Table of Contents

** **

 

** **

**STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **x**                                                       | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** **                                                                                              |
| **For the  quarterly period ended September 30, 2009** |
| ** **                                                  | ** **                                                                                              |

**or**

 

| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                           |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                         |
| ** ** | **For the  transition period from             to            ** |

 

**Commission File Number:  000-53620**

 

**NEULION,INC.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Canada**                                                    | ** ** | **98-0469479**                        |
|---------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |       | (I.R.S. Employer

Identification No.) |
| ** **                                                    | ** ** | ** **                            |
| **1600  Old Country Road, Plainview, New York**               | ** ** | **11803**                             |
| (Address of principal executive offices)                      |       | (Zip code)                            |
|                                                          |       |                                  |
| **(516)  622-8300**                                           |
| (Registrant’s telephone number, including area code)     |

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes  o  No  o

 

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

 

| Large accelerated filero                       |   | Accelerated filero         |
|------------------------------------------------|--------|----------------------------|
|                                           |   |                       |
| Non-accelerated filer                          |   | Smaller reporting companyx |
| (Do not check if a smaller reporting company)o |   |                       |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o  No  x

 

As of November 10,2009, there were 116,554,340 shares of the registrant’s common shares, no parvalue, outstanding.

 

 

 

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Table ofContents

 

**NEULION, INC.**

 

**TABLE OFCONTENTS**

 
| ** **                                   | ** **                                                                                                                                      | **Page No.** | ** ** |
|----------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|------------|
| **Part I.  Financial Information** |                                                                                                                                            |              |       |
| Item 1.                                      | Financial Statements                                                                                                                            |              |       |   |
|                                         |                                                                                                                                            |              |       |   |
|                                         | Consolidated Balance Sheets as at September 30, 2009 (Unaudited) and December 31, 2008                                                |              | 1          |   |
|                                         |                                                                                                                                            |              |       |   |
|                                         | Consolidated Statements of  Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2009 and 2008  (Unaudited) |              | 2          |   |
|                                         |                                                                                                                                            |              |       |   |
|                                         | Consolidated Statement of  Shareholders’ Equity for the Nine Months Ended September 30, 2009 (Unaudited)                              |              | 3          |   |
|                                         |                                                                                                                                            |              |       |   |
|                                         | Consolidated Statements of  Cash Flows for the Three and Nine Months Ended September 30, 2009 and 2008  (Unaudited)                        |              | 4          |   |
|                                         |                                                                                                                                            |              |       |   |
|                                         | Notes to Consolidated Financial Statements                                                                                                      |              | 5          |   |
|                                         |                                                                                                                                            |              |       |   |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial  Condition and Results of Operations                                                    |              | 19         |   |
|                                         |                                                                                                                                            |              |       |   |
| Item 3.                                      | Quantitative  and Qualitative Disclosures about Market Risk                                                                                     |              | 41         |   |
|                                         |                                                                                                                                            |              |       |   |
| Item 4.                                      | Controls and  Procedures                                                                                                                        |              | 41         |   |
|                                         |                                                                                                                                            |              |       |
| **Part II.  Other Information**         |                                                                                                                                            |              |       |
|                                         |                                                                                                                                            |              |       |
| Item 2.                                      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                    |              | 42         |   |
|                                         |                                                                                                                                            |              |       |   |
| Item 6.                                      | Exhibits                                                                                                                                        |              | 42         |   |
|                                         |                                                                                                                                            |              |       |
| SIGNATURES                                   |                                                                                                                                            | 43                |       |

 

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item1.            Financial Statements.**

 

**NEULION, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

[Expressed in U.S. dollars, unless otherwisenoted]

 
| ** **                                                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                 | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                                                 | ** ** | **[unaudited]**        | ** ** | **[audited]**         | ** ** |
| ** **                                                                                                                 | ** ** | **$**                  | ** ** | **$**                 | ** ** |
| ** **                                                                                                                 |       |                   |       |                  |       |
| **ASSETS**                                                                                                                 |       |                   |       |                  |       |
| **Current**                                                                                                                |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                  |       | 19,315,256             |       | 27,323,021            |       |
| Accounts receivable, net of allowance for doubtfulaccounts of  $132,222 and $290,538, respectively                         |       | 1,284,570              |       | 2,284,242             |       |
| Taxes receivable                                                                                                           |       | 15,040                 |       | 983,253               |       |
| Other receivables                                                                                                          |       | 718,475                |       | 227,711               |       |
| Inventory                                                                                                                  |       | 717,920                |       | 347,600               |       |
| Prepaid expenses and deposits                                                                                              |       | 1,132,328              |       | 1,830,260             |       |
| Due from related parties *[note 5]*                                                                                        |       | 27,000                 |       | 324,059               |       |
| **Total current assets**                                                                                                   |       | 23,210,589             |       | 33,320,146            |       |
| Property, plant and equipment, net                                                                                         |       | 5,233,335              |       | 6,474,989             |       |
| Intangible assets, net                                                                                                     |       | 4,789,338              |       | 5,749,332             |       |
| Goodwill                                                                                                                   |       | 6,846,183              |       | 6,846,183             |       |
| Other assets                                                                                                               |       | 707,660                |       | 1,347,032             |       |
| **Total assets**                                                                                                           |       | 40,787,105             |       | 53,737,682            |       |
| ** **                                                                                                                 |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                             |       |                   |       |                  |       |
| **Current**                                                                                                                |       |                   |       |                  |       |
| Accounts payable                                                                                                           |       | 6,161,373              |       | 4,465,388             |       |
| Accrued liabilities                                                                                                        |       | 6,334,352              |       | 7,595,116             |       |
| Derivative liability *[notes 2 and 11]*                                                                               |       | 3,626,150              |       | —                |       |
| Due to related parties *[note 5]*                                                                                          |       | 181,891                |       | 56,826                |       |
| Deferred revenue                                                                                                           |       | 4,197,895              |       | 3,091,993             |       |
| **Total current liabilities**                                                                                              |       | 20,501,661             |       | 15,209,323            |       |
| Long-term deferred revenue                                                                                                 |       | 561,819                |       | 638,510               |       |
| Other long-term liabilities                                                                                                |       | 677,717                |       | 876,271               |       |
| **Total liabilities**                                                                                                      |       | 21,741,197             |       | 16,724,104            |       |
|                                                                                                                       |       |                   |       |                  |       |
| Contingencies*[note 7]*                                                                                                    |       |                   |       |                  |       |
| ** **                                                                                                                 |       |                   |       |                  |       |
| **Shareholders’ equity**                                                                                              |       |                   |       |                  |       |
| Share capital                                                                                                              |       | 7,073,231              |       | 6,762,097             |       |
| Common shares (par value: none; authorized:  unlimited; issued and outstanding:110,537,883  and 110,084,044, respectively) |       |                   |       |                  |       |
| Additional paid-in capital *[note 2]*                                                                                      |       | 54,531,364             |       | 56,500,258            |       |
| Promissory notes receivable                                                                                                |       | (209,250               | )          | (209,250              | )          |
| Accumulated deficit *[note 2]*                                                                                             |       | (42,349,437            | )          | (26,039,527           | )          |
| **Total shareholders’ equity**                                                                                        |       | 19,045,908             |       | 37,013,578            |       |
| **Total liabilities and shareholders’ equity**                                                                        |       | 40,787,105             |       | 53,737,682            |       |

 

*See accompanying notes*

 

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**NEULION, INC.**

** **

**CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE LOSS**

[unaudited]

[Expressed in U.S. dollars, unless otherwisenoted]

 
| ** **                                                                                  | ** ** | **Three months**       | ** ** | **Nine months**         | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                  | ** ** | **ended**              | ** ** | **ended**               | ** ** |
| ** **                                                                                  | ** ** | **September 30,** | ** ** | **September  30,** | ** ** |
| ** **                                                                                  | ** ** | **2009**               | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                  | ** ** | **$**                  | ** ** | **$**                   | ** ** | **$** | ** ** | **$** | ** ** |
| **Revenue**                                                                                 |       |                   |       |                    |       |   |   |   |   |
| Services revenue                                                                            |       | 5,705,639              |       | 1,676,427               |       | 17,778,374 |   | 3,908,585 |   |
| Equipment revenue                                                                           |       | 355,663                |       | 1,022,614               |       | 1,319,393 |   | 3,727,204 |   |
|                                                                                        |       | 6,061,302              |       | 2,699,041               |       | 19,097,767 |   | 7,635,789 |   |
| ** **                                                                                  |       |                   |       |                    |       |   |   |   |   |
| **Costs and expenses**                                                                      |       |                   |       |                    |       |   |   |   |   |
| Cost of services revenue, exclusive of depreciation  andamortization shown separately below |       | 2,879,702              |       | 712,134                 |       | 9,171,546 |   | 1,464,734 |   |
| Cost of equipment revenue                                                                   |       | 345,136                |       | 822,673                 |       | 1,191,257 |   | 2,969,142 |   |
| Selling, general and administrative, includingstock-based  compensation *[note 8]*          |       | 7,200,976              |       | 2,270,857               |       | 21,152,982 |   | 5,933,585 |   |
| Depreciation and amortization                                                               |       | 1,043,902              |       | 245,595                 |       | 3,095,597 |   | 679,583 |   |
|                                                                                        |       | 11,469,716             |       | 4,051,259               |       | 34,611,382 |   | 11,047,044 |   |
| **Operating loss**                                                                          |       | (5,408,414             | )          | (1,352,218              | )          | (15,513,615 | ) | (3,411,255 | ) |
| ** **                                                                                  |       |                   |       |                    |       |   |   |   |   |
| **Other income (expense)**                                                                  |       |                   |       |                    |       |   |   |   |   |
| Unrealized loss on derivative *[notes 2 and 11]*                                            |       | (2,229,150             | )          | —                  |       | (3,038,200 | ) | — |   |
| Gain on foreign exchange                                                                    |       | 57,358                 |       | —                  |       | 104,575 |   | — |   |
| Investment income                                                                           |       | 116,255                |       | 2,112                   |       | 261,280 |   | 3,849 |   |
| Equity in loss of affiliate *[note 5]*                                                      |       | —                 |       | (27,561                 | )          | — |   | (1,006,386 | ) |
|                                                                                        |       | (2,055,537             | )          | (25,449                 | )          | (2,672,345 | ) | (1,002,537 | ) |
| **Net and comprehensive loss for  the period**                                              |       | (7,463,951             | )          | (1,377,667              | )          | (18,185,960 | ) | (4,413,792 | ) |
|                                                                                        |       |                   |       |                    |       |   |   |   |   |
| Net loss per weighted average number of sharesoutstanding -  basic and diluted *[note 6]*   |       | $                      | (0.07      | )                       | $          | (0.03 | ) | $ | (0.16 | ) | $ | (0.10 | ) |
|                                                                                        |       |                   |       |                    |       |   |   |   |   |
| Weighted average number of shares outstanding  - basic and diluted *[note 6]*               |       | 110,522,916            |       | 42,680,587              |       | 110,247,254 |   | 42,680,587 |   |
|                                                                                             |            |                        |            |                         |            |  |  |  |  |  |  |  |  |

 

*See accompanying notes*

 

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**NEULION, INC.**

 

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**

[unaudited]

[Expressed in U.S. dollars, unless otherwisenoted]

 
| ** **                                                                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** **          | ** ** | ** **     | ** ** | ** **      | ** ** | **Total**              | ** ** |
|-----------------------------------------------------------------------------|------------|-------------|------------|------------|------------|---------------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | ** **  | ** ** | ** ** | ** ** | **Additional**      | ** ** | **Promissory** | ** ** | **Accumulated** | ** ** | **shareholders’** | ** ** |
| ** **                                                                  | ** ** | **Common**  | ** ** | **shares** | ** ** | **paid-in capital** | ** ** | **Notes**      | ** ** | **deficit**     | ** ** | **equity**             | ** ** |
| ** **                                                                  | ** ** | **#**       | ** ** | **$**      | ** ** | **$**               | ** ** | **$**          | ** ** | **$**           | ** ** | **$**                  | ** ** |
| ** **                                                                  |       |        |       |       |       |                |       |           |       |            |       |                   |       |
| **Balance, December 31, 2008**                                         |       | 110,084,044 |       | 6,762,097  |       | 56,500,258          |       | (209,250       | )          | (26,039,527     | )          | 37,013,578             |       |
| Cumulative effect of change inaccounting  principle *[notes 2 and 11]* |       | —      |       | —     |       | (2,464,000          | )          | —         |       | 1,876,050       |       | (587,950               | )          |
| Exercise of stock options forcommon shares                                  |       | 160,292     |       | 91,428     |       | (18,341             | )          | —         |       | —          |       | 73,087                 |       |
| Stock-based compensation                                                    |       |        |       |       |       |                |       |           |       |            |       |                   |       |
| Issuance of common shares onvesting of  restricted share units              |       | 42,502      |       | 24,639     |       | —              |       | —         |       | —          |       | 24,639                 |       |
| Release of common shares fromescrow for  services                           |       | —      |       | 36,909     |       | —              |       | —         |       | —          |       | 36,909                 |       |
| Issuance of common shares underDirectors’  Compensation Plan           |       | 251,045     |       | 158,158    |       | —              |       | —         |       | —          |       | 158,158                |       |
| Stock options and warrants                                                  |       | —      |       | —     |       | 513,447             |       | —         |       | —          |       | 513,447                |       |
| Net loss                                                                    |       | —      |       | —     |       | —              |       | —         |       | (18,185,960     | )          | (18,185,960            | )          |
| **Balance, September 30, 2009**                                        |       | 110,537,883 |       | 7,073,231  |       | 54,531,364          |       | (209,250       | )          | (42,349,437     | )          | 19,045,908             |       |

 

*See accompanying notes*

 

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**NEULION, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

[unaudited]

[Expressed in U.S. dollars, unless otherwisenoted]

 
| ** **                                                                               | ** ** | **Three months**       | ** ** | **Nine months**        | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **                                                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                               | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                               | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$** | ** ** | **$** | ** ** |
| **OPERATING ACTIVITIES**                                                                 |       |                   |       |                   |       |   |   |   |   |
| Net loss                                                                                 |       | (7,463,951             | )          | (1,377,667             | )          | (18,185,960 | ) | (4,413,792 | ) |
| Adjustments to reconcile net loss to net cash  providedby (used in) operating activities |       |                   |       |                   |       |   |   |   |   |
| Depreciation and amortization                                                            |       | 1,043,902              |       | 245,595                |       | 3,095,597 |   | 679,583 |   |
| Equity in loss of affiliate                                                              |       | —                 |       | 27,561                 |       | — |   | 1,006,386 |   |
| Stock-based compensation                                                                 |       | 399,498                |       | —                 |       | 1,015,077 |   | — |   |
| Unrealized loss on derivative *[notes 2  and 11]*                                        |       | 2,229,150              |       | —                 |       | 3,038,200 |   | — |   |
|                                                                                     |       |                   |       |                   |       |   |   |   |   |
| Changes in operating assets and liabilities                                              |       |                   |       |                   |       |   |   |   |   |
| Accounts receivable                                                                      |       | 532,295                |       | (22,179                | )          | 999,672 |   | 1,546,791 |   |
| Inventory                                                                                |       | (426,885               | )          | 580,000                |       | (370,320 | ) | (51,000 | ) |
| Prepaid expenses, deposits and other assets                                              |       | 573,453                |       | (340,080               | )          | 1,337,304 |   | (119,691 | ) |
| Other receivables                                                                        |       | (54,173                | )          | —                 |       | (490,764 | ) | — |   |
| Deferred costs                                                                           |       | —                 |       | (675,919               | )          | — |   | (660,825 | ) |
| Taxes receivable                                                                         |       | 992,990                |       | —                 |       | 968,213 |   | — |   |
| Due from related parties                                                                 |       | 246,199                |       | (2,281                 | )          | 297,059 |   | 172,022 |   |
| Accounts payable                                                                         |       | 3,649,828              |       | 1,170,888              |       | 1,695,985 |   | 1,504,015 |   |
| Accrued liabilities                                                                      |       | (633,820               | )          | 531,792                |       | (1,542,688 | ) | 1,066,130 |   |
| Deferred revenue                                                                         |       | 1,117,483              |       | 102,640                |       | 1,029,211 |   | 147,893 |   |
| Long-term liabilities                                                                    |       | (43,523                | )          | —                 |       | (198,554 | ) | — |   |
| Due to related parties                                                                   |       | (224,698               | )          | (190,919               | )          | 125,065 |   | (728,953 | ) |
| **Cash provided by (used in)  operating activities**                                     |       | 1,937,748              |       | 49,431                 |       | (7,186,903 | ) | 148,559 |   |
| ** **                                                                               |       |                   |       |                   |       |   |   |   |   |
| **INVESTING ACTIVITIES**                                                                 |       |                   |       |                   |       |   |   |   |   |
| Purchase of property, plant and equipment                                                |       | (362,108               | )          | (182,918               | )          | (893,949 | ) | (1,237,176 | ) |
| **Cash used in investing  activities**                                                   |       | (362,108               | )          | (182,918               | )          | (893,949 | ) | (1,237,176 | ) |
| ** **                                                                               |       |                   |       |                   |       |   |   |   |   |
| **FINANCING ACTIVITIES**                                                                 |       |                   |       |                   |       |   |   |   |   |
| Capital contributions                                                                    |       | —                 |       | 1,750,000              |       | — |   | 2,600,000 |   |
| Proceeds from exercise of stock options                                                  |       | 6,087                  |       | —                 |       | 73,087 |   | — |   |
| **Cash provided by financing  activities**                                               |       | 6,087                  |       | 1,750,000              |       | 73,087 |   | 2,600,000 |   |
| ** **                                                                               |       |                   |       |                   |       |   |   |   |   |
| **Net increase (decrease) in cash  and cash equivalents****during the period**           |       | 1,581,727              |       | 1,616,513              |       | (8,007,765 | ) | 1,511,383 |   |
| Cash and cash equivalents, beginning of period                                           |       | 17,733,529             |       | 503,334                |       | 27,323,021 |   | 608,464 |   |
| **Cash and cash equivalents, end of period**                                             |       | 19,315,256             |       | 2,119,847              |       | 19,315,256 |   | 2,119,847 |   |

 

*See accompanying notes*

 

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** **

**NEULION,INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

** **

**1. Nature of Operations**

** **

On June 4, 2009, NeuLion, Inc. changed its name to NeuLionUSA Inc. (“NeuLion USA”).  On July 13,2009, JumpTV Inc. changed its name to NeuLion, Inc. (“NeuLion” or the “Company”).  In conjunction with the name change, thestock symbol was changed from “JTV” to “NLN”. This Quarterly Report on Form 10-Q reflects the name changesdescribed above as they are effective as of the date of filing this report.

