 20,000 shares of common stock and $100 in cash to Mr. Aharonoff.
      In May 2005 the requirements of the second milestone were reached and we issued
      40,000 shares of common stock and $100 in cash to Mr. Aharonoff. In April 2006,
      the third and final milestone payment of $20 in cash was paid to Mr. Aharonoff.





The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed at the date of acquisition (November 1, 2004) and is
      inclusive of milestone payments made subsequent to that date.




F-15


**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(4)
      Acquisitions (Continued)***





On
      October 28, 2005, ROO Broadcasting Limited ("ROO Broadcasting"), a wholly owned
      subsidiary of the Company, and the shareholders of Factory 212 Pty Ltd.
      ("Factory212") entered into an agreement, pursuant to which ROO Broadcasting
      acquired 51% of the outstanding ordinary shares of Factory212. Factory212 is
      an
      Australian based interactive marketing agency. As consideration for the ordinary
      shares of Factory212, the Company issued 10,000 shares (the "Initial Shares")
      of
      the Company's common stock to the Factory212 shareholders. Subject to the
      conditions described below, the Company may issue additional shares ("Additional
      Shares") of common stock to the Factory212 shareholders, issuable after December
      31, 2007, calculated as follows:




51%
      of
      [(1 * Factory212 Revenue) + (4 * Factory212 Earnings)]


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


Average
      ROO Share Price





where:
      "Factory212 Revenue" means the billings less all media and third party supplier
      costs of Factory212 for the twelve month period ending December 31, 2007;
      "Factory212 Earnings" means the earnings of Factory212 before tax and after
      deduction of interest and all other expenses for the twelve month period ending
      December 31, 2007; and "Average ROO Share Price" means the average price of
      the
      Company's common stock during the final five trading days of December
      2007.





If
      the
      Company does not issue the computed number of Additional Shares, ROO
      Broadcasting’s 51% ownership of Factory212 will be reduced on a pro rata basis
      by the difference between the computed number of Additional Shares and the
      actual number of Additional Shares issued. If the Company does not issue any
      Additional Shares, ROO Broadcasting will relinquish all of its 51% ownership
      of
      Factory212. However, if the Factory212 Earnings are greater than 15% of the
      Factory212 Revenue and the number of Additional Shares to be issued are less
      than 4.9% of the then current outstanding shares of common stock of the Company,
      the Company must proceed with issuing the maximum number of Additional Shares
      in
      accordance with the above formula.





The
      acquisition of Factory212 was conditioned upon the parties entering into the
      Amendment described above under "Amendment to Reality Group Purchase Agreement."
      If the Company fails to meet its material obligations under the terms of the
      Amendment, then the Company and ROO Broadcasting agreed that the Factory212
      shareholders may in their sole discretion require that ROO Broadcasting
      relinquish all of its ownership of Factory212. In such event, the Company agreed
      that the Factory 212 shareholders shall be entitled to retain ownership of
      their
      Initial Shares.





The
      operations of Factory212 during the period from November 1, 2005 to December
      31,
      2006 have been included in the consolidated statements.




F-16






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(4)
      Acquisitions (Continued)***




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





On
      October 1, 2006, Factory 212 Pty Ltd. (“Factory212”), a 51% owned subsidiary of
      the Company, and the shareholders of Sputnik Agency Pty Ltd. (“Sputnik”) entered
      into an agreement, pursuant to which Factory212 acquired the business and assets
      of Sputnik. Sputnik is an Australian based interactive marketing agency. As
      consideration for the business and assets of Sputnik, Factory212 issued shares
      representing 24.5% of the issued shares in Factory212 to the shareholders of
      Sputnik. These shares shall be issued through the reduction in the shareholding
      of all shareholders other than ROO Broadcasting. Also, a cash amount of $250
      is
      payable by ROO Broadcasting to the shareholders of Sputnik. In addition to
      this
      amount, 50% of any further payment of Additional Shares, as described in the
      agreement between Factory212 and ROO Broadcasting, will made to the shareholders
      of Sputnik less the cash amount of $250. Factory212 acknowledges and agrees
      to
      such payment and that accordingly, they will receive 50% less than originally
      provided in Additional Shares. The cash payment of $250 was made in December
      2006.





