**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**




**FORM
      10-K/A**




**AMENDMENT
                NO.
                1****x ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES**
              **EXCHANGE
                ACT OF 1934****FOR
                THE FISCAL YEAR ENDED DECEMBER 31, 2006****OR****o TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES**
              **EXCHANGE
                ACT OF 1934****COMMISSION
                FILE NUMBER: 000-27707****NEXCEN
                BRANDS, INC.**(EXACT
                NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)**DELAWARE**
            
            **20-2783217**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (IRS
                Employer
              Identification
                Number)**1330
                Avenue of the Americas, New York, N.Y.**
            
            **10019-5400**(Address
                of principal executive offices)
            
            (Zip
                Code)(Registrant’s
                telephone number, including area code):**(212)
                277-1100**SECURITIES
                REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:Title
                of Each Class
            Name
                of Each Exchange on Which Registered**Common
                Stock, par value $.01**
            **The
                NASDAQ Stock Market LLC**SECURITIES
                REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                NONE




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


Yes o No ý





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


Yes o No ý




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




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




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




Large
                  accelerated filero
              Accelerated
                  filerx
              Non-accelerated
                  filero




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




The
      aggregate market value of the voting stock held by nonaffiliates of the
      registrant was $210,085,794 ($5.50 per share) as of June 30,
      2006.




As
      of
      March 1, 2007 50,402,562 shares of the registrant’s common stock, $.01 par value
      per share, were outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**


None.










**NEXCEN
      BRANDS, INC.**


**FORM
      10-K/A**





**INDEX**





Explanatory
              Note
            3PART
                I
            3Item
                1
            Business
            3Item
                1A
            Risk
                Factors
            9Item
                1B
            Unresolved
                Staff Comments
            15Item
                2
            Properties
            15Item
                3
            Legal
                Proceedings
            16Item
                4
            Submission
                of Matters to a Vote of Security Holders
            17PART
                II
            19Item
                5
            Market
                for the Company’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            19Item
                6
            Selected
                Financial Data
            20Item
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            21Item
                7A
            Quantitative
                and Qualitative Disclosures About Market Risk
            30Item
                8
            Financial
                Statements and Supplementary Data
            31Item
                9
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            58Item
                9A
            Controls
                and Procedures
            58Item
                9B
            Other
                Information
            59PART
                III
            59Item
                10
            Directors
                and Executive Officers of the Registrant
            59Item
                11
            Executive
                Compensation
            64Item
                12
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            81Item
                13
            Certain
                Relationships and Related Transactions
            83Item
                14
            Principal
                Accounting Fees and Services
            84PART
                IV
            85Item
                15
            Exhibits,
                Financial Statement Schedules
            85





**FORWARD-LOOKING
      STATEMENTS**





In
      this
Amendment
      No. 1 to theAnnual Report on Form 10-K, we make statements that are
      considered forward-looking statements within the meaning of the Securities
      Act
      of 1934, as amended. The words “anticipate,” “believe,” “estimate,” “intend,”
“may,” “will,” “expect”, and similar expressions often indicate that a statement
      is a “forward-looking statement.” Statements about non-historic results also are
      considered to be forward-looking statements. None of these forward-looking
      statements are guarantees of future performance or events, and they are subject
      to numerous risks, uncertainties and other factors. Given
      the
      risks, uncertainties and other factors, you should not place undue reliance
      on
      any forward-looking statements. Our
      actual results, performance or achievements could differ materially from those
      expressed in, or implied by, these forward-looking statements. Factors that
      could cause or contribute to such differences include those discussed in Item
      1A
      of this Report under the heading “Risk Factors,” as well as elsewhere in this
      Report. Forward-looking statements reflect our reasonable beliefs and
      expectations as of the time we make them, and we have no obligation to update
      or
      revise any forward-looking statements, whether as a result of new information,
      future events or otherwise.





2


**EXPLANATORY
        NOTE**
 
 This
        Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended
        December 31, 2006 (this “Form 10-K/A”) of NexCen Brands, Inc. (the “Company,”
“we,” “our,” or “NexCen”), which was originally filed with the Securities and
        Exchange Commission on March 16, 2007, is being filed solely to include the
        information required by Part III of Form 10-K pursuant to General Instruction
        G(3) of Form 10-K because the Company’s definitive proxy statement for its 2007
        annual meeting will be filed more than 120 days after the end of the Company’s
        fiscal year. The original Form 10-K is also amended hereby to delete the
        reference on the cover page thereof to the incorporation by reference of
        the
        definitive proxy statement in Part III of such report. In addition, as required
        by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the
        “Exchange Act”), new certifications by our principal executive officer and
        principal financial officer are being filed as exhibits to this Form 10-K/A
        in
        Part IV, Item 15 hereof, which has been amended to include the additional
        certifications.
 
 In
        accordance with Rule 12b-15 under the Exchange Act, Part III is hereby amended
        and restated in its entirety as set forth below. Except as described in this
        Explanatory Note, no other information in the original Form 10-K is modified
        or
        amended hereby, and this Form 10-K/A does not otherwise reflect events occurring
        after the original filing date of March 16, 2007.


**PART
      I**





**ITEM
      1. BUSINESS**





**General
      Overview**





NexCen
      Brands engages in the acquisition and management of established consumer brands
      in intellectual property-centric industries. NexCen’s goal is to be the world
      leader in brand management for the 21st century. Our business is focused on
      acquiring, managing and developing intellectual property, which we refer to
      as
      IP, and IP-centric businesses. IP-centric companies own, license or otherwise
      possess rights to trademarks, trade names, copyrights, patents, trade secrets
      and other intangible assets. IP that we have acquired and expect to acquire
      in
      the future includes trademarks, trade names, copyrights, franchise rights,
      patents, trade secrets, know-how and other similar, valuable property, primarily
      used in the retail and consumer branded products and franchise businesses.
      In
      building our IP business, we expect to focus on three vertical segments: retail
      franchising, consumer branded products and quick service restaurant franchising
      (which we refer to as “QSR” franchising).




We
      commenced our IP business in June 2006, when we acquired UCC Capital
      Corporation, which we refer to as UCC. Upon the closing of that acquisition,
      Robert W. D’Loren, who was the president and chief executive officer of UCC,
      became our president and chief executive officer and a member of our Board
      of
      Directors.




In
      November 2006, we entered the retail franchising business by acquiring Athlete’s
      Foot Brands, LLC, along with an affiliated company and certain related assets.
      As a result of this acquisition, we are now the owner of The Athlete’s Foot
      brand and related marks. The Athlete’s Foot is one of the largest athletic
      footwear and apparel franchisors with over 600 retail locations in over 40
      countries.




In
      February 2007, we entered the consumer branded products business by acquiring
      Bill Blass Holding Co., Inc. and two affiliated businesses. The Bill Blass
      label
      represents timeless style, modern American and is an American legacy brand
      in
      the fashion industry.




Also
      in
      February 2007, we acquired MaggieMoo’s International, LLC (“MaggieMoo’s”) and
      the assets of Marble Slab Creamery, Inc. (“Marble Slab”), two well known and
      established brands within the hand-mixed, premium ice cream category. With
      these
      acquisitions NexCen entered the QSR franchising business.




More
      detailed information about The Athlete’s Foot, Bill Blass, MaggieMoo’s, and
      Marble Slab acquisitions is included below under the caption “Company
      Brands.”




We
      are
      evaluating various other potential acquisitions and are actively in discussions
      to acquire additional IP-centric businesses. On March 13, 2007 we signed a
      definitive agreement to acquire the Waverly brand from F. Schumacher & Co.
      for $36.75 million in cash and a warrant to purchase 50,000 common
      shares (to be priced at issuance). Waverly is a home
      décorlifestyle brand for harmonious and tasteful decorating. We expect
      to close this transaction by the end of April 2007, and intend to finance 50%
      of
      the purchase price with borrowings under the new credit facility entered into
      on
      March 12, 2007,
      as
      discussed under Item 7.*Management
      Discussion and Analysis of Financial Condition and Results of
      Operations*under
      the caption “Liquidity and Capital Resources”.




At
      December 31, 2006, we had only one operating segment - our intellectual property
      business. As we continue to acquire IP businesses, we expect to have three
      segments in the future: retail franchising, consumer brand products, and quick
      service restaurants. The businesses that we owned and operated in 2005 and
      2004
      have been sold. As a result, their results have been reclassified to
      discontinued operations in our historical financial statements, and our
      continuing operations in 2005 and earlier years reflect only corporate expenses
      and other non-operating items.




We
      own
      the proprietary rights to a number of trademarks used in this Report which
      are
      important to our business, including The Athlete’s Foot, Bill Blass, MaggieMoo’s
      and Marble Slab. We have omitted the “®” and “TM” trademark designations for
      such trademarks in this Report. Nevertheless, all rights to such trademarks
      named in this Report are reserved.




3




**Our
      Business**





***Operations
      and Strategy***





Our
      operating strategy is to generate revenue from licensing and other commercial
      arrangements with third parties who want to use the IP that we acquire. These
      third parties pay us licensing and other contractual fees and royalties for
      the
      right to use our IP on either an exclusive or non-exclusive basis. Our
      contractual arrangements may apply to a specific demographic product market,
      a
      specific geographic market or to multiple demographics and/or
      markets.




We
      expect
      that licensing and other contractual fees paid to us will include a mixture
      of
      upfront payments, required periodic minimum payments (regardless of sales
      volumes), and volume-dependent periodic royalties (based upon the number or
      dollar amount of branded products and services sold). Accordingly, we expect
      that our revenues will reflect both recurring and non-recurring payment
      streams.




We
      operate our IP business in what we call a “value net” business model. This model
      does not require us to incur substantial operating or capital costs in running
      our business, as we do not (and do not plan to) manufacture, warehouse or
      distribute the branded products associated with the IP we acquire (or build
      stores in the case of franchise operations). We intend to rely on third-party
      licensees and other business partners to incur such capital costs and perform
      such services. However, we will generally be involved in the marketing,
      promotion and quality control of products and services that make use of our
      IP
      (such as trademarks and trade names that we own), and we also may provide
      certain merchandising, purchasing and training support services with respect
      to
      franchise operations.  We
      believe that this business model mitigates -- or transfers to third parties
      --
      the risks related to working capital (i.e. inventory and receivables) and
      capital expenditures. We believe that this model allows us to maintain maximum
      operational and financial flexibility and positions us to succeed in today’s
      competitive global economy. As a result of our business model, we rely heavily
      on third parties, including licensees and franchisees, to make sales, generate
      revenues and help grow our business. Such reliance involves various risks and
      uncertainties, which are discussed below in Item *1A.
      Risk Factors* under
      the caption “Risks of Business We Acquire.”




We
      intend
      to leverage our brand management, marketing, and licensing expertise, costs
      and
      professionals across our three operating verticals. We expect that these
      operating verticals will enable us to generate royalties at the wholesale and
      retail level on sales of goods for brands that we acquire, through distribution
      channels that we own, without the loss of sales in third-party channels. For
      example, we might decide to contract with third parties to produce a “private
      label” brand of socks that use our owned brand, The Athlete’s Foot, for sale in
      our chain of The Athlete’s Foot franchisee stores. The manufacturer of the socks
      who sells the product to the franchisees would pay us a royalty on those sales
      and in turn the franchisees who sell the socks to their retail customers also
      would pay us a royalty on their sales.




The
      following graphic summarizes our three operating segments (retail franchising,
      consumer branded products and QSR franchising) and the opportunities to
      cross-leverage the operating verticals with each other. Franchise concepts
      we
      purchase can be sold to our existing network of master franchisees who currently
      manage our franchise brands worldwide. Brands that we acquire can be sold
      through third party retail channels and channels that we own and control,
      allowing us to earn wholesale and retail royalties. Our objective is to create
      a
      flexible operating structure, control our distribution channels, and sell our
      owned brands through these channels as well as third party
      channels.







***Diversification
        and Growth***
 
 As
        we
        build a portfolio of IP-centric businesses, we expect to operate a business
        model that is diversified in several ways:
  ·
              across
                  industries, ranging from apparel, footwear and sporting goods to
                  QSR and
                  retail franchising;
  ·
              across
                  channels of distribution, ranging from luxury to
                  mass-market;
  4
  ·
              across
                  consumer demand categories, ranging from luxury to
                  mass-market;
  ·
              across
                  licensees and franchisees, ranging from large licensees to individual
                  franchisees; and
  ·
              across
                  geographies (both within the United States and internationally);
                  and
  ·
              across
                  multiple demographic groups.
  We
        believe that this multi-category diversification will help reduce potential
        volatility in our financial results (given the varied sources of royalty
        payments from franchisees and licensees of different types and in different
        markets, demographics, and geographies) and may mitigate impairment
        risk.
  We
        believe that our business model offers a three-tiered growth
        opportunity:
  ·
              our
                  businesses can grow both domestically and internationally through
                  organic,
                  and synergistic growth;
  ·
              our
                  businesses can grow organically by expanding and extending owned
                  brands
                  into new product categories and retail channels, increasing brand
                  awareness and executing new licenses or selling new
                  franchises;
  ·
              we
                  can grow through acquisition by acquiring new brands or additional
                  franchise systems; and
  ·
              our
                  business can grow synergystically by leveraging our three operating
                  verticals.
  We
        can
        grow acquired brands by enabling them to sell branded products through franchise
        systems that we own. Conversely, we can expand our franchise systems by allowing
        them to sell additional branded products that we own or acquire. In either
        case,
        our objective will be to allow both our product brands and our systems to
        increase their sales. In each case, we would collect additional retail and
        wholesale royalties.
  ***Development
        of Our IP Business and Acquisition Strategy***
 
 We
        entered the IP business when we acquired UCC in June 2006. Historically,
        UCC
        provided strategic advice and structured finance solutions to IP-centric
        companies. At the time that we acquired UCC, UCC’s former president and chief
        executive officer, Robert D’Loren, became our president and chief executive
        officer, as well as a member of our board of directors. In September 2006,
        we
        hired David B. Meister to become our new chief financial officer, and in
        December 2006 we hired Charles Zona to become our Executive Vice President,
        Brand Management and Licensing. Other members of the UCC management team
        assumed
        management roles in our developing IP business, and at the end of 2006 we
        moved
        our corporate headquarters to New York City, where our IP business is
        based.
  Since
        June 2006, we have acquired four IP-centric companies. We have also been
        (and
        expect to continue to be) in active discussions with other potential acquisition
        candidates. Our objective is to acquire 3 to 5 businesses or significant
        groups
        of IP assets per year, with transaction sizes generally in excess of $50
        million
        total enterprise value.
  We
        maintain a highly disciplined pricing approach to acquisitions. Our objective
        is
        to acquire consumer branded products companies at transaction multiples that
        range from 4.5 to 5.5 times royalties. For QSR franchise concepts, our target
        range is from 3.0 to 4.5 times revenues. We believe this approach will enable
        us
        to make accretive acquisitions given our capital structure (using a combination
        of cash on hand, shares of our common stock and borrowings under debt
        facilities). For a discussion of limitations and risks associated with the
        use
        of our stock for acquisitions and to raise additional capital, see *Item
        1A. Risk Factors* under
        the caption “Risks of Our Acquisition Strategy.”
  ***Company
        Brands***
 
 Acquisition
        of The Athlete’s Foot .
        On
        November 7, 2006, our NexCen Acquisition Corp. subsidiary acquired Athlete’s
        Foot Brands, LLC, along with an affiliated advertising and marketing fund,
        and
        certain nominal fixed assets owned by an affiliated company. The Athlete’s Foot
        is an athletic footwear and apparel franchisor with 600 retail locations
        in over
        40 countries. The business also provides advertising and marketing support
        for
        the benefit of the franchisees, using a portion of the royalties it receives
        from franchisees. This business operates in our retail franchising
        vertical.
  5
  The
        purchase price for this acquisition,
        excluding contingent consideration, was $53.1 million, consisting
        of approximately $42.1 million in cash and $9.2 million in our common stock
        (approximately 1.4 million shares which were valued at $6.55 per share),
        which
        was the average closing price of our common stock for the five consecutive
        days
        that ended on November 6, 2006, which is the day immediately preceeding the
        date
        in which we closed the agreement to purchase The Athhlete’s Foot), and $1.8
        million in other deal related costs. At the closing on November 7, 2006,
        we also
        issued to one of the sellers a three-year warrant to purchase an additional
        500,000 shares of our common stock at a per share price of $6.49 (which was
        the
        closing price of our common stock on November 7, 2006). On March 14, 2007,
        we
        borrowed $26.5 million under a new $150 million senior credit facility secured
        by the assets of The Athlete’s Foot. This debt facility is discussed below in *Item
        7. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations* under
        the
        caption “Liquidity and Capital Resources.”
 
 Under
        the
        purchase agreement for The Athlete’s Foot, we may be required to pay up to an
        additional $8.5 million of cash and stock (in the same proportion as the
        initial
        acquisition), if the revenue and EBITDA of the acquired business (as defined
        in
        the purchase agreement) for the year ended December 31, 2006 equal or exceed
        performance targets specified in the purchase agreement. The purchase agreement
        requires a stand-alone audit of the 2006 financial results of Athletes Foot
        Brands, LLC to be completed by March 31, 2007. The earn-out will be calculated
        based on the 2006 audited financial results. We estimate that the contingent
        consideration will be $4.0 million, and we have recorded a liability as of
        December 31, 2006 to reflect this expected payment.
 
 Acquisition
        of Bill Blass .
        On
        February 15, 2007, our Blass Acquisition Corp. subsidiary acquired Bill Blass
        Holding Co., Inc. and two affiliated businesses. The Bill Blass label represents
        timeless style, modern American and is an American legacy brand. This business
        operates in our consumer brands vertical.
  At
        the
        closing, one of the Bill Blass companies executed a licensing agreement for
        men’s and women’s denim with Designer License Holding Company, LLC. The new
        license replaced a denim license and an active wear license that were terminated
        and had been held by two companies that are affiliated with one of the prior
        owners of Bill Blass.
  The
        initial purchase price for this acquisition was $54.6 million, consisting
        of
        $39.1 million in cash and $15.5 million in our common stock (approximately
        2.2
        million shares which were valued at $7.09 per share, which was the average
        closing price of our common stock for the ten consecutive days that ended
        on
        December 19, 2006, which is when we signed the agreement to purchase Bill
        Blass). Under the purchase agreement, the sellers will be entitled to receive
        up
        to an additional $16.2 million of consideration, payable in early 2008. The
        additional consideration under the earn-out will be equal to the amount by
        which
        the royalties generated from the Bill Blass trademarks in fiscal 2007,
        multiplied by 5.5, exceed $51.8 million, subject to certain adjustments.
        The
        total purchase price will not exceed $70.8 million. We expect to borrow
        approximately $27 million under our new credit facility, which will be secured
        by the assets of Bill Blass.
  Acquisition
        of MaggieMoo’s. On
        February 28, 2007, we acquired MaggieMoo’s International, LLC (“MaggieMoo’s”).
        The initial purchase price for this acquisition was $16.1 million, consisting
        of
        approximately $10.8 million of cash and debt repayment, and 515,352 shares
        of
        our common stock (reflecting valued at $5.3 million, based on the average
        closing price of our common stock for the fifteen consecutive days that ended
        on
        February 27, 2007, of $10.21). Under the purchase agreement, the sellers
        will be
        entitled to receive up to an additional $2.0 million of consideration in
        the
        form of an earn-out, payable on March 31, 2008. The earn-out will be based
        on
        the amount royalty payments earned during fiscal 2007 exceed royalty payments
        earned by MaggieMoo’s during fiscal 2006, pursuant to a formula set forth in the
        purchase agreement. MaggieMoo’s is the franchisor of 184 stores located in 36
        states domestically. Each location features a menu of freshly made super-premium
        ice creams, mix-ins, smoothies, and custom ice cream cakes. This business
        operates in our QSR vertical.
 
 Acquisition
        of Marble Slab .
        On
        February 28, 2007, we acquired the assets of Marble Slab Creamery, Inc. (“Marble
        Slab”). The purchase price of the acquisition was $21 million, consisting of $16
        million of cash, and the issuance of $5.0 million of notes payable which
        mature
        on February 28, 2008. The notes accrue interest at an annual rate of 6% per
        annum until maturity, and 8% thereafter, and are payable in cash or common
        stock
        priced at the time of issuance, at the Company’s option. We have deposited $5.0
        million into an escrow account to collateralize the payment of these notes.
        Marble Slab is the franchisor of 336 stores located in 35 states, Puerto
        Rico,
        Canada and the United Arab Emirates. Since 1983, each Marble Slab
        Creamery **** has
        featured homemade super-premium ice cream that is hand-rolled in freshly
        baked
        waffle cones. This business operates in our QSR vertical. We intend to borrow
        $19 million under the new senior credit facility entered into on March 12,
        2007
        secured by the assets of MaggieMoo’s and Marble Slab.
  We
        expect
        to borrow $19 million under our new senior credit facility, which will be
        secured by the assets of MaggieMoo’s and Marble Slab. Assuming we borrow all of
        the expected amounts for the Bill Blass, MaggieMoo’s and Marble Slab
        acquisitions, our total borrowings under our new $150 million credit facility
        (including the $26.5 million we borrowed for The Athlete’s Foot acquisition)
        would be approximately $72.5 million. For a discussion of risks associated
        with
        borrowings, see *Item
        1A. Risk Factors* under
        the caption “Risks of Our Our Current Business - Any failure to meet our debt
        obligations would adversely affect our business and financial
        condition. **”**
  6
  **Competition**
  Our
        brands are all subject to extensive competition by numerous domestic and
        foreign
        brands. Each of our brands has numerous competitors within each of our specific
        distribution channels. Our degree of success is dependent on the image of
        our
        brands to consumers and our licensees' ability to design, manufacture and
        sell
        products bearing our brands.
  In
        seeking to make acquisitions of IP and IP-centric businesses, we compete
        with
        other companies and financial buyers (such as private equity funds). While
        we
        believe the number of competitors is currently limited, we expect that more
        competitors will develop over time. Competitors may be larger than us, have
        access to greater financial and other resources or be willing to pay higher
        prices in acquisitions or assume greater acquisition-related risks. See *Item
        1A. Risk Factors* under
        the caption “Risks of Our Acquisition Strategy **-** Competition
        may negatively affect our ability to complete suitable acquisitions.”
  The
        Athletes Foot. Our franchisees operate in the retail athletic footwear and
        apparel business which is highly competitive with relatively low barriers
        to
        entry. The principal competitive factors in these markets are price, quality,
        selection of merchandise, reputation, store location, advertising and customer
        service.
 
 The
        businesses we acquired in 2007, and businesses we acquire in the future,
        are
        also subject to competitive risks and pressures, including price, quality,
        selection of merchandise, reputation, store location, advertising and customer
        service.
 