 

On October 20, 2008, NeuLion USA, a Delaware corporation,completed a merger with a subsidiary of NeuLion, a Canadian corporation (the “Merger”),that was accounted for as a reverse takeover. As a result of the Merger, NeuLion USA became the legal subsidiary ofNeuLion, and NeuLion was required to register its common shares in the UnitedStates under the Securities and Exchange Act of 1934, as amended.  On June 8, 2009, its RegistrationStatement on Form 10 became effective.

 

These interim unaudited consolidated financial statements for the threeand nine months ended September 30, 2009 and 2008, and as at September 30,2009 and December 31, 2008 are issued under the name of the legal acquirerin the Merger (NeuLion) but are deemed to be a continuation of the accountingacquirer (NeuLion USA).  These financialstatements reflect the assets, liabilities and results of operations of NeuLionUSA, the accounting acquirer, and only include the assets, liabilities andresults of operations of NeuLion, the legal acquirer, subsequent to the reversetakeover on October 20, 2008 (the “Acquired Business”).

 

The Company’s primary business is working with content partners todevelop end-to-end solutions for multimedia IPTV services.

 

**2. Basis of Presentation and Significant Accounting Policies**

** **

The Company’s accountingpolices are consistent with those presented in our annual consolidatedfinancial statements as at December 31, 2008, except for the adoption,effective January 1, 2009, of Accounting Standards Codification Topic815-40, “*Derivatives and Hedging*” (“ASC 815-40”),described below.  These interim unauditedconsolidated financial statements do not include all note disclosures requiredby generally accepted accounting principles (“GAAP”) in the U.S. for annualfinancial statements and therefore should be read in conjunction with theaudited consolidated financial statements, including the notes thereto, in the2008 annual financial statements.

 

The preparation of thesefinancial statements is in conformity with U.S. GAAP, which requires managementto make certain estimates that affect the reported amounts in the interimunaudited consolidated financial statements, and the disclosures made in theaccompanying notes. Despite the Company’s intention to establish accurateestimates and use reasonable assumptions, actual results may differ from theseestimates.  All significant intercompanytransactions and accounts have been eliminated on consolidation.

 

Note 12 reconciles the Company’s interim unaudited consolidatedfinancial statements from U.S. GAAP to Canadian GAAP.

 

In the opinion of management, these interim unaudited consolidatedfinancial statements contain all of the adjustments of a normal and recurringnature necessary to present fairly the Company’s financial position as at September 30,2009 and December 31, 2008 and the results of operations and cash flowsfor the three and nine-month periods ended September 30, 2009 and 2008.

 

**Recently Issued Accounting Standards**

** **

In June 2009, the Financial Accounting Standards Board (“FASB”)issued guidance now codified as Accounting Standards Codification Topic 105, “GenerallyAccepted Accounting Principles” (“ASC 105”) as the single source ofauthoritative non-governmental U.S. GAAP. ASC 105 does not change current U.S.GAAP, but is intended to 

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

simplify user access to all authoritative U.S. GAAP by providing allauthoritative literature related to a particular topic in one place (the “Codification”).On the effective date of ASC 105, the Codification superseded all then-existingnon-SEC accounting and reporting standards, and all other non-grandfatherednon-SEC accounting literature not included in the Codification becamenon-authoritative. The provisions of ASC 105 are effective for interim andannual periods ending after September 15, 2009. We adopted ASC 105 in thethird quarter of 2009. This pronouncement had no effect on our consolidatedfinancial position, results of operations or cash flows, but impacted ourfinancial reporting process by replacing all references to pre-Codificationstandards with references to the applicable Codification topic.

 

In October 2009, the FASB issued ASU 2009-13, “Multiple-DeliverableRevenue Arrangements” (“ASU 2009-13”). ASU 2009-13 amends guidance includedwithin ASC Topic 605-25 to require an entity to use an estimated selling pricewhen vendor specific objective evidence or acceptable third party evidence doesnot exist for any products or services included in a multiple elementarrangement.  The arrangementconsideration should be allocated among the products and services based upontheir relative selling prices, thus eliminating the use of the residual methodof allocation.  ASU 2009-13 also requiresexpanded qualitative and quantitative disclosures regarding significantjudgments made and changes in applying this guidance. ASU 2009-13 is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010. Early adoption andretrospective application are also permitted. The Company is currentlyevaluating the impact of adopting the provisions of ASU 2009-13.

 

In May 2009, the FASB issued ASC Topic 855, “*SubsequentEvents*” (“ASC 855”), which establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued. This statement sets forth the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements.  ASC 855 alsorequires the disclosure of the date through which an entity has evaluatedsubsequent events and the basis for that date, that is, whether that daterepresents the date the financial statements were issued or were available tobe issued.  This statement is effective for interim or annual reportingperiods ending after June 15, 2009. The Company adopted ASC 855 during the second quarter of 2009.  The adoption of ASC 855 did not have amaterial impact on our interim consolidated financial statements or relatedfootnotes.

 

In April 2009, the FASB issued ASC Topic 825, “*Interim Disclosures about**Fair Valueof**Financial Instruments*” (“ASC 825”),to require disclosures about fair value of financial instruments for interimand annual reporting periods of publicly traded companies.  This interpretation is effective for interimreporting periods ending after June 15, 2009. The Company adopted ASC 825during the second quarter of 2009.  Theadoption of ASC 825 did not have a material impact on our interim consolidatedfinancial statements or related footnotes.

 

Effective January 1, 2009, the Company adopted ASC 815-40.  One of the conclusions reached under ASC815-40 was that an equity-linked financial instrument would not be consideredindexed to the entity’s own stock if the strike price is denominated in acurrency other than the issuer’s functional currency.  The conclusion reached under ASC 815-40clarified the accounting treatment for these and certain other financialinstruments.  ASC 815-40 specifies that acontract would not be treated as a derivative if it met the following conditions:  (a) indexed to the Company’s own stock;and (b) classified in shareholders’ equity in the Company’s statement offinancial position.

 

As a result, the Company’s outstanding warrants denominated in Canadiandollars as detailed in note 11 are not considered to be indexed to our ownstock because the exercise price is denominated in Canadian dollars and ourfunctional currency is United States dollars and therefore have been treated asderivative financial instruments and recorded at their fair value as aliability.  All other outstanding convertibleinstruments are considered to be indexed to our own stock, because theirexercise price is denominated in the same currency as our functional currency,and are included in shareholders’ equity.

 

6

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

**Advertising**

** **

**Advertising costs are expensed asincurred and totaled $313,602**and $794,033for the three and nine months ended September 30,2009, respectively [three and nine months ended September 30, 2008 -$22,328and $71,525,respectively].

** **

**Comparative Information**

** **

**The Company has reclassifiedcertain prior period information to conform with the current period’spresentation.**

** **

**3.  BusinessCombination**

** **

**On October 20,2008, the Company completed the Merger. Under the terms of the Merger, NeuLion issued 49,577,427 common shareswhich represented approximately the entire issued and outstanding shares ofNeuLion prior to closing, to the securityholders of NeuLion USA, in exchangefor their NeuLion USA securities.  Thecommon shares of the Company are referred to herein as “Shares” or individuallyas a “Share.”**

** **

*Pro forma*

 

The results of operationsfor NeuLion and NeuLion USA have been included in the Company’s consolidatedstatements of operations since the completion of the Merger on October 20,2008.   The following unaudited pro formafinancial information presents the combined results of NeuLion USA and NeuLionas if the Merger had occurred at the beginning of 2008:

 
| ** **                                                                                   | ** ** | **Three months**       | ** ** | **Nine months**        | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **                                                                                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                   | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                   | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                                                   | ** ** | **[unaudited**         | ** ** | **[unaudited**         | ** ** | **[unaudited** | ** ** | **[unaudited** | ** ** |
|                                                                                         | ** ** | **actual]**            | ** ** | **pro forma]**         | ** ** | **actual]** | ** ** | **pro forma]** | ** ** |
|                                                                                         |       |                   |       |                   |       |   |   |   |   |
| Total revenue                                                                                |       | 6,061,302              |       | 6,637,283              |       | 19,097,767 |   | 18,782,540 |   |
| Cost of services revenue, exclusive of  depreciation and amortization shown separately below |       | (2,879,702             | )          | (3,563,851             | )          | (9,171,546 | ) | (11,759,684 | ) |
| Cost of equipment revenue                                                                    |       | (345,136               | )          | (822,673               | )          | (1,191,257 | ) | (2,969,142 | ) |
| Selling, general and administrative, including stock-based  compensation [i]                 |       | (7,200,976             | )          | (9,496,727             | )          | (21,152,982 | ) | (33,037,211 | ) |
| Impairment of goodwill [ii]                                                                  |       | —                 |       | —                 |       | — |   | (47,882,317 | ) |
| Impairment of long-lived assets [iii]                                                        |       | —                 |       | (4,771,251             | )          | — |   | (4,945,037 | ) |
| Depreciation and amortization [iv]                                                           |       | (1,043,902             | )          | (909,800               | )          | (3,095,597 | ) | (2,663,640 | ) |
| Operating loss                                                                               |       | (5,408,414             | )          | (12,927,019            | )          | (15,513,615 | ) | (84,474,491 | ) |
| Net loss                                                                                     |       | (7,463,951             | )          | (12,754,899            | )          | (18,185,960 | ) | (84,725,495 | ) |
| Net loss per weighted average number of shares outstanding  — basic and diluted         |       | (0.07                  | )          | (0.30                  | )          | (0.16 | ) | (1.99 | ) |

 

----

[i]In accordance with ASC 718, these amounts represent stock-based compensationfor the Company’s stock options, restricted share units, stock appreciationrights, warrants and retention warrants.

 

7

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

[ii]As at March 31, 2008, the Acquired Business’ market capitalizationdecreased below its carrying value. Management considered this to be an indicator of impairment and,accordingly, as at March 31, 2008, performed a goodwill impairment testand recorded a non-cash goodwill impairment charge of $47,882,317.

 

[iii]The Acquired Business determined that the business climate had changed suchthat the carrying value of the Acquired Business’ long-lived assets may not befully recoverable.  Accordingly, theAcquired Business recorded  non-cashimpairment charges of $173,786 in March 2008 and $4,771,251 in September 2008.

 

[iv]In determining the pro forma amounts above, the Company made adjustments todepreciation and amortization as a result of the revised fair values oftangible and intangible assets performed as a result of the Merger.

 

**4. Economic Dependence and Concentration of CreditRisk**

** **

For the nine months ended September 30, 2009, one customeraccounted for 10% of revenue.  For thenine months ended September 30, 2008, three customers accounted for 79% ofrevenue as follows:  50%, 16% and13%.  For the three months ended September 30,2009, one customer accounted for 11% of revenue.  For the three months ended September 30,2008, four customers accounted for 84% of revenue as follows: 42%, 17%, 15% and10%.

 

As at December 31, 2008, one****customeraccounted for 25% of the accounts receivable.

 

As at September 30, 2009, one vendor accounted for 41% of accountspayable.

 

**5**.Related Party Transactions

** **

The Company has entered intocertain transactions and agreements in the normal course of operations withrelated parties.  Significant relatedparty transactions are as follows:

 

*TransVideoInternational, Ltd. (“TransVideo”)*

 

TransVideo is a company controlled by the Chairman of the Board ofDirectors of the Company.  Set-top box (“STB”)purchases amounted to nil and $589,136****and transcoderlicensing fees amounted to $6,000****and $50,000****for the three and nine months ended September 30,2009, respectively.  STB purchasesamounted to $206,000****and $2,745,000****and transcoder licensing fees amounted to $16,000****and $61,000****for the threeand nine months ended September 30, 2008, respectively.  Included in cost of equipment revenue is thecost of STBs sold of $142,000****and $740,816****for the three and nine months ended September 30,2009, respectively [three and nine months ended September 30, 2008 -$706,000****and $2,555,000, respectively].

 

*KyLinTV, Inc. (**“KyLinTV”)*

 

KyLinTV is a company that is controlled by the Chairman of the Board ofDirectors of the Company.  On June 1,2008, the Company entered into an agreement with KyLinTV to build and deliverthe setup and back office operation of an IPTV service.  The Company also provides and charges KyLinTVfor administrative and general corporate support.  For each of the periods presented, theamounts paid for these services provided by the Company for the three and ninemonths ended September 30, 2009 were $160,185****and$461,415, respectively [three and nine months ended September 30, 2008 -$188,271 and $958,114, respectively]. During the three and nine months ended September 30, 2009, theCompany purchased STBs from KyLinTV in the amount of $157,500****and****$307,620,respectively.  During the nine monthsended September 30, 2008, the Company purchased computer equipment fromKyLinTV in the amount of $620,000.

 

8

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

*NewYork Islanders Hockey Club, LP (“New York Islanders”)*

 

The Company provides IT related professional services to the New YorkIslanders, a professional hockey club that is owned by the Chairman of theBoard of Directors of the Company.

 

*Renaissance Property Associates, LLC (“Renaissance”)*

 

Renaissance is a real estate management company owned by the Chairmanof the Board of Directors of the Company. In June 2009, the Company signed a sublease agreement withRenaissance for office space in Plainview, New York.  Rent expense paid by the Company toRenaissance of $99,972****and $286,809,inclusive of taxes and utilities, is included in selling, general andadministrative expense for the three and nine months ended September 30,2009, respectively.

 

*Patstar, Inc. (**“Patstar”)*

 

Patstar is a company controlled by the Vice-Chairman of the BoardDirectors of the Company that receives reimbursement of expenditures on behalfof the Company.  The nature of thesereimbursements relates to expenses that the Company has incurred in the normalcourse of business. Rent expense paid by Patstar of $991****and$2,753****is included as a recovery in selling,general and administrative expense for the three and nine months ended September 30,2009, respectively.

 

*HawaiiIPTV, LLC**(“Hawaii”)*

 

The Company had as an IPTV customer Hawaii, whose principals are familymembers of the Chairman of the Board of Directors of the Company.  Hawaii ceased operations during the third quarterof 2009.

 

*TheSmile Train, Inc.*(“*SmileTrain*”)

 

The Company provides IT related professional services to Smile Train, apublic charity whose founder and significant benefactor is the Chairman of theBoard of Directors of the Company.

 

The Company recognized revenue from related parties for the three andnine months ended as follows:

 
| ** **         | ** ** | **Three months**       | ** ** | **Nine months**        | ** ** |
|--------------------|------------|------------------------|------------|------------------------|------------|
| ** **         | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **         | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **         | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$** | ** ** | **$** | ** ** |
| New York Islanders |       | 89,016                 |       | 60,000                 |       | 300,992 |   | 180,000 |   |
| Renaissance        |       | 39,660                 |       | 30,000                 |       | 99,660 |   | 90,000 |   |
| Smile Train        |       | 27,000                 |       | 27,000                 |       | 81,000 |   | 93,000 |   |
| Hawaii             |       | 10,300                 |       | 21,759                 |       | 41,789 |   | 42,993 |   |
| KyLinTV            |       | 424,315                |       | 392,885                |       | 1,311,715 |   | 522,420 |   |
|               |       | 590,291                |       | 531,644                |       | 1,835,156 |   | 928,413 |   |

 

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Table of Contents

 

**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

As at September 30, 2009 and December 31,2008, the amounts due from (to) related parties are as follows:

 
| ** **         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|------------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **         | ** ** | **$**                  | ** ** | **$**                 | ** ** |
| New York Islanders |       | (1,657                 | )          | 29,189                |       |
| Renaissance        |       | —                 |       | (1,146                | )          |
| Smile Train        |       | 27,000                 |       | 27,000                |       |
| Hawaii             |       | —                 |       | 17,527                |       |
| TransVideo         |       | (135,889               | )          | (55,680               | )          |
| KyLinTV            |       | (44,345                | )          | 250,343               |       |
|               |       | (154,891               | )          | 267,233               |       |

** **

**Investment in affiliate — KyLinTV**

** **

The Company records its investment in KyLinTV using the equity method.