The
      operations of Sputnik, which are included in the operations of Factory212,
      during the period from October 1, 2006 to December 31, 2006 have been included
      in the consolidated statements.




F-17






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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





***(4)
      Acquisitions (Continued)***





The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed at the date of acquisition (October 1, 2006).




Current
                  assets
              
              $
              43Property,
                  Plant and Equipment
              
              
              55Intangible
                  Asset - Customer List
              
              
              262Total
                  Assets Acquired
              
              
              360Current
                  Liabilities
              
              
              163Total
                  Liabilities Assumed
              
              
              163**Net
                  Assets Acquired**
              
              $
              197


On
      October 1, 2006, The Reality Group Pty Ltd. (“Reality Group”), a 51% owned
      subsidiary of the Company, and the shareholders of Cooee Melbourne Pty Ltd.
      (“Cooee”) entered into an agreement, pursuant to which Reality Group acquired
      the business and assets of Cooee. Cooee is a provider of integrated
      communication solutions, including direct marketing, internet advertising and
      sales promotion. As consideration for the business and assets of Cooee, Reality
      Group will make a cash payment monthly for a period of 21 months to the
      shareholders of Cooee, subject to adjustment as follows. For the first six
      months, a payment of approximately $20 will be paid to Cooee at the conclusion
      of the month. After every six months, the amount due and payable to Cooee will
      be reconciled against revenue earned and paid from Cooee’s clients. At the end
      of each six month period, a reconciliation statement will be prepared and
      provided by Reality Group to Cooee. In the event that revenue from the six
      month
      period exceeds $394 (based on the pro rata expectation of a $788 annualized
      revenue) or is less than $394, the variance percentage between the expected
      $394
      revenue shall be either adjusted by way of deduction or an increase in respect
      of the fee paid in the following six month period in equal
      installments.





The
      operations of Cooee, which are included in the operations of Reality Group,
      during the period from October 1, 2006 to December 31, 2006 have been included
      in the consolidated statements.





As
      of
      December 31, 2006, $179 has been recorded as Intangible Assets - Customer
      Lists.





On
      November 21, 2006, we issued 100,000 shares of common stock in full and final
      settlement of the milestones detailed in the Undercover Media Purchase
      Agreement. The shares were valued at $260, based on the closing trading value
      of
      the shares on the previous day of $2.60. The value of these shares have been
      recorded as an intangible asset on the balance sheet and included in
“Content”.




F-18





**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(5)
      Commitments***





*Leases* - The
      Company is a party to a number of non-cancelable lease agreements primarily
      involving office premises and computer equipment. Computer equipment leases
      are
      generally for three year periods. There are three leases of office premises.
      The
      first is in Australia and is for a five year period ending in July 2011. The
      second is in New York and is for three years and ten months ending in November
      2008 with no renewal options. The third is in Australia and is for four years
      ending in September 2010.





The
      following is a schedule of future minimum payments under capital leases and
      operating leases and obligations under capital leases (present value of future
      minimum rentals) as of December 31, 2006.




Periods
                    January to December unless stated otherwise
                
                Capital
                
                Operating
                    Property
                
                Total2007
                
                $
                79
                
                $
                742
                
                $
                8212008
                
                
                80
                
                
                733
                
                
                8132009
                
                
                45
                
                
                463
                
                
                5082010
                
                
                45
                
                
                476
                
                
                5212011
                
                
                74
                
                
                309
                
                
                383Thereafter
                
                
                --
                
                
                109
                
                
                109Total
                    Minimum Lease Payments
                
                
                323
                
                $
                2,832
                
                $
                3,155Less
                    Amount Representing Interest
                
                
                (47
                )***Total
                    Obligations Under Capital Leases***
                
                $
                277




Short-term
      capital lease obligations of $71 is included in other current liabilities in
      the
      accompanying consolidated balance sheet.





Rent
      expense amounted to $743 and $336 for the years ended December 31, 2006 and
      2005, respectively.