 **Historical
        Operations**
 
 ***Historical
        Overview***
 
 Until
        late 2004, we owned, acquired and operated a number of mobile and wireless
        communications businesses. These businesses never became profitable, and
        during
        2004 we sold these businesses and started a mortgage-backed securities, or
        MBS,
        business. During 2004 and 2005, we assembled a leveraged portfolio of MBS
        investments. However, market conditions for the MBS business changed
        significantly during 2005 and into 2006, and the profitability of our leveraged
        MBS portfolio declined. In light of these changing market conditions, in
        late
        2005 and into 2006, we began to explore additional and alternative business
        strategies that we thought could help us become profitable more quickly and
        create shareholder value. These efforts resulted in our decision to acquire
        UCC
        in June 2006. On October 31, 2006, at the 2006 Annual Meeting of Stockholders
        (the “Annual Meeting”), our stockholders approved the sale of our MBS portfolio
        for the purpose of discontinuing our MBS business and allocating all cash
        proceeds from such sale to the growth and development of our IP business.
        We
        sold our MBS investments in November 2006, and since that time, we have focused
        entirely on our IP business.
  ***Holding
        Company Reorganization and Name Change***
 
 Aether
        Systems Inc. (“Aether Systems”), the historical entity through which we
        previously conducted the Mobile Government, EMS and Transportation businesses,
        was formed in January 1996. On July 12, 2005, the stockholders of Aether
        Systems
        approved a holding company reorganization of Aether Systems in which each
        share
        of Aether Systems common stock was exchanged for one share of common stock
        of
        Aether Holdings, Inc. (“Aether Holdings”), and Aether Systems became a wholly
        owned subsidiary of Aether Holdings. The reorganization was undertaken to
        implement restrictions on certain changes in the ownership of our common
        stock
        in an effort to protect the long-term value of our substantial net operating
        loss and capital loss carry forwards (as described in further detail below).
        In
        recognition of the changing business strategy of the Company, on October
        31,
        2006, our stockholders approved a change of our Company name from Aether
        Holdings to NexCen Brands. Effective November 1, 2006, we changed our “ticker”
symbol, under which our common stock is traded on the Nasdaq Global Market,
        from
“AETH” to “NEXC.”
  **Tax
        Loss Carry Forwards**
 
 As
        a
        result of the substantial losses incurred by our mobile and wireless
        communications businesses through 2004, as of December 31, 2006, we had federal
        net operating loss carry forwards of approximately $777 million that expire
        on
        various dates between 2011 and 2026. These
        tax
        loss carryforwards are generally available to offset federal income taxes.
        We
        expect to remain subject to certain state, local, and foreign tax obligations,
        as well as to a portion of the federal alternative minimum tax, as discussed
        below in*Item
        1A. Risk Factors*under
        the caption “Risks of Our Tax Loss Carry Forwards.”In addition, we had
        capital loss carry forwards of approximately $251 million that expire between
        2007 and 2011. If we had an ownership change as defined in Section 382 of
        the
        Internal Revenue Code of 1986, as amended (“IRC”), our net operating loss
        carryforwards and capital loss carry forwards generated prior to the ownership
        change would be subject to annual limitations, which could reduce, eliminate,
        or
        defer the utilization of these losses.
  7
  Generally,
        an ownership change occurs if one or more stockholders, each of whom owns
        5% or
        more in value of a corporation’s stock, increase or decrease their aggregate
        percentage ownership by 50% or more as compared to the lowest percentage
        of
        stock owned by such stockholders at any time during the preceding three-year
        period. For example, if a single stockholder owning 10% of our stock acquired
        an
        additional 50% of our stock in a three-year period, a change of ownership
        would
        occur. Similarly, if ten persons, none of whom owned our stock, each acquired
        slightly over 5% of our stock within a three-year period (so that such persons
        own, in the aggregate more than 50%) an ownership change would occur. Ownership
        of stock is determined by certain constructive ownership rules which can
        attribute ownership of stock owned by entities (such as estates, trusts,
        corporations, and partnerships) to the ultimate indirect owner.
  For
        purposes of this rule, all holders who each own less than 5% of a corporation’s
        stock are generally treated together as one (or, in certain cases, more than
        one) 5% stockholder. Transactions in the public markets among stockholders
        owning less than 5% of the equity securities generally are not included in
        the
        calculation. Special rules can result in the treatment of options (including
        warrants) or other similar interests as having been exercised if such treatment
        would result in an ownership change.
  As
        a
        result of the holding company reorganization that we completed in 2005, as
        described above under the caption “Holding Company Reorganization and Name
        Change,” shares of our common stock are subject to transfer restrictions
        contained in our certificate of incorporation. In general, the transfer
        restrictions prohibit any person from acquiring 5% or more of our stock without
        our consent. Persons who owned 5% or more of our stock prior to May 4, 2005
        are
        permitted to sell the shares owned as of May 4, 2005 without regard to the
        transfer restrictions. Shares acquired by such persons after May 4, 2005
        are
        subject to the transfer restrictions. While we expect that these transfer
        restrictions will help guard against a change of ownership occurring under
        Section 382 and the related rules, because we are using stock as consideration
        to make acquisitions, because we may decide (or need) to sell additional
        shares
        of our common stock in the future to raise capital for our business and because
        persons who held 5% or more of our stock prior to these restrictions taking
        effect can sell (and in some cases have sold) shares of our stock, we cannot
        guarantee that these restrictions will prevent a change of ownership from
        occurring. Our board of directors also has the right to waive the application
        of
        these restrictions to any transfer.
  One
        of
        our principal business objectives is to operate profitably so that we can
        realize value, in the form of tax savings, from our accumulated tax loss
        carry
        forwards. The Company monitors the change in shareholdings on a monthly basis
        and has an outside accounting firm (other than our independent auditor) perform
        a quarterly analysis to determine the cumulative percent change through the
        end
        of the particular quarter. Based upon a review of past changes in our ownership,
        as of December 31, 2006, we do not believe that we have experienced an ownership
        change (as defined under Section 382) that would result in any limitation
        on our
        future ability to use these net operating loss and capital loss carry forwards.
        However, we can not be certain that the IRS or some other taxing authority
        may
        not disagree with our position and contend that we have already experienced
        such
        an ownership change, which would severely limit our ability to use our net
        operating loss carry forwards and capital loss carry forwards to offset future
        taxable income.
  For
        a
        discussion on the risks associated with our tax loss carry forwards, please
        refer to *Item
        1A. Risk Factors* under
        the caption “Risks of Our Tax Loss Carry Forwards.”
  **Employees**
 
 As
        of
        December 31, 2006, we employed a total of 36 persons. None of our employees
        is
        covered by a collective bargaining agreement. We believe that our relations
        with
        our employees are good. As we acquire additional businesses, our employee
        base
        will increase.
  **General
        Corporate Matters**
 
 Our
        executive offices are located at 1330 Avenue of the Americas, 34 th Floor,
        New York, NY 10019. Our telephone number is (212) 277-1100 and our fax number
        is
        (212) 277-1160.
  **Availability
        of Information**
 
 We
        maintain a website at www.nexcenbrands.com ,
        which
        provides a wide variety of information on each of its brands. You may read
        and
        copy any materials we file with the Securities and Exchange Commission at
        the
        SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. For
        further information concerning the SEC’s Public Reference Room, you may call the
        SEC at 1-800-SEC-0330. Some of this information may also be accessed on the
        SEC’s website at www.sec.gov .
        We also
        make available free of charge, on or through our website, our annual report
        on
        Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
        amendments to those reports filed or furnished to the SEC pursuant to Section
        13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended
        (the
“Exchange Act”) as soon as reasonably practicable after we electronically file
        such material with, or furnish it to, the SEC. We are providing the address
        of
        our internet website solely for the information of investors. We do not intend
        the internet address to be an active link, and the contents of the website
        are
        not a part of this Report. We also maintain, in some cases through our
        licensees, sites for each of the Company's brands and operations, www.theathletesfoot.com , www.ucccapital.com and www.billblass.com .
  8
  **ITEM
        1A. RISK FACTORS**
 
 Investing
        on our common stock involves a high degree of risk. Before making an investment
        decision, you should carefully consider these risks as well as information
        we
        include or incorporate by reference in this prospectus. If any of the following
        risks actually occur, our business, financial condition or results of operations
        could be materially and adversely affected, and you may lose some or all
        of your
        investment.
  **Risks
        of Our Current Business**
  **We
        have incurred significant losses throughout our history and may not be
        profitable in the future.**
 
 Since
        our
        inception, we have incurred net losses of approximately $2.5 billion. We
        only
        recently began to implement our new IP-centric business strategy. There is
        no
        assurance that we will be able to operate this new IP business profitably
        or to
        report net income in the future and realize the value of our substantial
        tax
        loss carryforwards.
  **Our
        IP-centric business is new, and we may not be successful in operating or
        expanding it.**
 
 We
        do not have
        an
        established history of acquiring IP, or IP-centric businesses, and managing
        IP
        assets and businesses. We
        began
        to implement our IP-centric business in June 2006, when we acquired UCC.
        Upon
        the closing of that acquisition, Mr. D’Loren, who was the president and chief
        executive officer of UCC, became our president and chief executive officer.
        During their tenure with UCC, Mr. D’Loren and the other members of our
        senior management team were involved primarily in providing
        banking, finance, consulting and other advisory services to IP-centric
        businesses. They did not own or manage an IP-centric business directly. As
        a
        result, we may encounter unanticipated difficulties or challenges as we work
        to
        implement our new business strategy. If we are unable to address and overcome
        such difficulties or challenges, we may not be successful with our new business
        strategy.
  **We
        are dependent upon our president and chief executive officer, Robert W. D’Loren.
        If we lose Mr. D’Loren’s services, we may not be able to successfully implement
        our IP business strategy.**
 
 The
        successful implementation of our IP business strategy will depend primarily
        upon
        the efforts of Mr. D’Loren, our president and chief executive officer. Mr.
        D’Loren is the person primarily responsible for conceiving of and implementing
        our IP business strategy. Although we have entered into an employment agreement
        with Mr. D’Loren that runs through June 2009, there is no guarantee that he will
        remain employed by us throughout the period. If he ceases to work with us,
        or if
        his services are reduced, we will need to identify and hire other qualified
        executives, and we may not be successful in finding or hiring adequate
        replacements. This could impede our ability to fully implement our IP business
        strategy, which would harm our business and prospects.
  **The
        market price of our common stock has been, and may continue to be, volatile,
        which could reduce the market price of our common stock and, among other
        things,
        make it more expensive for us to complete acquisitions using our stock as
        consideration.**
 
 Since
        we
        announced the acquisition of UCC and the hiring of Mr. D’Loren, the trading
        price of our common stock has experienced significant price and volume
        fluctuations. This market volatility could reduce the market price of our
        common
        stock, regardless of our operating performance. In addition, the trading
        price
        of our common stock could change significantly over short periods of time
        in
        response to actual or anticipated variations in our quarterly operating results,
        announcements by us or by third parties on whom we rely or against whom we
        compete, factors affecting the markets in which we do business or changes
        in
        national or regional economic conditions. If our stock price declines, we
        may be
        required to issue additional shares to complete acquisitions, which would
        make
        them more dilutive to our stockholders. The market price of our common stock
        also could be reduced by general market price declines or market volatility
        in
        the future or future declines or volatility in the prices of stocks for
        companies against whom we compete or companies in the industries in which
        our
        licensees compete.
  9
  **We
        are unlikely to become profitable unless we can identify and acquire IP and
        IP-centric businesses on favorable terms.**
 
 Our
        ability to achieve our business objective of becoming profitable will depend
        on
        our ability to identify and acquire suitable acquisitions on favorable terms,
        so
        that we can increase our revenues and generate net income. If we are unable
        to
        complete acquisitions on favorable terms, our new IP business will be very
        limited and may not generate sufficient revenues to cover our expenses. There
        is
        no assurance that we will be able to complete any future acquisitions or
        that
        such transactions, if completed, will contribute positively to our operations
        and financial results and condition.
  **We
        are involved in litigation with respect to a business that we sold in
        2005.**
 
 In
        2005,
        we sold our mobile transportation business to Geologic Solutions, Inc. Since
        that time, Geologic has notified us of, and we have responded to, various
        indemnification claims for alleged breaches of representations and warranties
        under the asset purchase agreement pursuant to which we sold the transportation
        business to Geologic. We were unable to resolve these claims with Geologic,
        and
        in March 2006, Geologic filed a lawsuit against us in state court in New
        York.
        Geologic’s claims primarily involve allegations that we did not fully disclose
        certain aspects of our transportation business’ relationships with one of its
        major customers and two of its major suppliers that allegedly resulted in
        the
        devaluation of inventory and other adverse effects to the business. Geologic
        contends that it has suffered damages in excess of $30 million as a result
        of
        these alleged breaches. The Company believes it has meritorious defenses
        to
        Geologic’s claims and is vigorously defending against them. However, we cannot
        predict the outcome of this litigation, and an adverse resolution of such
        claims
        could require us to make a significant cash payment to Geologic. In such
        event,
        we would record a charge against earnings, further increasing the loss on
        the
        sale of the transportation business, and decreasing the amount of cash we
        have
        available for acquisitions and operations.
  **Any
        failure to meet our debt obligations would adversely affect our business
        and
        financial condition.**
 
 On
        March
        12, 2007, we entered into a new $150 million master loan agreement with BTMU
        Capital Corporation. As of March 14, 2007, we have approximately $26.5 million
        of long-term debt outstanding, and expect to draw an additional $46 million
        shortly to refinance the acquisitions of Bill Blass, MaggieMoo’s and Marble
        Slab. Interest rates for our master loan agreement vary based upon utilization
        and whether the borrowings are at the base rate or the London Interbank Offering
        Rate ("LIBOR").
 
 Our
        master loan agreement contains affirmative and negative covenants customary
        for
        senior secured credit facilities, including, among other things, restrictions
        on
        indebtedness, liens, fundamental changes, loans, acquisitions, capital
        expenditures, restricted payments, transactions with affiliates, common stock
        repurchases, dividends and other payment restrictions affecting subsidiaries
        and
        sale leaseback transactions. Our failure to comply with the financial and
        other
        restrictive covenants relating to our indebtedness could result in a default
        under the indebtedness, which could materially adversely affect our business,
        financial condition and results of operations. These restrictions may also
        limit
        our ability to operate our businesses and may prohibit or limit our ability
        to
        enhance our operations or take advantage of potential business opportunities
        as
        they arise.
 
 As
        a
        result of our indebtedness, we will need to use a portion of our cash flow
        to
        pay principal and interest, which will reduce the cash available to finance
        our
        operations and other business activities and could limit our flexibility
        in
        planning for or reacting to changes in our business. The master loan agreement
        may also limit our ability to obtain future financings which could negatively
        impact our business, financial condition, results of operations and growth.
        The
        amount of our debt may also cause us to be more vulnerable to economic downturns
        and adverse developments in our business.
 
  **Risks
        of Our Acquisition Strategy**
  **Competition
        may negatively affect our ability to complete suitable
        acquisitions.**
 
 We
        believe that there are a limited number of other companies competing for
        acquisitions of the type that we are seeking. However, we will face competition
        for acquisitions, and competition may increase as the business strategy we
        are
        pursuing continues to receive publicity. Existing and future competitors
        may be
        larger than us and have access to greater financial and other resources.
        As a
        result, acquisitions may become more expensive, and we may face greater
        difficulty in identifying suitable acquisition candidates on terms that we
        believe will make sense. If we are unable to expand our business by completing
        acquisitions on favorable terms, our financial results may be negatively
        affected.
  10
  **Acquisitions
        involve numerous risks that we may not be able to address or overcome, and
        could
        result in acquisitions that negatively affect our business and financial
        results.**
 
 Even
        if
        we are successful in completing IP-centric acquisitions, we may not be able
        to
        achieve or maintain profitability levels that will justify our investments
        in
        those acquisitions. Among other things, we may not be able to realize
        anticipated benefits from our acquisitions, including various synergies and
        economies of scope and scale. Each acquisition involves numerous risks, any
        of
        which could have a detrimental effect on our results of operations and/or
        the
        value of our equity. These risks include, among others:
  ·
              overpaying
                  for acquired assets or businesses;
  ·
              being
                  unable to license, market or otherwise exploit IP that we acquire
                  on
                  anticipated terms or at all;
  ·
              negative
                  effects on reported results of operations from acquisition-related
                  expenses and amortization or impairment of acquired intangibles;
  ·
              diversion
                  of management's attention from management of day-to-day operational
                  issues;
  ·
              failing
                  to maintain focus on, or ceasing to execute, core strategies and
                  business
                  plans as our IP portfolio grows and becomes more diversified;
  ·
              failing
                  to acquire or hire additional successful managers, or being unable
                  to
                  retain critical acquired managers;
  ·
              potential
                  adverse effects of a new acquisition on an existing business or
                  business
                  relationship; and
  ·
              underlying
                  risks of the businesses that we acquire, which may differ from
                  one
                  acquisition to the next, including those related to entering new
                  lines of
                  business or markets in which we have little or no prior experience.
  **Our
        ability to grow through the acquisition of additional IP assets and business
        will depend on the availability of capital to complete
        acquisitions.**
 
 We
        financed the acquisitions of The Athlete’s Foot, Bill Blass, MaggieMoo’s and
        Marble Slab with a combination of cash and equity, and we intend to finance
        our
        future IP acquisitions through a combination of available cash, bank or other
        institutional financing, and issuances of equity and possibly debt securities.
        As of March 14, 2007, we had approximately $39 million of cash on hand after
        borrowing $26.5 million under the new senior credit facility we entered into
        on
        March 12, 2007. There is no assurance that we will be able to secure borrowings
        in the future to fund acquisitions, either on terms that we consider reasonable
        or at all. In addition, under Section 382 of the Internal Revenue Code of
        1986,
        as amended, we face limitations on the number of shares of equity that we
        can
        issue without triggering limitations on our future ability to use our
        substantial accumulated tax loss carry forwards. Under certain circumstances,
        these limitations (if triggered) could significantly or, under certain
        circumstances, totally reduce the future value of our tax loss carry forwards
        (assuming we are able to generate taxable income that would benefit from
        the use
        of the tax loss carry forwards).
  As
        a
        result of these factors, we may lack access to sufficient capital to complete
        acquisitions that we identify and want to complete. In such a case, our
        inability to complete acquisitions could have a material adverse effect on
        our
        business, our financial results and the trading price of our stock.
  **We
        operate a global business that exposes us to additional risks that may
        negatively affect our results of operations and financial
        condition.**
  Our
        Athlete’s Foot franchisees operate in over 40 countries. In addition, the brands
        and other IP assets that we acquire and manage are currently used, and in
        the
        future are expected to be used, for products and services that will be
        advertised and sold in many different countries. As a result. we are subject
        to
        risks associated with doing business globally.  We intend to continue to
        pursue growth opportunities for our IP business outside the United States,
        which
        could expose us to greater risks.  The risks associated with our IP
        business outside the United States include:
  11
  ·
              Political
                  and economic instability or civil unrest;
  ·
              Armed
                  conflict, natural disasters or terrorism;
  ·
              Health
                  concerns or similar issues, such as a pandemic or epidemic;
  ·
              Multiple
                  foreign regulatory requirements that are subject to change and
                  that differ
                  between jurisdictions;
  ·
              Changes
                  in trade protection laws, policies and measures, and other regulatory
                  requirements effecting trade and investment;
  ·
              Differences
                  from one country to the next in legal protections applicable to
                  IP assets,
                  including trademarks and similar assets, enforcement of such protections
                  and remedies available for infringements;
  ·
              Fluctuations
                  in foreign currency exchange rates and interest rates; and
  ·
              Adverse
                  consequences from changes in tax
                  laws.
  The
        effects of these risks, individually or in the aggregate, could have a material
        adverse impact on our IP business.
  **Risks
        of Businesses We Acquire**
  **Our
        business will depend on market acceptance of the IP that we intend to acquire
        such as trademarks, brands and franchise rights. We expect these markets
        to be
        highly competitive.**
 
 Continued
        market acceptance of the IP that we intend to acquire, such as trademarks,
        brands and franchise rights is critical to our future success and subject
        to
        great uncertainty. The consumer branded products industries on which we expect
        to focus our acquisition activities are extremely competitive, both in the
        United States and overseas. Accordingly, we expect that we and our future
        licensees and other business partners (including franchisees) will face intense
        and substantial competition with respect to marketing and expanding products
        and
        services under acquired IP. As a result, we may not be able to attract
        licensees, franchisees and other business partners on favorable terms or
        at all.
        In addition, licensees and other third parties with whom we deal may not
        be
        successful in selling products and services that make use of our acquired
        IP.
        They (and we) also may not be able to expand the distribution of such products
        and services into new markets.
  In
        general, competitive factors include quality, price, style, name recognition
        and
        service. In addition, the presence in the marketplace of short-lived “fads” and
        the limited availability of shelf space can affect competition for many consumer
        products. Changes in consumer tastes, national, regional and local economic
        conditions, discretionary spending priorities, demographic trends, traffic
        patterns and the type, number and location of competing products and outlets
        also can affect market results. Competing trademarks and brands may have
        the
        backing of companies with greater financial, distribution, marketing, capital
        and other resources than do us or our licensees and other business partners.
        This may increase the obstacles that we and they face in competing successfully.
        Among other things, we may have to spend more on advertising and marketing
        or
        may need to reduce the amounts that we charge licensees and other business
        partners. This could have a negative impact on our business and financial
        results.
  **Because
        we expect to rely on unaffiliated third parties to market, distribute, sell
        and
        in some cases design products and services using IP such as trademarks and
        brands that we license, the success of our business may depend upon various
        factors that are beyond our control.**
 
 We
        expect
        to have limited personnel and operations. Substantially all of our earnings
        are
        expected to come from royalties generated from licensees, franchisees and
        similar contractual relationships involving IP that we acquire. Licensees,
        franchisees and other business partners are independent operators, and we
        will
        not exercise day-to-day control over any of them. As a result, our business
        will
        face a number of risks, including the following:
  ·
              We
                  expect that products using our IP will be manufactured by third
                  party
                  licensees, either directly or through third-party manufacturers
                  on a
                  subcontract basis. All manufacturers have limited production capacity,
                  and
                  the ones with whom we work (directly or indirectly) may not, in
                  all
                  instances, be able to satisfy manufacturing requirements for our
                  (and our
                  licensees’) products.
 
 ·
              We
                  expect to provide limited training and support to franchisees.
                  Consequently, franchisees may not successfully operate their businesses
                  in
                  a manner consistent with our standards and requirements, or may
                  not hire
                  and train qualified managers and other store
                  personnel.
  12
  ·
              While
                  we will try to ensure that our licensees and other business partners
                  maintain a high quality of products and services that use our IP,
                  they may
                  take actions that adversely affect the value of our IP or our business
                  reputation.
  **Our
        failure to protect proprietary rights that we acquire could decrease the
        value
        of those assets.**
 
 We
        expect
        to acquire a combination of trademarks, copyrights, franchise rights, service
        marks, trade secrets and similar intellectual property rights. The success
        of
        our IP business strategy will depend in part on our ability to license this
        intellectual property for use by third parties in selling various products
        and
        services and developing brand and product awareness in new geographic and
        product markets. Although we expect that much of our intellectual property
        will
        be protected by registration or other legal rules in the United States, in
        some
        cases registration may not be in place or available, particularly outside
        of the
        United States. In some cases, third parties may be using similar trademarks
        or
        other intellectual property in certain countries, and we may not be able
        to use
        certain of our intellectual property in those countries.
  We
        intend
        to monitor on an ongoing basis unauthorized filings of registrations for
        our
        trademarks and other intellectual property and to rely primarily upon a
        combination of trademark, copyright, know-how, trade secrets and contractual
        restrictions to protect our intellectual property rights. We believe that
        such
        measures afford only limited protection and, accordingly, there can be no
        assurance that actions taken in the past, or that we take in the future,
        to
        establish and protect our proprietary rights will be adequate to prevent
        infringement by others, or prevent a loss of revenue or other damages. In
        addition, the laws of some countries do not protect intellectual property
        rights
        to the same extent as the laws of the United States.
  **We
        may be required to spend significant time and money on protecting or defending
        our intellectual property rights.**
 
 We
        may
        from time to time be required to institute litigation to enforce legal
        protections that we believe apply to intellectual property that we acquire,
        including to protect our trade secrets. Such litigation could result in
        substantial costs and diversion of resources and could negatively affect
        our
        sales, profitability and prospects, regardless of whether we are able to
        successfully enforce our rights. In addition, to the extent that any of the
        intellectual property we acquire is deemed to violate the proprietary rights
        of
        others, we could be prevented from using it, which could cause a termination
        of
        licensing and other commercial arrangements. This would adversely affect
        our
        revenues and cash flow. We also could be required to defend litigation brought
        against us, which can be costly and time-consuming. It could also result
        in a
        judgment or monetary damages being levied against us.
  **The
        acquisition of IP assets and IP-centric businesses will result in us recording
        a
        material amount of goodwill and other intangible assets on our balance sheet.
        If
        we are required to write down a portion of this goodwill and other intangible
        assets, our financial results would be adversely affected.**
 
 As
        a
        result of our acquisition strategy, certain identifiable intangible assets
        with
        indefinite lives which meet specified accounting criteria will consist of
        identifiable intangible assets and goodwill. We will not amortize goodwill.
        We
        may not be able to realize the full fair value of intangible assets with
        indefinite lives and goodwill from our acquisitions. We will evaluate on
        at
        least an annual basis whether all or a portion of identifiable intangible
        assets
        and goodwill and intangible assets may be impaired. A ny
        write-down of intangible assets or goodwill resulting from future periodic
        evaluations would decrease our net income, and those decreases could be
        material .
  **Material
        weaknesses in disclosure controls and procedures and internal control over
        financial reporting of the businesses we acquire could adversely impact our
        ability to provide timely and accurate financial
        information.**
 
 The
        integration of acquisitions includes ensuring that our disclosure controls
        and
        procedures and our internal control over financial reporting effectively
        apply
        to and address the operations of newly acquired businesses. While we will
        make
        every effort to thoroughly understand any acquired entity’s business processes,
        our planning for proper integration into our company can give no assurance
        that
        we will not encounter operational and financial reporting difficulties impacting
        our controls and procedures. As a result, we may be required to change our
        disclosure controls and procedures or our internal control over financial
        reporting to accommodate newly acquired operations, and we may also be required
        to remediate historic weaknesses or deficiencies at acquired businesses.
        Our
        review and evaluation of disclosure controls and procedures and internal
        controls of the companies we acquire may take time and require additional
        expense, and if they are not effective on a timely basis could adversely
        affect
        our business and the market’s perception of our company.
  13
  **Risks
        of Our Tax Loss Carry Forwards**
 