 

From January 1, 2008 through September 30, 2009, the Company’sequity interest in the affiliate was 17.1%. As previously discussed, the Company also provides and charges KyLinTV foradministrative and general corporate support. Management has determined that as a result of the 17.1% equity interestcombined with the services that the Company provides KyLinTV, the Companycontinues to have significant influence on the operating activities of KyLinTV;therefore, the Company continues to account for KyLinTV using the equity methodof accounting for investment.

 

The Company’s proportionate share of the equity loss from KyLinTV hasbeen accounted for as a charge on the Company’s consolidated statements of operationsand comprehensive loss.   Due to KyLinTV’s accumulated losses, theinvestment had been reduced to zero as at December 31, 2008.  No further charges will be recorded as theCompany has no obligation to fund the losses of KyLinTV.

 

The results of operations and financial position of the Company’sequity basis investment in KyLinTV are summarized below for the three and ninemonths ended September 30:

 
| ** **                              | ** ** | **Three months**       | ** ** | **Nine months**        | ** ** |
|-----------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                              | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$** | ** ** | **$** | ** ** |
| Condensed income statement information: |       |                   |       |                   |       |   |   |   |   |
| Net sales                               |       | 2,047,409              |       | 1,851,368              |       | 6,003,173 |   | 4,574,186 |   |
| Net loss                                |       | (1,302,214             | )          | (1,812,905             | )          | (4,282,112 | ) | (6,045,973 | ) |

 

10

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                           | ** ** | **$**                  | ** ** | **$**                 | ** ** |
| Condensed balance sheet information: |       |                   |       |                  |       |
| Current assets                       |       | 1,834,646              |       | 927,427               |       |
| Non-current assets                   |       | 1,238,950              |       | 2,411,319             |       |
| Total assets                         |       | 3,073,596              |       | 3,338,746             |       |
| Current liabilities                  |       | 14,080,872             |       | 10,063,909            |       |
| Non-current liabilities              |       | —                 |       | —                |       |
| Equity (deficiency)                  |       | (11,007,276            | )          | (6,725,163            | )          |
| Total  liabilities and equity        |       | 3,073,596              |       | 3,338,746             |       |

 

**6.Loss per Share**

** **

Basic loss per share is computed by dividing net loss for the period bythe weighted average number of Shares outstanding for the period. Diluted lossper share is computed by dividing net loss for the period by the weightedaverage number of Shares outstanding and, if dilutive, potential Shares usingthe treasury stock method.

 

For the three and nine months ended September 30, 2009 and 2008,the Company had potential Shares which, due to the losses incurred, wereconsidered anti-dilutive equity instruments. Accordingly, the effect of theconvertible instruments detailed below for each of the periods has not beenreflected in computing diluted loss per share for the three and nine monthsended September 30, 2009 and 2008.

 

**Thefollowing table summarizes the potential Shares that were outstanding as at September 30,2009 and 2008 but were not included in the computation of diluted loss pershare as their effect would have been anti-dilutive.**

** **
| ** **                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|-----------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **2009**               | ** ** | **2008**               | ** ** |
| ** **                  | ** ** | **#**                  | ** ** | **#**                  | ** ** |
| Stock options               |       | 8,286,022              |       | 5,559,044              |       |
| Restricted share plan units |       | 16,720                 |       | —                 |       |
| Stock appreciation rights   |       | 1,690,000              |       | —                 |       |
| Warrants                    |       | 16,197,500             |       | —                 |       |
| **Retention warrants**      | ** ** | **867,215**            | ** ** | **—**             | ** ** |

** **

**7.  Contingencies**

 

During the ordinary course of business activities, the Company may becontingently liable for litigation and a party to claims.  Management believes that adequate provisionshave been made in the accounts when required. Although the extent of potential costs and losses, if any is uncertain,management believes that the ultimate resolution of such contingencies will nothave an adverse effect on the consolidated financial position or results ofoperations of the Company.

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

** **

 

**8.  Stock Option and Stock-Based CompensationPlans**

 

The following table showsthe breakdown of total stock-based compensation expense included in the interimconsolidated statement of operations:

 
| ** **                   | ** ** | **Three months**       | ** ** | **Nine months**        | ** ** |
|------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                   | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                   | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$** | ** ** | **$** | ** ** |
|                         |       |                   |       |                   |       |   |   |   |   |
| Stock options and warrants   |       | 160,232                |       | —                 |       | 513,447 |   | — |   |
| Restricted share plan units  |       | 8,870                  |       | —                 |       | 24,639 |   | — |   |
| Stock appreciation rights    |       | 171,014                |       | —                 |       | 241,174 |   | — |   |
| Directors’ compensation |       | 40,750                 |       | —                 |       | 198,908 |   | — |   |
| Escrowed shares              |       | 18,632                 |       | —                 |       | 36,909 |   | — |   |
|                         |       | 399,498                |       | —                 |       | 1,015,077 |   | — |   |

 

On May 27, 2009, anemployee of the Company exercised 50,000 stock options with an exercise priceof $0.64 for gross proceeds to the Company of $32,000.

 

On June 27, 2009, anemployee of the Company exercised 100,000 stock options with an exercise priceof $0.35 for gross proceeds to the Company of $35,000.

 

On June 30, 2009,the Company issued 251,045 Shares to current and former non-managementdirectors of the Company as compensation pursuant to the Directors’Compensation Plan.

 

On September 11,2009, an employee of the Company exercised 8,750 stock options with exerciseprices of $0.47 and $0.64 for gross proceeds to the Company of $5,175.

 

On September 17,2009, an employee of the Company exercised 1,542 stock options with exerciseprices of $0.47 and $0.70 for gross proceeds to the Company of $912.

 

**9.  Segmented Information**

 

The Company operates as one reportable segment: to provide fullend-to-end enterprise-level IPTV and other professional services.  The majority of the Company’s revenues andlong-lived assets are in the United States.

 

**10.  Income Taxes**

 

The Company accounts for income taxes in accordance with ASC 740, “IncomeTaxes Recognition” (“ASC 740”).  Therewere no accrued interest and penalties associated with uncertain tax positionsas of September 30, 2009.

 

As of December 31, 2008, the Company had unrecognized tax benefitsof $28.0 million.  Other than additionallosses, there has been no significant change in unrecognized tax benefitsthrough September 30, 2009.  Oureffective tax rate is zero due to current year losses and the associatedvaluation allowance on the Company’s net operating losses.

 

12

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Table of Contents

 

**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

**11.Derivative Instruments**

 

The Company’s only derivative instruments are11,000,000 warrants, the exercise price for which are denominated in a currencyother than the Company’s functional currency, as follows:

 

·                  5,500,000 Series A warrants exercisableat Cdn$1.25 and expire on October 20, 2010.

·                  5,500,000 Series B warrants exercisableat Cdn$1.50 and expire on October 20, 2010.

 

These warrants have been recorded at their relative fair values atissuance and will continue to be recorded at fair value at each subsequentbalance sheet date.  Any change in valuebetween reporting periods will be recorded as other income (expense).  These warrants will continue to be reportedas a liability until such time as they are exercised or expire.  The fair value of these warrants is estimatedusing the Black-Scholes-Merton option-pricing model.

 

As of January 1, 2009, the grant date fair value of these warrantsin the amount of $2,464,000 was reallocated from additional paid-in-capital anda derivative liability was recorded in the amount of $587,950, being the fairvalue of the warrants on January 1, 2009 offset by an adjustment toaccumulated deficit of $1,876,050.

 

As of September 30, 2009 and June 30, 2009, the fair value ofthe warrants was determined to be $3,626,150 and $1,397,000, respectively;accordingly, the Company recorded $2,229,150****and****$3,038,200****in otherexpense for the three and nine months ended September 30, 2009,respectively, related to the change in the fair value of these warrants.  There is no cash flow impact for thesederivatives until the warrants are exercised. If these warrants are exercised, the Company will receive the proceedsfrom the exercise at the current exchange rate at the time of exercise.

 

**12.Reconciliation of U.S. GAAP to Canadian GAAP**

 

The consolidatedfinancial statements of the Company are prepared in U.S. dollars in accordancewith U.S. GAAP. The following adjustments and disclosures would be required inorder to present these consolidated financial statements in accordance withCanadian GAAP:

 

**Income Statement Items using Canadian GAAP**

** **
| ** **                                                                        | ** ** | **Three months**       | ** ** | **Nine  months**       | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **                                                                        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                        | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$** | ** ** | **$** | ** ** |
|                                                                              |       |                   |       |                   |       |   |   |   |   |
| NET LOSS USING UNITED STATES GAAP                                                 |       | (7,463,951             | )          | (1,377,667             | )          | (18,185,960 | ) | (4,413,792 | ) |
|                                                                              |       |                   |       |                   |       |   |   |   |   |
| Add:                                                                              |       |                   |       |                   |       |   |   |   |   |
| Adjustment for stock based compensation on SARs  [i]                              |       | 126,495                |       | —                 |       | 194,207 |   | — |   |
| Adjustment for unrealized loss on derivative [ii]                                 |       | 2,229,150              |       | —                 |       | 3,038,200 |   | — |   |
| NET LOSS USING CANADIAN GAAP                                                      |       | (5,108,306             | )          | (1,377,667             | )          | (14,953,553 | ) | (4,413,792 | ) |
| **NET  AND COMPREHENSIVE LOSS PER SHARE**USING  CANADIAN GAAP - basic and diluted |       | **$**                  | **(0.05**  | **)**                  | **$**      | **(0.03** | **)** | **$** | **(0.14** | **)** | **$** | **(0.10** | **)** |
|                                                                                   |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

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** **

**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

**Balance Sheet Items using Canadian GAAP**

** **
| ** **                                       | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **U.S.**                    | ** ** | **Canadian**               | ** ** | **U.S.** | ** ** | **Canadian** | ** ** |
| ** **                                       | ** ** | **GAAP**                    | ** ** | **GAAP**                   | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
| ** **                                       | ** ** | **$**                       | ** ** | **$**                      | ** ** | **$** | ** ** | **$** | ** ** |
|                                             |       |                        |       |                       |       |   |   |   |   |
| Accrued liabilities [i]                          |       | 6,334,352                   |       | 6,123,546                  |       | 7,595,116 |   | 7,579,517 |   |
| Derivative liability [ii]                        |       | 3,626,150                   |       | —                     |       | — |   | — |   |
| Total current liabilities [i] and [ii]           |       | 20,501,661                  |       | 16,664,705                 |       | 15,209,323 |   | 15,192,724 |   |
| Total liabilities [i] and [ii]                   |       | 21,741,197                  |       | 17,904,241                 |       | 16,724,104 |   | 16,707,505 |   |
| Accumulated deficit [i] and [ii]                 |       | (42,349,437                 | )          | (38,512,481                | )          | (26,039,527 | ) | (26,022,928 | ) |
| **Total shareholders’ equity [i] and [ii]** | ** ** | **19,045,908**              | ** ** | **22,882,864**             | ** ** | **37,013,578** | ** ** | **37,030,177** | ** ** |

** **

**Cash Flows Items using Canadian GAAP**

** **
| ** **                          | ** ** | **Three months**       | ** ** | **Nine months**        | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **                          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                          | ** ** | **2009**               | ** ** | **2009**               | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                          | ** ** | **U.S.**               | ** ** | **Canadian**           | ** ** | **U.S.** | ** ** | **Canadian** | ** ** |
| ** **                          | ** ** | **GAAP**               | ** ** | **GAAP**               | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
| ** **                          | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$** | ** ** | **$** | ** ** |
|                                |       |                   |       |                   |       |   |   |   |   |
| Net loss [i] and [ii]               |       | (7,463,951             | )          | (5,108,306             | )          | (18,185,960 | ) | (14,953,553 | ) |
| Stock-based compensation [i]        |       | 399,498                |       | 273,003                |       | 1,015,077 |   | 820,870 |   |
| Unrealized loss  on derivative [ii] |       | 2,229,150              | ** ** | **—**             |       | 3,038,200 | ** ** | **—** | ** ** |

** **

**Therewere no material differences in cash flow items using Canadian GAAP for thethree and nine months ended September 30, 2008.**

** **

**Areasof material difference between Canadian GAAP and U.S. GAAP and their impact onthe consolidated financial statements are as follows:**

** **

**[i]   StockAppreciation Rights (“SARs”)**

** **

**·**                  Under U.S. GAAP, the Company recognizes a liabilityand compensation expense for the fair value of the SARs on each reporting date.

** **

**·**                  Under Canadian GAAP, the Company recognizes aliability and compensation expense for the “in the money” value of the SARs oneach reporting date.

** **

**[ii]   DerivativeLiability**

** **

·                  CICA Handbook Section 3861, *FinancialInstruments — Disclosure and Presentation*, establishes standards forpresentation of financial instruments and non-financial derivatives, andidentifies the information that should be disclosed about them.  The revisions change the accounting forcertain financial instruments that have liability and equity characteristics.

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

**·**                  Under U.S. GAAP, the Company recognizes a derivativeliability on the consolidated balance sheets for the fair value of allconvertible instruments with an exercise price denominated in a currency otherthan the Company’s functional currency. The Company fair values this liability on each reporting date with thecorresponding entry to unrealized gain (loss) on derivative on the consolidatedstatement of operations.

** **

**·**                  Under Canadian GAAP, the Company fair values theseconvertible instruments on the grant date and includes them within additionalpaid in capital on the consolidated balance sheets.  The Company does not recognize any changes infair value.

** **

In addition, recent Canadian GAAP accountingpronouncements that may impact the Company’s disclosurerequirements are as follows:

 

***CICA Handbook Section 1535 —Capital Disclosures***

** **

**The Company manages the followingaccounts in regards to capital management:**

** **
| ** **                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                    | ** ** | **$**                  | ** ** | **$**                 | ** ** |
| **Shareholders’ equity** |       |                   |       |                  |       |
| Share capital                 |       | 7,073,231              |       | 6,762,097             |       |
| Additional paid in capital    |       | 54,531,364             |       | 56,500,258            |       |
| Promissory note receivable    |       | (209,250               | )          | (209,250              | )          |
| Accumulated deficit           |       | (42,349,437            | )          | (26,039,527           | )          |
|                          |       | 19,045,908             |       | 37,013,578            |       |

** **

**(The figures in the table above arepresented in accordance with U.S. GAAP.)**

** **

The Company’s outstandingshare capital is comprised of Shares.  AtSeptember 30, 2009, an unlimited number of Shares were authorized and110,537,883 (December 2008 - 110,084,044) Shares were issued andoutstanding. Approximately 60%****of the Sharesare held by insiders, and the remaining Shares are widely held.  Further information on the Company’soutstanding share capital is provided in note 8 of the Company’s annualconsolidated financial statements.

 

At September 30,2009, a total of 8,286,022****stock options,16,720****restricted share units, 16,197,500****warrants, 867,215****retentionwarrants and 1,690,000****SARs wereoutstanding, which convertible securities cumulatively representedapproximately 24% of the Company’s issued and outstanding share capital.Pursuant to guidelines set by the Company’s respective equity plans:

 

·                  The maximum number of Shares available for issuanceupon exercise of stock options is limited to the greater of 12.5% of the issuedand outstanding Shares and 4,000,000;

 

·                  The maximum number of Shares that may be issuedpursuant to awards of restricted share units is 1,000,000;

 

·                  The maximum number of Shares available for issuancepursuant to the exercise of retention warrants is limited to 2,500,000; and

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

·                  The maximum number of Shares available for issuancepursuant to the exercise of SARs is limited to the greater of 5% of the issuedand outstanding Shares and 4,150,000.

 

The Company is incompliance with these guidelines.

 

**The Company’s objective in managingcapital is to ensure a sufficient liquidity position to finance its revenuegrowth, general and administrative expenses, working capital and capitalexpenditures.**

** **

**In order to maintain or adjust itscapital structure, the Company may issue new shares and/or purchase shares forcancellation pursuant to normal course issuer bids.**

** **

**To finance its activities, theCompany has relied on revenue growth and capital contributions.**

** **

**The Company’s policy is to maintaina minimal level of debt.  At this timethe Company has not utilized debt facilities as part of its capital managementprogram nor has it paid dividends to its shareholders.**

** **

**The capital management objectivesfor the period ended September 30, 2009 remained the same as those of theprevious fiscal period.**

** **

**The Company is not subject to anyexternally imposed capital requirements.**

** **

***CICA Handbook Sections 3862 and3863 — Financial Instruments — Disclosures and Presentation***

** **

The Company’s financial instruments are comprised of cash and cashequivalents, accounts receivable, other receivables, accounts payable, otheraccrued liabilities and amounts due to/from related party.