F-19






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(6)
      Property and Equipment***





Property
      and equipment at December 31, 2006 consists of the following:





MotorMotor
            
            Vehicles
            
            Computer
            
            Leasehold
            
            Furniture
                and
            
            OfficeVehicles
            
            Capital
                Lease
            
            Software
            
            Improvements
            
            Fixtures
            
            Equipment
            
            TotalCost
            
            $
            8
            
            $
            176
            
            $
            114
            
            $
            182
            
            $
            304
            
            $
            857
            
            $
            1,641Accumulated
                Depreciation
            
            
            (6
            )
            
            (108
            )
            
            (68
            )
            
            (26
            )
            
            (24
            )
            
            (461
            )
            
            (693
            )Net
            
            $
            2
            
            $
            68
            
            $
            46
            
            $
            156
            
            $
            280
            
            $
            396
            
            $
            948Estimated
                useful life
            
            
            6
                years
            
            
            7
                years
            
            
            2
                years
            
            
            5
                years
            
            
            5
                years
            
            
            4
                years




Depreciation
      expense (including amortization of capital lease assets) amounts to $173 and
      $147 for the years ended December 31, 2006 and 2005, respectively.




F-20






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(7)
      Income Taxes***





The
      (provision) benefit for income taxes consisted of the following:


Years
                  ended December 31,2006
              
              2005Current:Australian
                  Federal Tax Expense
              
              $
              84
              
              $
              (105
              )Non-Current:Australian
                  Federal Tax Expense
              
              
              8
              
              
              (19
              )***Totals***
              
              $
              92
              
              $
              (124
              )The
                  reconciliation of reported income tax expense to the amount of
                  income tax
                  expense that would result from applying Australian federal tax
                  rates to
                  pretax income is as follows:Statutory
                  Federal Income Tax
              
              $
              138
              
              $
              (117
              )Other
                  (Non Allowable Deductions)
              
              
              (46
              )
              
              (7
              )***Totals***
              
              $
              92
              
              $
              (124
              )The
                  components of deferred tax assets and liabilities as of December
                  31, 2006
                  for Australian federal taxes, are as follows:Deferred
                  Tax Assets:Provision
                  Accounts
              
              $
              30Depreciation
              
              
              (7
              )Other
                  Liabilities
              
              
              20Tax
                  Loss Carryforward
              
              
              150***Total***
              
              $
              193




At
      December 31, 2006, we had substantial U.S. federal net operating tax loss
      carryforwards expiring at various dates through 2026. The Tax Reform Act of
      1986
      enacted a complex set of rules which limits a company's ability to utilize
      net
      operating loss carryforwards and tax credit carryforwards in periods following
      an ownership change. These rules define an ownership change as a greater than
      50
      percent point change in stock ownership within a defined testing period which
      is
      generally a three-year period. As a result of stock issued by us from time
      to
      time, including the stock issued related to the conversion of outstanding
      warrants, or the result of other changes in ownership of our outstanding stock,
      we may have experienced an ownership change and consequently our utilization
      of
      net operating loss carryforwards could be significantly limited. A 100%
      valuation allowance has been established due to the uncertainty about the
      realization of the deferred tax asset.




F-21






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(8)
      Goodwill and Intangible Assets***





As
      of
      December 31, 2006, goodwill is $1,123 and it is comprised of $1,033, which
      represents the excess of acquisition costs over the fair value of net assets
      of
      the Reality Group acquisition at the date of acquisition of $1,990 less $957,
      which represents the buyback of shares which was recorded as a reduction of
      goodwill. Also included in goodwill is $90 related to the acquisition of the
      remaining 24% of ROO Media Europe Limited.





At
      December 31, 2006 intangible assets include the following:





Customer
                List
            
            Software
            
            Content
            
            Domain
                NameCost
            
            $
            1,110
            
            $
            1,300
            
            $
            791
            
            $
            54Less
                Amortization
            
            
            (509
            )
            
            (530
            )
            
            (353
            )
            
            (13
            )Totals
            
            $
            601
            
            $
            770
            
            $
            438
            
            $
            41




Estimated
      future annual amortization expense as of December 31, 2006 is as
      follows:





Customer
                List
            
            Software
            
            Content
            
            Domain
                Name2007
            
            $
            355
            
            $
            265
            
            $
            266
            
            $
            112008
            
            
            126
            
            
            265
            
            
            172
            
            
            112009
            
            
            71
            
            
            226
            
            
            
            
            
            112010
            
            
            49
            
            
            14
            
            
            
            
            
            8Totals
            
            $
            601
            
            $
            770
            
            $
            438
            
            $
            41





The
      customer lists were acquired as a component of the Reality Group, Factory212,
      Sputnik and Cooee acquisitions and are being amortized over a 4 year period
      on a
      straight line basis. The software is being amortized over a 5 year period on
      a
      straight line basis. Content is made up of digital videos, audio, and
      photographs and is capitalized at the cost of production. Content is amortized
      over a 2 year period on a straight line basis. The Company purchased the domain
      name www.roo.com in
      November 2005 and it is being amortized over a 5 year period on a straight
      line
      basis.