 **We
        may not be able to realize value from our tax loss carry
        forwards.**
 
 As
        of
        December 31, 2006 **,** we
        had
        federal net operating loss carry forwards of approximately $777 million that
        expire between 2011 and 2026. In addition, we had capital loss carry forwards
        of
        approximately $251 million that expire between 2006 and 2011. If we had an
“ownership
        change” as
        defined in section 382 of the Internal Revenue Code, our net operating loss
        carry forwards and capital loss carry forwards generated prior to the ownership
        change would be subject to annual limitations, which could reduce, eliminate,
        or
        defer the utilization of these losses. Based upon a review of past changes
        in
        our ownership, as of December 31, 2006, we do not believe that we have
        experienced an ownership change (as defined under section 382) that would
        result
        in any limitation on our future ability to use these net operating loss and
        capital loss carry forwards. However, we can not assure you that the IRS
        or some
        other taxing authority may not disagree with our position and contend that
        we
        have already experienced such an ownership change, which would severely limit
        our ability to use our net operating loss carry forwards and capital loss
        carry
        forwards to offset future taxable income.
  Generally,
        an ownership change occurs if one or more stockholders, each of whom owns
        5% or
        more in value of a corporation’s stock, increase or decrease their aggregate
        percentage ownership by 50% or more as compared to the lowest percentage
        of
        stock owned by such stockholders at any time during the preceding three-year
        period. For example, if a single stockholder owning 10% of our stock acquired
        an
        additional 50% of our stock in a three-year period, a change of ownership
        would
        occur. Similarly, if ten persons, none of whom owned our stock, each acquired
        slightly over 5% of our stock within a three-year period (so that such persons
        own, in the aggregate more than 50%) an ownership change would occur. Ownership
        of stock is determined by certain constructive ownership rules which can
        attribute ownership of stock owned by entities (such as estates, trusts,
        corporations, and partnerships) to the ultimate indirect owner.
  For
        purposes of this rule, all holders who each own less than 5% of a corporation’s
        stock are generally treated together as one (or, in certain cases, more than
        one) 5% stockholder. Transactions in the public markets among stockholders
        owning less than 5% of the equity securities generally are not included in
        the
        calculation. Special rules can result in the treatment of options (including
        warrants) or other similar interests as having been exercised if such treatment
        would result in an ownership change.
  On
        July
        12, 2005, our stockholders approved a holding company reorganization in which
        each share of what was then Aether Systems common stock was exchanged for
        one
        share of common stock of a new holding company (then called Aether Holdings,
        and
        now called NexCen Brands). As a result of this transaction, shares of our
        common
        stock are subject to transfer restrictions contained in our certificate of
        incorporation. In general, the transfer restrictions prohibit any person
        from
        acquiring more than 5% of our stock without our consent. Persons who owned
        5% or
        more of our stock prior to May 4, 2005 are permitted to sell the shares owned
        as
        of May 4, 2005 without regard to the transfer restrictions. Shares acquired
        by
        such persons after May 4, 2005 are subject to the transfer restrictions.
        While
        we expect that these transfer restrictions will help guard against an ownership
        change occurring under section 382 and the related rules, because we are
        using
        stock as consideration to make acquisitions, and because we may decide (or
        need)
        to sell additional shares of our common stock in the future to raise capital
        for
        our business and because persons who held more than 5% of our stock prior
        to
        these restrictions taking effect can sell (and in some cases have sold) shares
        of our stock, we cannot guarantee that these restrictions will prevent a
        change
        of ownership from occurring.
  **We
        may not be able to use our tax loss carry forwards because we may not generate
        taxable income** *.*
 
 The
        use
        of our net operating loss carry forwards is subject to uncertainty because
        it is
        dependent upon the amount of taxable income we generate. Similarly, the extent
        of our actual use of our capital loss carry forwards is also subject to
        uncertainty because their use depends on the amount of capital gains we
        generate. There can be no assurance that we will have sufficient taxable
        income
        (or capital gains) in future years to use the net operating loss carry forwards
        or capital loss carry forwards before they expire. This is especially true
        for
        our capital loss carry forwards, because they expire over a shorter period
        of
        time than our net operating loss carry forwards.
  **The
        IRS could challenge the amount of our tax loss carry
        forwards.**
 
 The
        amount of our net operating loss carry forwards and capital loss carry forwards
        has not been audited or otherwise validated by the IRS. The IRS could challenge
        the amount of our net operating loss carry forwards and capital loss carry
        forwards, which could result in an increase in our liability for income taxes.
        In addition, calculating whether an ownership change has occurred is subject
        to
        uncertainty, both because of the complexity and ambiguity of section 382
        and
        because of limitations on a publicly traded company’s knowledge as to the
        ownership of, and transactions in, its securities. Therefore, we cannot assure
        you that the calculation of the amount of our net loss carry forwards may
        not be
        changed as a result of a challenge by a governmental authority or our learning
        of new information about the ownership of, and transactions in, our
        securities.
  14
  **We
        expect to be subject to **state,
        local and foreign taxes, as well as**the alternative minimum tax.
        Our net loss carry forwards would not offset the alternative minimum tax
        in its
        entirety.**
 
 We
        will
        continue to be subject to state, local and foreign taxes. As a result of
        our capital loss carry forwards and net operating loss carry forwards, we
        anticipate our federal income tax liability over the next
        several years will be reduced substantially. However, we expect to be
        subject to the alternative minimum tax provisions of the Internal Revenue
        Code
        which limits the use of net operating loss carry forwards. These provisions
        would result, in effect, in 10% of our alternative minimum taxable income
        being
        subject to the 20% alternative minimum tax assessed on corporations. This
        amounts to a 2% effective tax rate on our alternative minimum taxable
        income.
  **The
        IRS may seek to impose the accumulated earnings tax on some or all of the
        taxable income we retain.**
 
 We
        expect
        to retain all or a substantial portion of future earnings over the next several
        years to finance the development and growth of our IP business. As a result,
        we
        may not declare or pay any significant dividends on shares of our common
        stock
        for an extended period. If the IRS believed we were accumulating earnings
        beyond
        our reasonable business needs, the IRS could seek to impose an accumulated
        earnings tax, or AET, of 15% on our accumulated taxable income. We do not
        believe that we will be subject to the AET due to various reasons, including
        the
        existence of our large deficit in accumulated earnings and profits. However,
        the
        IRS may disagree with us on this point, and the IRS may attempt to impose
        the
        AET on all or a portion of our taxable income. In such event, we would expect
        to
        challenge any attempt by the IRS to impose the AET on our business, but the
        outcome of such a challenge is uncertain.
  If
        we
        distributed our accumulated taxable income for each year to our stockholders
        as
        dividends, we would not be subject to the AET for the amounts so distributed,
        but would be subject to the AET only for the amount of earnings retained.
        If we
        paid dividends to stockholders out of current earnings, these dividends would,
        generally speaking, be eligible to be treated as “qualified dividends” for
        federal income tax purposes, taxed at the current maximum federal rate of
        15%,
        assuming that the recipient stockholder met the various requirements under
        the
        Internal Revenue Code for such treatment. The maximum rate for qualified
        dividends is currently projected to increase to the maximum federal income
        tax
        rate applicable to ordinary income (currently 35%) for tax years beginning
        after
        December 31, 2008 in accordance with the Jobs and Growth Tax Relief
        Reconciliation Act of 2003.
  **Limits
        on ownership of our common stock could have an adverse consequence to you
        and
        could limit your opportunity to receive a premium on our
        stock.**
 
 As
        noted
        above, it is important that we avoid an ownership change under section 382
        of
        the Internal Revenue Code, in order to retain the ability to use our net
        operating loss carry forwards and capital loss carry forwards to offset future
        income. Under transfer restrictions that have been applicable to our common
        stock since 2005, no one is permitted to acquire 5% or more of our stock
        without
        the consent of our Board of Directors. In addition, even if our Board of
        Directors consented to a significant stock acquisition, a potential buyer
        might
        be deterred from acquiring our common stock while we still have significant
        tax
        losses being carried forward, because such an acquisition might trigger an
        ownership change and severely impair our ability to use our tax losses against
        future income. Thus, this potential tax situation could have the effect of
        delaying, deferring or preventing a change in control and, therefore, could
        affect adversely our shareholders’ ability to realize a premium over the then
        prevailing market price for our common stock in connection with a change
        in
        control.
  The
        transfer restrictions that apply to shares of our common stock, although
        designed as a protective measure to avoid an ownership change, may have the
        effect of impeding or discouraging a merger, tender offer or proxy contest,
        even
        if such a transaction may be favorable to the interests of some or all of
        our
        shareholders. This effect might prevent our stockholders from realizing an
        opportunity to sell all or a portion of their common stock at a premium to
        the
        prevailing market price.
  **ITEM
        1B. UNRESOLVED STAFF COMMENTS**
 
 None.
 
 **ITEM
        2. PROPERTIES**
 
 As
        of
        December 31, 2006, we leased a total of approximately 16,450 square feet
        of
        office space. Our principal offices total 10,250 square feet and are located
        in
        New York, NY. The Athlete’s Foot office is located in Norcross, GA and totals
        6,200 square feet of leased office space. In addition, we maintain a lease
        for
        space in Marlborough, Massachusetts that we used for the Mobile Government
        business that we sold in 2005. We have sublet this office space to BIO-Key
        International, Inc., the company that purchased the Mobile Government business
        (“BIO-Key”). We believe that our retained facilities are adequate for the
        purposes for which they are presently used and that replacement facilities
        are
        available at comparable cost, should the need arise.
  15
 As
        we
        acquire additional businesses, we expect to own or lease additional office
        space. Such additions may come through assuming leases of businesses we acquire,
        purchasing property owned by acquired businesses as part of the acquisitions,
        or
        entering into new leases either to consolidate operations in multiple locations
        or to accommodate the needs of our business as it expands. We do not own
        or
        lease property used by our franchisees.
 
 **ITEM
        3. LEGAL PROCEEDINGS**
 
 IPO
        Litigation .
        NexCen
        is among the hundreds of defendants named in a
        series of class
        action lawsuits seeking damages due to alleged violations of securities
        law.  The case is being heard in the United States District Court for the
        Southern District of New York.  The court has consolidated the actions by
        all of the named defendants that actually issued the securities in
        question.  There are approximately 310 consolidated cases before Judge
        Scheindlin, including this action, under the caption In
        Re
        Initial Public Offerings Litigation ,
        Master
        File 21 MC 92 (SAS).
 
 As
        to
        NexCen, these actions were filed on behalf of persons and entities that acquired
        the Company’s stock after its initial public offering in October 20,
        1999.  Among other things, the complaints claim that prospectuses, dated
        October 20, 1999 and September 27, 2000 and issued by NexCen in
        connection with the public offerings of common stock, allegedly contained
        untrue
        statements of material fact or omissions of material fact in violation of
        securities laws because the prospectuses allegedly failed to disclose that
        the
        offerings’ underwriters had solicited and received additional and excessive
        fees, commissions and benefits beyond those listed in the arrangements with
        certain of their customers which were designed to maintain, distort and/or
        inflate the market price of the Company’s common stock in the aftermarket. 
The actions seek unspecified monetary damages and rescission.  NexCen
        believes the claims are without merit and is vigorously contesting these
        actions.
 
 After
        initial procedural motions and the start of discovery in 2002 and 2003, the
        plaintiffs voluntarily dismissed without prejudice the officer and director
        defendants of each of the 310 named issuers, including NexCen.  Then
        in June 2003, the Plaintiff’s Executive Committee announced a proposed
        settlement with the issuer-defendants, including NexCen, and the officer
        and
        director defendants of the issuers (the “Issuer Settlement”).  A settlement
        agreement was signed in 2004 and presented to the District Court for approval.
        The proposed Issuer Settlement does not include the underwriter-defendants,
        and
        they have continued to defend the actions and have objected to the proposed
        settlement. (One of the defendant-underwriters signed a memorandum of
        understanding in April 2006 agreeing to a $425 million settlement of claims
        against it.)  Under terms of the proposed Issuer Settlement, NexCen
        has a reserve of $465,000 for its estimated exposure. If the proposed
        settlement is approved by the court, it is extremely unlikely
        that NexCen would incur any material financial or other
        liability.
 
 The
        District Court granted preliminary approval of the proposed Issuer Settlement
        in
        2005 and held a fairness hearing on the matter in April 2006. In December
        2006,
        before final action by the District Court on the proposed Issuer Settlement,
        the
        U.S. Court of Appeals for the Second Circuit issued a ruling vacating class
        certification for certain plaintiffs in the actions against the
        underwriter-defendants. A petition was filed in early 2007 seeking rehearing
        of
        this decision, but the Second Circuit had not acted on the petition as of
        March
        1, 2007. The impact of this decision on the claims against the issuer-defendants
        (including NexCen ) and
        on
        the proposed Issuer Settlement is unclear. Since December 2006, the District
        Court has stayed all proceedings in these cases pending further action by
        the
        Second Circuit.
 
 Transportation
        Business Sale .
        On
        March 13, 2006, a complaint captioned Geologic Solutions, Inc. v. Aether
        Holdings, Inc. was filed against the Company in the Supreme Court for the
        State
        of New York, New York County. The complaint generally alleges that plaintiff
        Geologic was damaged as a result of certain alleged breaches of contract
        and
        fraudulent inducement arising out of NexCen’s alleged misrepresentations and
        failure to disclose certain information in connection with the asset purchase
        agreement dated as of July 20, 2004 for the purchase and sale of our
        Transportation business. The allegations in Geologic’s complaint are
        substantially similar to claims Geologic made in a previous request to the
        Company for indemnification. The complaint seeks monetary damages in an amount
        not less than $30 million and other relief. During the second quarter of
        2006,
        the plaintiff agreed to substitute Aether Systems, Inc. for Aether Holdings,
        Inc. as defendant in the case because Aether Systems, Inc. was the party
        to the
        asset purchase agreement upon which Geologic’s claims are based. We believe we
        have a meritorious defense to Geologic’s claims and are vigorously defending
        against this action; however, we cannot predict the outcome of this litigation,
        and an adverse resolution of such claims could require us to make a significant
        cash payment to Geologic. We have incurred costs in connection with the defense
        of this lawsuit, which have been recorded against discontinued operations,
        further increasing the loss on the sale of the Transportation segment, and
        decreasing the amount of cash we have available for acquisitions and
        operations.
  16
  Legacy
        UCC Litigation .
        UCC and
        Mr. D’Loren in his capacity as president of UCC are parties along with unrelated
        parties to litigation resulting from a default on a loan to The Songwriter
        Collective, LLC (“TSC”), which UCC had referred to a third party. A shareholder
        of TSC filed a lawsuit in the U.S. District Court for the Middle District
        of
        Tennessee alleging, that certain misrepresentations by TSC and its agents
        (including UCC and D’Loren) induced the shareholder to contribute certain rights
        to musical compositions to TSC. The lawsuit, which is captioned Tim Johnson
        v.
        Fortress Credit Opportunities I, L.P., et al., seeks declaratory judgment,
        reformation and rescission, and monetary damages relating to the loan and
        alleged loss of value on contributed assets. UCC and Mr. D’Loren have filed
        cross-claims against TSC and certain TSC officers claiming indemnity. TSC
        has
        filed various cross and third-party claims against UCC, Mr. D’Loren and another
        TSC shareholder, Annie Roboff. Roboff has filed a separate action in the
        Chancery Court in Davidson County, Tennessee, which is captioned Roboff v.
        Mason, et al., as well as claims in the federal court lawsuit, against UCC,
        Mr.
        D’Loren, TSC and the other parties. The claims include fraud and negligent
        misrepresentation allegations against Mr. D’Loren, and UCC. Ms. Roboff
        previously made these same claims in a lawsuit that she filed in state court
        in
        New York. That lawsuit was dismissed on procedural grounds, and Ms. Roboff
        has
        appealed the dismissal. UCC believes these claims are without merit and is
        vigorously defending the actions.  UCC’s insurance carrier is defending the
        litigation. The litigation is in discovery and the outcome cannot be estimated
        at this time; however, settlement discussions are being held.  The loss, if
        any, could exceed existing insurance coverage and any excess could adversely
        affect our financial condition and results.
 
 Other .
        In
        addition to the matters discussed above, we become involved from time to
        time in
        other litigation in the ordinary course of our business.  As of the date of
        this Report, there are no other proceedings that management considers material
        to the Company.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 On
        October 31, 2006, the Company held its Annual Meeting, at which six proposals
        were presented to the Company’s stockholders for consideration. The six matters
        presented for consideration were: (1) a proposal to approve the sale of the
        Company’s existing MBS portfolio for the purpose of discontinuing the Company’s
        MBS business and allocating all cash proceeds from such sale to the growth
        and
        development of the IP business; (2) a proposal to amend the Certificate of
        Incorporation to change the Company’s name to “NexCen Brands, Inc.”; (3) the
        election of eight directors to hold office until the 2007 Annual Meeting
        of
        Stockholders or until their successors are elected and qualified; (4) a proposal
        to ratify the appointment of KPMG LLP as the Company’s independent registered
        public accounting firm for the fiscal year ending December 31, 2006; (5)
        a
        proposal to approve the adoption of the Company’s 2006 Long-Term Equity
        Incentive Plan (the “2006 Plan”); and (6) a proposal to approve the adoption of
        the 2006 Management Bonus Plan (the “Bonus Plan”).
  The
        number of issued and outstanding shares of common stock of the Company as
        of
        September 6, 2006, the record date established by the Company’s Board of
        Directors for determining stockholder eligibility to vote at the Annual Meeting,
        was 47,434,296. Computershare, the Company’s independent inspectors of election
        at the Annual Meeting, certified the voting results. There were present in
        person or by proxy at the Annual Meeting stockholders holding an aggregate
        of
        45,700,427 shares of common stock of the Company, representing approximately
        96%
        of the total shares eligible to vote. Set forth below are the results of
        the
        votes taken at the Annual Meeting.
 
 The
        proposal to proceed with the sale of the Company’s existing MBS portfolio was
        approved by the stockholders by the following vote:
  Votes
                    For:
                Votes
                    Against:
                Abstain:
                Broker
                    Non-votes:32,103,838
                22,199
                115,719
                13,458,671
  The
          proposal to amend the Certificate of Incorporation to change the Company’s name
          to “NexCen Brands, Inc.” was approved by the stockholders by the following
          vote:
 
 Votes
                    For:
                Votes
                    Against:
                Abstain:
                Broker
                    Non-votes:32,035,990
                88,502
                117,264
                13,458,671
  17
  The
          nominees for election to the Board of Directors were elected by the stockholders
          by the following vote:
 
 Name:
                Votes
                    For:
                Votes
                    Withheld:James
                    T. Brady
                41,792,081
                3,908,346Robert
                    W. D’Loren
                39,221,678
                6,478,749Jack
                    B. Dunn IV
                38,603,925
                7,096,502Edward
                    J. Mathias
                41,794,381
                3,906,046David
                    S. Oros
                39,260,172
                6,440,255Jack
                    Rovner
                41,794,481
                3,905,946Truman
                    T. Semans
                41,795,322
                3,905,105George
                    P. Stamas
                38,901,401
                6,799,026
  The
          proposal to ratify the appointment of KPMG LLP as the Company’s independent
          registered public accounting firm for the fiscal year ending December 31,
          2006
          was approved by the stockholders by the following vote:
 
 Votes
                    For:
                Votes
                    Against:
                Abstain:
                Broker
                    Non-Votes:45,203,932
                17,993
                478,502
                0
  The
          proposal to approve the adoption of the 2006 Plan was approved by the
          stockholders by the following vote:
 
 Votes
                    For:
                Votes
                    Against:
                Abstain:
                Broker
                    Non-Votes:25,527,030
                6,697,235
                17,491
                13,458,671
  The
          proposal to approve the adoption of the Bonus Plan was approved by the
          stockholders by the following vote:
 
 Votes
                    For:
                Votes
                    Against:
                Abstain:
                Broker
                    Non-Votes:25,437,530
                6,213,506
                590,720
                13,458,671
  18
  **PART
        II**
 
 **ITEM
        5. MARKET FOR NEXCEN’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
        PURCHASES OF EQUITY SECURITIES**
 
 PRICE
        RANGE OF COMMON STOCK
 
 Our
        common stock has been quoted on the Nasdaq Global Market under the symbol
        NEXC
        since November 1, 2006. Prior to that time, the symbol AETH had been used,
        starting with our initial public offering on October 20, 1999. The
        following table sets forth, for the periods indicated, the high and low prices
        per share of the common stock as reported on the Nasdaq Global
        Market.
 
 **2006**
              
              **2005****QUARTER
                  ENDED**
              
              **HIGH**
              
              **LOW**
              
              **HIGH**
              
              **LOW**March 31
              
              $
              3.85
              
              $
              3.13
              
              $
              3.51
              
              $
              3.24June 30
              
              $
              5.50
              
              $
              3.75
              
              $
              3.45
              
              $
              3.04September 30
              
              $
              6.33
              
              $
              5.54
              
              $
              3.67
              
              $
              3.27December 31
              
              $
              7.42
              
              $
              5.71
              
              $
              3.57
              
              $
              3.27
 
 APPROXIMATE
        NUMBER OF EQUITY SECURITY HOLDERS
 
 The
        number of stockholders of record of NexCen’s common stock as of
        February 28, 2007 was 469.
 
 DIVIDENDS
 
 We
        have
        never declared or paid any cash dividends on our capital stock or, when we
        were
        organized as a limited liability company, did we make any distributions to
        our
        members. For the period that our accumulated tax loss carry forwards remain
        available for use, we expect to retain earnings, if any, to support the
        development of our business, rather than pay periodic cash dividends. Our
        Board
        of Directors may reconsider or change this policy in the future. Payment
        of
        future dividends, if any, will be at the discretion of our Board of Directors,
        after taking into account such factors as it considers relevant, including
        our
        financial condition, the performance of our business, the perceived benefits
        to
        the Company and our stockholders of re-investing earnings, anticipated future
        cash needs of our business, the tax consequences of retaining earnings and
        the
        tax consequences to the Company and its stockholders of making dividend
        payments.
 
 SECURITIES
        AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
 
 **Plan
                  Category**
              
              **Plan
                  Name**
              
              **Number
                  of**
                **securities**
                **to****be
                  issued upon****exercise**
                **of
                  outstanding**
                **options,****and**
                **restricted
                  stock**
              
              **Weighted-average**
                **exercise
                  price of**
                **outstanding**
                **options,**
                **and
                  restricted stock**
              
              **Number
                  of**
                **securities**
                **remaining**
                **available
                  for**
                **future**
                **issuance
                  under**
                **equity**
                **compensation**
                **plans**Equity
                  compensation plans approved
                by
                  security holders
              
              
              1999
                  Equity
                Incentive
                  Plan
              
              
              4,689,398
              
              $
              4.19
              
              
              02006
                  Equity
                Incentive
                  Plan
              
              
              426,000
              
              
              6.88
              
              
              3,074,000Equity
                  compensation plans not approved
                by
                  security holders
              
              
              Acquisition
                Incentive
                  Plan
              
              
              123,006
              
              
              3.23
              
              
              0Total
              
              
              
              
              
              5,238,404
              
              $
              4.39
              
              
              3,074,000
 
 The
        1999
        Equity Incentive Plan (the “1999 Plan”) provides for the issuance of NexCen
        common stock, pursuant to grants of stock options or restricted stock, in
        an
        amount equal to 20% of the Company’s outstanding shares. On September 2, 2005,
        the Company filed a registration statement with the Securities and Exchange
        Commission on Form S-8 registering an additional 973,866 shares under the
        1999
        Plan.
 