 

The fair value of a financial instrument is defined as the amount atwhich the instrument could be exchanged in a current transaction betweenwilling parties.

 

The fair value of assets and liabilities were as follows:

 
| ** **                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                   | ** ** | **$**                  | ** ** | **$**                 | ** ** |
|                         |       |                   |       |                  |       |
| Financial Assets             |       |                   |       |                  |       |
| Held-for-Trading             |       |                   |       |                  |       |
| Cash and cash equivalents    |       | 19,315,256             |       | 27,323,021            |       |
| Loans and Receivables        |       |                   |       |                  |       |
| Accounts receivable          |       | 1,284,570              |       | 2,284,242             |       |
| Other receivables            |       | 718,475                |       | 227,711               |       |
| Due from related parties     |       | 27,000                 |       | 324,059               |       |
| Financial Liabilities        |       |                   |       |                  |       |
| Other Financial  Liabilities |       |                   |       |                  |       |
| Accounts payable             |       | 6,161,373              |       | 4,465,388             |       |
| Accrued liabilities          |       | 6,334,352              |       | 7,595,116             |       |
| Due to related parties       |       | 181,891                |       | 56,826                |       |

 

All fair values denoted above approximate their carrying values due totheir short term nature and/or variable interest rates.

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

Risk management is primarily the responsibility of the Company’scorporate finance function.  Significantrisks are regularly monitored and actions are taken, when appropriate,according to the Company’s approved policies, established for thatpurpose.  In addition, as required, theserisks are reviewed with the Company’s Board of Directors.

 

Foreign Exchange Risk

 

The Company is exposed to foreign exchange risk as a result oftransactions in currencies other than its functional currency of the UnitedStates dollar.  The majority of theCompany’s revenues are transacted in U.S. dollars, whereas a portion of itsexpenses are transacted in U.S. or Canadian dollars.  The Company does not use derivativeinstruments to hedge against foreign exchange risk.

 

Interest Rate Risk

 

The Company is exposed to interest rate risk on its invested cash andcash equivalents and its short-term investments.  The interest rates on these instruments arebased on the banks’ applicable rate and therefore are subject to change withthe market.  The Company does not usederivative financial instruments to reduce its interest rate risk.

 

Credit Risk

 

The Company sells itsservices to a variety of customers under various payment terms and therefore isexposed to credit risk.  The Company hasadopted policies and procedures designed to limit this risk.  The maximum exposure to credit risk at thereporting date is the carrying value of receivables.  The Company establishes an allowance fordoubtful accounts that represents its estimate of incurred losses in respect ofaccounts receivable.  The Companybelieves that the concentration of credit risk is limited due to the Company’sprimary source of revenues to date being subscription revenues, for whichmonies are received in advance principally through credit cards.

 

There is no significantcredit risk related to the Company’s cash and cash equivalents and short-terminvestments. Credit risk is managed through conducting financial and otherassessments of these investments on an ongoing basis.

 

The following table setsout details of the age of accounts receivable that are outstanding and relatedallowance for doubtful accounts:

 
| ** **                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                            | ** ** | **$**                  | ** ** | **$**                 | ** ** |
|                                  |       |                   |       |                  |       |
| Current                               |       | 750,923                |       | 1,697,271             |       |
| 31-60 days                            |       | 201,073                |       | 287,070               |       |
| 61-90 days                            |       | 140,828                |       | 105,525               |       |
| Over 90 days                          |       | 323,968                |       | 484,914               |       |
| Less: Allowance for doubtful accounts |       | (132,222               | )          | (290,538              | )          |
| Total accounts  receivable, net       |       | 1,284,570              |       | 2,284,242             |       |

 

The carrying amount ofaccounts receivable is reduced through the use of an allowance account and theamount of the loss is recognized in the consolidated statements of operationsand comprehensive loss.  When a receivablebalance is considered uncollectible, it is written off against the allowancefor accounts receivable. Subsequent recoveries of amounts previously writtenoff are credited against operating expenses in the consolidated statements ofoperations and comprehensive loss.

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at September 30, 2009 and for the three and nine months ended**

**September 30, 2009 and2008 is unaudited**

 

***Recent Accounting Pronouncements***

** **

In February 2008, the Canadian Institute ofChartered Accountants (“CICA”) issued new Handbook Section 3064, *Goodwill and Intangible Assets*, whichreplaces Section 3062, *Goodwill and OtherIntangible Assets*, and Section 3450, *Research andDevelopment Costs*.  The newstandard addresses when an internally developed intangible asset meets thecriteria for recognition as an asset. The section also issued amendments to Section 1000, *Financial Statement Concepts*.  These changes are effective for fiscal yearsbeginning on or after October 1, 2008, with earlier adoption permitted,and have been adopted by the Company effective January 1, 2009.  The objectives of the changes are toreinforce a principle-based approach to the recognition of costs as assets andto clarify the application of the concept of matching revenues and expenses in Section 1000.  Collectively, these changes bring Canadianpractice closer to International Financial Reporting Standards (“IFRS”) byeliminating the practice of recognizing as assets a variety of start-up,pre-production and similar costs that do not meet the definition andrecognition criteria of an asset.  Therewas no material effect on the Company’s interim consolidated financialstatements as a result of adopting CICA Handbook Section 3064.

 

In February 2008, the CICA Accounting Standards Board confirmedthat the changeover to IFRS from Canadian GAAP will be required for publiclyaccountable enterprises, effective for the interim and annual financialstatements relating to fiscal years beginning on or after January 1,2011.  The Company became an SEC issuereffective June 8, 2009 and expects to continue to use U.S. GAAP until thedate that IFRS is implemented in the United States, which is currentlyestimated to occur no sooner than 2014.

 

**13.Subsequent Event**

 

We evaluated subsequentevents through November 10**,** 2009 when thefinancial statements were issued.

 

On October 31, 2009, NeuLion consummated the acquisition of 100%of the outstanding securities of Interactive Netcasting Systems Inc. (“INSINC”),a leading provider of sports webcasting services.  Under the terms of the acquisition,shareholders of INSINC received consideration consisting of 6 million commonshares of the Company, Cdn $2.5 million in cash, 1 million common sharepurchase warrants to acquire common shares at USD $1.35 per share and 500,000common share purchase warrants to acquire common shares at USD $1.80 pershare.  Both series of warrants areexercisable for a period of 2 years.

 

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**Item2.            Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*On June 4, 2009, NeuLion, Inc.changed its name to NeuLion USA, Inc. (“NeuLion USA”).  On July 13, 2009, JumpTV Inc. changedits name to NeuLion, Inc. (the “Company” or “NeuLion”).  In conjunction with the name change, thestock symbol was changed from “JTV” to “NLN”. This MD&A reflects the name changes described above.*

 

The following Management’sDiscussion & Analysis (“MD&A”) of NeuLion’s financial conditionand results of operations, prepared as of November 10, 2009, should beread in conjunction with the Company’s unaudited consolidated financialstatements and accompanying notes for the three and nine months ended September 30,2009 and 2008, which have been prepared in accordance with United Statesgenerally accepted accounting principles (“U.S. GAAP”).  For additional information and details,readers are referred to the Company’s Annual Audited Financial Statements,Annual Information Form (“AIF”) and MD&A for 2008 which can be foundon www.sedar.com and its Form 10 filed onhttp://www.sec.gov/edgar.shtml.  Alldollar amounts are in U.S. dollars (“US$” or “$”) unless stated otherwise.

 

On October 20, 2008,NeuLion USA, a Delaware corporation, completed a merger with a subsidiary ofNeuLion (the “Merger”) that was accounted for as a reverse takeover.  As a result of the Merger, NeuLion USA becamethe legal subsidiary of NeuLion, and NeuLion was required to register itscommon shares in the United States under Section 12 of the SecuritiesExchange Act of 1934, as amended.  OnJune 8, 2009, its Registration Statement on Form 10 became effective.

 

On October 31, 2009, NeuLion consummatedthe acquisition of 100% of the outstanding securities of Interactive NetcastingSystems Inc. (“INSINC”), a leading provider of sports webcasting services.  Under the terms of the acquisition,shareholders of INSINC received consideration consisting of 6 million commonshares of the Company, Cdn $2.5 million in cash, 1 million common sharepurchase warrants to acquire common shares at USD $1.35 per share and 500,000common share purchase warrants to acquire common shares at USD $1.80 per share.  Both series of warrants are exercisable for aperiod of 2 years.

 

Our MD&A is intendedto enable readers to gain an understanding of NeuLion’s current results andfinancial position.  To do so, we provideinformation and analysis comparing the results of operations and financialposition for the current three and nine-month periods to those of the precedingcomparable three and nine-month periods. We also provide analysis and commentary that we believe is required toassess the Company’s future prospects. Accordingly, certain sections of this report contain forward-lookingstatements that are based on current plans and expectations.  These forward-looking statements are affectedby risks and uncertainties that are discussed in the AIF and Form 10, and couldhave a material impact on future prospects. Readers are cautioned that actual results could vary.

 

**Cautions regardingforward-looking statements**

 

This MD&A containscertain forward-looking statements, which reflect management’s expectationsregarding the Company’s growth, results of operations, performance and businessprospects and opportunities.

 

Statements about the Company’sfuture plans and intentions, results, levels of activity, performance, goals orachievements or other future events constitute forward-looking statements.  Wherever possible, words such as “may,” “will,”“should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,”“predict,” or “potential” or the negative or other variations of these words,or similar words or phrases, have been used to identify these forward-lookingstatements.  These statements reflectmanagement’s current beliefs and are based on information currently availableto management as at the date hereof.

 

Forward-looking statementsinvolve significant risk, uncertainties and assumptions.  Many factors could cause actual results,performance or achievements to differ materially from the results discussed orimplied in the forward-looking statements. These factors should be considered carefully and readers should notplace undue reliance on the forward-looking statements.  Although the forward-looking statementscontained in this MD&A are based upon what management believes to bereasonable assumptions, the Company cannot assure readers that actual 

 

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results will be consistentwith these forward-looking statements. These forward-looking statements are made as of the date of thisMD&A, and the Company assumes no obligation to update or revise them toreflect new events or circumstances, except as required by law.  Many factors could cause the actual results,performance or achievements of the Company to be materially different from anyfuture results, performance or achievements that may be expressed or implied bysuch forward-looking statements, including: the integration of the businesses of the Company andits subsidiaries NeuLion USA and INSINC, our continued relationships with ourchannel partners, general economic and market segment conditions, competitoractivity, product capability and acceptance, rates, technology changes andinternational risk and currency exchange. More specific risks include that the Company, NeuLion USA and INSINCwill not be able to realize some or all expected synergies due toincompatibilities in our businesses, the inability of management to bring aboutsuch synergies or a changing business environment rendering such synergiesinadvisable or uneconomical.  Afterintegrating the businesses, the suite of service offerings may not perform asexpected if shifting demand moves in a direction away from our expectedbusiness model, if competitors are able to take market share away from us or ifchanging technology adversely impacts us. In addition, while the Company expects its content partners and those ofits subsidiaries to continue and expand their relationship with each of us,there can be no assurance that such relationships will continue as expected, orat all. More detailed assessment of the risks that could cause actual results tomaterially differ from current expectations is contained in the “Risk Factors”section of the AIF and Form 10.

 

**MERGER AND REVERSE TAKE-OVER**

 

On October 20, 2008, the Companycompleted the Merger with NeuLion USA, an IPTV company that provides acomprehensive suite of technology and services to content owners andaggregators.  NeuLion USA provides anend-to-end technology solution which enables content to be monetized andstreamed to multiple platforms through browser-based devices.  Content can be viewed on the computer,television through a proprietary set-top box (“STB”) and mobile devises.  Under the terms of the Merger, NeuLion issued49,577,427 common shares directly, as well as 1,840,097 common shares subjectto a performance escrow relating to a prior acquisition, which representedapproximately the entire issued and outstanding common shares of NeuLion priorto closing, to the securityholders of NeuLion USA in exchange for their NeuLionUSA securities.    The escrow shares weresubsequently cancelled in September 2009. The common shares of NeuLion are referred to herein as “Shares,” or eachindividually as a “Share.”  Pursuant tothe Merger, the Company also issued 5,000,000 warrants to purchase Shares,fully vested and exercisable for two years at US$0.63 per share, and 2,700,000employee stock options to purchase Shares, vesting in equal monthly amountsover 48 months and exercisable for five years at US$0.60 per share, toemployees of NeuLion USA who became employees of the Company.

 

On October 20, 2008, AvantaLion LLC, anentity controlled by Charles B. Wang, our Chairman of the Board of Directors ofthe Company and the spouse of Nancy Li, our CEO and the founder and CEO ofNeuLion USA, purchased 10,000,000 units from NeuLion’s treasury at a price ofCdn$1.00 per unit. Each unit (a “Unit”) consists of one Share, one-half of oneShare purchase warrant exercisable at Cdn$1.25 and one-half of one Sharepurchase warrant exercisable at Cdn$1.50. The warrants partially comprising theUnits are exercisable for a period of two years from the date of issuance. G.Scott Paterson, our Vice Chairman, also purchased 1,000,000 Units on the sameterms. The aggregate gross proceeds from the sale of Units (the “PrivatePlacement”) were Cdn$11.0 million or US$9.2 million.

 

In accordance with Accounting StandardsCodification Topic 805 (“ASC 805”), “*Business Combinations*”,the Company has determined that NeuLion USA was the accounting acquirer andaccordingly has accounted for the Merger as a reverse takeover.  Therefore, the financial statements and thisMD&A for the three and nine months ended September 30, 2009 and 2008reflect the assets, liabilities and results of operations of NeuLion USA, theaccounting acquirer, and only include the assets, liabilities and results ofoperations of NeuLion, the legal acquirer, subsequent to the reverse takeoveron October 20, 2008 (the “Acquired Business”).  This MD&A is issued under the name of thelegal acquirer (NeuLion), but is deemed to be a continuation of the accountingacquirer (NeuLion USA).

 

**OVERVIEW**

 

The Company is an IPTV service and technology providerthat builds and manages private networks for content owners and aggregatorswhich enables content to be streamed to multiple platforms through browserbased devices.  The Company provides an “end-to-end”IPTV service for its customers of live and on-demand sports, international andvariety programming. “IPTV” refers to the distribution over an IP network ofstreamed audio, video and other multimedia content, similar to televisionprogramming content, using industry standard streaming protocols.

 

This end-to-end enterprise technology solution enablesthe distribution of IPTV content to subscribers and pay-per-view customers forviewing on multiple platforms, including Internet-connected browser-baseddevices such as personal computers, laptops and mobile devices and standardtelevision sets through Internet-connected STBs.

 

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The Company’s business model has evolved from itsinception in December 2003 as a professional services provider to becomingan end-to-end provider of the following IPTV services:

 

·                  content management — encoding of various digital andanalog TV and video formats,

·                  subscriber management — managing subscriber access andcontrol of subscriber accounts,

·                  digital rights management — preserving the integrityof the content and protecting it from unauthorized access,

·                  billing services — enabling customers to viewsubscription accounts, providing pay-per-view transactional billing, paymentprocessing and advertising insertion, and

·                  delivery — delivering streamed audio, video and othermultimedia content anywhere, anytime through the Company’s  IPTV service and infrastructure

 

This evolution commenced in 2006 and is one of thereasons for the increase in revenue, cost of services and equipment revenue andselling general and administrative expenses over the past 3 years.

 

Through the acquisition of the Acquired Business on October 20,2008, the Company has expanded its portfolio of content partners from professionalsports (the National Hockey League (“NHL”) and the National Football League (“NFL”)),international content (Chinese programming through KyLinTV, Inc. (“KyLinTV”))and faith based programming (Sky Angel) to include college sports, cyclingevents, soccer events and additional international channels.

 

Additionally, through the consummation of theacquisition of INSINC on October 31, 2009, the Company expanded itsportfolio of content partners to include the Western Hockey League (WHL),Ontario Hockey League (OHL), Central Hockey League (CHL), British ColumbiaHockey League (BCHL), Central Canadian Hockey League (CCHL), Alberta JuniorHockey League (AJHL), Central Junior Hockey League (CJHL) and the CanadianFootball League (CFL).  INSINC alsoprovides its services to government and entertainment broadcasting sectors withclients including Business News Network (BNN), CTV News Channel, RogersSportsnet, TVG Networks, The Canadian Press, the Canadian Ministry of Justice,the BC Ministry of Education, and the Legislative Assemblies of BritishColumbia and Newfoundland and Labrador, among others.

 

The Company’s success is dependent upon severalfactors, including securing contractual relationships, maintainingtechnological advantage in a rapidly changing industry and efficiently andeffectively operating the distribution network.