The
      Company’s policy is to regularly review goodwill and intangible assets to
      determine if they have been permanently impaired by adverse conditions. As
      of
      December 31, 2006 management does not believe the goodwill or intangible assets
      to be impaired.




F-22






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(9)
      2004 Callable Secured Convertible Notes and Related Statement of Operations
      Effects***




On
      September 10, 2004, the Company entered into a securities purchase agreement
      for
      the sale of (i) $3,000 in callable secured convertible notes and (ii) warrants
      to purchase 3,000,000 shares of our common stock.





Upon
      placement of the $3,000 callable secured convertible notes and the issuance
      of
      the 3,000,000 detachable warrants we recorded the event under the guidance
      of
      the Emerging Issues Task Force (EITF) issue number 00-27 "Application of issue
      No. 98-5 to Certain Convertible Instruments".





We
      computed the value of a beneficial conversion feature related to the notes
      as
      $351 and expensed the amount as interest expense during the year ended December
      31, 2005. We also recorded a discount of $32 for the detachable warrants issued
      in conjunction with the callable secured convertible notes.





On
      July
      18, 2005, we entered into a securities purchase agreement for the sale of:
      (i)
      $2,500 in callable secured convertible notes; and (ii) warrants to purchase
      100,000 shares of our common stock. The warrants were valued under the
      Black-Scholes method of $117.





On
      August
      18, 2005, we entered into an omnibus consent and waiver agreement with the
      holders of the then outstanding callable secured convertible notes (the
      "Noteholders"). Under the agreement, the Noteholders consented to a private
      placement of up to 5,333,333 shares of the Company's common stock at a purchase
      price of $1.50 per share in one or more closings. Noteholders agreed to amend
      the amount of consideration required to prepay the then outstanding callable
      secured convertible notes in full to: (a) payment of $3,400 in cash within
      five
      business days of the date of the agreement; and (b) issuance of warrants
      entitling the Noteholders to purchase 60,000 shares of the Company's common
      stock with a fixed exercise price of $1.50 per share exercisable for a period
      of
      five years from the issue date. The warrants were valued under the Black-Scholes
      method at $78. In addition, the Noteholders waived certain notice and other
      requirements in order to facilitate prepayment of the outstanding callable
      secured convertible notes. The warrants were issued by the Company on October
      11, 2005.





On
      August
      23, 2005, the Company repaid the holders of the Company’s then outstanding
      callable secured convertible notes.




F-23






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(10)
      Preferred Shares***





On
      March
      9, 2005, the Board of Directors of the Company amended the Company’s Certificate
      of Incorporation to designate the rights of Series A Preferred Stock. The
      Certificate of Designation authorizes the Company to issue up to 10,000,000
      shares of Series A Preferred Stock, par value $.0001 per share. The Series
      A
      Preferred Stock has a stated value of $.0001 and a liquidation preference over
      the Company’s common stock and any other class or series of capital stock whose
      terms expressly provide that the holders of Series A Preferred Stock should
      receive preferential payment. Holders of Series A Preferred Stock are entitled
      to vote on all matters submitted to shareholders of the Company and are entitled
      to ten votes for each share of Series A Preferred Stock owned. Holders of shares
      of Series A Preferred Stock vote together with the holders of common stock
      on
      all matters and do not vote as a separate class.





Beginning
      two years from the date of issuance of the Series A Preferred Stock, each one
      share of Series A Preferred Stock is convertible, at the option of the holder,
      into two shares of the Company’s common stock. However, holders cannot convert
      any share of Series A Preferred Stock if the market price of the Company’s
      common stock is below $0.40 per share.