 The
        Acquisition Incentive Plan (the “2000 Plan”) was effective December 15,
        2000. Grants under the 2000 Plan may be made to all employees, consultants
        and
        certain other service providers (other than directors and executive officers)
        of
        the Company. Under the 2000 Plan, NexCen’s Board of Directors has authorized the
        issuance of up to 1,900,000 shares of NexCen common stock in connection with
        the
        grant of stock options or restricted stock. All options granted under the
        2000
        Plan must be nonqualified stock options. Any shares covered by an award that
        are
        used to pay the exercise price or any required withholding tax will become
        available for re-issuance under the plan. In the event of a “change of control”
as such term is defined in the 2000 Plan, awards of restricted stock and
        stock
        options will become fully vested or exercisable, as applicable, to the extent
        the award agreement granting such restricted stock or options provides for
        such
        acceleration. (Individuals receive an award agreement upon grant of an award
        under the 2000 Plan.) A participant will immediately forfeit any and all
        unvested options and forfeit all unvested restricted stock at the time of
        termination from NexCen, unless the award agreement provides otherwise. No
        participant may exercise vested options after the 90 th day from
        the date of termination from NexCen, unless the award grant provides otherwise.
  19
  Effective
        October 31, 2006, the Company adopted the 2006 Plan to replace the 1999 Plan
        and
        the 2000 Plan. The Company’s stockholders approved the adoption of the 2006 Plan
        at the Annual Meeting held on October 31, 2006. The 2006 Plan is now the
        sole
        plan for providing stock-based compensation to eligible employees, directors
        and
        consultants. The 1999 Plan and the 2000 Plans will remain in existence solely
        for the purpose of addressing the rights of holders of existing awards already
        granted under those plans. No new awards will be granted under the 1999 Plan
        and
        the 2000 Plan. A total of 3.5 million shares of common stock are initially
        reserved for issuance under the 2006 Plan, which represented approximately
        7.4%
        of NexCen’s outstanding
        shares at the time of adoption .
        Options
        under the 2006 Plan expire after ten years and are granted at an exercise
        price
        no less than the fair value of the common stock on the grant date.
 
 
 **UNREGISTERED
        SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
 The
        following table presents shares surrendered by employees to exercise stock
        options and to satisfy tax withholding obligations on vested restricted stock
        and stock option exercises.
  **Period**
                **Total
                    Number**
                  **of
                    Shares**
                  **Purchased**
                **Average
                    Price**
                  **Paid
                    for Shares**
                **Total
                    Number**
                  **of
                    Shares**
                  **Purchased
                    as**
                  **Part
                    of Publicly**
                  **Announced**
                  **Plans
                    or**
                  **Programs**
                **Maximum
                    Number**
                  **of
                    Shares that**
                  **May
                    Yet Be**
                  **Purchased
                    Under**
                  **the
                    Plans and**
                  **Programs**January
                    1 - January 31, 2006
                -
                -
                -
                -February
                    1 - February 28, 2006
                -
                -
                -
                -March
                    1 - March 31, 2006
                -
                -
                -
                -April
                    1 - April 30, 2006
                -
                -
                -
                -May
                    1 - May 31, 2006
                -
                -
                -
                -June
                    1 - June 30, 2006
                85,900
                $4.10
                -
                -July
                    1 - July 31, 2006
                -
                -
                -
                -August
                    1 - August 31, 2006
                -
                -
                -
                -September
                    1 - September 30, 2006
                -
                -
                -
                -October
                    1 - October 31, 2006
                -
                -
                -
                -November
                    1 - November 30, 2006
                -
                -
                -
                -December
                    1 - December 31, 2006
                -
                -
                -
                -Total
                85,900
                $4.10
                -
                -
 **ITEM
          6. SELECTED FINANCIAL DATA**
 
 The
        table
        that follows presents portions of our Consolidated Financial Statements and
        is
        not a complete presentation in accordance with U.S. generally accepted
        accounting principles. You should read the following Selected Financial Data
        together with our Consolidated Financial Statements and related notes and
        with
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations” included in Item 7 of this Report. The historical results presented
        below are not necessarily indicative of the results to be expected for any
        future fiscal year.
 
 The
        results of operations in the following Selected Financial Data, as well as
        in
        our Consolidated Financial Statements, present the results of our IP Segment
        in
        2006 in continued operations, and EMS, Transportation and Mobile Government
        businesses, which we sold during 2004, and MBS which we sold in 2006, as
        discontinued operations. Loss from continuing operations does not include
        any
        financial results of the EMS, Transportation, Mobile Government, or MBS
        businesses. Our sold businesses are presented as discontinued operations
        for
        each of the historical periods. As a result, these results differ from what
        has
        been presented in the prior reporting periods.
  20
  **YEAR
                  ENDED DECEMBER 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(IN
                  THOUSANDS, EXCEPT PER SHARE AMOUNTS)**CONSOLIDATED
                  STATEMENT OF OPERATIONS DATA:Royalty
                  revenues
              
              $
              1,175
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Franchise
                  fee revenues
              
              
              749
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  revenues
              
              
              1,924
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  operating expenses
              
              
              (10,413
              )
              
              (5,241
              )
              
              (14,643
              )
              
              (21,796
              )
              
              (39,063
              )Operating
                  loss
              
              
              (8,489
              )
              
              (5,241
              )
              
              (14,643
              )
              
              (21,796
              )
              
              (39,063
              )Total
                  non-operating income (loss)
              
              
              3,337
              
              
              1,690
              
              
              (10,000
              )
              
              (3,900
              )
              
              17,703Loss
                  from continuing operations before taxes
              
              
              (5,152
              )
              
              (3,551
              )
              
              (24,643
              )
              
              (25,696
              )
              
              (21,360
              )Income
                  taxes
              
              
              (81
              )
              
              —
              
              
              —
              
              
              —
              
              
              —Loss
                  from continuing operations
              
              
              (5,233
              )
              
              (3,551
              )
              
              (24,643
              )
              
              (25,696
              )
              
              (21,360
              )Profit
                  (loss) from discontinued operations, net of tax
                expense
                  (benefit) of $64, $75,and $(535) for
                2006,
                  2003, and 2002, respectively
              
              
              2,358
              
              
              225
              
              
              (44,510
              )
              
              (23,756
              )
              
              (304,062
              )Gain
                  (loss) on sale of discontinued operations
              
              
              755
              
              
              (1,194
              )
              
              20,825
              
              
              —
              
              
              —Net
                  loss
              
              $
              (2,120
              )
              $
              (4,520
              )
              $
              (48,328
              )
              $
              (49,452
              )
              $
              (325,422
              )Net
                  loss per share (basic and diluted) from
                continuing
                  operations
              
              $
              (0.11
              )
              $
              (0.08
              )
              $
              (0.57
              )
              $
              (0.60
              )
              $
              (0.51
              )Gain
                  (loss) per share (basic and diluted) on sale
                of
                  discontinued operations
              
              
              0.07
              
              
              (0.02
              )
              
              (0.54
              )
              
              (0.56
              )
              
              (7.22
              )Net
                  loss per share - basic and diluted
              
              $
              (0.04
              )
              $
              (0.10
              )
              $
              (1.11
              )
              $
              (1.16
              )
              $
              (7.73
              )Weighted
                  average shares outstanding - basic and diluted
              
              
              45,636
              
              
              44,006
              
              
              43,713
              
              
              42,616
              
              
              42,117CONSOLIDATED
                  BALANCE SHEET DATA:Cash
                  and cash equivalents (including restricted cash)
              
              $
              84,834
              
              $
              9,725
              
              $
              69,555
              
              $
              39,682
              
              $
              68,593Investments
                  available for sale - discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              220,849
              
              
              255,825Trademarks
                  and goodwill
              
              
              64,607
              
              
              —
              
              
              —
              
              
              —
              
              
              —Mortgage-backed
                  securities, at fair value,
                discontinued
                  operations
              
              
              —
              
              
              253,900
              
              
              62,184
              
              
              —
              
              
              —Total
                  assets
              
              
              158,385
              
              
              266,008
              
              
              136,586
              
              
              398,105
              
              
              475,407Repurchase
                  agreements related to
                discontinued
                  operations
              
              
              —
              
              
              133,924
              
              
              —
              
              
              —
              
              
              —Total
                  debt
              
              
              —
              
              
              —
              
              
              —
              
              
              154,942
              
              
              154,945Stockholders’
                  equity
              
              $
              146,613
              
              $
              126,387
              
              $
              130,590
              
              $
              179,301
              
              $
              229,398
 
  
 
 **ITEM
        7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 The
        following discussion and analysis should be read in conjunction with the
        Selected Financial Data in Item 6 above and our Consolidated Financial
        Statements and the related notes, which appear in Item 8 of this
        Report.
 
 In
        this
        discussion and analysis, we explain our financial condition and results of
        operations. We have organized our discussion and analysis as
        follows:
 
 •
              We
                  provide an introduction to our financial results and
                  condition.
 •
              We
                  discuss our critical accounting policies.
 •
              We
                  discuss recent accounting pronouncements.
 •
              We
                  discuss the results of our continuing operations for the year ended
                  December 31, 2006, compared with results for the years ended December
                  31, 2005 and 2004.
 •
              We
                  discuss our financial condition, liquidity and capital resources
                  and our
                  contractual obligations.
  21
 INTRODUCTION
 
 Our
        business has undergone significant change, and consequently our financial
        results and condition are difficult to compare from one year to the next.
        As
        discussed in Item 1, our business has changed to an IP-centric strategy.
        When we
        talk about our “continuing operations,” we are referring to our IP business. The
        results of our prior businesses (our MBS business and our mobile and wireless
        data businesses) are reported in “discontinued operations.”
  Because
        our IP business is relatively new and because we are building this business
        initially through acquisitions, each acquisition has a material impact on
        our
        financial results and condition. This makes period-to-period comparisons
        even
        more difficult. Over time, as our group of owned businesses expands, we expect
        that additional acquisitions (other than very significant acquisitions) will
        have a less material impact on our results, and period-to-period comparisons
        will become more meaningful.
  In
        reviewing our financial results and condition for the 2006, 2005 and 2004
        fiscal
        years, you should keep in mind the following factors with respect to our
        continuing operations:
  ·
              We
                  did not earn franchise or royalty revenues before November 2006,
                  when we
                  acquired The Athlete’s Foot. Accordingly, our 2006 results reflect just
                  seven weeks of revenue from The Athlete’s Foot business. Our results do
                  not reflect any other revenue for 2006 or any prior years, because
                  revenues from our prior businesses have been reclassified to “discontinued
                  operations.”
  ·
              Our
                  operating expenses reflect the expenses of our IP business and
                  all other
                  expenses that were not directly attributable to the businesses
                  now
                  included in “discontinued operations.” This includes the costs of our
                  corporate staff. Accordingly, while results of our continuing operations
                  reflect revenues for only a small portion of 2006, they include
                  significant operating expenses for all of 2006 and prior
                  years.
  ·
              We
                  acquired UCC in June 2006. Since that time, UCC has focused on
                  pursuing
                  acquisition and financing opportunities for our IP business. UCC
                  has not
                  generated revenue since we acquired it, but we have incurred the
                  operating
                  expenses associated with the UCC business as part of the cost of
                  developing our IP business. We cannot predict whether UCC will
                  generate
                  revenue in the future from providing advice to third parties, as
                  this is
                  not the focus of our business strategy. The reported loan servicing
                  revenue at UCC of $148,000 in 2006 was recorded in other income
                  because it
                  is not the focus of our new IP
                  business.
  ·
              Our
                  financial results and condition for 2006 and prior years do not
                  include
                  any of the revenues, expenses, assets or liabilities of Bill Blass,
                  MaggieMoo’s or Marble Slab, as we acquired these businesses in February
                  2007. Our 2007 results will include the results and condition of
                  these
                  businesses, although they will only be included in our first quarter
                  2007
                  results for less than half of that quarter. If we acquire additional
                  businesses in 2007, our results will include those businesses only
                  from
                  and after the date on which we acquire
                  them.
  ·
              We
                  have been focused primarily on acquisitions, and are only beginning
                  to
                  focus on the development of acquired businesses. Beginning in 2007,
                  we
                  expect to devote substantial attention to integrating our acquired
                  businesses and pursuing organic growth opportunities through both
                  franchising and licensing arrangements. While we do not expect
                  such
                  activities to require us to incur material additional expenses,
                  we cannot
                  predict when they will result in incremental
                  revenue.
  ·
              Our
                  operating expenses are increasing as we add personnel and facilities
                  to
                  support our growing business. These additions are coming both through
                  our
                  acquisitions and through hirings we make to add needed skills or
                  to expand
                  our staff so that we can properly manage and develop our business.
                  In 2004
                  and 2005, we reduced our operating expenses significantly as we
                  sold
                  businesses and then managed a mortgage-backed securities business
                  that did
                  not require an extensive staff. In 2006, we reversed this trend,
                  as we
                  began to grow our IP business, and we expect the operating expenses
                  will
                  continue to increase in the near term as we build our IP business.
                  However, we expect that our value net business model will enable
                  us to
                  operate efficiently and to leverage our people and facilities across
                  a
                  broad base of operations, thereby mitigating the rate of
                  increase.
  ·
              Our
                  balance sheet has changed significantly, and we expect that it
                  will
                  continue to change significantly in the near term. During 2006,
                  we sold
                  all of our MBS investments for cash and used a substantial portion
                  of the
                  cash proceeds to repay indebtedness under repurchase agreements
                  and to
                  fund a portion of the purchase prices of UCC and The Athlete’s Foot (as
                  well as to fund our operating losses). With these acquisitions,
                  we
                  acquired substantial IP assets and goodwill, as well as a limited
                  amount
                  of other assets and liabilities. With additional acquisitions,
                  we will be
                  using cash to pay a portion of the purchase price and we will be
                  acquiring
                  assets, particularly trademarks and goodwill, and assuming or incurring
                  various operating liabilities associated with the acquired businesses.
                  In
                  addition, we will be incurring indebtedness under our new credit
                  facility
                  to finance a portion of the purchase price of our acquisitions.
                  We expect
                  to borrow approximately $72.5 million under the new credit facility
                  to
                  finance a portion of the purchase prices of our acquisitions of
                  The
                  Athlete’s Foot, Bill Blass, MaggieMoo’s and Marble
                  Slab.
  22
  ·
              We
                  continue to earn interest on our cash balances. In 2007, we will
                  begin to
                  pay interest on our borrowings under our new credit facility. Interest
                  income and interest expense will be reported as part of “Non operating
                  income” on our statement of
                  operations.
  ·
              The
                  number of shares we have outstanding has continued to increase
                  as we use
                  our capital stock as consideration for acquisitions. We also have
                  granted
                  a significant number of new stock options and have issued several
                  warrants
                  to purchase common stock in connection with acquisitions and as
                  long-term
                  incentives for newly hired executives and other key personnel (both
                  in
                  connection with acquisitions and as part of our efforts to build
                  our
                  management team as we expand our business). We expect to continue
                  to issue
                  stock as consideration for acquisitions and possibly to raise additional
                  capital for our business, subject to limitations under laws and
                  rules that
                  could affect our future use of our tax loss carry forwards. These
                  limitations are discussed above in*Item
                  1. Business*under the caption “Tax Loss Carry Forwards” and also in*Item
                  1A. Risk Factors*under the caption “Risks of Our Tax Loss Carry
                  Forwards.”
  In
        view
        of these various factors, we expect that our financial results in 2007 will
        differ significantly from our results in 2006, and our financial condition
        also
        will continue to change as we expand our operations and complete
        acquisitions.
  As
        described above in *Item
        1. Business* under
        the caption “Our Business -- Operations and Strategy,” our strategy is to
        generate revenue from licensing and other commercial arrangements with third
        parties who want to use the IP that we acquire. These third parties (including
        franchisees) pay us licensing and other contractual fees and royalties for
        the
        right to use our IP on either an exclusive or non-exclusive basis. Our
        contractual arrangements may apply to a specific product market, a specific
        geographic market, or to multiple markets. Our revenue represents a relatively
        small percentage of the revenue of our licensees and franchisees (typically
        a 6%
        royalty). Our revenue will depend upon our ability to negotiate successful
        licensing and franchising arrangements for our acquired brands, our ability
        to
        expand our franchised business and the ability of our licensees and franchisees
        to sell products and services that make use of our IP (which will entitle
        us to
        receive fees and royalties from them).
  As
        a
        result of our IP business strategy, we expect that our principal assets will
        be
        intangible assets (the trademarks and other IP assets and associated goodwill
        related to the brands and businesses that we acquire, manage and develop)
        and
        our people. We do not expect to have substantial tangible assets, as our
        business model is not designed to require significant capital investment
        in
        tangible assets.
  DISCONTINUED
        OPERATIONS
 
 Discontinued
        operations include the net results of our MBS and our mobile and wireless
        communications businesses. During 2004, in three separate transactions we
        sold
        our mobile and wireless data businesses, which were organized into three
        operating segments -- EMS, Transportation and Mobile Government. The aggregate
        sale price for these three businesses was $54.0 million in cash. In November
        2006, we exited the MBS business by selling our remaining $75.5 million of
        MBS
        and recognized a gain of $755,000. Earlier in 2006, we sold $140 million
        of our
        MBS investments and used the proceeds primarily to repay indebtedness under
        repurchase agreements that had been incurred to purchase MBS.
 
 The
        net
        results of our discontinued operations include only those expenses directly
        attributable to the businesses that have been sold and do not include any
        of the
        costs of our corporate staff or offices, including the costs of being a public
        company. These results were materially affected by impairment charges that
        we
        recognized in 2004 (relating to the mobile and wireless data businesses)
        and
        2005 (relating to the MBS business):
 
 ·
              During
                  2004, we reassessed the value of goodwill, intangible and certain
                  other
                  assets of our Transportation and Mobile Government operations and
                  ultimately recorded aggregate impairment charges of $35.6 million
                  during
                  2004. These impairment charges are included in the loss from discontinued
                  operations in 2004.
  ·
              During
                  2005, as a result of changes in our business strategy, we decided
                  that
                  unrealized losses in our MBS portfolio at December 31, 2005 should
                  be
                  considered “other than temporary” impairments under Statement of
                  Accounting Standards 115 and needed to be charged against operating
                  results as of that date. As a result, we recognized the unrealized
                  loss of
                  approximately $2.1 million and wrote-off the unamortized premium
                  of $1.9
                  million, for a total other than temporary impairment charge of
                  approximately $4.0 million. These charges are included in the profit
                  from
                  discontinued operations in 2005.
  23
  ·
              During
                  2006, we exited the MBS business and recognized a gain in the fourth
                  quarter of 2006 of approximately $755,000 related to the sale of
                  our
                  remaining MBS investments.
  Reported
        gain or loss on the sale of these businesses includes the impact of the
        impairment charges.
  For
        a
        discussion of potential post-sale contingencies related to the Transportation
        and Mobile Government businesses that could have an impact on our future
        financial results and condition see *Item
        1A. Risk Factors* under
        the caption “Risks of Our Current Business -- We are involved in litigation with
        respect to a business that we sold in 2005” and *Note
        12 to Consolidated Financial Statements* . Other
        than these contingencies (and costs that we incur in connection with efforts
        to
        resolve them), all of which would be reported as adjustments to gain or loss
        on
        sale of discontinued operations, we do not expect that discontinued operations
        will have any impact on our future results or financial condition.
 
 CRITICAL
        ACCOUNTING POLICIES
 
 Our
        critical accounting policies affect the amount of income and expense we record
        in each period as well as the value of our assets and liabilities and our
        disclosures regarding contingent assets and liabilities. In applying these
        critical accounting policies, we must make estimates and assumptions to prepare
        our financial statements that, if made differently, could have a positive
        or
        negative effect on our financial results. We believe that our estimates and
        assumptions are both reasonable and appropriate, in accordance with the
        applicable accounting rules. However, estimates involve judgments with respect
        to numerous factors that are difficult to predict and are beyond management’s
        control. As a result, actual amounts could materially differ from
        estimates.
  Management
        believes that the following accounting policies represent “critical accounting
        policies,” which the Securities and Exchange Commission defines as those that
        are most important to the portrayal of a company’s financial condition and
        results of operations and require management’s most difficult, subjective, or
        complex judgments, often because management must make estimates about uncertain
        and changing matters.
 
 ·
              Valuation
                  of deferred tax assets - We have deferred tax assets as a result
                  of years
                  of accumulated tax loss carry forwards. Management believes we
                  will
                  achieve profitable operations in future years that may enable us
                  to
                  recover the benefit of our deferred tax assets. However, we presently
                  do
                  not have sufficient objective evidence to support management’s belief and,
                  accordingly, we maintain a full valuation allowance for our net
                  deferred
                  tax assets as required by U.S. generally accepted accounting
                  principles.
 
 ·
              Valuation
                  of trademarks, goodwill and intangible assets - Trademarks represent
                  the
                  present value of future royalty income associated with the ownership
                  of
                  each trademark. The Company expects its trademarks to contribute
                  to cash
                  flows indefinitely, and therefore will not amortize any trademarks
                  unless
                  their useful life is no longer deemed indefinite. Goodwill represents
                  the
                  excess of the acquisition cost over the fair value of the net assets
                  acquired and is not amortized. Goodwill is evaluated for impairment
                  annually, or more frequently as required in accordance with SFAS
                  No. 142
                  “Goodwill and Other Intangible Assets.” Intangible assets with estimable
                  useful lives are amortized over their respective estimated useful
                  lives
                  and are reviewed for impairment in accordance with SFAS No. 144
                  “Accounting for Impairment or Disposal of Long-Lived Assets.” We will
                  evaluate the fair value of trademarks and goodwill to assess potential
                  impairments on an annual basis, or more frequently if events or
                  other
                  circumstances indicate that we may not be able to recover the carrying
                  amount of the asset. We will evaluate the fair value of trademarks
                  and
                  goodwill at the reporting segment level and make that determination
                  based
                  upon future cash flow projections. Assumptions to be used in these
                  projections, such as forecasted growth rates, cost of capital and
                  multiples to determine the terminal value of the reporting segments,
                  will
                  be consistent with internal projections and operating plans. We
                  will
                  record an impairment loss when the implied fair value of the trademarks
                  and goodwill assigned to the reporting segment is less than the
                  carrying
                  value of the reporting segment, including trademarks and goodwill.
                  In
                  accordance with SFAS No. 144, “Accounting for the Impairment or Disposal
                  of Long-Lived Assets,” whenever events or changes in circumstances
                  indicate that the carrying values of long-lived assets (which include
                  our
                  intangible assets with determinable useful lives) may be impaired,
                  we will
                  perform an analysis to determine the recoverability of the asset’s
                  carrying value. These events or circumstances may include, but
                  are not
                  limited to; projected cash flows which are significantly less than
                  the
                  most recent historical cash flows; a significant loss of management
                  contracts without a realistic expectation of a replacement; and
                  economic
                  events which could cause significant adverse changes and uncertainty
                  in
                  business patterns. In our analysis, to determine the recoverability
                  of the
                  asset’s carrying value, we will make estimates of the undiscounted cash
                  flows from the expected future operations of the asset. If the
                  analysis
                  indicates that the carrying value is not recoverable from future
                  cash
                  flows, the asset will be written down to estimated fair value and
                  an
                  impairment loss will be recognized.
  24
  Goodwill
        and trademarks acquired in a purchase business combination which are determined
        to have an indefinite useful life are not amortized. We believe our business
        model enables us to leverage our brand management, marketing, and licensing
        expertise, costs and professionals across our three operating verticals,
        increasing the value of each brand. We evaluate the estimated lives of our
        identifiable intangible assets at each reporting period.
 