 

**Revenue**

 

The Company earns revenue in two areas: servicesrevenue and equipment revenue.  Servicesrevenue includes subscriber revenue, eCommerce revenue and technology servicesrevenue.  Equipment revenue includes thesale and shipping of STBs.  These aredescribed in detail in the “OPERATIONS” section.

 

***Customer relationships***

 

The Company has two types of customer relationships —business-to-consumer (“B2C”) and business-to-business (“B2B”).

 

The B2C relationships are more individual consumeroriented.  The Company has signeddistribution agreements with individual channel or content providers inexchange for royalty payments to such providers.  The Company then markets the content on one(or more) of the targeted websites that the company has developed which arefocused on a specific diaspora community (e.g. Talfazat, LLC for the MiddleEast community; TV-Desi, Inc. for the South Asian community), as well ason the general Company website for purchase by an end user.   The Company often aggregates the contentinto bundles or packages of similar interest. The Company incurs marketing expenses in promoting the availability ofthe content.  The Company is in theprocess of migrating this group of customer relationships to a B2B relationshipthrough partnerships and/or affiliates (partially or wholly owned) that groupthe content into similar interests.

 

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The B2B relationships have been the focus of theCompany in the past and are expected to be the focus in the future.  A B2B relationship is focused on providing anend-to-end solution to a customer to enable that customer to provide IPTV toits end users.  This type of relationshipis different than above in that the B2B customer typically aggregates thecontent, negotiates the licensing rights and markets directly the availabilityof the content.  This customer availsitself of the full services of the Company in delivery to its end users.  This type of relationship is typical in theprofessional and college sports properties and the Sky Angel agreement.

 

**Products**

 

***Sports Programming***

 

The Company offers live and on-demand sportscontent.  The Company has content anddistribution agreements with leading professional and collegiate sportsproperties.  Amongst professional andamateur sports clients, the Company counts the NFL and the NHL as professionalsports leagues and the American Hockey League, the WHL and OHL, and the CFL asamateur sports leagues.  The Company alsoowns IPTV rights to distribute in North America live streaming of SouthAmerican Fédération Internationale de Football Association World Cup Qualifiergames in 2009.  The Company also operatesa portfolio of sports-oriented web sites, including Jumptv.com, Cycling.tv andCollegeSportsDirect.com.  On the collegiatelandscape, the Company is the premier partner for National Collegiate AthleticAssociation colleges and universities, with agreements in place withapproximately 170****colleges, universities or relatedsites.

 

***Ethnic/International andSpecialty Programming***

 

The Company also offers what is referred to in theindustry as “ethnic television,” which the Company defines as televisiondirected at a specific diaspora community, as determined by a sharednationality, language or culture, and generally excluding communities for whichEnglish is the primary language.  TheCompany has license agreements directly with television broadcasters (referredto as “channel partners”) representing approximately 150 channels in over 40countries that give the Company rights to stream, predominantly on an exclusiveworld-wide basis and generally for an initial four-year term, the channelpartners’ live linear television feeds over the public Internet.

 

**Distribution Methods**

 

The Company distributes content through two primarydistribution methods:

 

·                  Internet-connected browser-based devices such aspersonal computers, laptops and mobile devices; and

 

·                  Standard television through the Company’sInternet-connected STBs.

 

Both of the Company’s distribution methods takeadvantage of an open IPTV network, the public Internet.  As a result, content delivered by the Companyis available globally and is potentially unlimited in breadth.

 

***Industry and Business Trends***

 

There have been no significant changes inindustry and business trends from the Company’s 2008 annual MD&A.

 

**Overall Performance - Overview**

 

The Company uses the term “organic” to referto the period-over-period changes in its revenues and expenses, excluding therevenues and expenses of the Acquired Business. This permits readers to better compare current year and prior yearrevenues and expenses, and to understand changes that have occurred, withoutregard to the effect of the Merger.

 

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***Three months ended September 30, 2009***

 

Revenue for the threemonths ended September 30, 2009 was $6.1****million,up 126% from $2.7 million for the three months ended September 30,2008.  The revenue growth of $3.4 millionwas due to an increase in services revenue of $4.0****million,offset by a decrease in our equipment revenue of $0.6 million.   The revenue growth is primarily attributableto the acquisition of the Acquired Business, which contributed $3.1 million ofthe growth.  The organic increase(excluding the results of the Acquired Business) in services revenue isconsistent with the increasing scope of operations.  As the number of subscribers increases, thereis a cumulative effect of increasing subscriber revenue on a quarter overquarter basis.  The decrease in equipmentrevenue is a result of the uneven nature of this revenue stream — customersoften place large single orders made to meet minimum order requirements, tomanage the lead time between ordering and shipping and to minimize the relatedshipping costs.  The lead time on neworders is approximately 12 weeks from placing an order to receipt ofgoods.  The purchase by customers of STBsis a leading indicator of future subscriptions. On a pro forma basis, as described in note 3 of the financialstatements, revenue decreased from $6.6 million to $6.1****milliondue to a decline in revenue in the Acquired Business of $0.8 million, offset byorganic growth of $0.3 million.

 

Our net loss for thethree months ended September 30, 2009 was $7.5****million,or a loss of $0.07 per basic and diluted share, compared with a net loss of$1.4 million or a loss of $0.03****per basic anddiluted share for the three months ended September 30, 2008.  The increase in net loss of $6.1****million was due to the following:

 

·                  Increase in organic loss of $1.1 million(excluding non-operating expenses)

·                  Net loss in the Acquired Business of $1.8****million (excluding non-operating expenses)

·                  Increased non-operating expenses of $3.2****million which includes an increase of $2.2 million inunrealized loss on derivative (detailed below in the Net Loss to EBITDAreconciliation)

 

On a pro forma basis (asif the merger had occurred on January 1, 2008), our net loss for the threemonths ended September 30, 2008 was $12.8****millionor a loss of $0.30****per basic anddiluted share.   The improvement in netloss of $5.3****million on a pro forma basis wasdue to the following:

 

·                  Increase in organic loss of $1.1 million (excluding non-operatingexpenses)

·                  Reduction in net loss in the Acquired Business of $3.8 million due tocost reductions in most areas of the business (excluding non-operatingexpenses)

·                  Reduction in non-operating expenses of $2.6 million which includes anincrease of $2.2 million in unrealized loss on derivative (detailed below inthe Net Loss to EBITDA reconciliation)

 

Our non-GAAP AdjustedEBITDA loss was $4.0 million for the three months ended September 30, 2009compared with a non-GAAP Adjusted EBITDA loss of $1.1****millionfrom the three months ended September 30, 2008.  The increase in non-GAAP Adjusted EBITDA lossis due to the cash impact of the items noted above.  On a pro forma basis, our non-GAAP AdjustedEBITDA loss decreased from a loss of $6.7****million forthe three months ended September 30, 2008 to a loss of $4.0****million for the three months ended September 30,2009.  This decrease is due to costreductions in most areas of the Acquired Business offset by the increasedorganic costs.

 

The Company reportsNon-GAAP Adjusted EBITDA loss because it is a key measure used by management toevaluate the results of the Company and make strategic decisions about theCompany.  Non-GAAP Adjusted EBITDA loss representsnet loss before interest, income taxes, depreciation and amortization,stock-based compensation, impairment of long-lived assets, unrealized loss onderivatives, equity in loss of affiliate, investment income and foreignexchange gain.   This measure does nothave any standardized meaning prescribed by GAAP and therefore is unlikely tobe comparable to the calculation of similar measures used by other companies,and should not be viewed as an alternative to measures of financial performanceor changes in cash flows calculated in accordance with GAAP.

 

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The reconciliation fromnet loss to non-GAAP Adjusted EBITDA loss is as follows:

 
| ** **                                   | ** ** | **Three months ended September 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                | ** ** | ** ** | ** ** | **Pro forma** | ** ** |
| ** **                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **$**                                     | ** ** | **$** | ** ** | **$** | ** ** |
|                                         |       |                                      |       |   |   |   |   |
| Net loss for the period                      |       | (7,463,951                                | )          | (1,377,667 | ) | (12,754,899 | ) |
|                                         |       |                                      |       |   |   |   |   |
| Add back:                                    |       |                                      |       |   |   |   |   |
| Impairment of long-lived assets              |       | —                                    |       | — |   | 4,771,251 |   |
| Depreciation and amortization                |       | 1,043,902                                 |       | 245,595 |   | 909,800 |   |
| Stock-based compensation                     |       | 399,498                                   |       | — |   | 570,591 |   |
| Unrealized loss on derivative                |       | 2,229,150                                 |       | — |   | — |   |
| Equity in loss of affiliate                  |       | —                                    |       | 27,561 |   | 27,561 |   |
| Investment income and foreign  exchange gain |       | (173,613                                  | )          | (2,112 | ) | (199,681 | ) |
|                                         |       |                                      |       |   |   |   |   |
| Non-GAAP Adjusted EBITDA loss                |       | (3,965,014                                | )          | (1,106,623 | ) | (6,675,377 | ) |

 

***Ninemonths ended September 30, 2009***

 

Revenue for the ninemonths ended September 30, 2009 was $19.1****million,up 151% from $7.6 million for the nine months ended September 30,2008.  The revenue growth of $11.5million was primarily due to an increase in services revenue of $13.9 millionand was offset by a decrease in our equipment revenue of $2.4 million.   The revenue growth is due to the acquisitionof the Acquired Business, which contributed $9.9****millionof the growth coupled with an organic increase of $1.6 million.  The organic increase (excluding the resultsof the Acquired Business) in services revenue is consistent with the increasingscope of operations.  As the number ofsubscribers increases, there is a cumulative effect of increasing subscriberrevenue on a quarter over quarter basis. The decrease in equipment revenue is a result of the uneven nature ofthis revenue stream — customers often place large single orders made to meetminimum order requirements, to manage the lead time between ordering andshipping and to minimize the related shipping costs.  The lead time on new orders is approximately12 weeks from order to receipt.  Thepurchase by customers of STBs is a leading indicator of futuresubscriptions.  On a pro forma basis, asdescribed in note 3 of the financial statements, revenue increased from $18.8million to $19.1****million due to organic growth.

 

Our net loss for the ninemonths ended September 30, 2009 was $18.2****million,or a loss of $0.16 per basic and diluted share, compared with a net loss of$4.4 million or a loss of $0.10****per basic anddiluted share for the nine months ended September 30, 2008.  The increase in net loss of $13.8****million was due to the following:

 

·                  Increase in organic loss of $2.9****million (excluding non-operating expenses)

·                  Net loss in the Acquired Business of $5.8million (excluding non-operating expenses)

·                  Increased non-operating expenses of $5.1million which includes an increase of $3.0 million in unrealized loss onderivative (detailed below in the Net Loss to EBITDA reconciliation)

 

On a pro forma basis (asif the merger had occurred on January 1, 2008), our net loss for the ninemonths ended September 30, 2008 was $84.7****millionor a loss of $1.99****per basic anddiluted share.   The improvement in netloss of $66.5****million on a pro forma basis wasdue to the following:

 

·                  Increase in organic loss of $2.9****million(excluding non-operating expenses)

·                  Elimination of impairment of goodwill and long-lived assets of $52.8million

·                  Reduction in net loss in the Acquired Business of $18.4****million due to cost reductions in most areas of thebusiness (excluding non-operating expenses)

·                  Increase in non-operating expenses of $1.8****millionwhich includes an increase of $3.0 million in unrealized loss on derivative(detailed below in the Net Loss to EBITDA reconciliation)

 

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Our non-GAAP AdjustedEBITDA loss was $11.4****million forthe nine months ended September 30, 2009 compared with a non-GAAP AdjustedEBITDA loss of $2.7****million fromthe nine months ended September 30, 2008. The increase is non-GAAP Adjusted EBITDA loss is due to the cash impactof the items noted above.  On a pro formabasis, our non-GAAP Adjusted EBITDA loss decreased from a loss of $26.9****million for the nine months ended September 30, 2008to a loss of $11.4****million forthe nine months ended September 30, 2009. This decrease is due to cost reductions in most areas of the AcquiredBusiness offset by the increased organic costs as noted above.  The reconciliation from net loss to non-GAAPAdjusted EBITDA loss is as follows:

 
| ** **                                   | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | ** **                               | ** ** | ** ** | ** ** | **Pro forma** | ** ** |
| ** **                                   | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **$**                                    | ** ** | **$** | ** ** | **$** | ** ** |
|                                         |       |                                     |       |   |   |   |   |
| Net loss for the period                      |       | (18,185,960                              | )          | (4,413,792 | ) | (84,725,495 | ) |
|                                         |       |                                     |       |   |   |   |   |
| Add back:                                    |       |                                     |       |   |   |   |   |
| Impairment of goodwill                       |       | —                                   |       | — |   | 47,882,317 |   |
| Impairment of long-lived assets              |       | —                                   |       | — |   | 4,945,037 |   |
| Depreciation and amortization                |       | 3,095,597                                |       | 679,583 |   | 2,663,640 |   |
| Stock-based compensation                     |       | 1,015,077                                |       | — |   | 2,110,810 |   |
| Unrealized loss on derivative                |       | 3,038,200                                |       | — |   | — |   |
| Equity in loss of affiliate                  |       | —                                   |       | 1,006,386 |   | 1,006,386 |   |
| Investment income and foreign  exchange gain |       | (365,855                                 | )          | (3,849 | ) | (755,382 | ) |
|                                         |       |                                     |       |   |   |   |   |
| Non-GAAP Adjusted EBITDA loss                |       | (11,402,941                              | )          | (2,731,672 | ) | (26,872,687 | ) |

 

**OPERATIONS**

 

**Revenue**

 

The Company earns revenuein four broad categories:

 

·                  Subscriber revenue, which is recognized over theperiod of service or usage.

·                  eCommerce revenue, which is recognized as the serviceis performed.

·                  Technology services revenue, which consists of the setup and transcoder revenue and is recognized over the life of the contract.

·                  Equipment revenue, which is recognized when title ofthe STB passes to the customer.

 

While our revenues havebeen growing due to the organic growth in our existing business and the Merger,we are uncertain as to how our revenues will be impacted by the currentdownturn in the global economy.

 

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**Cost and Expenses**

 

***Costof Services Revenue***

 

Cost of services revenueprimarily consists of:

 

·                  Cost of Subscriber revenue, which consists of threeprimary components:

·                  Royalty payments

·                  Network operating costs

·                  Bandwidth usage fees

·                  Colocation fees

·                  Cost of eCommerce revenue, which consists of:

·                  Merchandising, donor and ticket sales, which has noassociated cost — revenue is booked on a net basis

·                  Cost of advertising revenue is subject to revenueshares with the content provider

·                  Cost of Technology services revenue, which consistsof:

·                  Third party transcoder software purchased

·                  Maintenance costs for transcoders

 

***Costof Equipment Revenue***

 

Equipment revenueconsists of the sale of STBs to content partners and/or end users to enable theend user to receive the content over the Internet and display the signal on atelevision.   Cost of equipment revenueprimarily consists of purchases from TransVideo International, Ltd. (“TransVideo”)and Tatung Technology Incorporation of the products and parts for resale tocustomers.  Shipping revenue and costsare included in equipment revenue and cost of equipment revenue, respectively.

 

***Selling,General and Administrative Expenses, including Stock-Based Compensation***

 

Selling,general and administrative (“SG&A”) costs include:

 

·                  *Wages and benefits* — represents compensation for the Company’s full-timeand part-time employees as well as fees for consultants who are used by theCompany from time to time;

·                  *Stock-based compensation* — we estimate the fair value of our options, warrantsand stock appreciation rights (“Convertible Securities”) for financialaccounting purposes using the Black-Scholes-Merton model, which requires anumber of subjective assumptions, including the expected life of theConvertible Securities, risk-free interest rate, dividend rate, forfeiture rateand future volatility of the price of our Shares.  We expense the estimated fair value over thevesting period of the Convertible Securities. The vesting period is normally over a four year period, vesting in anequal amount each month; however, the Board of Directors has the discretion togrant options with different vesting periods.

·                  *Marketing —*represents**expensesfor both global and local marketing programs that focus on various targetsports properties and ethnic communities. These initiatives include both on-line and off-line marketingexpenditures.  These expenditures alsoinclude search engine marketing and search engine optimization;

·                  *Professional fees* — represents legal, recruiting andaccounting fees; and

·                  *Other SG&A expenses****—***representsexpenses for travel expenses, rent, office supplies, corporate IT services,credit card processing fees and other general operating expenses.

 

***Equityin Loss of Affiliate***

 

From January 1, 2008 through September 30,2009, the Company’s equity interest in KyLinTV was 17.1%.  KyLinTV is a company that is controlled bythe Chairman of the Board of Directors of the Company.  The Company also provides and charges KyLinTVfor administrative and general corporate support.  Management has determined that as a result ofthe 17.1% equity interest combined with the services that the Company providesKyLinTV, the Company

 

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continues to have significant influence on the operating activities ofKyLinTV, therefore the Company continues to account for KyLinTV using theequity method of accounting for investment.