On
      March
      17, 2005, ROO Group, Inc. (the “Company”) issued 6,000,000 shares of Series A
      Preferred Stock to its Chief Executive Officer, Robert Petty, and 1,500,000
      shares of Series A Preferred Stock to its Chief Financial Officer, Robin Smyth.
      These shares have been valued at the equivalent number (2:1) of common shares
      valued as at the issue date to a combined valuation of $750. These shares were
      issued as a performance bonus to Messrs. Petty and Smyth for, among other
      things, their role in helping expand and grow the Company’s business operations.





Also
      on
      March 17, 2005, the Company issued an aggregate of 2,000,000 shares of Series
      A
      Preferred Stock to two accredited investors as consideration for investor
      relations services. These shares have been valued at the equivalent number
      (2:1)
      of common shares valued as at the issue date to a combined valuation of
      $200.





On
      September 30, 2005, the Company amended the terms of its Series A Preferred
      Stock to provide that: (1) the holders thereof may not convert shares of Series
      A Preferred Stock if the market price of the Common Stock is below $3.00 per
      share; and (2) removing the following restriction on the holders thereof from
      converting shares of Series A Preferred Stock immediately prior to a change
      in
      control of the Company:





"if
      at
      the time of a conversion under this Section 5.2 the market price of the Common
      Stock is below $0.40 per share, then each share of Series A Preferred Stock
      shall convert into such number of shares of Common Stock equal to (x) two (2),
      multiplied by (y) the closing price of the Common Stock on the date of the
      event
      triggering an automatic conversion under this Section 5.2 divided by
      $0.20." ****




F-24





**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(10)
      Preferred Shares (Continued)***





On
      June
      30, 2006, ROO Group, Inc. (the “Company”) issued 500,000 shares of Series A
      Preferred Stock to an employee. These shares were valued at the equivalent
      number (1:25) of common shares based upon the fair market value as at the issue
      date at $64. Such amount is included in "Non-Cash Compensation". These shares
      were issued as a performance bonus for, among other things, the employee’s role
      in helping expand and grow the Company’s business operations.





***(11)
      Stock Issuances***





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





On
      August
      18, 2006, the Company entered into a Common Stock Purchase Agreement pursuant
      to
      which the Company sold 4,420,000 shares of its common stock and 2,210,000
      warrants to purchase shares of common stock to accredited investors, a number
      of
      which are existing shareholders of the Company. The offering closed on August
      23, 2006. The warrants were valued under the Black-Scholes method as $2,658.
      The
      shares of common stock were sold at a price of $1.25 per share resulting in
      gross proceeds of $5,525. Each investor was issued warrants to purchase a number
      of shares of common stock equal to 50% of the number of shares of common stock
      purchased. The warrants have an exercise price of $2.00 per share and a term
      of
      five years.





The
      Company agreed to prepare and file a registration statement with the Securities
      and Exchange Commission registering the resale of the shares of common stock
      sold in the private placement on or prior to 30 days following the closing
      date.
      If the registration statement was not filed within such time or if the
      registration statement was not declared effective within 120 days following
      the
      closing date, the Company would be required to pay liquidated damages to the
      investors equal to 1% of the dollar amount of their investment for each calendar
      month or portion thereof that the registration statement is not filed or
      declared effective. The Company failed to fulfill its obligations to timely
      file
      the Registration Statement and owes approximately $166 in liquidated damages
      to
      the investors. Such amount is included in other current liabilities in the
      accompanying consolidated balance sheet. The Registration Statement was declared
      effective on December 27, 2006.




F-25






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(11)
      Stock Issuances (Continued)***





Savvian
      LLC, Burnham Hill Partners, a division of Pali Capital, Inc. and Brimberg &
Co., registered broker-dealers, acted as placement agents for the sale of the
      Company's common stock. In connection with the closing, the Company paid the
      placement agents a cash fee of $461. In addition, the Company issued the
      placement agents 801,369 warrants to purchase shares of common stock with an
      exercise price of $1.25 per share for a period of five years and were valued
      under the Black-Scholes method as $1,057. The net proceeds of $4,985 were
      received after deducting placement agent fees of $461, legal fees of $74 and
      escrow agent fees of $5. The transaction was exempt from registration
      requirements pursuant to Rule 506 of Regulation D promulgated under the
      Securities Act of 1933, as amended.