 RECENT
        ACCOUNTING PRONOUNCMENTS
 
 In
        June
        2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for
        Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
        Accounting for Income Taxes.”  FIN 48 establishes that the financial
        statement effects of a tax position taken or expected to be taken in a tax
        return are to be recognized in the financial statements when it is more likely
        than not, based on the technical merits, that the position will be sustained
        upon examination.   It also provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure, and transition.  FIN 48 is effective for fiscal years
        beginning after December 15, 2006, and is required to be adopted by the
        Company in the first quarter of fiscal 2007.   We are currently
        assessing the impact that this standard will have on our consolidated results
        of
        operations, financial position, or cash flows.
  In
        September 2006, Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the
        Effects of Prior Year Misstatements when Quantifying Misstatements in Current
        Year Financial Statements,” was issued. SAB 108 expresses the staff’s view
        regarding the process of quantifying financial statement misstatements. The
        interpretation provides guidance on the consideration of the effects of prior
        year misstatements in quantifying current year misstatements for the purpose
        of
        a materiality assessment. The cumulative effects of the initial application
        should be reported in the carrying amounts of assets and liabilities as of
        the
        beginning of that fiscal year, and the offsetting adjustment should be made
        to
        the opening balance of the retained earnings for that year. The disclosures
        should include the nature and amount of each individual error being corrected
        in
        the cumulative adjustment, when and how each error being corrected arose
        and the
        fact that the errors had previously been considered immaterial. The guidance
        of
        SAB 108 is effective for fiscal years beginning after November 15, 2006.
        SAB 108
        has not had an impact on our financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
        applies to any other accounting pronouncements that require or permit fair
        value
        measurements.  SFAS No. 157 provides a common definition of fair value as
        the price that would be received to sell an asset or paid to transfer a
        liability in a transaction between market participants. The new standard
        also
        provides guidance on the methods used to measure fair value and requires
        expanded disclosures related to fair value measurements.  SFAS No. 157 is
        effective for financial statements issued for fiscal years beginning after
        November 15, 2007.  We are currently assessing the impact that this
        standard will have on our consolidated results of operations, financial
        position, or cash flows. ****
 
 RESULTS
        OF CONTINUING OPERATIONS
 
 *Loss
        From Continuing Operations*
 
 Loss
        from
        continuing operations of $5.2 million in 2006 increased $1.7 million, or
        47% in
        2006 from a loss of $3.6 million in 2005. The increase in the amount of the
        loss
        primarily reflects increases in selling, general and administrative costs
        and
        stock based compensation following the acquisition of UCC and increased
        restructuring charges related to the relocation of our headquarters from
        Baltimore, Maryland to New York City, partially offset by $1.9 million of
        royalty and franchise revenues and increases in interest income and other
        income. As discussed above, we recorded revenue for only seven weeks of 2006
        (after the November 7, 2006 acquisition of The Athlete’s Foot), while we
        incurred expenses for the entire year and also incurred expenses associated
        with
        the process of transitioning to a new senior management team (following the
        completion of the UCC acquisition).
  Loss
        from
        continuing operations of $3.6 million in 2005 decreased $21.1 million, or
        86% in
        2005 from a loss of $24.6 million in 2004. The reduction in the amount of
        the
        loss primarily reflects decreased operating costs in 2005 following the sale
        of
        our EMS, Transportation and Mobile Government businesses in 2004, interest
        expense from subordinated notes of $7.9 million in 2004, an investment loss
        of
        $3.6 million in 2004, and a loss on the early extinguishment of the subordinated
        notes of $2.4 million in 2004.
  25
 *Royalty
        and Franchise Fee Revenue*
 
 The
        Company began recognizing royalty and franchise fee revenues following the
        acquisition of The Athlete’s Foot in November 2006, and we recognized $1.9
        million through the end of the fiscal year. Royalty revenues are recorded
        as they are earned and become receivable from franchisees. Franchise
        fee revenue is recognized when all initial services are performed, which is
        considered to be upon the opening of the applicable franchisee store.
 
 As
        discussed above, all revenues from the MBS and the mobile and wireless
        communications businesses have been reclassified to discontinued operations
        and
        are included in profit (loss) from discontinued operations.
 
 *Total
        Operating Expenses*
 
 Operating
        expenses of $10.4 million in 2006 increased $5.2 million, or 99% in 2006
        from
        $5.2 million in 2005. The increase primarily reflects an increase in selling,
        general and administrative costs and stock based compensation following the
        acquisition of UCC, and increased restructuring charges related to the
        relocation of our headquarters from Baltimore, Maryland to New York City
        and the
        transition of our senior management team.
 
 Operating
        expenses of $5.2 million in 2005 decreased $9.4 million, or 64% in 2005 from
        $14.6 million in 2004. The reduction primarily reflects decreased operating
        costs in 2005 following the sale of our EMS, Transportation and Mobile
        Government businesses in 2004 as we reduced our expenses consistent with
        the
        lower cost MBS business we were operating at the time.
 
 Operating
        expenses that are reclassed to discontinued operations were those directly
        attributable to businesses that have been sold. All other costs are corporate
        expenses that would have been incurred regardless of our business operations,
        and therefore remain included as part of continuing operations.
 
 *Selling,
        General and Administrative Expenses*
 
 Selling,
        general and administrative (“SG&A”) expenses consist primarily of
        compensation and personnel related costs, rent, facility related support
        costs,
        travel and advertising.
 
 SG&A
        expenses increased $2.5 million, or 70%, to $6.1 million in 2006 from $3.6
        million in 2005. The increase primarily reflects additional costs resulting
        from
        our acquisitions of UCC and The Athlete’s Foot. Excluding these acquisitions,
        SG&A expenses would have decreased $0.8 million. The primary drivers of the
        increase relate to personnel related costs at UCC and The Athlete’s Foot which
        were not owned in 2005. The personnel hired through the UCC acquisition comprise
        our new executive and management team, and the majority of our corporate
        staff.
 
 SG&A
        expenses decreased $4.4 million, or 55%, to $3.6 million in 2005 from $8.0
        million in 2004. The decline reflects primarily the results of streamlining
        our
        corporate infrastructure to align it with the needs of our former MBS business
        following the sale of our mobile and wireless data businesses. Of the decrease,
        approximately $2.5 million was related to personnel reductions.
 
 *Professional
        Fees*
 
 Professional
        fees of $1,149,000, $1,444,000 and $2,808,000 in 2006, 2005 and 2004,
        respectively, consist of the costs of outside professionals, primarily related
        to **** legal
        expense associated with our public reporting, disposition, compliance and
        corporate finance activities and accounting fees related to auditing and
        tax
        services.
 
 *Depreciation
        and Amortization*
 
 Depreciation
        expenses arise from property and equipment purchased for use in our operations.
        Amortization costs arise from intangible assets acquired in acquisitions.
 
 Depreciation
        and amortization increased $312,000, or 196%, to $471,000 in 2006 from $159,000
        in 2005. The increase primarily reflects the revision of estimated useful
        lives
        and the resulting accelerated depreciation of assets that were located in
        our
        Baltimore headquarters and were taken out of service with the closing of
        that
        office, amortization of an intangible asset related to a non-compete agreement
        with our chief executive officer, and amortization of intangibles of franchise
        agreements and master development agreements related to The Athlete’s Foot
        acquisition.




26


Depreciation
        and amortization decreased $2.1 million, or 93%, to $159, 000 in 2005 from
        $2.2
        million in 2004. The decrease reflects primarily the impact of our transition
        from our mobile and wireless data businesses to our MBS business (including
        the
        associated streamlining of our corporate infrastructure). This included
        disposing of fixed assets that were no longer needed to support our continuing
        operations.
 
 *Stock
        Compensation Expense*
 
 We
        adopted SFAS No. 123R, “Share-Based Payment” in the first quarter of 2006. At
        that time we began to recognize compensation expense over the service period
        for
        the fair value of all equity based award grants issued after January 1, 2006,
        as
        well as expense attributable to the remaining service period for all prior
        grants that had not fully vested by that date.
 
 Stock
        compensation expense of $1.6 million in 2006 reflects the adoption of SFAS
        No.
        123R, and the granting of 5,366,000 options and warrants to purchase shares
        upon
        their becoming exercisable. These options and warrants were issued to provide
        long-term incentive packages to new key executives and other senior managers
        that we hired in 2006, including individuals who were employed by UCC and
        The
        Athlete’s Foot prior to their acquisition by us. Stock compensation expense of
        $76,000 and $594,000 in 2005 and 2004, respectively, represents the cost
        associated with the grants of restricted stock and decreased approximately
        $518,000 from 2004 to 2005. The decreases result primarily from the reduction
        of
        our work force and the vesting of restricted stock grants. In 2004 and 2005,
        stock compensation expense was recorded using the intrinsic-value-based method. See Note 2 to Consolidated Financial
        Statements.
 
 *Interest
        Income*
 
 Interest
        income increased $1.1 million or 78% to $2.6 million in 2006 from $1.5 million
        in 2005. Interest income decreased $2.5 million or 63% to $1.5 million in
        2005
        from $4.0 million in 2004. The higher amounts in 2006 and 2004 reflect interest
        received on higher cash balances invested in securities other than MBS. These
        were primarily investments in U.S. government securities with maturities
        of less
        than 12 months. In 2005, substantially all available cash was invested in
        MBS
        and related securities. The interest income (net of interest expense and
        amortization of premiums) from such investments (approximately $3.6 million)
        was
        originally reported as revenue from our MBS business and is now included
        in
        results of discontinued operations. Total interest income in 2006, including
        the
        net amount earned on MBS investments, was $6.2 million.
 
 *Interest
        Expense on Subordinated Notes*
 
 In
        October 2004, we redeemed all of our outstanding 6% convertible subordinated
        notes. Prior to that time, we incurred interest expense on these subordinated
        notes which decreased by $2.5 million from 2003 to 2004 because of the
        redemption of the subordinated notes in October 2004. No further interest
        expense was incurred after the redemption of the notes. When we redeemed
        all of
        our then-outstanding 6% convertible subordinated notes at a price of 101.2%
        (in
        accordance with the terms of those notes), we realized a $2.4 million loss,
        which consisted of a $1.9 million premium on the redemption and the recognition
        of approximately $560,000 in unamortized deferred financing costs. The early
        retirement of the debt resulted in a savings of $4.3 million in interest
        expense
        on the notes that we would have been required to pay through their maturity
        in
        March 2005.
 
 *Other
        Income (Expense)*
 
 Other
        income of $700,000 in 2006 primarily reflects $525,000 of payments received
        from
        a venture capital investment, which we wrote-off in 2002. We record these
        payments when we receive them as the extent of future payments, if any, cannot
        be readily determined. We also recorded $148,000 of loan servicing revenue
        received by UCC in 2006. We expect the loan servicing activity to decrease
        in
        2007 and beyond as the underlying loans are paid-off.
 
 Other
        income in 2005 of $231,000 primarily represents income from the sale of fully
        depreciated fixed assets (such as computer equipment and furniture) that
        were
        taken out of service during our restructuring efforts associated with the
        transition to our MBS business. In September 2005, we received a royalty
        payment
        of $49,000 relating to a prior investment in a company that we acquired in
        2004.
 
 Other
        expense for 2004 was approximately $60,000, primarily attributable to the
        cost
        of a litigation settlement.
 
 *Investment
        Loss*
 
 Investment
        loss was $19,000 in 2005 reflected losses realized upon the sale of all of
        the
        remaining long-term investments **** we
        had in
        2005 that were **** not
        related to our MBS portfolio. The investment loss in 2004 consisted of a
        $5.4
        million loss on the liquidation of our investments available for sale consisting
        of highly liquid U.S. Government Agency-sponsored securities. The loss was
        partially offset by a gain of $1.8 million relating to the sale of other
        investments.
  27
  *Income
        Taxes*




We
        recorded a current income tax expense in 2006 of $81,000. As discussed in *Note
        8 to Consolidated Financial Statements,* we are
        required to record a deferred tax liability with respect to acquired intangible
        assets (principally The Athlete’s Foot trademark) that are amortized for tax
        purposes over a definite life but not amortized under GAAP because they are
        classified as indefinite-life assets. Under GAAP we are not able to offset
        this
        liability in our financial statements with a portion of the deferred tax
        asset
        created by our accumulated net tax loss carry forwards until such time as
        we
        have satisfied GAAP requirements that there be objective evidence of our
        ability
        to generate sustainable profitability from our operations. As we have a history
        of losses, we have not satisfied this requirement at December 31, 2006. Even
        if
        we are able to report net income in 2007 and beyond, we may not satisfy this
        accounting requirement over the next several quarters (and perhaps longer).
        As a
        result, we are likely to continue to record a deferred tax expense in our
        statement of operations for at least a portion of 2007. This income tax expense
        is not a cash expense, but is a GAAP requirement to record. We are able to
        use
        our accumulated net tax loss carry forwards in preparing our tax returns
        to
        reduce our current cash tax obligations. When we are permitted, under GAAP,
        to
        offset the deferred tax liability against the deferred tax asset resulting
        from
        our accumulated tax loss carry forwards, we will do so.
  As
          discussed in *Item
          1* . *Business* under
          the caption “Tax Loss Carry Forwards,” our net tax loss carry forwards will not
          offset all state, local and foreign tax liabilities, and we also will remain
          subject to alternative minimum taxes, as discussed in *Item
          1A. Risk Factors* under
          the caption “Risks of Our Tax Loss Carry Forwards -- We expect to be subject in
          the alternative minimum tax and our net loss carry forwards would not offset
          this tax in its entirety.” Our state, local and foreign tax position is
          discussed in *Note
          8 to Consolidated Financial Statements* ,
          and the
          $81,000 expense for 2006 reflects the net amount of current state, local
          and
          foreign taxes payable. Our continuing operations were not subject to any
          alternative minimum tax in 2006. Our net loss from discontinued operations
          included a net tax expense of $64,000 in 2006, as compared to $0 in 2005
          and
          $75,000 in 2004. This was attributable to the application of the alternative
          minimum tax. If our continuing operations generate taxable income in the
          future,
          we expect to record current tax liabilities for state, local, foreign and
          federal alternative minimum taxes, as our net tax loss carry forwards will
          not
          offset such tax liabilities in their entirety. We cannot yet estimate the
          effective tax rate that would result from these taxes, though we expect
          them to
          result in a modest overall effective tax rate.




*Discontinued
      Operations*





The
      following discrete events impact the comparability of discontinued operations
      from year to year:





·
            During
                2006, the Company exited the MBS business. The Company recognized
                a gain
                in the fourth quarter of 2006 of approximately $755,000 related to
                the
                sale of its remaining MBS investments.





·
            Management
                determined that unrealized losses in the MBS portfolio at December
                31,
                2005 should be considered “other than temporary” impairments under
                Statement of Accounting Standards 115 and were charged against operating
                results as of that date. During the fourth quarter of 2005, the Company
                recognized the unrealized loss of approximately $2.1 million and
                wrote-off
                the unamortized premium of $1.9 million for the total other than
                temporary
                impairment charge of approximately 4.0 million. Prior to that time,
                management had considered such unrealized losses as not “other than
                temporary” and had recorded such losses in “Other Comprehensive Losses” on
                the Company’s balance sheet.





·
            In
                2004, we sold our mobile and wireless data businesses, which were
                organized into three operating segments. In January 2004, we sold our
                EMS segment for $18.0 million in cash and a $1.0 million note (which
                was
                paid in full in August 2004). In September 2004 we sold our
                Transportation and Mobile Government businesses for $25.0 million
                in cash
                and $10.0 million in cash, respectively.





·
            During
                the second quarter of 2004, we reassessed the value of the Transportation
                and Mobile Government goodwill and recorded impairment charges related
                to
                goodwill of $12.2 million and $8.9 million, respectively. These
                impairments are reflected in discontinued operations.





·
            During
                2004, we reassessed the value of the Transportation and Mobile Government
                intangibles and other long-lived assets and recorded non-cash impairment
                charges related to Transportation intangibles and other assets of
                $3.1
                million and $11.3 million, respectively and reported as discontinued
                operations.





FINANCIAL
      CONDITION





During
      2006, our total assets decreased by $108 million, while our total liabilities
      decreased by $128 million.  These changes reflect principally the sale of
      our MBS investments and the repayment of all borrowings pursuant to short-term
      repurchase agreements that were incurred to purchase MBS.  At December 31,
      2005, our MBS portfolio totaled $253.9 million (net of the charges discussed
      above under the heading “Introduction”), and our short-term, MBS-related
      borrowings totaled $133.9 million. We sold all of our MBS for cash during 2006
      and used a substantial portion of the proceeds to repay all of the outstanding
      short-term borrowings, and to fund a portion of the purchase price of The
      Athlete’s Foot and our operating costs. We had no outstanding borrowings at
      December 31, 2006. The balance of the proceeds from the sale of our MBS is
      held
      as cash and cash equivalents and is invested as discussed below in Item 7A
      Quantitative and Qualitative Disclosures About Market Risk. Our cash balance
      also increased by approximately $7.9 million as a result of the expiration
      of a
      letter of credit that had been collateralized by a cash deposit (which was
      released at the time of expiration). That cash collateral had been reflected
      on
      our balance sheet as “restricted cash” at December 31, 2005.





The
      other
      additional significant change in our balance sheet at December 31, 2006 as
      compared to December 31, 2005 is the addition of $64.6 million of trademarks
      and
      goodwill resulting from the UCC and The Athlete’s Foot acquisitions.





*Liquidity
      and Capital Resources*





Liquidity
      refers to our ability to meet financial obligations that arise during the normal
      course of business. Sources of liquidity can include cash generated by
      operations, available borrowings, and proceeds from the sale of securities
      or
      assets. Our operations have not been profitable historically, and thus they
      have
      consumed, rather than generated, cash. One of our key objectives is to achieve
      profitability in our IP business, so that our operations will enhance our
      liquidity and increase the amount of cash we have available for investment
      in
      the growth and development of our business.





Our
      business model does not involve significant capital asset investment (other
      than
      planned acquisitions of IP assets and IP-centric businesses.) Accordingly,
      we do
      not expect to be required to fund any material capital expenditures outside
      of
      our core IP acquisition program.


28


Although
      we had more than $83 million of cash on hand at December 31, 2006, we concluded
      that securing an additional source of liquidity was important to ensure our
      continued ability to fund acquisitions and the expansion of our business.
      Accordingly, on March 12, 2007 we entered into a new $150 million bank credit
      facility, the terms of which are discussed below. We believe that the
      combination of cash on hand and available borrowings under this new credit
      facility will provide us with sufficient liquidity to meet current operations
      and planned business growth for at least the next twelve months.





Additional
      sources of liquidity, if needed, may be available through additional bank
      borrowings and market sales or private placements of debt or equity securities.
      We cannot assure that any such additional borrowings or sales of securities
      will
      be available to us (should they be needed in the future) on favorable terms
      and
      conditions or at all. Such sources of additional liquidity are subject to many
      risks and uncertainties that are not within our control, such as changes in
      the
      condition of the capital markets and prevailing bank loan terms, as well as
      the
      trading price of our common stock. See *Item
      1A. Risk Factors* under
      the captions “Risk of Our Current Business -- The
      market price of our common stock has been, and may continue to be, volatile,
      which could reduce the market price of our common stock and, among other things,
      make it more expensive for us to complete acquisitions using our stock as
      consideration” and “Risks
      of
      Our Acquisition Strategy -- Our
      ability to grow through the acquisition of additional IP assets and business
      will depend on the availability of capital to complete acquisitions ”
for
      a
      discussion of risks relating to our ability to fund additional
      acquisitions.





On
      March
      12, 2007, NexCen Acquisition Corp. (“the Issuer”) entered into a master loan
      agreement with BTMU Capital Corporation. This master loan agreement provides
      for
      borrowings pursuant to the issuance of a single class of notes to the Issuer
      and
      its wholly-owned subsidiaries (“Co-Issuers”) which are jointly and severally
      liable for payments required under the notes. The assets of the Issuers and
      Co-Issuers are pledged as collateral security under each Note, and secure the
      obligations of the Issuer and all Co-Issuers under all of the notes. The notes
      are non-recourse to the Company. The pledged assets are those of the Issuer
      and
      Co-Issuers (mainly IP assets and the related royalties). Each note is repayable
      in full after five years. The facility has no expiration date and can be
      terminated by the Co-Issuers upon 30 days notice and by BTMU Capital Corportaion
      by electing not to fund future advances, however, each note funding maintains
      its respective maturity date. The maximum aggregate amount of borrowings that
      may be outstanding at any one time under the agreement is $150 million. The
      borrowing rate is LIBOR plus an interest rate margin, which ranges from 1.50%
      to
      3.00%. The Company may refinance all or part of the notes with no pre-payment
      penalties. This allows us to refresh available borrowing capacity under the
      facility, such as by completing securitization transactions involving certain
      of
      our acquired IP assets and using the proceeds from these transactions to repay
      notes under the master loan agreement. The borrowing rate is based on 3-month
      LIBOR which is a floating rate. The LIBOR rate resets every 90
      days.




The
      following table reflects use of net cash for operations, investing, and
      financing activities:





**(IN
                THOUSANDS)**
            
            **2006**
            
            **2005**
            
            **2004**Net
                cash (used in) provided by operating activities
            
            $
            (890
            )
            $
            2,128
            
            $
            (17,623
            )Net
                cash provided by (used in) investing activities
            
            
            210,274
            
            
            (195,907
            )
            
            202,278Net
                cash (used in) provided by financing activities
            
            
            (126,940
            )
            
            134,148
            
            
            (150,154
            )Net
                increase (decrease) in cash and cash equivalents
            
            $
            82,444
            
            $
            (59,631
            )
            $
            34,501





Net
      cash
      used in operating activities was $890,000 in 2006, compared to net cash provided
      by operating activities of $2.1 million and used in operating activities of
      $17.6 million for 2005 and 2004, respectively. Historically, our operations
      have
      not been profitable. In 2005, due to a substantial reduction in operating
      expenses, the operating activities from our MBS business provided net cash
      in
      2005. As discussed above under the heading “Introduction,” our IP business did
      not generate any royalty and franchise fee revenue until November 2006, when
      we
      acquired The Athlete’s Foot. However, we incurred operating expenses throughout
      all of 2006, as we transitioned our of the MBS business and into our IP
      business.





Net
      cash
      provided by investing activities was $210 million in 2006, primarily reflecting
      $254 million of MBS sales and principal repayments, partially offset by $43.2
      million of cash used in the acquisitions of UCC and The Athlete’s Foot. Cash
      used in investing activities of $196 million for 2005, primarily related to
      $387
      million used to purchase MBS, partially offset by $85 million of principal
      repayments on our MBS and proceeds from the sale of $107 million of MBS. Net
      cash provided by investing activities was $202 million for 2004, consisting
      primarily of a net amount of $219 million from the purchase and sale of
      investments (primarily United States Government Agency-sponsored securities).
      Additionally, we used $64 million to purchase MBS and received approximately
      $19
      million, $23.0 million, and $9.0 million from the sale of our EMS,
      Transportation and Mobile Government businesses, respectively, net of
      transaction expenses, and received $2.4 million in net proceeds from the sale
      of
      other investments.




29




Net
      cash
      used in financing activities in 2006 of $127 million primarily reflects the
      repayment of short-term repurchase agreements that were used to fund MBS
      investments. Net cash provided by financing activities in 2005 of $134 million
      which primarily related to the funding we received through repurchase agreements
      to purchase MBS. Net cash used in financing activities of $150 million for
      2004,
      consisting primarily of $157 million used to redeem the remaining outstanding
      6%
      convertible subordinated notes. We also received approximately $4.6 million
      of
      cash upon the release of collateral relating to certain letters of credit that
      expired in 2004.





Our
      financial condition may also be affected by claims relating to the mobile and
      wireless data businesses that we sold during 2004. Under the definitive purchase
      agreements that we signed to affect those sales, we have agreed to indemnify
      the
      buyers of those businesses for certain breaches of representations and
      warranties and other covenants that we provided to them with respect to the
      sales of the businesses. In addition, we remain liable for the operation of
      each
      of the business segments prior to their dispositions. In addition, as discussed
      in *Note
      13 to Consolidated Financial Statements* ,
      we have
      resolved one dispute with Geologic, the buyer of our Transportation business,
      and have been notified by Geologic of additional significant potential indemnity
      claims against us. This lawsuit also is discussed above in *Item
      3. Legal Proceedings* .
      We have
      not received any indemnity claims from the buyers of our other two mobile and
      wireless data businesses, and most of the indemnification provisions relating
      to
      the sale of our EMS business have now expired. Most of the indemnification
      provisions relating to the other two businesses will continue through the first
      quarter of 2007.








*Contractual
      Obligations*





The
      following table reflects our contractual commitments, including our future
      minimum lease payments as of December 31, 2006:


Payments
                due by periodContractual
                Obligations
            
            
            
            Less
                than
            
            1-3
            
            3-5
            
            More
                than($
                in thousands)
            
            Total
            
            1
                year
            
            years
            
            years
            
            5
                yearsLong-Term
                Debt
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Capital
                Lease Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                Leases
            
            
            8,718
            
            
            502
            
            
            1,735
            
            
            1,739
            
            
            4,742Purchase
                Obligations
            
            
            58,600
            
            
            58,600
            
            
            -
            
            
            -
            
            
            -Other
                Long-Term Liabilities Reflected on the
              Registrants
                Balance Sheet under GAAP
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            67,318
            
            $
            59,102
            
            $
            1,735
            
            $
            1,739
            
            $
            4,742








The
      operating lease obligations reflect real estate leases in New York City,
      Norcross, Georgia, and Marlborough, Massachusetts (which we sub-lease). The
      purchase obligation reflects the Company’s $54.6 million agreement related to
      the Bill Blass acquisition, which occurred on February 15, 2007, and the
      estimated $4.0 million contingent consideration related to The
      Athlete’s Foot acquisition. We have not included contracts for maintenance
      support on hardware or software that we own because we generally pay in advance
      for these services and have the option of choosing whether or not to renew
      these
      services each year. We also have not included in this table potential contingent
      liability that we may have to the buyers of our EMS, Transportation or Mobile
      Government businesses, under the terms of the purchase agreements with the
      buyers and we cannot readily estimate the potential amount of liabilities that
      might arise in the future, if any.