 

The Company’s proportionate share of theequity loss from KyLinTV has been accounted for as a charge on the Company’sconsolidated statements of operations and comprehensive loss.   Dueto KyLinTV’s accumulated losses, the investment had been reduced to zero as at December 31,2008.  No further charges will berecorded as the Company has no obligation to fund the losses of KyLinTV.

 

**SELECTED INTERIM INFORMATION**

 

Theselected interim consolidated financial information set out below for the eightmost recently completed quarters has been derived from the Company’s unauditedinterim consolidated financial statements and accompanying notes posted onwww.sedar.com.  Readers should read thefollowing information in conjunction with those statements and related notes.

 
| ** **                        | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **Q3**     | ** ** | **Q2**     | ** ** | **Q1**     | ** ** | **Q4** | ** ** | **Q3** | ** ** | **Q2** | ** ** | **Q1** | ** ** | **Q4** | ** ** |
| ** **                        | ** ** | **$**      | ** ** | **$**      | ** ** | **$**      | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| **Income Statement Data:**        |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Revenue                           |       | 6,061,302  |       | 6,462,438  |       | 6,574,026  |       | 5,807,550 |   | 2,699,041 |   | 2,987,128 |   | 1,949,620 |   | 5,284,485 |   |
| Cost  of revenue                  |       | 3,224,838  |       | 3,293,481  |       | 3,844,483  |       | 3,205,272 |   | 1,534,807 |   | 1,753,689 |   | 1,145,381 |   | 3,822,315 |   |
| Net  loss for the period          |       | (7,463,951 | )          | (4,928,130 | )          | (5,793,878 | )          | (7,223,468 | ) | (1,377,667 | ) | (1,549,979 | ) | (1,486,146 | ) | (164,690 | ) |
| Basic  and diluted loss per share |       | (0.07      | )          | (0.04      | )          | (0.05      | )          | (0.13 | ) | (0.03 | ) | (0.04 | ) | (0.03 | ) | 0.00 |   |

 

The selected interiminformation for the periods from Q4 2007 to Q3 2008 represents income statementdata for NeuLion USA, excluding the Acquired Business.  For the periods from Q4 2008 (subsequent to October 20,2008) to Q3 2009, the selected interim information represents income statementdata for NeuLion including the Acquired Business.

 

The Q4 2007 revenueincludes $4.6 million of equipment revenue which is significantly higher thancomparable periods.  The sale of STBsquarter over quarter is very uneven in nature. The Company expected STB revenue to have a much slower growth rate thanservices revenue.  Services revenue is arecurring revenue stream whereas STB revenue is earned on new customers and/orsubscribers.

 

The Q4 2008 net lossincludes a non-cash impairment charge of $1.0 million.  This non-cash impairment charge was notincurred in the comparative periods.

 

The Q1 2009, Q2 2009 andQ3 2009 net losses include a non-cash loss on derivative charge of $0.5million, $0.3 million and $2.2 million, respectively.  These non-cash losses on derivative were notincurred in comparative periods.

 

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**RESULTS OF OPERATIONS**

 

### **Comparison of ThreeMonths Ended September 30, 2009 to Three Months Ended September 30,2008**

### ** **

### **Our interim consolidated financial statements forour three months ended September 30, 2009 and 2008 have been prepared inaccordance with U.S. GAAP.  Included innote 12**of the financial statementsis thereconciliation between our consolidated financial statements prepared inaccordance with U.S. GAAP and Canadian GAAP.

 
| ** **                                                                                   | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **$**      | ** ** | **$**      | ** ** | **%**      | ** ** |
| **Revenue**                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Services revenue                                                                             |       | 5,705,639  |       | 1,676,427  |       | 240        | %          |
| Equipment revenue                                                                            |       | 355,663    |       | 1,022,614  |       | -65        | %          |
| Total Revenue                                                                                |       | 6,061,302  |       | 2,699,041  |       | 125        | %          |
|                                                                                         |       |       |       |       |       |       |       |
| **Costs and  expenses**                                                                      |       |       |       |       |       |       |       |
| Cost of services revenue,  exclusive of depreciationand  amortization shown separately below |       | 2,879,702  |       | 712,134    |       | 304        | %          |
| Cost of equipment revenue                                                                    |       | 345,136    |       | 822,673    |       | -58        | %          |
| Selling, general and  administrative, includingstock-based  compensation                     |       | 7,200,976  |       | 2,270,857  |       | 217        | %          |
| Depreciation and amortization                                                                |       | 1,043,902  |       | 245,595    |       | 325        | %          |
|                                                                                         |       | 11,469,716 |       | 4,051,259  |       | 183        | %          |
| **Operating loss**                                                                           |       | (5,408,414 | )          | (1,352,218 | )          | 300        | %          |
| ** **                                                                                   |       |       |       |       |       |       |       |
| **Other income  (expense)**                                                                  |       |       |       |       |       |       |       |
| Unrealized loss on derivative                                                                |       | (2,229,150 | )          | —     |       | —     |       |
| Gain on foreign exchange                                                                     |       | 57,358     |       | —     |       | —     |       |
| Investment income                                                                            |       | 116,255    |       | 2,112      |       | 5404       | %          |
| Equity in loss of affiliate                                                                  |       | —     |       | (27,561    | )          | -100       | %          |
|                                                                                         |       | (2,055,537 | )          | (25,449    | )          | 7977       | %          |
| **Net and  comprehensive loss for the period**                                               |       | (7,463,951 | )          | (1,377,667 | )          | 442        | %          |

 

### **Revenue**

 

***ServicesRevenue***

 

Services revenue includesrevenue from subscribers, eCommerce and technology services.  Services revenue increased from $1.7 millionfor the three months ended September 30, 2008 to $5.7****millionfor the three months ended September 30, 2009.  The increase is a combination of the organicgrowth in services revenue and the effect of the Merger on October 20,2008. The organic growth in our services revenue was $0.9****million.  The Acquired Business comprised $3.1****million of total services revenue for the quarter.

 

Subscriber revenueincreased from $1.4****million forthe three months ended September 30, 2008 to $4.0****millionfor the three months ended September 30, 2009.  The increase is a combination of the growthin subscribers and the effect of the Merger on October 20, 2008. Theorganic growth in our subscriber revenue was $0.8 million.

 

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The organic increase wasa result of $0.6 million in revenue growth from our existing customers coupledwith $0.2 million in revenue generated from 18 new customers.  The Acquired Business comprised $1.8****million of total subscriber revenue for the period.

 

eCommerce revenueincreased from zero for the three months ended September 30, 2008 to $0.9****million for the three months ended September 30,2009.  The Acquired Business comprisedall of eCommerce revenue for the period.

 

Technology servicesrevenue increased from $0.3****million forthe three months ended September 30, 2008 to $0.8****millionfor the three months ended September 30, 2009.  The increase is a combination of the growthin technology services revenue and the effect of the Merger on October 20,2008. The organic growth in our technology services revenue was $0.1****million.   As newcustomers begin streaming video or develop their user interface, we earntechnology services revenue.  Thisrevenue is recognized over the life of the contractual relationship.  The Acquired Business comprised $0.4****million of total technology services revenue for theperiod.

 

### ***EquipmentRevenue***

### ** **

Equipment revenuedecreased from $1.0****million forthe three months ended September 30, 2008 to $0.4****millionfor the three months ended September 30, 2009.  The decrease in equipment revenue is a resultof the uneven nature of the revenue stream; customers often place large singleorders to meet minimum order requirements to manage the lead time betweenordering and shipping and to minimize the related shipping costs.  The lead time on new orders is approximately12 weeks from order to receipt.  Thetiming of specific orders is not consistent period over period.  We sell our STBs to customers, who in turnsell or give them to new users, and we also sell directly to users.  The demand for STBs is driven by newsubscribers and the level of inventory carried by our customers.  Our customers do not have the right of returnon purchased STBs.  Initial orders by newcustomers and new users will impact the trend of STB revenues.  The Company expects STB revenue to have amuch slower growth rate than services revenue. Services revenue is recurring (monthly) revenue whereas STB revenue isearned on new customers and/or subscribers.

 

### **Costsand Expenses**

### ** **

***Costof Services Revenue***

 

Cost of services revenueincreased from $0.7****million or 41%of services revenue for the three months ended September 30, 2008 to $2.9****million or 51% of services revenue for the three monthsended September 30, 2009.  Thisincrease was a combination of the costs associated with increased revenue andthe effect of the Merger on October 20, 2008.  The Acquired Business comprised $1.9****million of total costs of services revenue for the period.

 

Organic cost of servicesrevenue increased from $0.7 million or 41% of services revenue for the threemonths ended September 30, 2008 to $1.0****millionor 38% of services revenue for the three months ended September 30,2009.  The $0.3 million increase was aresult of additional costs relating to colocation and network fees in supportof increased revenue.    The 3%improvement (as a percentage of services revenue) primarily relates tonegotiated lower rates on bandwidth costs. 

 

Management expects tomaintain cost of services revenue at between 50% and 60% of services revenue,including the Acquired Business, based on the mix of services revenue and aseconomies of scale are realized.

 

### ***Cost ofEquipment Revenue***

### ** **

Cost of equipment revenuedecreased from $0.8****million forthe three months ended September 30, 2008 to $0.4****millionfor the three months ended September 30, 2009 on lower revenue.  Cost of equipment revenue is directlyvariable with changes in equipment revenue. Cost of equipment revenue as a percentage of equipment revenue increasedfrom 80% for the three months ended September 30, 2008 to 97% for thethree months ended September 30, 2009 due to an increase in the proportionof revenue which was sold on a cost recovery basis (shipping and replacementparts).

 

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### ***Selling, Generaland Administrative, including Stock-Based Compensation***

### ** **

Selling, general andadministrative, including stock-based compensation, increased from $2.3****million for the three months ended September 30, 2008to $7.2****million****forthe three months ended September 30, 2009. The Acquired Business accounted for $3.4****millionof the total increase of $4.9****million inselling, general and administrative costs for the period.  The individual variances are due to the following:

 

·                  Wages and benefits increased from $1.8****million for the three months ended September 30,2008 to $4.7****million****for the threemonths ended September 30, 2009.   The Acquired Business accounted for $2.0****million of the totalincrease of $2.9 million in wages andbenefits for the period. The organic increase of $0.9****million was primarily related to the increase in employeesto support the increased revenue and the Merger with the AcquiredBusiness.  In conjunction with theMerger, the Company added senior management and provided market levelcompensation for the CEO.

 

·                  Stock-based compensation expenseincreased from zero for the three months ended September 30, 2008 to $0.4****million****forthe three months ended September 30, 2009. This increase was due to the assumption of convertible instruments inconjunction with the Merger and the Company granting convertible instruments toemployees subsequent to the Merger.

 

·                  Marketing*expenses increased from a nominal amount for thethree months ended September 30, 2008 to $*0.3****million*****forthe three months ended September 30, 2009. *The AcquiredBusiness accounted for $0.2****million of the total increase of $0.3****million in marketingexpenses for the period.  The AcquiredBusiness is more of a business-to-consumer focused business and incurs highermarketing expenses including search engine marketing and search engineoptimization on the Internet.

 

·                  Professional fees increased from $0.1 million for the three months ended September 30, 2008 to $0.5million for the three months ended September 30,2009.  The increase was primarilyrelated to fees incurred in connection with public company reporting compliance.  Inaddition, the Company incurred $0.2 million for professional fees associatedwith the acquisition of INSINC.

 

·                  Other SG&A expenses *increased from $*0.4*****million for the three months ended September 30, 2008 to $*1.3****million*****forthe three months ended September 30, 2009. *The AcquiredBusiness accounted for $0.7****million of the total increase of $0.9 million for the period.

 

### ***Equity in Loss of Affiliate***

### ** **

Equity in loss of KyLinTVdecreased from a nominal amount for the three months ended September 30,2008 to zero for the three months ended September 30,2009.  The decrease is as a result of thecumulative losses exceeding the full value of the Company’s investment in2008.  Due to KyLinTV’s accumulatedlosses, the investment had been reduced to zero.  The Company still owns its equity position inthe affiliate, however the Company is not required to fund any additionallosses, and as such no further charges will be incurred.

 

### ***Depreciation andAmortization***

### ** **

Depreciation and amortization increased from $0.3****million for the three months ended September 30, 2008to $1.1****millionfor the three months ended September 30, 2009.   The increase was due to amortization onassets acquired in theMerger ($0.8****million) and the increasedcapital assets required to support the increased revenue.

 

### ***Unrealized Losson Derivative***

### ** **

Unrealized loss on derivative increased from zero forthe three months ended September 30, 2008 to $2.2****million for the three months ended September 30,2009.   The increase was due to the adoptionof ASC 815-40, effective January 1, 2009, which required the Company tofair value all convertible instruments denominated in a

 

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currency other than the Company’s functionalcurrency.  On January 1, 2009, thegrant date fair value of warrants denominated in Canadian dollars of $2.5million was reallocated from additional paid in capital and a derivative liabilitywas recorded in the amount of $0.6 million with an adjustment to openingaccumulated deficit of $1.9 million.  Thedifference between the fair value at September 30, 2009 of $3.6****million and the fair value at June 30, 2009 of $1.4****million resulted in an unrealized loss on derivative of$2.2****million.

 

### **Comparison of Nine MonthsEnded September 30, 2009 to Nine Months Ended September 30, 2008**

### ** **

### **Our interim consolidated financial statements forour nine months ended September 30, 2009 and 2008 have been prepared inaccordance with U.S. GAAP.  Included innote 12**of the financial statementsis thereconciliation between our consolidated financial statements prepared inaccordance with U.S. GAAP and Canadian GAAP.

 
| ** **                                                                                   | ** ** | **2009**    | ** ** | **2008**   | ** ** | **Change** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **$**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| **Revenue**                                                                                  |       |        |       |       |       |       |       |
| Services revenue                                                                             |       | 17,778,374  |       | 3,908,585  |       | 355        | %          |
| Equipment revenue                                                                            |       | 1,319,393   |       | 3,727,204  |       | -65        | %          |
| Total Revenue                                                                                |       | 19,097,767  |       | 7,635,789  |       | 150        | %          |
|                                                                                         |       |        |       |       |       |       |       |
| **Costs and  expenses**                                                                      |       |        |       |       |       |       |       |
| Cost of services revenue,  exclusive of depreciationand  amortization shown separately below |       | 9,171,546   |       | 1,464,734  |       | 526        | %          |
| Cost of equipment revenue                                                                    |       | 1,191,257   |       | 2,969,142  |       | -60        | %          |
| Selling, general and  administrative, includingstock-based  compensation                     |       | 21,152,982  |       | 5,933,585  |       | 256        | %          |
| Depreciation and amortization                                                                |       | 3,095,597   |       | 679,583    |       | 356        | %          |
|                                                                                         |       | 34,611,382  |       | 11,047,044 |       | 213        | %          |
| **Operating loss**                                                                           |       | (15,513,615 | )          | (3,411,255 | )          | 355        | %          |
|                                                                                         |       |        |       |       |       |       |       |
| **Other income  (expense)**                                                                  |       |        |       |       |       |       |       |
| Unrealized loss on derivative                                                                |       | (3,038,200  | )          | —     |       | —     |       |
| Gain on foreign exchange                                                                     |       | 104,575     |       | —     |       | —     |       |
| Investment income                                                                            |       | 261,280     |       | 3,849      |       | 6688       | %          |
| Equity in loss of affiliate                                                                  |       | —      |       | (1,006,386 | )          | -100       | %          |
|                                                                                         |       | (2,672,345  | )          | (1,002,537 | )          | 167        | %          |
| **Net and  comprehensive loss for the period**                                               |       | (18,185,960 | )          | (4,413,792 | )          | 312        | %          |

 

### **Revenue**

### ** **

***ServicesRevenue***

 

Services revenue includesrevenue from subscribers, eCommerce and technology services.  Services revenue increased from $3.9 millionfor the nine months ended September 30, 2008 to $17.8****millionfor the nine months ended September 30, 2009.  The increase is a combination of the organicgrowth in services revenue and the effect of the Merger on October 20,2008. The organic growth in our services revenue was $4.0****million.  The Acquired Business comprised $9.9****million of total services revenue for the period.

 

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Subscriber revenueincreased from $3.1****million forthe nine months ended September 30, 2008 to $12.5****millionfor the nine months ended September 30, 2009.  The increase is a combination of the growthin subscribers and the effect of the Merger on October 20, 2008. Theorganic growth in our subscriber revenue was $3.1****million.   Included in the organic increase was $2.5 inrevenue from existing customers and $0.6 million in revenue generated from 19new customers.  The Acquired Businesscomprised $6.3****million of total subscriberrevenue for the period.

 

eCommerce revenueincreased from zero for the nine months ended September 30, 2008 to $2.5million for the nine months ended September 30, 2009.  The Acquired Business comprised all ofeCommerce revenue for the period.