On
      November 14, 2006, the Company entered into a securities purchase agreement
      pursuant to which the Company sold an aggregate of 8,378,377 shares of the
      Company’s common stock and warrants to purchase an additional 2,513,513 shares
      of the Company’s common stock to accredited investors resulting in gross
      proceeds of $15,500. The offering closed on November 16, 2006. The unit price
      of
      the common stock and corresponding warrant was $1.85. The warrants have an
      exercise price of $3.00 per share and a term of five years. The warrants were
      valued under the Black-Scholes method as $2,943. At any time at which the market
      price of the Company's Common Stock exceeds $5.00 for 10 trading days during
      any
      20 consecutive trading days, the Company may elect to call the warrants,
      provided that, the shares underlying such warrants are registered pursuant
      to a
      registration statement.





The
      Company agreed to prepare and file a registration statement with the Securities
      and Exchange Commission registering the resale of the shares of common stock
      sold in the private placement on or prior to 30 days following the closing
      date.
      If the registration statement is not filed within such time, the Company must
      pay liquidated damages to the investors equal to 1% of the dollar amount of
      their investment for each calendar month or portion thereof that the
      registration statement is not filed, up to a maximum of 10%. Also, if the
      registration statement is not declared effective within 120 days following
      the
      closing date, the Company must pay liquidated damages to the investors equal
      to
      1% of the dollar amount of their investment for each calendar month or portion
      thereof that the registration statement is declared effective, up to a maximum
      of 10%. The Company failed to fulfill its obligations to timely file the
      Registration Statement and owes approximately $16 in liquidated damages to
      the
      investors. Such amount is included in other current liabilities in the
      accompanying consolidated balance sheet. The Registration Statement was declared
      effective on December 27, 2006.




F-26






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(11)
      Stock Issuances (Continued)***





Merriman
      Curhan Ford & Co. and Brimberg & Co., financial advisors and registered
      broker-dealers, acted as placement agents for the sale of the Company's common
      stock. In connection with the closing we paid the placement agents a cash fee
      of
      an aggregate $930. In addition, the Company issued to the placement agents
      326,757 warrants to purchase shares of our common stock with an exercise price
      of $3.00 per share exercisable for a period of five years and were valued under
      the Black-Scholes method as $383. In connection with the November 2006
      Financing, we received net proceeds of $14,493 after payment of placement agent
      fees of $930, legal fees and expenses of $72, and escrow agent fees of
      $5.





On
      November 21, 2006, we issued 100,000 shares of common stock in full and final
      settlement of the milestones detailed in the Undercover Media Purchase
      Agreement. The shares were valued at $260, based on the closing trading value
      of
      the shares on the previous day of $2.60. The value of these shares have been
      recorded as an intangible asset on the balance sheet and included in
“Content”.





**** ***(12)
      Stock Option Plan***





On
      August
      23, 2005 the Board of Directors of ROO Group, Inc. increased the number of
      incentive stock options or non-qualified options to purchase an aggregate of
      2,500,000 shares of common stock may be issued Stock Option Plan (the "Plan").
      Pursuant to the Plan, which expires on April 1, 2014, incentive stock options
      or
      non-qualified options to purchase shares of common stock have been issued to
      officers, directors, employees and consultants of ROO Group.





The
      Board
      of Directors have also determined that the currently outstanding incentive
      stock
      options or non-qualified options be reissued on terms in line with the Company’s
      current position to reinstate the incentive nature of the Plan for officers,
      directors, employees and consultants. On August 23, 2005 the Board of Directors
      reissued the 277,000 outstanding stock options under the Plan for two years
      and
      at an exercise price of $2.00 per share.





On
      November 16, 2006 our Board of Directors of ROO Group, Inc. increased the number
      of shares which may be issued under the 2004 Stock Option Plan to an aggregate
      of 8,000,000 shares of common stock.




F-27





**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(12)
      Stock Option Plan (Continued)***





The
      Plan
      is administered by the Board of Directors of ROO Group (the "Board") or by
      a
      committee to which administration of the Plan, or of part of the Plan, may
      be
      delegated by the Board (in either case, the "Administrator"). Options granted
      under the Plan are not generally transferable by the optionee except by will,
      the laws of descent and distribution or pursuant to a qualified domestic
      relations order, and are exercisable during the lifetime of the optionee only
      by
      such optionee. Options granted under the Plan vest in such increments as is
      determined by the Administrator. To the extent that options are vested, they
      must be exercised within a maximum of three months of the end of optionee's
      status as an employee, director or consultant, or within a maximum of 12 months
      after such optionee's termination by death or disability, but in no event later
      than the expiration of the option term. The exercise price of all stock options
      granted under the Plan shall be determined by the Administrator. With respect
      to
      any participant who owns stock possessing more than 10% of the voting power
      of
      all classes of ROO Group's outstanding capital stock, the exercise price of
      any
      incentive stock option granted must equal at least 110% of the fair market
      value
      on the grant date.