Obligations
      under our new master loan agreement, which we entered into and began to borrow
      under in March 2007, will be included as “Long-Term Debt” in the future.





*Off
      Balance Sheet Arrangements*





Other
      than the BIO-Key lease, we do not have any off-balance sheet
      arrangements.





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





The
      following discussion about our market risk disclosures involves forward-looking
      statements. Actual results could differ materially from those projected in
      these
      forward-looking statements.





At
      December 31, 2006, we had no outstanding borrowings or other debt. We invest
      our
      cash and cash equivalents in investment funds which normally conform to the
      following investment strategies; investing at least 80% of assets in U.S.
      Government securities and repurchase agreements for those securities, investing
      in U.S. Government securities issued by entities that are chartered or sponsored
      by Congress but whose securities are neither issued nor guaranteed by the U.S.
      Treasury, maintaining a dollar-weighted average maturity at sixty days or less.
      These investments are generally subject to the risks of changes in market
      interest rates and the impact of any declines in the credit quality of an issuer
      or a provider of credit support. A 10% change in interest rates would not
      materially impact the returns on our excess cash balances. In general, the
      Company accepts a slightly lower rate of interest on its investments in exchange
      for a higher credit rating from the issuer or the guarantor of the securities
      in
      which the Company invests. Our primary objective in investing cash balances
      is
      to preserve principal and maintain liquidity, rather than to seek enhanced
      investment returns.




30




Under
      the
      new bank credit agreement, we are subject to interest rate risk from the
      fluctuation in LIBOR rates. At the request of our bank, we are obligated to
      hedge the interest rate exposure on a certain portion of our outstanding loans.





The
      Athlete’s Foot has franchisees located in countries that transact business in
      currencies other than the U.S. dollar. The foreign currency is translated into
      U.S dollars to determine the amount of royalties due to the Company. Because
      the
      franchisees are located in forty countries, the currency risk to the Company
      is
      well diversified and the risk of any single currency to the Company is
      low.





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





TABLE
      OF
      CONTENTS





The
      following financial statements required by this item are included in the Report
      beginning on page 32.





Report
                of Management on Internal Control over Financial Reporting
            32Reports
                of Independent Registered Public Accounting Firm
            33Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            35Consolidated
                Statements of Operations and Comprehensive Loss
              for
                the years ended December 31, 2004, 2005, and 2006
            36Consolidated
                Statements of Stockholders’ Equity for the
              years
                ended December 31, 2006, 2005 and 2004
            37Consolidated
                Statements of Cash Flows for the years
              ended
                December 31, 2006, 2005 and 2004
            38Notes
                to Consolidated Financial Statements
            39




31




**Report
      of Management on Internal Control over Financial
      Reporting**





The
      Board
      of Directors and Stockholders


NexCen
      Brands, Inc.





We
      are
      responsible for establishing and maintaining adequate internal control over
      financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
      for
      NexCen Brands, Inc. (the “Company”). We conducted an evaluation of the
      effectiveness of our internal control over financial reporting as of December
      31, 2006 based on the framework in *Internal
      Control-Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (the
      “COSO Framework”). As noted in the COSO Framework, an internal control system,
      no matter how well conceived and operated, can provide only reasonable and
      not
      absolute assurance to management and the Board of Directors regarding
      achievement of an entity’s financial reporting objectives. Management’s
      evaluation of the effectiveness of our internal control over financial reporting
      as of December 31, 2006, excluded The Athlete’s Foot, which was acquired by the
      Company on November 7, 2006. The Athlete’s Foot consolidated assets and
      consolidated revenues comprised 2% and 100%, respectively, of the consolidated
      financial statements of the Company for the year ended December 31, 2006. Based
      our evaluation under the COSO Framework, we concluded that the Company’s
      internal control over financial reporting was effective as of December 31,
      2006. KPMG LLP, an independent registered accounting firm, has audited
      management’s assessment of the effectiveness of the Company’s internal control
      over financial reporting at December 31, 2006.








/s/
                Robert W. D’Loren*President
                and Chief Executive Officer*/s/
                David B. Meister*Senior
                Vice President and Chief Financial Officer**(Principal
                Financial and Accounting Officer)*New
                York, New YorkMarch
                16, 2007




32




Report
        of Independent Registered Public Accounting Firm
 
 The
        Board
        of Directors and Stockholders
 NexCen
        Brands, Inc.:
 
 We
        have
        audited management's assessment, included in the accompanying *Report
        of Management on Internal Control over Financial Reporting,* that
        NexCen Brands, Inc. and subsidiaries (the Company) maintained effective internal
        control over financial reporting as of December 31, 2006, based on criteria
        established in *Internal Control—Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission (COSO).* The
        Company's management is responsible for maintaining effective internal control
        over financial reporting and for its assessment of the effectiveness of internal
        control over financial reporting. Our responsibility is to express an opinion
        on
        management's assessment and an opinion on the effectiveness of the Company’s
        internal control over financial reporting based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management's assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinion.
 
 A
        company's internal control over financial reporting is a process designed
        to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company's internal control
        over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company’s
        assets that could have a material effect on the financial statements.
 
 Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
 
 In
        our
        opinion, management's assessment that the Company maintained effective internal
        control over financial reporting as of December 31, 2006, is fairly stated,
        in
        all material respects, based on criteria established in Internal
        Control *—Integrated
        Framework issued by the Committee of Sponsoring Organizations of the Treadway
        Commission (COSO).* Also,
        in
        our opinion, the Company maintained, in all material respects, effective
        internal control over financial reporting as of December 31, 2006, based
        on criteria
        established in *Internal Control—Integrated Framework issued by the Committee* *of
        Sponsoring Organizations of the Treadway Commission (COSO)* *.*
 
 The
        Company acquired Athlete’s Foot Brands, LLC (TAF) during 2006, and management
        excluded from its assessment of the effectiveness of the Company’s internal
        control over financial reporting as of December 31, 2006, TAF’s internal control
        over financial reporting associated with total assets of approximately $2.8
        million, which excludes the goodwill and intangible assets recorded in the
        acquisition, and total revenues of approximately $1.9 million included in
        the
        consolidated financial statements of NexCen Brands, Inc. and subsidiaries
        as of
        and for the year ended December 31, 2006.  Our
        audit
        of internal control over financial reporting of the Company also excluded
        an
        evaluation of the internal control over financial reporting of TAF.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheets of NexCen
        Brands, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related
        consolidated statements of operations and comprehensive loss, stockholders’
equity, and cash flows for each of the years in the three-year period ended
        December 31, 2006, and our report dated March 16, 2007 expressed an unqualified
        opinion on those consolidate financial statements.






KPMG
                LLPBaltimore,
                MarylandMarch
                16, 2007




33




Report
        of Independent Registered Public Accounting Firm
  The
        Board
        of Directors and Stockholders
 NexCen
        Brands, Inc.:
 
 We
        have
        audited the accompanying consolidated balance sheets of NexCen Brands, Inc.
        and
        subsidiaries (the Company) as of December 31, 2006 and 2005, and the related
        consolidated statements of operations and comprehensive loss, stockholders’
equity, and cash flows for each of the years in the three-year period ended
        December 31, 2006. These consolidated financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these consolidated financial statements based on our
        audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of NexCen Brands, Inc. and
        subsidiaries as of December 31, 2006 and 2005, and the results of its their
        operations and their cash flows for each of the years in the three-year period
        ended December 31, 2006, in conformity with U.S. generally accepted accounting
        principles.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company’s internal
        control over financial reporting as of December 31, 2006, based on criteria
        established in *Internal
        Control—Integrated Framework issued by the Committee of Sponsoring Organizations
        of the Treadway Commission (COSO),* and our
        report dated March 16, 2007 expressed an unqualified opinion on management’s
        assessment of, and the effective operation of, internal control over financial
        reporting. The Company acquired Athlete’s Foot Brands, LLC (TAF) during 2006,
        and management excluded from its assessment of the effectiveness of the
        Company’s internal control over financial reporting as of December 31, 2006,
        TAF’s internal control over financial reporting associated with total assets
        of
        approximately $2.8 million, which excludes the goodwill and intangible assets
        recorded in the acquisition, and total revenues of approximately $1.9 million
        included in the consolidated financial statements of NexCen Brands, Inc.
        and
        subsidiaries as of and for the year ended December 31, 2006. Our audit of
        internal control over financial reporting of the Company also excluded an
        evaluation of the internal control over financial reporting of TAF.


KPMG
                LLPBaltimore,
                MarylandMarch
                16, 2007




34




**NEXCEN
      BRANDS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


(IN
      THOUSANDS, EXCEPT SHARE DATA)





**DECEMBER 31,****2006**
            
            **2005**ASSETSCash
                and cash equivalents
            
            $
            83,536
            
            $
            1,092Mortgage-backed
                securities, at fair value - discontinued operations
            
            
            —
            
            
            253,900Trade
                receivables, net of allowances of $530 and $0
            
            
            2,042
            
            
            —Interest
                receivable
            
            
            511
            
            
            1,174Prepaid
                expenses and other current assets
            
            
            2,210
            
            
            954Total
                current assets
            
            
            88,299
            
            
            257,120Property
                and equipment, net
            
            
            389
            
            
            255Restricted
                cash
            
            
            1,298
            
            
            8,633Trademarks
                and goodwill
            
            
            64,607
            
            
            —Intangible
                assets, net of amortization
            
            
            3,792
            
            
            —Total
                Assets
            
            $
            158,385
            
            $
            266,008LIABILITIES
                AND STOCKHOLDERS’ EQUITYAccounts
                payable and accrued expenses
            
            $
            3,235
            
            $
            2,797Repurchase
                agreements and sales tax liabilities - discontinued
                operations
            
            
            1,333
            
            
            135,592Restructuring
                accruals
            
            
            145
            
            
            —Other
                current liabilities
            
            
            4,524
            
            
            175Total
                current liabilities
            
            
            9,237
            
            
            138,564Other
                liabilities, long term
            
            
            2,535
            
            
            1,057Total
                liabilities
            
            
            11,772
            
            
            139,621Commitments
                and ContingenciesStockholders’
                equity:Preferred
                stock, $0.01 par value; 1,000,000 shares
              authorized;0
                shares issued and outstanding
              atDecember 31,2006
                and 2005, respectively
            
            
            —
            
            
            —Common
                stock, $0.01 par value; 1,000,000,000 shares
              authorized;
                47,966,085 and 44,018,946 shares issuedand
              outstanding
                at December 31, 2006 and 2005, respectively
            
            
            481
            
            
            440Additional
                paid-in capital
            
            
            2,615,742
            
            
            2,593,085Treasury
                stock
            
            
            (352
            )
            
            —Accumulated
                deficit
            
            
            (2,469,258
            )
            
            (2,467,138
            )Unrealized
                loss on investments available for sale
            
            
            —
            
            
            —Total
                stockholders’ equity
            
            
            146,613
            
            
            126,387Total
                liabilities and stockholders’ equity
            
            $
            158,385
            
            $
            266,008





See
      accompanying notes to consolidated financial statements.




35




**NEXCEN
      BRANDS, INC.**


CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(IN
      THOUSANDS, EXCEPT PER SHARE DATA)





**YEAR
                ENDED DECEMBER 31,****2006**
            
            **2005**
            
            **2004**Royalty
                revenues
            
            $
            1,175
            
            $
            —
            
            $
            —Franchise
                fee revenues
            
            
            749
            
            
            —
            
            
            —Total
                revenues
            
            
            1,924
            
            
            —
            
            
            —Operating
                expenses:Selling,
                general and administrative expenses
            
            
            (6,082
            )
            
            (3,569
            )
            
            (7,975
            )Professional
                fees
            
            
            (1,149
            )
            
            (1,444
            )
            
            (2,808
            )Depreciation
                and amortization
            
            
            (471
            )
            
            (159
            )
            
            (2,212
            )Stock
                based compensation
            
            
            (1,632
            )
            
            (76
            )
            
            (594
            )Restructuring
                charges
            
            
            (1,079
            )
            
            7
            
            
            (1,054
            )Total
                operating expenses
            
            
            (10,413
            )
            
            (5,241
            )
            
            (14,643
            )Operating
                loss
            
            
            (8,489
            )
            
            (5,241
            )
            
            (14,643
            )Non-operating
                income (expense)Interest
                income
            
            
            2,637
            
            
            1,478
            
            
            3,955Interest
                expense from subordinated notes
            
            
            —
            
            
            —
            
            
            (7,917
            )Other
                income (expense)
            
            
            700
            
            
            231
            
            
            (60
            )Loss
                on early extinguishment of subordinated notes
            
            
            —
            
            
            —
            
            
            (2,419
            )Investment
                loss, net
            
            
            —
            
            
            (19
            )
            
            (3,559
            )Total
                non-operating income (expense)
            
            
            3,337
            
            
            1,690
            
            
            (10,000
            )Loss
                from continuing operations before income taxes
            
            
            (5,152
            )
            
            (3,551
            )
            
            (24,643
            )Income
                taxes
            
            
            (81
            )
            
            —
            
            
            —Loss
                from continuing operations
            
            
            (5,233
            )
            
            (3,551
            )
            
            (24,643
            )Discontinued
                operations:Income
                (loss) from discontinued operations,
              net
                of tax expense of $64 for 2006 and $75 for 2004
            
            
            2,358
            
            
            225
            
            
            (44,510
            )Gain
                (loss) on sale of discontinued operations
            
            
            755
            
            
            (1,194
            )
            
            20,825Net
                loss
            
            
            (2,120
            )
            
            (4,520
            )
            
            (48,328
            )Other
                comprehensive income (loss):Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            (3,830
            )Unrealized
                holding gain on investments available for sale
            
            
            —
            
            
            —
            
            
            67Comprehensive
                loss
            
            $
            (2,120
            )
            $
            (4,520
            )
            $
            (52,091
            )Loss
                per share (basic and diluted) from continuing operations
            
            $
            (0.11
            )
            $
            (0.08
            )
            $
            (0.57
            )Income
                (loss) per share (basic and diluted) from
              discontinued
                operations
            
            
            0.07
            
            
            (0.02
            )
            
            (0.54
            )Net
                loss per share - basic and diluted
            
            $
            (0.04
            )
            $
            (0.10
            )
            $
            (1.11
            )Weighted
                average shares outstanding -basic and diluted
            
            
            45,636
            
            
            44,006
            
            
            43,713





See
      accompanying notes to consolidated financial statements.




36




**NEXCEN
      BRANDS, INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


(IN
      THOUSANDS)





**FOREIGN**
            
            **UNREALIZED****ADDITIONAL**
            
            **ACCUM-**
            
            
            
            **CURRENCY**
            
            **GAIN****PREFERRED**
            
            **COMMON**
            
            **PAID-IN**
            
            **ULATED**
            
            **TREASURY**
            
            **TRANSLATION**
            
            **(LOSS)
                ON****STOCK**
            
            **STOCK**
            
            **CAPITAL**
            
            **DEFICIT**
            
            **STOCK**
            
            **ADJUSTMENT**
            
            **INVESTMENT**
            
            **TOTAL**Balance
                at
              December
                31, 2003
            
            $
            -
            
            $
            429
            
            $
            2,589,608
            
            $
            (2,414,283
            )
            $
            -
            
            $
            3,830
            
            $
            (283
            )
            $
            179,301Exercise
                of options
              and
                warrants
            
            
            -
            
            
            11
            
            
            1,952
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,963Option
                and warrant expense
            
            
            -
            
            
            -
            
            
            1,417
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,417Unrealized
                gain on
              investments
              available
                for sale
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            67
            
            
            67Foreign
                currency translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,830
            )
            
            -
            
            
            (3,830
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (48,328
            )
            
            -
            
            
            
            
            
            -
            
            
            (48,328
            )Balance
                at
              December
                31, 2004
            
            $
            -
            
            $
            440
            
            $
            2,592,977
            
            $
            (2,462,611
            )
            $
            -
            
            $
            -
            
            $
            (216
            )
            $
            130,590Exercise
                of
              options
                and warrants
            
            
            -
            
            
            -
            
            
            32
            
            
            (7
            )
            
            -
            
            
            -
            
            
            -
            
            
            25Option
                and
              warrant
                expense
            
            
            -
            
            
            -
            
            
            76
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            76Unrealized
                gain on
              investments
                available
              for
                sale
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            216
            
            
            216Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,520
            )
            
            -
            
            
            -
            
            
            -
            
            
            (4,520
            )Balance
                at
              December
                31, 2005
            
            $
            -
            
            $
            440
            
            $
            2,593,085
            
            $
            (2,467,138
            )
            $
            -
            
            $
            -
            
            $
            -
            
            $
            126,387Exercise
                of options
              and
                warrants
            
            
            -
            
            
            -
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1Option
                and
              warrant
                expense
            
            
            -
            
            
            -
            
            
            3,177
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,177Common
                stock
              issued
            
            
            -
            
            
            41
            
            
            19,479
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            19,520Common
                stock
              repurchased
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (352
            )
            
            -
            
            
            -
            
            
            (352
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,120
            )
            
            -
            
            
            -
            
            
            -
            
            
            (2,120
            )Balance
                at
              December
                31, 2006
            
            $
            -
            
            $
            481
            
            $
            2,615,742
            
            $
            (2,469,258
            )
            $
            (352
            )
            $
            -
            
            $
            -
            
            $
            146,613





See
      accompanying notes to consolidated financial statements.




37




**NEXCEN
      BRANDS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(IN
      THOUSANDS)





**2006**
            
            **2005**
            
            **2004****Revised**
            
            **Revised**Cash
                flows from operating activities:Net
                loss from continuing operations
            
            $
            (5,233
            )
            $
            (3,551
            )
            $
            (24,643
            )Adjustments
                to reconcile net loss from
              continuing
                operations to net cash (used in)
              provided
                by operating activities:Depreciation
                and amortization
            
            
            471
            
            
            159
            
            
            2,212Amortization
                of loan fees
            
            
            —
            
            
            —
            
            
            840Amortization
                of mortgage premiums
            
            
            —
            
            
            670
            
            
            22Stock
                based compensation
            
            
            1,632
            
            
            76
            
            
            594Gain
                on disposal of assets
            
            
            —
            
            
            —
            
            
            (80
            )Realized
                losses on long term investments
            
            
            —
            
            
            19
            
            
            3,559Loss
                on early extinguishment of subordinated notes
            
            
            —
            
            
            —
            
            
            2,419Changes
                in assets and liabilities, net of
              acquired
                assets and liabilities:(Increase)
                in trade receivables, net of allowances
            
            
            (791
            )
            
            —
            
            
            —(Increase)
                decrease in prepaid expenses
              and
                other assets
            
            
            (1,096
            )
            
            3,112
            
            
            (513
            )Decrease
                (increase) in interest receivable
            
            
            663
            
            
            (818
            )
            
            1,211(Decrease)
                increase in accounts payable, accrued
              expenses,accrued
                employee compensation and
              benefits
                and accrued interestpayable
            
            
            (249
            )
            
            903
            
            
            (4,128
            )Increase
                (decrease) in restructuring accruals
              and
                other liabilities
            
            
            314
            
            
            (1,202
            )
            
            836Cash
                provided by discontinued
              operationsfor
                operating activities
            
            
            3,399
            
            
            2,760
            
            
            48Net
                cash (used in) provided by operating activities
            
            
            (890
            )
            
            2,128
            
            
            (17,623
            )Cash
                flows from investing activities:Sales
                and maturities of investments available for sale
            
            
            —
            
            
            45
            
            
            1,171,641Purchases
                of investments available for sale
            
            
            —
            
            
            —
            
            
            (952,791
            )Purchases
                of property and equipment
            
            
            (151
            )
            
            (47
            )
            
            (331
            )Proceeds
                from the sale of property and equipment
            
            
            —
            
            
            —
            
            
            93Sale
                of long-term investments
            
            
            —
            
            
            —
            
            
            2,396Acquisitions,
                net of cash acquired
            
            
            (43,189
            )
            
            —
            
            
            —Cash
                provided by (used in) discontinued
              operations
                in investing activities
            
            
            253,614
            
            
            (195,905
            )
            
            (18,730
            )Net
                cash (used in) provided by investing activities
            
            
            210,274
            
            
            (195,907
            )
            
            202,278Cash
                flows from financing activities:Repayment
                of notes payable including redemption
              of
                convertible debt
            
            
            —
            
            
            —
            
            
            (156,771
            )(Increase)
                decrease in restricted cash
            
            
            7,335
            
            
            199
            
            
            4,628Exercise
                of options and warrants
            
            
            1
            
            
            25
            
            
            1,989Purchase
                of treasury stock
            
            
            (352
            )
            
            —
            
            
            —Cash
                (used in) provided by discontinued operations in financing
                activities
            
            
            (133,924
            )
            
            133,924
            
            
            —Net
                cash (used in) provided by financing activities
            
            
            (126,940
            )
            
            134,148
            
            
            (150,154
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            82,444
            
            
            (59,631
            )
            
            34,501Cash
                and cash equivalents, at beginning of period
            
            
            1,092
            
            
            60,723
            
            
            26,222Cash
                and cash equivalents, at end of period
            
            $
            83,536
            
            $
            1,092
            
            $
            60,723Supplemental
                disclosure of cash flow information:Cash
                paid during the year for interest
            
            $
            1,403
            
            $
            5,387
            
            $
            9,500





Supplemental
      disclosure of non-cash investing and financing activities:





In
      June
      2006 and in connection with the acquisition of a business, the Company issued
      2.5 million shares of common stock, 440,000 warrants and options to acquire
      106,236 shares of common stock with an aggregate fair value of approximately
      $11
      million. In November 2006 and in connection with the acquisition of a business,
      the Company issued 1.4 million shares of common stock, and 500,000 warrants
      with
      an aggregate fair value of approximately $9.8 million.





In
      2004,
      the Company incurred unrealized holding gains (losses) associated with its
      investments available for sale totaling $67,000. These amounts have been
      reported as increases (decreases) in stockholders’ equity. See accompanying
      notes to Consolidated Financial Statements.





See
      accompanying notes to consolidated financial statements




38




**NEXCEN
      BRANDS, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**(1)**  **ORGANIZATION,
      DESCRIPTION OF THE BUSINESS, AND BASIS OF PRESENTATION**





NexCen
      engages in the acquisition and management of established consumer brands in
      intellectual property-centric industries. NexCen’s goal is to be the world
      leader in brand management for the 21st century. Our business is focused on
      acquiring, managing and developing intellectual property, which we refer to
      as
      IP, and IP-centric businesses. IP that we have acquired and expect to acquire
      in
      the future includes trademarks, trade names, copyrights, franchise rights,
      patents, trade secrets, know-how and other similar, valuable property, primarily
      used in the retail and consumer branded products and franchise businesses.
      In
      building our IP business, we expect to focus on three vertical segments: retail
      franchising, consumer branded products and quick service restaurant franchising
      (which we refer to as “QSR” franchising).




We
      commenced our IP business in June 2006, when we acquired UCC Capital
      Corporation, which we refer to as UCC. In November 2006, we entered the retail
      franchising business by acquiring Athletes Foot Brands, LLC, an affiliated
      company and certain related assets. As a result of this acquisition, we are
      now
      the owner of The Athlete’s Foot â brand
      and related marks. The Athlete’s Foot is an athletic footwear and apparel
      franchisor with 600 retail locations in over 40 countries.




In
      February 2007, we entered the consumer branded products business by acquiring
      Bill Blass Holding Co., Inc. and two affiliated businesses. The Bill Blass
      label
      represents timeless style and is an American legacy brand in the fashion
      industry.




In
      February 2007, we acquired MaggieMoo’s International, LLC (“MaggieMoo’s”) and
      the assets of Marble Slab Creamery, Inc. (“Marble Slab”), two well known and
      established brands within the hand-mixed premium ice cream category. These
      acquisitions mark NexCen’s entry into the QSR franchising sector. We are
      actively in discussions to acquire additional IP-centric
      businesses.




On
      March
      13, 2007 we signed a definitive agreement to acquire the Waverly brand from
      F.
      Schumacher & Co. for $36.75 million in cash and a warrant to purchase
      50,000 common shares (to be priced at issuance). Waverly is a home
      décorlifestyle brand for harmonious and tasteful decorating. We expect
      to close this transaction by the end of April 2007, and intend to finance 50%
      of
      the purchase price with borrowings under the new credit facility entered into
      on
      March 12, 2007.





At
      December 31, 2006, we had only one operating segment - our intellectual property
      business. As we continue to acquire IP businesses, we expect to have three
      segments in the future including: retail franchising, consumer brand products,
      and quick service restaurants.