 

Technology servicesrevenue increased from $0.8****million forthe nine months ended September 30, 2008 to $2.8****millionfor the nine months ended September 30, 2009.  The increase is a combination of the organicgrowth in technology services revenue and the effect of the Merger on October 20,2008. The organic growth in our technology services revenue was $0.9****million.   As newcustomers begin streaming video or develop their user interface, we earntechnology services revenue.  Thisrevenue is recognized over the life of the contractual relationship.  The Acquired Business comprised $1.1****million of total technology services revenue for theperiod.

 

### ***EquipmentRevenue***

### ** **

Equipment revenuedecreased from $3.7****million forthe nine months ended September 30, 2008 to $1.3****millionfor the nine months ended September 30, 2009.  The decrease in equipment revenue is a resultof the uneven nature of the revenue stream; customers often place large singleorders to meet minimum order requirements to manage the lead time betweenordering and shipping and to minimize the related shipping costs.  The lead time on new orders is approximately12 weeks from order to receipt.  Thetiming of specific orders is not consistent period over period.  We sell our STBs to customers, who in turnsell or give them to new users, and we also sell directly to users.  The demand for STBs is driven by newsubscribers and the level of inventory carried by our customers.  Our customers do not have the right of returnon purchased STBs.  Initial orders by newcustomers and new users will impact the trend of STB revenues.  The Company expects STB revenue to have amuch slower growth rate than services revenue. Services revenue is recurring (monthly) revenue whereas STB revenue isonly from new customers and/or subscribers.

 

### **Costsand Expenses**

### ** **

***Costof Services Revenue***

 

Cost of services revenueincreased from $1.5****million or 38%of services revenue for the nine months ended September 30, 2008 to $9.2****million or 52% of services revenue for the nine monthsended September 30, 2009.  Thisincrease was a combination of the costs associated with increased revenue andthe effect of the Merger on October 20, 2008.  The Acquired Business comprised $6.0****million of total costs of services revenue for the period.

 

Organic cost of servicesrevenue increased from $1.5****million or 38%for the nine months ended September 30, 2008 to $3.2****millionor 41% for the nine months ended September 30, 2009.  The increase was a result of increasedrevenue and higher costs for bandwidth due to higher usage by existingsubscribers and additional costs relating to colocation and network fees.  

 

Management expects tomaintain cost of services revenue at between 50% and 60% of services revenue,including the Acquired Business, based on the mix of services revenue and aseconomies of scale are realized.

 

### ***Cost ofEquipment Revenue***

### ** **

Cost of equipment revenuedecreased from $2.9****million forthe nine months ended September 30, 2008 to $1.2****millionfor the nine months ended September 30, 2009 on lower revenue.  Cost of equipment revenue is directlyvariable with changes in equipment revenue. Cost of equipment revenue as a percentage of equipment revenue increasedfrom 80% for the nine months ended September 30, 2008 to 90% for the ninemonths ended September 30, 2009 due to an increase in the proportion ofrevenue which was sold on a cost recovery basis (shipping and replacementparts).

 

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### ***Selling, Generaland Administrative, including Stock-Based Compensation***

### ** **

Selling, general andadministrative, including stock-based compensation, increased from $5.9****million for the nine months ended September 30, 2008to $21.1****million****forthe nine months ended September 30, 2009. The Acquired Business accounted for $10.7****millionof the total $15.2 million increase in selling, general and administrative forthe period.  The individual variances are due to the following:

 

·                  Wages and benefits increased from $4.6****million for the nine months ended September 30,2008 to $14.7****million****for the ninemonths ended September 30, 2009.   The Acquired Business accounted for $6.5****million of the totalincrease of $10.1 million in wages andbenefits for the period. The organic increase of $3.6****million was primarily related to the increase in employeesto support the increased revenue and the Merger with the AcquiredBusiness.  In conjunction with theMerger, the Company added senior management and provided market levelcompensation for the CEO.

 

·                  Stock-based compensation expenseincreased from zero for the nine months ended September 30, 2008 to $1.0****million****forthe nine months ended September 30, 2009. This increase was due to the assumption of convertible instruments inconjunction with the Merger and the Company granting convertible instruments toemployees subsequent to the Merger.

 

·                  Marketing*expenses increased from $0.1 million for the ninemonths ended September 30, 2008 to $*0.8****million*****forthe nine months ended September 30, 2009. *The AcquiredBusiness accounted for $0.6****million of the total increase of $0.8 million in marketing expenses for the period.  The Acquired Business is more of abusiness-to-consumer focused business and incurs higher marketing expensesincluding search engine marketing and search engine optimization on theInternet.

 

·                  Professional fees*increased from $*0.6****million*****for the nine months ended September 30, 2008 to $*1.1****million*****forthe nine months ended September 30, 2009. *The increasewas primarily related to fees incurred in connection with public companyreporting compliance.  In addition, theCompany incurred $0.2 million for professional fees associated with theacquisition of INSINC.

 

·                  Other SG&A expenses *increased from $*0.6*****million for the nine months ended September 30, 2008 to $*3.5 million*****forthe nine months ended September 30, 2009. *The AcquiredBusiness accounted for $2.4****million of the total increase of $2.9 million for the period.

 

### ***Equity in Loss of Affiliate***

### ** **

Equity in loss of KyLinTVdecreased from $1.0****million forthe nine months ended September 30, 2008 to zero for the nine months ended September 30, 2009.  The decrease is as a result of the cumulativelosses exceeding the full value of the Company’s investment in 2008.  Due to KyLinTV’s accumulated losses, theinvestment had been reduced to zero.  TheCompany still owns its equity position in the affiliate, however the Company isnot required to fund any additional losses, and as such no further charges willbe incurred.

 

### ***Depreciation andAmortization***

### ** **

Depreciation and amortization increased from $0.7****million for the nine months ended September 30, 2008to $3.1****millionfor the nine months ended September 30, 2009.   The increase was due to amortization onassets acquired in the Merger ($2.4****million) andthe increased capital assets required to support the increased revenue.

 

### ***Unrealized Losson Derivative***

### ** **

Unrealized loss on derivative increased from zero forthe nine months ended September 30, 2008 to $3.0 million for the nine months ended September 30, 2009.   The increase was due to the adoption of ASC815-40.  The

 

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difference between the fair value at September 30,2009 of $3.6****million and the fair value at January 1,2009 of $0.6****million resulted in an unrealizedloss on derivative of $3.0****million.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

As of September 30, 2009, our principal sources of liquidityincluded cash and cash equivalents of $19.3 millionand trade accounts receivable of $1.3****million. We do not have a credit facility.

 

At September 30, 2009, approximately 70% of ourcash and cash equivalents were held in interest bearing bank accounts with aU.S. bank that received an A- rating by Standard and Poors and an A2 rating byMoody’s and 22% of our cash andcash equivalents  were held in bankaccounts with two of the top five Canadian commercial banks.  The Company believes that these U.S. andCanadian financial institutions are secure notwithstanding the current globaleconomy and that we will be able to access the remaining balance of bankdeposits as these deposits are with large reputable banks.  Our investment policy is to invest in lowrisk short-term investments which are primarily term deposits.  We have not had a history of any defaults onthese term deposits, nor do we expect any in the future given the short term tomaturity of these investments.

 

Based on our current business plan and internal forecasts, andconsidering the risks that are present in the current global economy, webelieve that cash on hand will be sufficient to meet our working capital andoperating cash requirements for the next twelve months. The Company is still inthe early stage of business.  From theCompany’s inception it has incurred substantial net losses.  The Company continues to review its operatingstructure to reduce costs.  Cash fromoperations could be affected by various risks and uncertainties, including, butnot limited to, the risks detailed in or incorporated by reference in our AIFand our Form 10 in the sections titled “Risk Factors”.

 

During the nine months ended September 30, 2009, the Company’s cashposition decreased by $8.0 million. The Company used $11.0****million to fund operations and $0.9****millionto purchase fixed assets, offset by the impact of $3.9****millionin other working capital changes.

 

**WorkingCapital Requirements**

 

The net working capital at September 30, 2009 was $2.7****million, a decrease of $15.4 million from the December 31, 2008 networking capital of $18.1million. The decreased working capital is primarily due to funding operationsand the fair value of the derivative liability on September 30, 2009.

 

Current assets at September 30, 2009 were $23.2 million, a decrease of $10.1****million from the December 31, 2008balance of $33.3 million. Thechange is primarily due to a decrease in our cash and cash equivalents of $8.0****million.

 

Current liabilities at September 30, 2009 were $20.5****million, an increase of $5.3****millionfrom the December 31, 2008 balance of $15.2 million.   The change is primarily due to the fairvalue of the derivative liability of $3.6 million.

 

**CashFlows**

 

The Company’s business isstill in the early stages, with only a few years of operating history.  As at September 30, 2009, the Companyhad cash and cash equivalent balances of $19.3****million.  From the Company’s inception, it has incurrednet losses and has an accumulated deficit of $42.3****million;management expects these losses to continue in the short term.  The Company will require expenditures ofsignificant funds for marketing, building its subscriber management systems,programming and website development, maintaining adequate video streaming anddatabase software, pursuing and maintaining channel distribution agreementswith its channel partners, fees relating to acquiring and maintaining Internetstreaming rights to its content and the construction and maintenance of theCompany’s delivery infrastructure and office facilities.  In addition, under the terms of theAcquisition Agreement with INSINC, the Company paid Cdn$2.5 million in cash onOctober 31, 2009.  There can be noassurance that the Company will ultimately be able to generate sufficientrevenue or reduce its costs in the anticipated time frame to become profitableand have sustainable cash flows.

 

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**Summary Balance Sheet Data:**

 
| ** **                    | ** ** | **September 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|-------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **$**                              | ** ** | **$**                             | ** ** |
| ** **                    |       |                               |       |                              |       |
| **Current Assets**            |       |                               |       |                              |       |
| Cash and cash equivalents     |       | 19,315,256                         |       | 27,323,021                        |       |
| Accounts receivable, net      |       | 1,284,570                          |       | 2,284,242                         |       |
| Taxes receivable              |       | 15,040                             |       | 983,253                           |       |
| Other receivables             |       | 718,475                            |       | 227,711                           |       |
| Inventory                     |       | 717,920                            |       | 347,600                           |       |
| Prepaid expenses and deposits |       | 1,132,328                          |       | 1,830,260                         |       |
| Due from related parties      |       | 27,000                             |       | 324,059                           |       |
| **Total current assets**      |       | 23,210,589                         |       | 33,320,146                        |       |
| ** **                    |       |                               |       |                              |       |
| **Current Liabilities**       |       |                               |       |                              |       |
| Accounts payable              |       | 6,161,373                          |       | 4,465,388                         |       |
| Accrued liabilities           |       | 6,334,352                          |       | 7,595,116                         |       |
| Derivative liability          |       | 3,626,150                          |       | —                            |       |
| Due to related parties        |       | 181,891                            |       | 56,826                            |       |
| Deferred revenue              |       | 4,197,895                          |       | 3,091,993                         |       |
| **Total current liabilities** |       | 20,501,661                         |       | 15,209,323                        |       |
| ** **                    |       |                               |       |                              |       |
| **Working capital ratio**     |       | 1.13                               |       | 2.19                              |       |

 

**Comparative Summarized Cash Flows**

 
| ** **                                      | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **$**                                      | ** ** | **$**                                     | ** ** | **$** | ** ** | **$** | ** ** |
|                                            |       |                                       |       |                                      |       |   |   |   |   |
| Cash provided by (used in) operating activities |       | 1,937,748                                  |       | 49,431                                    |       | (7,186,903 | ) | 148,559 |   |
| Cash used in investing activities               |       | (362,108                                   | )          | (182,918                                  | )          | (893,949 | ) | (1,237,176 | ) |
| Cash provided by financing activities           |       | 6,087                                      |       | 1,750,000                                 |       | 73,087 |   | 2,600,000 |   |

 

### ***Operating Activities***

### ** **

Cash used in operatingactivities for the nine months ended September 30, 2009 was $7.2million.  Changes in net cash used inoperating activities reflect the following:

 

·                  net loss of $18.2****million****for the nine months ended; less

·                  non-cash items adjusted to net loss in the amount of$7.1****million,****whichrelates to stock-based compensation, depreciation and amortization andunrealized loss on derivative; and

·                  changes in operating assets and liabilities of $3.9****million.

 

### ***Investing Activities***

### ** **

Cash used in investingactivities for the nine months ended September 30, 2009 was $0.9****million.  These fundswere used to purchase fixed assets.

 

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### ***Financing Activities***

### ** **

Cash provided byfinancing activities was $0.1 million****for the ninemonths ended September 30, 2009. The funds were received from stock option exercises.

 

In the near future, theCompany expects that it will continue to use its cash resources to fund workingcapital requirements.    The Companybelieves existing cash and cash equivalents will be sufficient to satisfy normalworking capital needs and capital expenditures for at least the next twelvemonths.  However, the Company may selladditional equity securities to further enhance its liquidity position, and thesale of additional equity securities could result in dilution to itsshareholders.

 

**Off-BalanceSheet Arrangements**

 

TheCompany did not have any off-balance sheet arrangements as of September 30,2009.

 

**Financial Instruments**

** **

The Company’sfinancial instruments are comprised of cash and cash equivalents, accounts receivable,other receivables, taxes receivable, other receivables, deposits, accountspayable, accrued liabilities, amounts due to/from related parties, and deferredrevenue.

 

***Fair value of financial instruments***

** **

Fair value of a financialinstrument is defined as the amount for which the instrument could be exchangedin a current transaction between willing parties.  The estimated fair value of our financialinstruments approximates their carrying value due to the short maturity term ofthese financial instruments.

 

***Risksassociated with financial instruments***

** **

**[i] *Foreign exchange risk***

** **

The Company is exposed to foreign exchangerisk as a result of transactions in currencies other than its functionalcurrency of the United States dollar. The majority of the Company’s revenues are transacted in U.S. dollars,whereas a portion of its expenses are transacted in U.S. or Canadiandollars.  The Company does not usederivative instruments to hedge against foreign exchange risk.

 

**[ii] *Interest rate risk***

** **

The Company is exposed to interest rate riskon its invested cash and cash equivalents and its short-term investments.  The interest rates on these instruments arebased on the bank’s rate and therefore are subject to change with themarket.  The Company does not use derivativefinancial instruments to reduce its interest rate risk.

 

**[iii] *Credit risk***

 

The Company sells itsservices to a variety of customers under various payment terms and therefore isexposed to credit risk.  The Company hasadopted policies and procedures designed to limit this risk.  The maximum exposure to credit risk at thereporting date is the carrying value of receivables.  The Company establishes an allowance for doubtfulaccounts that represents its estimate of incurred losses in respect of accountsreceivable.

 

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**RELATED PARTY TRANSACTIONS**

 

The Company has entered into certaintransactions and agreements in the normal course of operations with relatedparties.  Significant related partytransactions are as follows:

 

***TransVideo***

 

TransVideo is a company that is controlled by the Chairman of the Boardof Directors of the Company.  STBpurchases amounted to zero and $589,136****and transcoderlicensing fees amounted to $6,000****and $50,000****for the three and nine months ended September 30,2009, respectively.  STB purchasesamounted to $206,000****and $2,745,000****and transcoder licensing fees amounted to $16,000****and $61,000****for the threeand nine months ended September 30, 2008, respectively.  Included in cost of equipment revenue is thecost of STBs sold of $142,000****and $740,816****for the three and nine months ended September 30,2009, respectively [three and nine months ended September 30, 2008 -$706,000****and $2,555,000, respectively].

 

***KyLinTV***

 

KyLinTV is a company that is controlled by the Chairman of the Board ofDirectors of the Company.  On June 1,2008, the Company entered into an agreement with KyLinTV to build and deliverthe setup and back office operation of an IPTV service.  The Company also provides and charges KyLinTVfor administrative and general corporate support.  For each of the periods presented, theamounts paid for these services provided by the Company for the three and ninemonths ended September 30, 2009 were $160,185****and$461,415, respectively [three and nine months ended September 30, 2008 -$188,271 and $958,114, respectively]. During the three and nine months ended September 30, 2009, the Companypurchased STBs from KyLinTV in the amount of $157,500****and****$307,620, respectively. During the nine months ended September 30, 2008, the Companypurchased computer equipment from KyLinTV in the amount of $620,000.

 

***New YorkIslanders Hockey Club, LP (“New York Islanders”)***

 

The Company provides IT related professional services to the New YorkIslanders, a professional hockey club that is owned by the Chairman of theBoard of Directors of the Company.

 

***Renaissance Property Associates, LLC (“Renaissance”)***

 

Renaissance is a real estate management company owned by the Chairmanof the Board of Directors of the Company. In June 2009, the Company signed a sublease agreement withRenaissance for office space in Plainview, New York.  Rent expense paid by the Company toRenaissance of $99,972****and $286,809,inclusive of taxes and utilities, is included in selling, general andadministrative expense for the three and nine months ended September 30,2009, respectively.