If
      the
      compensation cost for the stock-based employee compensation plans had been
      determined based on fair values of awards on the grant date, estimated using
      the
      Black-Scholes option pricing model, which would be consistent with the method
      described in SFAS No. 123(R), the Company's reported net (loss) and (loss)
      per
      share would have been reduced to the pro forma amounts shown below:





Year
                EndedDecember
                31, 2005Net
                (Loss) as reported
            
            $
            (8,957
            )Deduct:
                Amount by which stock-based employeecompensation
                as determined under fair valuebased
                method for all awards exceeds thecompensation
                as determined under the intrinsicvalue
                method
            
            
            (357
            )Pro
                Forma Net (Loss)
            
            $
            (9,314
            )Basic
                and Diluted (Loss) Per Share as Reported
            
            $
            (1.40
            )Pro
                Forma Basic and Diluted (Loss) Per Share
            
            $
            (1.45
            )




F-28






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(12)
      Stock Option Plan (Continued)***





Under
      SFAS No. 123(R)  the fair value of each option grant is estimated on the
      date of grant using the Black-Scholes option-pricing model with the following
      weighted-average assumptions:




Year
                  Ended December 31, 2006
              
              Year
                  Ended December 31, 2005Expected
                  life (in years)
              
              
              2.77
              
              
              2.00Risk-free
                  interest rate
              
              
              4.74
              %
              
              4.75
              %Volatility
              
              
              96
              %
              
              351
              %Dividend
                  yield
              
              
              0
              %
              
              0
              %


A
      summary
      of the status of stock option awards as of December 31, 2006 and changes during
      the year then ended is presented below:


**Shares**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Weighted**
                  **Average**
                  **Remaining**
                  **Contractual**
                  **Life
                    (Years)**
                
                **Intrinsic**
                  **Value**Outstanding
                    at December 31, 2005
                
                
                1,783,050
                
                $
                2.00Granted
                
                
                4,284,500
                
                
                2.36Exercised
                
                
                --
                
                
                --Cancelled
                    or expired
                
                
                (419,695
                )
                
                2.23Outstanding
                    at December 31, 2006
                
                
                5,647,855
                
                
                2.25
                
                
                2.90
                
                $
                4,518Exercisable
                    at December 31, 2006
                
                
                1,825,967
                
                
                2.15
                
                
                1.35
                
                
                1,643


The
      weighted-average grant-date fair value of option awards granted during the
      years
      ended December 31, 2006 and 2005 was $1.39 and $1.31, respectively. There have
      been no options exercised from inception to December 31, 2006.




F-29






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(13)
      Subsequent Events***





On
      January 22, 2007, we entered into an Asset Purchase Agreement with RJM Price
      & Company, Inc. (“RJM”) and Robertson Price. Pursuant to the Agreement, we
      acquired all of the properties, rights and assets constituting the business
      of
      RJM, which operates under the name MyVideoDaily (“MVD”). The Agreement provides
      for a consideration of up to an aggregate of $1,350 payable as follows: (i)
      $250
      paid upon the execution of the Agreement, (ii) $1,000 in shares of our common
      stock will be paid to Mr. Price in equal quarterly installments upon the
      achievement of certain milestones at a price per share which will be equal
      to
      equal to the average closing price of our common stock over the final 20 trading
      days of the quarterly period in which the milestone is achieved; (iii) $100
      payable upon the second anniversary of the closing of the acquisition. The
      milestones include: (i) the full integration of MVD’s keyword generation and
      search marketing engine into our operations; (ii) Robertson Price utilizing
      his
      best efforts to increase organic traffic to our properties by 50%; (iii)
      Robertson Price use of MVD in our best interests, which determination shall
      be
      made by us; (iv) Robertson Price leading and delivering product development
      initiative to provide the most profitable customer /consumer traffic driven
      feature for our 2007 product offering, including community and user generated
      content modules; (v) Robertson Price assisting in traffic driving
      recommendations initiatives for key clients leading to increased revenues over
      and above original customer projections; (vi) continued employment of Robertson
      Price for a full year; provided that if his employment is terminated by (a)
      Robertson Price due to a breach by us of the APA or the employment agreement,
      which breach is not cured within the permitted cure-period, or (b) us for any
      reason other than for “Cause” (as defined in the Employment Agreement), then
      Robertson Price will, as of the date of termination, automatically be deemed
      to
      have been employed for a full year.