Our
      operating strategy is to generate revenue from licensing and other commercial
      arrangements with third parties who want to use the IP that we acquire. These
      third parties will pay us licensing and other contractual fees and royalties
      for
      the right to use our IP on either an exclusive or non-exclusive basis. Our
      contractual arrangements may apply to a specific product market, a specific
      geographic market or to multiple markets.




We
      expect
      that licensing and other contractual fees paid to us will include a mixture
      of
      upfront payments, required periodic minimum payments (regardless of sales
      volumes), and volume-dependent periodic royalties (based upon the number or
      dollar amount of branded products and services sold). Accordingly, we expect
      that our revenues will reflect both recurring and non-recurring payment
      streams.




**(2)
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RELATED TO CONTINUING
      OPERATIONS**





The
      following accounting principles have been used by management in the preparation
      of the Company’s Consolidated Financial Statements in accordance with U.S.
      generally accepted accounting principles:





(a)
      PRINCIPLES OF CONSOLIDATION





The
      Consolidated Financial Statements include the accounts of the Company and its
      majority-owned subsidiaries. All significant intercompany transactions and
      balances have been eliminated in consolidation.





(b)
      CASH
      AND CASH EQUIVALENTS




39




Cash
      equivalents include all highly liquid investments purchased with original
      maturities of three months or less. Cash and cash equivalents consisted of
      the
      following:





**(in
                thousands)**
            
            **DECEMBER 31,**
              **2006**
            
            **DECEMBER 31,**
              **2005**Cash
            
            $
            10,694
            
            $
            832Money
                market accounts
            
            
            72,842
            
            
            222U.S.
                Government Agency-sponsored securities
            
            
            —
            
            
            38Total
            
            $
            83,536
            
            $
            1,092





(c)
      PROPERTY AND EQUIPMENT





Property
      and equipment are stated at cost. Depreciation is calculated using the
      straight-line method over the estimated useful lives of the assets, which range
      from three to seven years. The costs of leasehold improvements are capitalized
      and amortized using the straight-line method over the shorter of the lease
      term
      or the estimated useful life of the asset.





In
      accordance with SFAS No. 144 “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,”
      long-lived assets, such as property, plant, and equipment are reviewed for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. Recoverability of assets
      to
      be held and used is measured by a comparison of the carrying amount of an asset
      to estimated undiscounted future cash flows expected to be generated by the
      asset. If the carrying amount of an asset exceeds its estimated future cash
      flows, an impairment charge is recognized by the amount by which the carrying
      amount of the asset exceeds the fair value of the asset. Assets to be disposed
      of would be separately presented on the balance sheet and reported at the lower
      of the carrying amount or fair value less costs to sell, and are no longer
      depreciated. The assets and liabilities of a disposed group classified as held
      for sale would be presented separately in the appropriate asset and liability
      sections of the balance sheet.





(d)
      INCOME TAXES





The
      Company recognizes income taxes using the asset and liability method, in
      accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      Under
      the asset and liability method, deferred tax assets and liabilities are
      recognized for the future tax consequences attributable to differences between
      the financial statement carrying amounts of existing assets and liabilities
      and
      their respective tax bases. Deferred tax assets and liabilities are measured
      using enacted tax rates expected to apply to taxable income in the years in
      which those temporary differences are expected to be recovered or settled.
      The
      effect of a tax rate change on deferred tax assets and liabilities is recognized
      as income in the period that includes the enactment date. In assessing the
      likelihood of realization of deferred tax assets, the Company considers whether
      it is more likely than not that some portion or all of the deferred tax assets
      will not be realized. The ultimate realization of deferred tax assets is
      dependent upon the generation of future taxable income during periods in which
      these temporary differences become deductible.





(e)
      STOCK
      OPTIONS AND WARRANTS





Prior
      to
      January 1, 2006, the Company accounted for equity-based employee compensation
      arrangements in accordance with the provisions of Accounting Principle Board
      Opinion No. 25, “ *Accounting
      for Stock Issued to Employees* ,”
(“APB
      No. 25”) and related interpretations including FIN 44 “ *Accounting
      for Certain Transactions Involving Stock Compensation* .”
Under
      APB No. 25, compensation expense was based upon the difference, if any, on
      the
      date of grant, between the fair value of the Company’s stock and the exercise
      price referred to as the intrinsic-value-based method. Statement of Financial
      Accounting Standards No. 123, “ *Accounting
      for Stock Based Compensation”* (“SFAS
      No. 123”) established accounting and disclosure requirements using a
      fair-value-based method of accounting for stock-based employee compensation
      plans. As was allowed by SFAS No. 123, the Company had elected to apply the
      intrinsic-value-based method of accounting described above, and had adopted
      only
      the disclosure requirements of SFAS No. 123 and Statement of Financial
      Accounting Standards No. 148, “ *Accounting
      for Stock-based Compensation Transition and Disclosure.* ”





As
      of
      January 1, 2006 the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “ *Share-Based
      Payments* ”
(“SFAS
      No. 123R”). SFAS No. 123R requires that new share-based payments, such as grants
      of stock options, restricted shares, warrants, and stock appreciation rights,
      be
      measured at fair value and reported as expense in a company’s financial
      statements over the requisite service period. For existing share-based payment
      awards granted prior to January 1, 2006, the Company has recognized, in current
      earnings, compensation expense over the remaining service period, if any, based
      on the grant date fair value of those awards as calculated for disclosure under
      SFAS No. 123. However, in accordance with SFAS No. 123R, the Company no longer
      recognizes forfeitures as they occur, rather, forfeitures are estimated in
      calculating the fair value of each award.




40


The
      following table illustrates the effect on net loss from continuing operations
      if
      the fair-value method had been applied to all outstanding and unvested awards
      in
      each of the years ended December 31, 2005, and 2004:




**(in
                thousands)**
            
            **2005**
            
            **2004**Net
                loss from continuing operations, as reported
            
            $
            (3,551
            )
            $
            (24,643
            )Add
                stock-based employee compensation expense
              included
                in reported net loss
            
            
            76
            
            
            594Deduct
                total stock-based employee compensation expense
              determined
                under fair-value method for all awards
            
            
            (526
            )
            
            (1,568
            )Pro
                forma net loss from continuing operations
            
            $
            (4,001
            )
            $
            (25,617
            )Pro
                forma net loss per share from continuing operations
            
            $
            (0.09
            )
            $
            (0.59
            )Weighted
                average basic shares outstanding
            
            
            44,006
            
            
            43,713




See
        Note
        10, Stock Options and Warrants, for the assumptions used to calculate the
        stock
        compensation expense under the fair-value method shown above.




(f)
      EARNINGS PER SHARE





The
      Company computes net income (loss) per share in accordance with SFAS No. 128,
      “ *Earnings
      Per Share* .”
Under
      the provisions of SFAS No. 128, basic net income (loss) per share is computed
      by
      dividing net income (loss) for the period by the weighted average number of
      common shares outstanding during the period. Diluted net income (loss) per
      share
      is computed by dividing the net income (loss) for the period by the weighted
      average number of common and dilutive common equivalent shares outstanding
      during the period. As the Company has had a net loss in each of the periods
      presented, basic and diluted net loss per share are the same. Options and
      warrants to purchase 7.2 million, 1.9 million and 2.1 million shares of the
      Company’s common stock during 2006, 2005, and 2004, respectively, have been
      excluded from the calculation of diluted net loss per share because their
      inclusion would be anti-dilutive.





(g)
      USE
      OF ESTIMATES





The
      preparation of consolidated financial statements in conformity with U.S.
      generally accepted accounting principles requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the dates of the consolidated
      financial statements and the reported amounts of income and expenses during
      the
      reporting period. Actual results could differ from those estimates. Estimates
      are used in accounting for, among other things, valuation of goodwill and
      intangible assets and estimated useful lives of identifiable intangible assets,
      guarantees, depreciation, restructuring accruals, valuation of deferred tax
      assets and contingencies. Estimates and assumptions are reviewed periodically
      and the effects of revisions are reflected in the consolidated financial
      statements in the period they are determined to be necessary.





(h)
      RECLASSIFICATIONS





Certain
      fiscal year 2005 and 2004 amounts have been reclassified to conform to the
      current year presentation. None of these reclassifications had a material effect
      on the Company’s Consolidated Financial Statements.





(i)
      REVISED CASH FLOWS





For
      the
      years ended December 31, 2006, 2005, and 2004, the Company has separately
      disclosed the operating, investing and financing portions of the cash flows
      attributed to its discontinued operations, which in prior periods were reported
      on a combined basis as a single amount.





(j)
      RECENT ACCOUNTING PRONOUNCEMENTS





In
      June
      2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
      Accounting for Income Taxes.”  FIN 48 establishes that the financial
      statement effects of a tax position taken or expected to be taken in a tax
      return are to be recognized in the financial statements when it is more likely
      than not, based on the technical merits, that the position will be sustained
      upon examination.   It also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition.  FIN 48 is effective for fiscal years
      beginning after December 15, 2006, and is required to be adopted by the
      Company in the first quarter of fiscal 2007.   We are currently
      assessing the impact that this standard will have on our consolidated results
      of
      operations, financial position, or cash flows.




41





In
      September 2006, Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the
      Effects of Prior Year Misstatements when Quantifying Misstatements in Current
      Year Financial Statements,” was issued. SAB 108 expresses the staff’s view
      regarding the process of quantifying financial statement misstatements. The
      interpretation provides guidance on the consideration of the effects of prior
      year misstatements in quantifying current year misstatements for the purpose
      of
      a materiality assessment. The cumulative effects of the initial application
      should be reported in the carrying amounts of assets and liabilities as of
      the
      beginning of that fiscal year, and the offsetting adjustment should be made
      to
      the opening balance of the retained earnings for that year. The disclosures
      should include the nature and amount of each individual error being corrected
      in
      the cumulative adjustment, when and how each error being corrected arose and
      the
      fact that the errors had previously been considered immaterial. The guidance
      of
      SAB 108 is effective for fiscal years beginning after November 15, 2006. SAB
      108
      has not had an impact on the Company’s financial statements.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
      applies to any other accounting pronouncements that require or permit fair
      value
      measurements.  SFAS No. 157 provides a common definition of fair value as
      the price that would be received to sell an asset or paid to transfer a
      liability in a transaction between market participants.  The new standard
      also provides guidance on the methods used to measure fair value and requires
      expanded disclosures related to fair value measurements.  SFAS No. 157 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007.  We are currently assessing the impact that this
      standard will have on our consolidated results of operations, financial
      position, or cash flows. ****





(k)
      REVENUE RECOGNITION





Royalties
      from franchise operations are recorded as franchise revenues as the fees are
      earned and become receivable from franchisees. Franchise fee income is
      recognized when all initial required services are performed, which is considered
      to be upon the opening of the franchisee’s store.





(l)
      GOODWILL, TRADEMARKS, AND INTANGIBLE ASSETS





Goodwill
      represents the excess of costs over the fair value of assets related to the
      UCC
      and The Athlete’s Foot acquisitions, and trademarks represents the value of
      future royalty income associated with the ownership of The Athlete’s Foot
      trademark. Identifiable intangible assets include the value of non-compete
      agreements of key executives, and franchise agreements and master development
      agreements of The Athlete’s Foot, and are amortized on a straight-line basis
      over five and twenty years, respectively. Goodwill and trademarks acquired
      in a
      purchase business combination are determined to have an indefinite useful life
      are not amortized, but instead tested for impairment at least annually in
      accordance with the provisions of SFAS No. 142, “ *Goodwill
      and Other Intangible Assets* .”
At
      each reporting period, we assess The Athletes Foot trademark to determine if
      facts and circumstances changed, requiring a re-evaluation of the estimated
      life
      of the trademarks. SFAS No. 142 also requires that intangible assets
      with estimable useful lives be amortized over their respective estimated useful
      lives to their estimated residual values, and reviewed for impairment in
      accordance with SFAS No. 144.





(m)
      FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The
      carrying amounts of the Company’s financial instruments, which included cash
      equivalents, restricted cash, accounts receivable, accounts payable, and accrued
      expenses, approximate their fair value due to the relatively short duration
      of
      the instruments.





(n)
      TRADE
      RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS





Trade
      receivables at The Athlete’s Foot consist of amounts the Company expects to
      collect from franchisees for royalties and franchise fees, net of allowance
      for
      doubtful accounts of $530,000 as of December 31, 2006. The Company provides
      a reserve for uncollectible amounts based on its assessment of individual
      accounts. Trade receivables are not collateralized. Cash flows related to trade
      receivable activity are classified as increases or decreases in trade
      receivables on the consolidated statement of cash flows.





**(3)
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RELATED TO DISCONTINUED
      OPERATIONS**





The
      following additional accounting principles have been used by management in
      the
      preparation of the Company’s Consolidated Financial Statements and relate
      principally to the Company’s discontinued operations:





(a)
      INVESTMENTS AVAILABLE FOR SALE INCLUDING MORTGAGE-BACKED SECURITIES
      (“MBS”)




42




Investments
      available-for-sale consisted of highly liquid investments in U.S. Government
      Agency-sponsored mortgaged-backed securities with original maturities greater
      than one year.





The
      Company invested in MBS representing interests in or obligations backed by
      pools
      of mortgage loans. Acquisitions of MBS were recorded on the trade date.
      Purchases of newly issued MBS were recorded when all significant uncertainties
      regarding the characteristics of the securities were removed. Realized gains
      and
      losses on sales of MBS were determined on the specific identification
      basis.





(b)
      REPURCHASE AGREEMENTS





The
      Company financed the acquisition of its MBS through the use of repurchase
      agreements with the MBS serving as collateral. Generally, the Company’s
      borrowings were fixed rate repurchase agreements with original maturities of
      28
      days.





(c)
      FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The
      carrying amounts of the Company’s financial instruments, which included cash
      equivalents, restricted cash, accounts receivable, accounts payable, and accrued
      expenses, approximate their fair value due to the relatively short duration
      of
      the instruments.





(d)
      OTHER
      COMPREHENSIVE INCOME (LOSS)





For
      the
      year ended December 31, 2004, other comprehensive income (loss) consists of
      unrealized gains (losses) on investments available for sale and MBS; and foreign
      currency translation adjustments. For 2004, the Company’s foreign currency
      translation loss was recognized through the sale of the foreign operations.
      During 2005, the Company determined that the impairments on the MBS portfolio
      were “other than temporary” and the losses were recognized in
      earnings.




**(4)
      PROPERTY AND EQUIPMENT**





Property
      and equipment consists of the following:




43




**ESTIMATED**
              **USEFUL**
            
            
            **DECEMBER 31,****(in
                thousands)**
            
            
            **LIVES**
            
            
            **2006**
            
            
            **2005**Furniture
                and fixtures
            
            
            7
                - 10 Years
            
            $
            206
            
            $
            31Computer
                and equipment
            
            
            3
                - 5 Years
            
            
            126
            
            
            35Software
            
            
            3
                Years
            
            
            112
            
            
            62Leasehold
                improvements
            
            
            Term
                of Lease
            
            
            393
            
            
            303Total
                property and equipment
            
            
            
            
            $
            837
            
            $
            431Less
                accumulated depreciation
            
            
            
            
            
            (448
            )
            
            (176
            )Property
                and equipment net of
              accumulateddepreciation
            
            
            
            
            $
            389
            
            $
            255





Depreciation
      expense of property and equipment was $272,000, $159,000 and $2.2 million for
      2006, 2005 and 2004, respectively. The Company recognizes rent expense on a
      straight-line basis over the lease period based upon the aggregate lease
      payments over the lease period. The lease period is determined as the original
      lease term without renewals, unless and until the exercise of lease renewal
      options is reasonably assured, and also includes any period provided by the
      landlord as a “free rent” period. Aggregate lease payments include all rental
      payments specified in the contract, including contractual rent increases.





**(5)
      ACCOUNTS PAYABLE AND ACCRUED EXPENSES**





Accounts
      payable and accrued expenses consist of the following:





**DECEMBER 31,****(in
                thousands)**
            
            **2006**
            
            **2005**Professional
                fees
            
            $
            2,681
            
            $
            762Taxes
                other than payroll and income
            
            
            116
            
            
            112Escrow
                account
            
            
            40
            
            
            1,000Other
            
            
            398
            
            
            923Accounts
                payable and accrued expenses
            
            $
            3,235
            
            $
            2,797








**(6)
      RESTRUCTURING CHARGES**





After
      the
      acquisition of UCC, the Company relocated its principal corporate office from
      Baltimore, Maryland to New York City. As a result, certain reductions in
      staffing occurred in 2006. Upon termination of employment, the Baltimore
      employees became eligible for separation benefits, including severance payments.
      Restructuring charges in prior years related to separation agreements of
      subsidiaries are classified as discontinued operations.




44




A
      rollforward of the restructuring accrual is as follows:





**(in
                thousands)**
            
            **Employee**
              **Separation**
              **Benefits**
            
            **Facility**
              **Closure**
              **Costs
                and**
              **Other**
            
            **Total****2005
                Restructuring:**Restructuring
                liability as of December 31, 2004
            
            $
            68
            
            $
            191
            
            $
            259Adjustments
            
            
            —
            
            
            (7
            )
            
            (7
            )Cash
                payments
            
            
            (68
            )
            
            (184
            )
            
            (252
            )Restructuring
                liability as of December 31, 2005
            
            
            —
            
            
            —
            
            
            —**2006
                Restructuring:**Charges
                to continuing operations
            
            
            895
            
            
            —
            
            
            895Cash
                payments and other
            
            
            (750
            )
            
            —
            
            
            (750
            )Restructuring
                liability as of December 31, 2006
            
            $
            145
            
            $
            —
            
            $
            145





**(7)
      DEBT**





The
      Company had no debt or repurchase agreements at December 31, 2006.





The
      Company financed the acquisition of its MBS through the use of repurchase
      agreements with the MBS serving as collateral. At December 31, 2005, all of
      the
      Company’s borrowings were fixed rate repurchase agreements with original
      maturities of 28 days. The following table provides selected information on
      the
      Company’s repurchase agreements at December 31, 2005.





**(Dollars
                in thousands)**
            
            **Amount**
            
            **Weighted**
              **average
                rate**CounterpartyDaiwa
                Securities of America
            
            $
            37,867
            
            
            4.35
            %Countrywide
                Securities Corporation
            
            
            33,823
            
            
            4.35
            %UBS
                Financial Services, Inc.
            
            
            62,234
            
            
            4.34
            %Total
            
            $
            133,924
            
            
            4.35
            %





On
      October 4, 2004, the Company repurchased the remainder of its outstanding
      6% subordinated notes due March 2005 for a price of 101.2%. The total
      repurchase payment was $157.1 million, consisting of $154.9 million in
      principal, a $1.9 million redemption premium and approximately $310,000 in
      accrued interest. In connection with the repurchase, the Company recorded a
      $2.4
      million charge which is presented in the Consolidated Statements of Operations
      and Comprehensive Loss as “Loss on early extinguishment of subordinated notes.”
The charge consisted of the $1.9 million redemption premium and a non-cash
      charge of approximately $560,000 related to the recognition of unamortized
      deferred financing costs.





**(8)
      INCOME TAXES**





The
      components of income tax expense from continuing operations for the calendar
      years ended December 31 are as follows:





**(in
                thousands)**
            
            **2006**
            
            **2005**
            
            **2004****Federal**
            
            $
            196
            
            $
            -
            
            $
            -**State
                and Local**
            
            
            (152
            )
            
            -
            
            
            -**Foreign**
            
            
            37
            
            
            -
            
            
            -**Total
                income tax expense**
            
            $
            81
            
            $
            -
            
            $
            -**Current**
            
            $
            81
            
            $
            -
            
            $
            -**Deferred**
            
            
            -
            
            
            -
            
            
            -**Total
                Income Tax Expense**
            
            $
            81
            
            $
            -
            
            $
            -





45





A
      reconciliation of the difference between the effective income tax rate and
      the
      statutory federal income tax rate for continuing operations is as
      follows:





**2006**
            
            **2005**
            
            **2004**U.S.
                Statutory Federal Rate
            
            
            -35.00
            %
            
            -35.00
            %
            
            -35.00
            %Increase/(decrease)
                resulting from:State
                taxes, net of federal benefit
            
            
            -3.25
            %
            
            0
            %
            
            0
            %Changes
                in valuation allowance
            
            
            43.83
            %
            
            -136.40
            %
            
            27.90
            %Other
            
            
            -4.01
            %
            
            171.40
            %
            
            7.10
            %Effective
                Tax Rate
            
            
            1.57
            %
            
            0.00
            %
            
            0.00
            %





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts reflected for tax purposes. The following summarizes the significant
      components of the Company’s deferred tax assets and liabilities at December
      31:





**(in
                thousands)**
            
            **2006**
            
            **2005**Deferred
                Tax Assets:Net
                operating loss carryforwards
            
            $
            325,524
            
            $
            325,851Investments
            
            
            6,119
            
            
            7,796Capital
                loss carryforwards
            
            
            105,570
            
            
            120,892Tax
                credit carryforwards
            
            
            4,150
            
            
            4,150AMT
                Tax credit carryforwards
            
            
            63
            
            
            -Depreciation
                and amortization
            
            
            134
            
            
            40Stock-based
                compensation
            
            
            1,135
            
            
            -Other
            
            
            1,057
            
            
            1,366Gross
                Deferred Tax Asset
            
            $
            443,752
            
            $
            460,095Deferred
                Tax LiabilitiesAmortization
            
            $
            (782
            )
            $
            -Other
            
            
            -
            
            
            -Gross
                Deferred Tax Liability
            
            $
            (782
            )
            $
            -Valuation
                allowance
            
            $
            (443,188
            )
            $
            (460,095
            )Net
                Deferred Tax Asset/(Liability)
            
            $
            (218
            )
            $
            -





The
      deferred tax liability of $218,000 at December 31, 2006, is primarily the result
      of the difference in accounting for the Company’s Athlete’s Foot trademark,
      which is amortized over 15 years for tax purposes but not amortized for book
      purposes. This net deferred tax liability cannot be offset against the Company’s
      deferred tax assets under U.S. generally accepted accounting principles since
      it
      relates to an indefinite-lived asset and is not anticipated to reverse in the
      same period. The Company’s strategy to acquire intellectual property may result
      in assets being recorded as indefinite lived intangibles. In future periods,
      the
      Company may record additional net deferred tax liabilities that will result
      in
      deferred income tax expense being recorded in the Company’s statement of
      operations. As
      part
      of the UCC acquisition, the Company established a net state deferred tax
      liability which enabled the Company to benefit current year state net operating
      losses. This deferred tax benefit fully offset the deferred tax expense related
      to the indefinite-lived assets described above. As a result, the Company did
      not
      have deferred tax expense during 2006.





The
      valuation allowance for deferred tax assets decreased by $16.9 million and
      by
      $4.5 million in 2006 and 2005, respectively. During 2006, the Company’s deferred
      tax assets and related valuation allowance decreased primarily due to expiration
      of certain capital loss carryforwards. In assessing the realizability of
      deferred assets, management considers whether it is more likely than not that
      some portion or all of the deferred tax assets will not be realized for
      financial statement purposes. The ultimate realization of deferred tax assets
      is
      dependent upon the generation of future taxable income during the periods in
      which those temporary differences become deductible. Based upon the Company’s
      historical operating performance and the reported cumulative net losses to
      date, the
      Company presently does not have sufficient objective evidence to support the
      recovery of its deferred tax assets. Accordingly, the Company has provided
      a
      full valuation allowance for its net deferred tax assets as required by U.S.
      generally accepted accounting principles.




46




Approximately
      $361.7 million of the valuation allowance for deferred tax assets as of December
      31, 2006 will be allocated to “Income Tax Benefit” in the consolidated
      statements of operations and comprehensive loss upon realization. The remaining
      portion of the valuation allowance will be allocated to “Additional Paid-In
      Capital.”





At
      December 31, 2006, the Company has federal net operating loss carryforwards
      of approximately $777 million which expire at various dates between 2011 and
      2026. To the extent net operating loss carryforwards relate to stock-based
      compensation, the tax benefits will be credited to Additional paid-in capital
      when realized. The Company has capital loss carryforwards of approximately
      $251
      million which expire at various dates between 2007 and 2011. In addition, the
      Company has federal tax credit carryforwards of approximately $4.2 million
      which
      expire at various dates between 2020 and 2022. In the event of future changes
      in
      common stock ownership above a certain threshold, the future realization of
      net
      operating loss carryforwards, capital loss carryforwards and certain other
      tax
      credits would become subject to limitation under the Internal Revenue Code.
      Also, included in the amounts above are federal net operating losses acquired
      with the close of the UCC Capital merger. The utilization of UCC Capital
      acquired assets will be subject to certain annual limitations as required under
      Internal Revenue Code Section 382.