 

***Patstar, Inc. (******“Patstar”)***

 

Patstar is a company controlled by the Vice-Chairman of the BoardDirectors of the Company that receives reimbursement of expenditures on behalfof the Company.  The nature of thesereimbursements relates to expenses that the Company has incurred in the normalcourse of business. Rent expense paid by Patstar of $991****and$2,753****is included as a recovery in selling,general and administrative expense for the three and nine months ended September 30,2009, respectively.

 

***Hawaii IPTV,LLC******(“Hawaii”)***

 

The Company had as an IPTV customer Hawaii, whose principals are familymembers of the Chairman of the Board of Directors of the Company.  Hawaii ceased operations during the thirdquarter of 2009.

 

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***The Smile Train, Inc.*****(“*Smile Train*”)**

 

The Company provides IT related professional services to Smile Train, apublic charity whose founder and significant benefactor is the Chairman of theBoard of Directors of the Company.

 

The Company recognized revenue from related parties for the three andnine months ended as follows:

 
| ** **         | ** ** | **Three months**  | ** ** | **Nine months**   | ** ** |
|--------------------|------------|------------------------|------------|------------------------|------------|
| ** **         | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **         | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **         | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$** | ** ** | **$** | ** ** |
|               |       |                   |       |                   |       |   |   |   |   |
| New York Islanders |       | 89,016                 |       | 60,000                 |       | 300,992 |   | 180,000 |   |
| Renaissance        |       | 39,660                 |       | 30,000                 |       | 99,660 |   | 90,000 |   |
| Smile Train        |       | 27,000                 |       | 27,000                 |       | 81,000 |   | 93,000 |   |
| Hawaii             |       | 10,300                 |       | 21,759                 |       | 41,789 |   | 42,993 |   |
| KyLinTV            |       | 424,315                |       | 392,885                |       | 1,311,715 |   | 522,420 |   |
|               |       | 590,291                |       | 531,644                |       | 1,835,156 |   | 928,413 |   |

 

As at September 30, 2009 and December 31,2008, the amounts due from (to) related parties are as follows:

 
| ** **          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|------------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **          | ** ** | **$**                  | ** ** | **$**                 | ** ** |
|                |       |                   |       |                  |       |
| New  York Islanders |       | (1,657                 | )          | 29,189                |       |
| Renaissance         |       | —                 |       | (1,146                | )          |
| Smile  Train        |       | 27,000                 |       | 27,000                |       |
| Hawaii              |       | —                 |       | 17,527                |       |
| TransVideo          |       | (135,889               | )          | (55,680               | )          |
| KyLinTV             |       | (44,345                | )          | 250,343               |       |
|                |       | (154,891               | )          | 267,233               |       |

 

**Investment in affiliate — KyLinTV**

** **

The Company records its investment in KyLinTV using the equity method.

 

From January 1, 2008 through September 30, 2009, the Company’sequity interest in the affiliate was 17.1%. As previously discussed, the Company also provides and charges KyLinTV foradministrative and general corporate support. Management has determined that as a result of the 17.1% equity interestcombined with the services that the Company provides KyLinTV, the Companycontinues to have significant influence on the operating activities of KyLinTV;therefore, the Company continues to account for KyLinTV using the equity methodof accounting for investment.

 

The Company’s proportionate share of the equity loss from KyLinTV hasbeen accounted for as a charge on the Company’s consolidated statements ofoperations and comprehensive loss.   Due to KyLinTV’s accumulated losses, theinvestment had been reduced to zero as at December 31, 2008.  No further charges will be recorded as theCompany has no obligation to fund the losses of KyLinTV.

 

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The results of operations and financial position of the Company’sequity basis investment in KyLinTV are summarized below for the three and ninemonths ended September 30:

 
| ** **                              | ** ** | **Three months**       | ** ** | **Nine months**        | ** ** |
|-----------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                              | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **$**                  | ** ** | **$**                  | ** ** | **$** | ** ** | **$** | ** ** |
| Condensed income statement information: |       |                   |       |                   |       |   |   |   |   |
| Net sales                               |       | 2,047,409              |       | 1,851,368              |       | 6,003,173 |   | 4,574,186 |   |
| Net loss                                |       | (1,302,214             | )          | (1,812,905             | )          | (4,282,112 | ) | (6,045,973 | ) |

 
| ** **                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                            | ** ** | **$**                  | ** ** | **$**                 | ** ** |
|                                  |       |                   |       |                  |       |
| Condensed  balance sheet information: |       |                   |       |                  |       |
| Current  assets                       |       | 1,834,646              |       | 927,427               |       |
| Non-current  assets                   |       | 1,238,950              |       | 2,411,319             |       |
| Total  assets                         |       | 3,073,596              |       | 3,338,746             |       |
| Current  liabilities                  |       | 14,080,872             |       | 10,063,909            |       |
| Non-current  liabilities              |       | —                 |       | —                |       |
| Equity  (deficiency)                  |       | (11,007,276            | )          | (6,725,163            | )          |
| Total  liabilities and equity         |       | 3,073,596              |       | 3,338,746             |       |

 

**RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued guidance now codified as Accounting StandardsCodification Topic 105, “Generally Accepted Accounting Principles” (“ASC 105”)as the single source of authoritative non-governmental U.S. GAAP. ASC 105 doesnot change current U.S. GAAP, but is intended to simplify user access to allauthoritative U.S. GAAP by providing all authoritative literature related to aparticular topic in one place (the “Codification”). On the effective date of ASC105, the Codification superseded all then-existing non-SEC accounting andreporting standards, and all other non-grandfathered non-SEC accountingliterature not included in the Codification became non-authoritative. Theprovisions of ASC 105 are effective for interim and annual periods ending afterSeptember 15, 2009. We adopted ASC 105 in the third quarter of 2009. Thispronouncement had no effect on our consolidated financial position, results ofoperations or cash flows, but impacted our financial reporting process byreplacing all references to pre-Codification standards with references to theapplicable Codification topic.

 

In October 2009, the FASB issuedASU 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”).ASU 2009-13 amends guidance included within ASC Topic 605-25 to require anentity to use an estimated selling price when vendor specific objectiveevidence or acceptable third party evidence does not exist for any products orservices included in a multiple element arrangement.  The arrangement consideration should beallocated among the products and services based upon their relative sellingprices, thus eliminating the use of the residual method of allocation.  ASU 2009-13 also requires expandedqualitative and quantitative disclosures regarding significant judgments made andchanges in applying this guidance. ASU 2009-13 is effective prospectively forrevenue arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010. Early adoption and retrospectiveapplication are also permitted. The company is currently evaluating the impactof adopting the provisions of ASU 2009-13.

 

In May 2009, the FASB issued ASC Topic855, “*Subsequent Events*” (“ASC 855”), whichestablishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.  This statement sets forth thecircumstances under which 

 

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an entity should recognize events or transactions occurring after thebalance sheet date in its financial statements. ASC 855 also requires the disclosure of the date through which an entityhas evaluated subsequent events and the basis for that date, that is, whetherthat date represents the date the financial statements were issued or wereavailable to be issued.  This statement is effective for interim or annualreporting periods ending after June 15, 2009.  The Company adopted ASC 855 during the secondquarter of 2009.  The adoption of ASC 855did not have a material impact on our interim consolidated financial statementsor related footnotes.

 

In April 2009, the FASB issued ASC Topic825, “*Interim Disclosures about**Fair Value of**Financial Instruments*”(“ASC 825”), to require disclosures about fair value of financial instrumentsfor interim and annual reporting periods of publicly traded companies.  This interpretation is effective for interimreporting periods ending after June 15, 2009. The Company adopted ASC 825during the second quarter of 2009.  Theadoption of ASC 825 did not have a material impact on our interim consolidatedfinancial statements or related footnotes.

 

Effective January 1, 2009, the Companyadopted ASC Topic 815-40, “*Derivatives and Hedging*”(ASC 815-40).  One of the conclusionsreached under ASC 815-40 was that an equity-linked financial instrument wouldnot be considered indexed to the entity’s own stock if the strike price is denominatedin a currency other than the issuer’s functional currency.  The conclusion reached under ASC 815-40clarified the accounting treatment for these and certain other financialinstruments.  ASC 815-40 specifies that acontract would not be treated as a derivative if it met the followingconditions:  (a) indexed to theCompany’s own stock; and (b) classified in shareholders’ equity in theCompany’s statement of financial position.

 

As a result, the Company’s outstandingwarrants denominated in Canadian dollars as detailed in note 11 are notconsidered to be indexed to our own stock because the exercise price isdenominated in Canadian dollars and our functional currency is United Statesdollars and therefore have been treated as derivative financial instruments andrecorded at their fair value as a liability. All other outstanding convertible instruments are considered to beindexed to our own stock, because their exercise price is denominated in thesame currency as our functional currency, and are included in shareholders’equity.

 

In February 2008, theCanadian Institute of Chartered Accountants issued new Handbook Section 3064,*Goodwill and Intangible Assets*,which replaces Section 3062, *Goodwill and OtherIntangible Assets*, and Section 3450, *Research andDevelopment Costs*.  The newstandard addresses when an internally developed intangible asset meets thecriteria for recognition as an asset. The section also issued amendments to Section 1000, *Financial Statement Concepts*.  These changes are effective for fiscal yearsbeginning on or after October 1, 2008, with earlier adoption permitted,and have been adopted by the Company effective January 1, 2009.  The objectives of the changes are toreinforce a principle-based approach to the recognition of costs as assets andto clarify the application of the concept of matching revenues and expenses in Section 1000.  Collectively, these changes bring Canadianpractice closer to International Financial Reporting Standards (“IFRS”) byeliminating the practice of recognizing as assets a variety of start-up,pre-production and similar costs that do not meet the definition andrecognition criteria of an asset.  Therewas no material effect on the Company’s interim consolidated financialstatements as a result of adopting CICA Handbook Section 3064.

 

In February 2008, the CICA Accounting StandardsBoard confirmed that the changeover to IFRS from Canadian GAAP will be requiredfor publicly accountable enterprises, effective for the interim and annualfinancial statements relating to fiscal years beginning on or after January 1,2011.  The Company became an SEC issuereffective June 8, 2009 and expects to continue to use U.S. GAAP until thedate that IFRS is implemented in the United States, which is currently estimatedto occur no sooner than 2014.

 

## **OUTSTANDINGSHARE DATA**

## ** **

The Company has totalshares outstanding as at November 10, 2009 of 116,554,340.  In addition, the Company has 29,041,000****outstanding options, SARs, restricted share units, warrantsand retention warrants, which are each exchangeable for one Share uponexercise.  On September 25, 2009,3,680,194 Shares that were being held in escrow were cancelled.

 

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## **DISCLOSURECONTROLS AND CONTROLS OVER FINANCIAL REPORTING**

## ** **

***Evaluation of disclosurecontrols and procedures:***

 

The Companymaintains appropriate disclosure controls and procedures and internal controlsover financial reporting (each as defined in National Instrument 52-109, *Certification of Disclosure in Issuers’ Annual and Interim Filings*(“NI52-109”) of the Canadian Securities Administrators) to ensure that informationdisclosed externally is complete, reliable and timely. The Company’s ChiefExecutive Officer and Chief Financial Officer evaluated, or caused anevaluation under their direct supervision of, the design and operatingeffectiveness of the Company’s disclosure controls and procedures (“DC&P”)and internal controls over financial reporting (“ICFR”) as at September 30,2009, and have concluded that such DC&P and ICFR were appropriatelydesigned and were operating effectively, except as outlined below.  See “Limitation on scope of design” below.

 

There were nochanges to our ICFR during our last fiscal quarter ended September 30,2009 that have materially affected, or are reasonably likely to affect, ourICFR.

 

***Limitation on scope of design:***

 

We have limitedthe scope of design of our internal controls and procedures and internalcontrols over financial reporting to exclude controls, policies and proceduresof NeuLion USA and its subsidiaries, which were acquired as part of theMerger.  The chart below presents thesummary financial information of NeuLion USA.

 

**Balance Sheet Data:**

 
| ** **            | ** ** | **September 30,** | ** ** |
|-----------------------|------------|------------------------|------------|
| ** **            | ** ** | **2009**               | ** ** |
| ** **            | ** ** | **$**                  | ** ** |
| Current assets        |       | 14,932,029             |       |
| Long-term assets      |       | 14,808,954             |       |
| Current liabilities   |       | 8,596,472              |       |
| Long-term liabilities |       | 510,082                |       |

 

**Income StatementData:**

 
| ** **              | ** ** | **3 months ended**          | ** ** | **9 months ended**          | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **September 30, 2009** | ** ** | **September 30, 2009** | ** ** |
| ** **              | ** ** | **$**                       | ** ** | **$**                       | ** ** |
| Total revenue           |       | 3,117,534                   |       | 9,353,437                   |       |
| Total cost of revenue   |       | (1,364,544                  | )          | (4,521,319                  | )          |
| Net loss for the period |       | (2,743,783                  | )          | (7,756,011                  | )          |

 

The scope limitation isin accordance with section 3.3(1)(b) of NI 52-109 to which this MD&Arelates, which allows an issuer to limit its design of DC&P and ICFR toexclude controls, policies and procedures of a business that the issueracquired not more than 365 days prior to the end of the fiscal period.

 

**Item3.**                                                           **Quantitative andQualitative Disclosures About Market Risk**

 

Not applicable.

 

**Item4.**                                                           **Controls and Procedures**

 

The Company’s principalexecutive officer and principal financial officer, with the assistance of othermembers of the Company’s management, have evaluated the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (assuch term is defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act) as of the end of the period covered by this quarterlyreport.  Based upon such evaluation, theCompany’s principal executive officer and principal financial officer haveconcluded that the Company’s disclosure controls and procedures are effectiveas of the end of the period covered by this quarterly report.

 

During our most recentfiscal quarter, no change in our internal control over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item2. ****Unregistered Sales of Equity Securitiesand Use of Proceeds****.**

 

1.                                       Between July 1,2009 and September 30, 2009, the Company issued 9,996 Shares to two formeremployees and one former consultant as restricted share units vested pursuantto the Company’s Restricted Share Plan. Under the Restricted Share Plan, the restricted share units vest inequal monthly increments on the last day of each month and are valued on thedate of issuance.  The aggregate valueattributable to the Shares issued during that period was $8,870.  The Company issued the Shares to the twoformer employees residing outside the United States in reliance on Regulation Sadopted under the Securities Act of 1933, as amended (the “Securities Act”).  The Company issued the Shares to the oneformer consultant residing within the United States in reliance on theexemption from registration set forth in Section 4(2) of theSecurities Act for transactions not involving any public offering.

 

2.                                       On September 11,2009, a former employee of the Company residing within the United Statesexercised 8,750 stock options to purchase 8,750 Shares, with an exercise priceof $0.47 per share for 2,500 Shares and of $0.64 per share for 6,250 Shares,for aggregate gross proceeds to the Company of $5,175.  The Company offered and sold the Shares in relianceon the exemption from the registration requirements of the Securities Actafforded by Rule 701 promulgated thereunder.

 

3.                                       On September 17,2009, a former employee of the Company residing within the United Statesexercised 1,542 stock options to purchase 1,542 Shares, with an exercise priceof $0.47 per share for 729 Shares and of $0.70 per share for 813 Shares, foraggregate gross proceeds to the Company of $912.  The Company offered and sold the Shares in relianceon the exemption from the registration requirements of the Securities Actafforded by Rule 701 promulgated thereunder.

 

**Item6.  Exhibits.**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(i)*              |       | Articles of Incorporation, as amended, of  NeuLion, Inc.                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 10.1*                |       | Acquisition Agreement, dated as of October 5,  2009, by and among NeuLion, Inc., Interactive Netcasting Systems Inc.  and Hugh Dobbie, Jr. (portions of this exhibit have been omitted  pursuant to a request for confidential treatment on file with the Securities  and Exchange Commission) |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 10.2*                |       | Voting Support Agreement, dated as of  October 5, 2009, by and among NeuLion, Inc., Hugh Dobbie, Jr.  and Dowco Computer Systems Ltd.                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 31.1*                |       | Certification of principal executive officer of the  Company, pursuant to Securities Exchange Act Rule 13a-14(a)                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 31.2*                |       | Certification of principal financial officer of the  Company, pursuant to Securities Exchange Act Rule 13a-14(a)                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 32.1*                |       | Certifications pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of The  Sarbanes-Oxley Act of 2002, signed by the principal executive officer of the  Company and the principal financial officer of the Company                                                             |

 

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*Filed herewith

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed in its behalf by the undersigned thereunto dulyauthorized.

 

 
|                         | **NEULION, INC.**              |
|------------------------------|--------------------------------|
|                         |                           |
|                         |                           |
| Date: November 10, 2009 | /s/ Nancy Li                   |
|                         | Name: Nancy Li                 |
|                         | Title: Chief Executive Officer |
|                         |                           |
|                         |                           |
| Date: November 10, 2009 | /s/ Arthur J. McCarthy         |
|                         | Name: Arthur J. McCarthy       |
|                         | Title: Chief Financial Officer |

 

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