Pursuant
      to the terms of the Agreement, the Company has entered into an Employment
      Agreement with Robertson Price, a principal of RJM pursuant to which Mr. Price
      will be retained by ROO Media Corporation as Senior Vice President of Product
      & Network Management..





On
      January 25, 2007, ROO Group, Inc. (the “Company”) entered into an agreement with
      News Corporation (“News Corp”). The Agreement provides for the issuance of
      2,000,000 shares of the Company’s common stock upon execution of the Agreement,
      which shall be held in escrow and released to News Corp. on January 1, 2008,
      upon the achievement of certain milestones. The Agreement provides that if
      the
      milestones are not met as set forth in the Agreement, the Company shall issue
      to
      News Corp warrants to purchase 2,000,000 shares of the Company’s common stock
      which shall be exercisable for a term of two years at a price of $3.00 per
      share
      or such lesser price per share that is the closing per share of the Company’s
      common stock on any date that is within ten days prior to the date of the
      Agreement. The Agreement provides for the release of the shares to News Corp
      upon a change of control as defined in the Agreement, if certain conditions
      exist.




F-30






**ROO
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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







***(13)
      Subsequent Events (Continued)***





The
      Company also agreed to issue an additional 2,000,000 shares of its common stock
      to News Corp upon the achievement of certain milestones. Further, the Company
      agreed that if the milestones are not timely achieved, the Company shall issue
      to News Corp warrants to purchase 2,000,000 shares of the Company’s common stock
      which shall be exercisable for a term of two years at a price of $3.00 per
      share
      or such lesser price per share that is the closing per share of the Company’s
      common stock on any date that is within ten days prior to the date of the
      Agreement.





The
      Company has granted News Corp piggy back registration rights in connection
      with
      shares issuable to News Corp pursuant to the Agreement. The Company will rely
      upon an exemption from securities registration afforded by Section 4(2) the
      Securities Act of 1933, as amended and/or Regulation D promulgated thereunder
      in
      connection with the issuance of the shares.





On
      February 16, 2007, Wurld Media, Inc. issued a promissory note to the Company
      in
      the principal amount of $1,500,000. Pursuant to the promissory note the Company
      advanced to Wurld Media the sum of $800,000, and in its sole discretion may
      make
      additional advances of up to, but not exceeding $1,500,000. The promissory
      note
      accrues interest at the rate of 8% and in the event of a default will accrue
      interest at the rate of 10%. The promissory note is secured by all of the assets
      of Wurld Media. The promissory note is due and payable upon the earlier of
      (i)
      the closing of the acquisition of the assets of Wurld Media, in which event,
      the
      loan amount will be credited against the purchase price of the assets or (ii)
      November 26, 2007.





The
      Company has entered into a Letter of Intent for the acquisition of the assets
      of
      Wurld Media and is currently conducting due diligence. In addition, pursuant
      to
      the letter of intent Wurld Media agreed to grant to the Company a perpetual
      worldwide, royalty-free license for all components of the Peer Impact store
      front and P2P platform which it owns and developed.





On
      March
      6, 2007, Reality Group Pty. Ltd. issued a promissory note to the Company in
      the
      principal amount of $380,000. Pursuant to the promissory note the Company
      advanced to Reality Group the sum of $190,000, and in its sole discretion may
      make additional advances of up to, but not exceeding $380,000. Interest on
      the
      promissory note accrues at the rate of 8% per annum. The promissory note is
      due
      on June 30, 2008 and is secured by all the assets of Reality Group. In addition,
      Grant Lee and Mike Bollan agreed to pledge 20% of the ordinary shares of Reality
      Group which they own as security for Reality Group’s obligations under the
      promissory note.




F-31