For
      Aether Systems, the historical operating entity, the Company recorded deferred
      tax assets using the federal and gross state statutory tax rate versus a state
      tax rate net of federal tax benefit. This method was adopted due to substantial
      accumulated operating and capital losses (Tax Attributes) generated under the
      Company’s historical business strategies and management’s belief that the
      Company may not generate sufficient future taxable income, apportioned to the
      State where the Tax Attributes were generated, to realize the federal tax
      benefit on the state income taxes. In June 2006, with the acquisition of UCC
      Capital, the Company commenced its new business strategy, acquiring, managing
      and developing intellectual property. At December 31, 2006, the Company has
      recorded deferred taxes related to IP acquisitions, which include The Athlete’s
      Foot and UCC Capital, using the federal statutory tax rate plus the state
      statutory tax rate, “net of federal tax benefit.” The historical Tax Attributes
      remaining from Aether Systems continue to be recorded using a gross state
      statutory tax rate.





**(9)
      BENEFIT PLANS**





The
      Company has a defined contribution plan under Section 401(k) of the
      Internal Revenue Code that provide for voluntary employee contributions of
      1 to
      15 percent of compensation for substantially all employees. The Company
      contributed the following amounts to the plans for the years ended
      December 31, 2004, 2005 and 2006, respectively:





**(in
                thousands)**
            
            **2006**
            
            **2005**
            
            **2004**Continuing
                operations
            
            $
            60
            
            $
            60
            
            $
            69Discontinued
                operations
            
            
            —
            
            
            —
            
            
            318Total
                employer contributions
            
            $
            60
            
            $
            60
            
            $
            387





As
      a
      result of the merger with UCC, the Company has a second defined contribution
      plan under Section 401(k); however, the Company did not contribute any
      amounts to the plan in 2006. The Company’s long term plan is to have one defined
      contribution plan under Section 401(k) for all of its entities.





**(10)
      STOCK OPTIONS AND WARRANTS**





In
      September 1999, the Company adopted the 1999 Equity Incentive Plan, as
      amended on September 2, 2005, (as amended, the “1999 Plan”). Under the 1999
      Plan, the Company had the ability to grant options and restricted stock for
      employees, directors, and service providers equaling up to 20% of the
      outstanding shares of common stock of the Company. Options under the 1999 Plan
      generally expire after ten years and normally vest over a period of up to four
      years. Options were granted at an exercise price equal to the fair value of
      the
      common stock on the grant date.




Effective
      December 15, 2000, the Company adopted the Acquisition Incentive Plan (the
“2000 Plan”) to provide options or direct grants to all employees (other than
      directors and officers of the Company and any eligible affiliates) and other
      service providers of the Company and its related companies, without shareholder
      approval.  Under the 2000 Plan, the Company had the ability to grant 1.9
      million options. Options were granted at an exercise price equal to the fair
      value of the common stock on the grant date.




47




Effective
      October 31, 2006, the Company adopted the 2006 Equity Incentive Plan (the “2006
      Plan”) to replace the 1999 Plan and the 2000 Plan. The Company’s stockholders
      approved the adoption of the 2006 Plan at the 2006 Annual Stockholders’ Meeting
      on October 31, 2006.  The 2006 Plan is now the sole plan for issuing
      stock-based compensation to eligible employees, directors and consultants.
      The
      1999 Plan and the 2000 Plans will remain in existence solely for the purpose
      of
      addressing the rights of holders of existing awards already granted under those
      plans prior to the adoption of the 2006 plan. No new awards will be granted
      under the 1999 Plan and the 2000 Plan. A total of 3.5 million shares of common
      stock are initially reserved for issuance under the 2006 Plan, which represented
      approximately 7.4% of NexCen’s outstanding shares at the time of adoption.
      Options under the 2006 Plan expire after ten years and are granted at an
      exercise price no less than the fair value of the common stock on the grant
      date.




Total
      stock-based compensation expense was $1,632,000, $76,000 and $594,000 for the
      twelve months ended December 31, 2006, 2005, and 2004, respectively. The Company
      had issued 43,225 shares of restricted stock in 2002 to certain employees.
      All
      shares of restricted stock granted in 2002 were fully vested by the end of
      first
      half of 2005. The costs of these restricted shares were included in stock-based
      compensation expense as of December 31, 2005. The Board of Directors authorized
      issuance of 250,000 shares of restricted stock to three of its senior officers
      during the first quarter of 2006, which were subsequently issued in the second
      quarter of 2006. Following this grant, 100,000 of these restricted shares vested
      on June 6, 2006 with a fair value of $410,000. The remaining 150,000 restricted
      shares have a three year vesting period that commenced on May 5, 2006. The
      holders of these restricted stock grants surrendered a total of 86,000 shares
      of
      common stock to us in satisfaction of their minimum withholding tax obligations
      arising from these grants. We recorded the shares surrendered to us as treasury
      stock. An additional 20,000 restricted shares were granted to non-officer
      employees in the second quarter of 2006, of which 15,000 vested in the fourth
      quarter of 2006, and 5,000 vested in the first quarter of 2007.





The
      total
      income tax benefit recognized in the income statement for stock-based
      compensation arrangements was $0 for the years ended December 31, 2006,
      2005, and 2004, respectively. There was no capitalized stock-based compensation
      cost incurred during the years ended December 31, 2006, 2005, and 2004.




The
      per
      share weighted-average value of options granted by the Company during 2006,
      2005
      and 2004 were $4.31, $3.30 and $3.60, respectively. The fair value of each
      stock
      option award is estimated on the date of grant using the Black-Scholes option
      pricing model. The amounts for each year were calculated based on an expected
      option life of five years and volatility of 70.0 percent for 2004, an expected
      option life of five years and volatility rates from 16.8 percent to 30.2 percent
      for 2005, and an expected option life of three to six years and volatility
      rates
      from 26.9 percent to 35.2 percent for 2006 **.** In
      addition, the calculations assumed risk-free interest rates from 2.80 percent
      to
      3.81 percent in 2004, 3.72 percent to 4.35 percent in 2005 and 4.59 percent
      to
      5.10 percent in 2006. Historically, the Company has never distributed dividends
      to its stockholders, therefore no expected dividend assumptions were factored
      into our fair value calculation.




Through
      December 31, 2006, the Company estimated expected terms of three to six years
      for all options. Due to the significant changes in the Company’s business over
      the past three years, the Company has elected to use the “simplified” method, as
      defined in the Securities and Exchange Commission’s Staff Accounting Bulletin
      No.107 (“SAB No. 107”), to estimate expected term for stock options granted
      after December 31, 2005. The simplified method allows companies to estimate
      an
      expected term by using the vesting term plus the original contractual term
      divided by two. The Company will discontinue the use of the simplified method
      for stock option grants no later than December 31, 2007 as required by SAB
      No.
      107. The Company used historical data to estimate volatility based on the
      expected term of the options and for stock option forfeitures. The Company
      used
      the five-year US Treasury daily yield curve rates for the risk-free interest
      rate.




A
      summary
      of stock options and restricted shares granted under the 2006 Plan, 1999 Plan,
      and the 2000 Plan for January 1, 2004 through December 31, 2006, warrants issued
      by the Company outside of such plans for January 1, 2004 through December 31,
      2006, and changes during each twelve month period is presented below:




48





2004
            
            2005
            
            2006(IN
                THOUSANDS, EXCEPT PER SHARE AMOUNTS)
            
            NUMBER
                OF SHARES
            
            WEIGHTED
                AVERAGE EXERCISE PRICE (PER SHARE)
            
            NUMBER
                OF SHARES
            
            WEIGHTED
                AVERAGE EXERCISE PRICE (PER SHARE)
            
            NUMBER
                OF SHARES
            
            WEIGHTED
                AVERAGE EXERCISE PRICE (PER SHARE)Outstanding
                at beginning of year
            
            
            5,112
            
            $
            8.25
            
            
            2,146
            
            $
            3.98
            
            
            1,949
            
            $
            3.52Granted
            
            
            127
            
            $
            3.60
            
            
            5
            
            $
            3.30
            
            
            5,366
            
            $
            4.31Exercised
            
            
            (1,035
            )
            $
            4.66
            
            
            (38
            )
            $
            0.49
            
            
            (120
            )
            $
            (0.10
            )Canceled
            
            
            (2,058
            )
            $
            16.02
            
            
            (164
            )
            $
            10.29
            
            
            (21
            )
            $
            (0.83
            )Outstanding
                at end of year
            
            
            2,146
            
            $
            3.98
            
            
            1,949
            
            $
            3.52
            
            
            7,174
            
            $
            4.17Exercisable
                at year-end
            
            
            1,689
            
            $
            4.19
            
            
            1,771
            
            $
            3.57
            
            
            2,616
            
            $
            3.57




The
      total
      number of options and warrants issued by the Company since January 1, 2004
      includes the following:




·
            Options
                to acquire approximately 3,375,000 shares of Company common stock
                and
                warrants to acquire 125,000 shares of Company common stock, which
                were
                issued to UCC employees on June 6, 2006 in connection with the acquisition
                of UCC.




·
            In
                connection with the acquisition of UCC, the Company compensated its
                financial advisor for the transaction, Jefferies & Company, Inc.,
                through the payment of a fee of $77,000 and the issuance of warrants
                exercisable through June 2009 to purchase 440,000 shares of Company
                common
                stock at an exercise price of $3.19 per
                share.




·
            On
                October 31, 2006 the compensation committee approved the issuance
                of
                175,000 non-qualified options to members of its Board of Directors.




·
            On
                November 7, 2006, in connection with the acquisition of The Athlete’s
                Foot, the Company issued warrants exercisable through November 7,
                2009 to
                purchase 500,000 shares of Company common stock at an exercise price
                of
                $6.49.




·
            The
                Company has granted options as part of its long-term incentive plan
                to
                employees hired following the Company’s relocation to New York.




The
      total
      intrinsic value of stock options exercised during the twelve months ended
      December 31, 2006 and 2005 was $529,000 and $110,000, respectively. Cash
      received during 2006 and 2005 from share options exercised under the share-based
      payment plans was $12,000 and $19,000, respectively.  Total shares
      exercised were 120,000 in 2006, of which 115,000 were related to restricted
      shares. These
      shares were not included in the calculation of the weighted average exercise
      price.




The
      table
      above includes warrants to purchase 870,416 shares of Company common stock
      granted prior to 2004. The total number of warrants outstanding at December
      31,
      2006 is 1,935,416.




A
      summary
      of the status of the shares
      issuable pursuant to options and restricted stock grants for each equity
      incentive plan, shares issuable under warrant grants made outside of the equity
      incentive plans and the aggregate shares issuable pursuant to options,
      restricted stock and warrantsas of December 31, 2006, and changes
      during the twelve months then ended is presented below:




Number
                of shares and warrants are in thousands2006
                Plan
            
            1999
                Plan
            
            2000
                Plan
            
            Warrants
            
            TotalNumber
                of Shares
            
            Weighted
                Average Grant Date Fair Value
            
            Number
                of Shares
            
            Weighted
                Average Grant Date Fair Value
            
            Number
                of Shares
            
            Weighted
                Average Grant Date Fair Value
            
            Number
                of Warrants
            
            Weighted
                Average Grant Date Fair Value
            
            Number
                of Shares & Warrants
            
            Weighted
                Average Grant Date Fair ValueJanuary
                1, 2006
            
            
            -
            
            $
            -
            
            
            178
            
            $
            1.93
            
            
            -
            
            $
            -
            
            
            -
            
            $
            -
            
            
            178
            
            $
            1.93Granted
            
            
            426
            
            
            2.19
            
            
            3,669
            
            
            1.36
            
            
            206
            
            
            2.99
            
            
            1,065
            
            
            1.31
            
            
            5,366
            
            
            1.48Vested
            
            
            -
            
            
            -
            
            
            (225
            )
            
            2.43
            
            
            (101
            )
            
            3.55
            
            
            (940
            )
            
            1.32
            
            
            (1,266
            )
            
            1.69Forfeited
            
            
            -
            
            
            -
            
            
            (3
            )
            
            0.99
            
            
            (18
            )
            
            3.27
            
            
            -
            
            
            -
            
            
            (21
            )
            
            2.92Expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -December
                31, 2006
            
            
            426
            
            $
            2.19
            
            
            3,619
            
            $
            1.32
            
            
            87
            
            $
            2.28
            
            
            125
            
            $
            1.20
            
            
            4,257
            
            $
            1.43




49




The
      total
      unrecognized compensation cost related to non-vested share-based compensation
      agreements granted under all stock option plans as of December 31, 2006, was
      $4,992,000. The cost is expected to be recognized over the weighted-average
      remaining period of approximately 2.4 years.




The
        following table includes information on fully vested stock options and stock
        options outstanding for each equity incentive plan as of December 31, 2006,
        and
        on fully vested warrants and warrants outstanding as of December 31,
        2006:


****
            
            **2006
                LT Plan**
            
            **1999 Plan**
            
            **2000 Plan**
            
            **Warrants**
            
            **Total******
            
            **Stock**
              **Options**
              **Outstanding**
            
            **Stock**
              **Options**
              **Currently**
              **Vested**
            
            **Stock**
              **Options**
              **Outstanding**
            
            ****
              **Stock**
              **Options**
              **Currently**
              **Vested**
            
            **Stock**
              **Options**
              **Outstanding**
            
            ****
              **Stock**
              **Options**
              **Currently**
              **Vested**
            
            **Warrants
                Outstanding**
            
            ****
              **Warrants
                Currently Vested**
            
            **Stock**
              **Options
                & Warrants Outstanding**
            
            ****
              **Stock
                Options & Warrants Currently Vested**Number
                (in
              thousands)
            
            
            426
            
            
            —
            
            
            4,689
            
            
            1,071
            
            
            123
            
            
            36
            
            
            1,936
            
            
            1,810
            
            
            7,174
            
            
            2,917Weighted
              average
              exercise
              price
            
            $
            6.88
            
            
            —
            
            $
            4.19
            
            $
            4.69
            
            $
            3.23
            
            $
            2.43
            
            $
            3.60
            
            $
            3.57
            
            $
            4.17
            
            $
            3.97Aggregate
              Intrinsic
              value
            
            
            148
            
            
            —
            
            
            15,117
            
            
            3,571
            
            
            492
            
            
            173
            
            
            7,018
            
            
            6,627
            
            
            22,775
            
            
            10,371Weighted
              average
              remaining
                contractual
              term
            
            
            9.9
                years
            
            
            —
            
            
            8.3
                years
            
            
            4.4
                years
            
            
            9.1
                years
            
            
            8.7
                years
            
            
            3.0
                years
            
            
            2.6
                years
            
            
            7.0
                years
            
            
            3.3
                years





**(11)
      RELATED PARTY TRANSACTIONS**





The
      Company receives legal services from Kirkland & Ellis LLP, which
      is considered a related party because a partner at that firm
      is a member of the Company’s Board of Directors.  For the years ended
      December 31, 2006, 2005 and 2004 expenses related to Kirkland &
Ellis LLP were approximately $1.7 million, $640,000, and $2.1 million,
      respectively. For the years ended December 31, 2006 and 2005, the Company
      had outstanding payables due to Kirkland & Ellis LLP of approximately
      $492,000 and $45,000, respectively.





Through
      February 2005, the Company received benefit coordination services
      from Huber Oros, which was considered a related party because an
      owner of Huber Oros is related to a member of the Company’s senior management
      who also serves on the Company’s Board of Directors. During February 2005, Huber
      Oros was acquired by an unrelated entity and the individual who is a related
      party did not retain any continuing ownership interest in the acquiring entity.
      For the years ended December 31, 2006, 2005, and 2004, expenses related to
      Huber Oros were approximately $0, $7,000 and $108,000 respectively. As of
      December 31, 2006 and 2005, there were no outstanding payables due to Huber
      Oros.





FTI
      Consulting, Inc. (FTI) provided due diligence services totaling approximately
      $15,000 in connection with the acquisition of UCC. Two members of NexCen’s Board
      of Directors serve as Directors of FTI, with one also serving as President
      and
      Chief Executive Officer for FTI Consulting, Inc. For
      the
      year ended December 31, 2006, the Company had no outstanding payables due to
      FTI
      Consulting, Inc.





Athletes
      Foot Marketing Support Fund, LLC (“MSF”), is an entity which is funded by the
      domestic franchisees of The Athletes Foot to provide domestic marketing and
      promotional services on behalf of the franchisees. On an as needed basis, the
      Company advances funds to MSF under a loan agreement. The terms of the loan
      agreement include a borrowing rate of prime plus two percent, and repayment
      by
      MSF with no penalty, at any time. At December 31, 2006, the Company had a
      receivable balance of $350,000 from MSF.





**(12)
      COMMITMENTS AND CONTINGENCIES**





(a)
      LEGAL
      PROCEEDINGS





IPO
      Litigation .
      NexCen
      is among the hundreds of defendants named in a series of class action
      lawsuits seeking damages due to alleged violations of securities law.  The
      case is being heard in the United States District Court for the Southern
      District of New York.  The court has consolidated the actions by all of the
      named defendants that actually issued the securities in question.  There
      are approximately 310 consolidated cases before Judge Scheindlin, including
      this
      action, under the caption In
      Re
      Initial Public Offerings Litigation ,
      Master
      File 21 MC 92 (SAS).




50




As
      to
      NexCen, these actions were filed on behalf of persons and entities that acquired
      the Company’s stock after its initial public offering in October 20,
      1999.  Among other things, the complaints claim that prospectuses, dated
      October 20, 1999 and September 27, 2000 and issued by NexCen in
      connection with the public offerings of common stock, allegedly contained untrue
      statements of material fact or omissions of material fact in violation of
      securities laws because the prospectuses allegedly failed to disclose that
      the
      offerings’ underwriters had solicited and received additional and excessive
      fees, commissions and benefits beyond those listed in the arrangements with
      certain of their customers which were designed to maintain, distort and/or
      inflate the market price of the Company’s common stock in the aftermarket. 
The actions seek unspecified monetary damages and rescission.  NexCen
      believes the claims are without merit and is vigorously contesting these
      actions.





After
      initial procedural motions and the start of discovery in 2002 and 2003, the
      plaintiffs voluntarily dismissed without prejudice the officer and director
      defendants of each of the 310 named issuers, including NexCen.  Then
      in June  2003, the Plaintiff’s Executive Committee announced a proposed
      settlement with the issuer-defendants, including NexCen, and the officer and
      director defendants of the issuers (the “Issuer Settlement”).  A settlement
      agreement was signed in 2004 and presented to the District Court for approval.
      The proposed Issuer Settlement does not include the underwriter-defendants,
      and
      they have continued to defend the actions and have objected to the proposed
      settlement. (One of the defendant-underwriters signed a memorandum of
      understanding in April 2006 agreeing to a $425 million settlement of claims
      against it.)  Under terms of the proposed Issuer Settlement, NexCen
      has a reserve of $465,000 for its estimated exposure. If the proposed
      settlement is approved by the court, it is extremely unlikely
      that NexCen would incur any material financial or other
      liability.





The
      District Court granted preliminary approval of the proposed Issuer Settlement
      in
      2005 and held a fairness hearing on the matter in April 2006. In December 2006,
      before final action by the District Court on the proposed Issuer Settlement,
      the
      U.S. Court of Appeals for the Second Circuit issued a ruling vacating class
      certification for certain plaintiffs in the actions against the
      underwriter-defendants. A petition was filed in early 2007 seeking rehearing
      of
      this decision, but the Second Circuit had not acted on the petition as of March
      1, 2007. The impact of this decision on the claims against the issuer-defendants
      and on the proposed Issuer Settlement is unclear. Since December 2006, the
      District Court has stayed all proceedings in these cases pending further action
      by the Second Circuit.




Transportation
      Business Sale. On March
      13, 2006, a complaint captioned Geologic Solutions, Inc., v. Aether Holdings,
      Inc. was filed against the Company in the Supreme Court for the State of New
      York, New York County. The complaint generally alleges that plaintiff Geologic
      was damaged as a result of certain alleged breaches of contract and fraudulent
      inducement arising out of NexCen’s alleged misrepresentations and failure to
      disclose certain information in connection with the asset purchase agreement
      dated as of July 20, 2004 for the purchase and sale of our Transportation
      business. The allegations in Geologic’s complaint are substantially similar to
      claims Geologic made in a previous request to the Company for indemnification.
      The complaint seeks monetary damages in an amount not less than $30 million
      and
      other relief. During the second quarter of 2006, the plaintiff agreed to
      substitute Aether Systems, Inc. for Aether Holdings, Inc. as defendant in the
      case because Aether Systems, Inc. was the party to the asset purchase agreement
      upon which Geologic’s claims are based. The Company believes it has a
      meritorious defense to Geologic’s claims and is vigorously defending against
      this action; however, we cannot predict the outcome of this litigation, and
      an
      adverse resolution of such claims could require us to make a significant cash
      payment to Geologic. The Company has incurred costs in connection with the
      defense of this lawsuit, which have been recorded against discontinued
      operations, further increasing the loss on the sale of the Transportation
      segment, and decreasing the amount of cash we have available for acquisitions
      and operations.





Legacy
      UCC Litigation .
      UCC and
      Mr. D’Loren in his capacity as president of UCC are parties along with unrelated
      parties to litigation resulting from a default on a loan to The Songwriter
      Collective, LLC (“TSC”), which UCC had referred to a third party. A shareholder
      of TSC filed a lawsuit in the U.S. District Court for the Middle District of
      Tennessee alleging, that certain misrepresentations by TSC and its agents
      (including UCC and D’Loren) induced the shareholder to contribute certain rights
      to musical compositions to TSC. The lawsuit, which is captioned Tim Johnson
      v.
      Fortress Credit Opportunities I, L.P., et al., seeks declaratory judgment,
      reformation and rescission, and monetary damages relating to the loan and
      alleged loss of value on contributed assets. UCC and Mr. D’Loren have filed
      cross-claims against TSC and certain TSC officers claiming indemnity. TSC has
      filed various cross and third-party claims against UCC, Mr. D’Loren and another
      TSC shareholder, Annie Roboff. Roboff has filed a separate action in the
      Chancery Court in Davidson County, Tennessee, which is captioned Roboff v.
      Mason, et al., as well as claims in the federal court lawsuit, against UCC,
      Mr.
      D’Loren, TSC and the other parties. The claims include fraud and negligent
      misrepresentation allegations against Mr. D’Loren, and UCC. Ms. Roboff
      previously made these same claims in a lawsuit that she filed in state court
      in
      New York. That lawsuit was dismissed on procedural grounds, and Ms. Roboff
      has
      appealed the dismissal. UCC believes these claims are without merit and is
      vigorously defending the actions.  UCC’s insurance carrier is defending the
      litigation. The litigation is in discovery and the outcome cannot be estimated
      at this time; however, settlement discussions are being held.  The loss, if
      any, could exceed existing insurance coverage and any excess could adversely
      affect our financial condition and results.




51




(b)
      LEASES





The
      Company is obligated under noncancelable operating leases for office space
      that
      expire at various dates through 2008. Future minimum lease payments under
      noncancelable operating leases and related sublease rent commitments as of
      December 31, 2006 are as follows:





**Operating
                Leases ($ in 000's)**
            
            **Payments
                due by period****2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**Gross
                lease commitments
            
            $
            1,865,277
            
            $
            1,748,385
            
            $
            895,056
            
            $
            888,572
            
            $
            850,752
            
            $
            4,742,364less:
                sub-leases
            
            
            (1,363,023
            )
            
            (907,967
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Lease
                commitments, net
            
            $
            502,254
            
            $
            840,418
            
            $
            895,056
            
            $
            888,572
            
            $
            850,752
            
            $
            4,742,364





Rent
      expense from continuing operations under operating leases was approximately
      $398,000, $158,000, and $454,000 for the years ended December 31, 2006,
      2005 and 2004, respectively.





The
      subleased payments shown above are related to the Mobile Government headquarters
      lease in Massachusetts, which the Company has subleased to the buyer of that
      business, BIO-Key International, Inc., and to Northlight Financial LLC who
      rents
      space in the Company’s New York headquarters.





(c)
      RESTRICTED CASH





Restricted
      cash of $1,298,000 includes funds held in money market accounts as security
      for
      outstanding letters of credit established for the facility leases of the Mobile
      Government headquarters in Massachusetts, and the Company’s headquarters in New
      York. At December 31, 2005, the Company had restricted cash of $8.6
      million, $749,000 was related to the Massachusetts facility lease, and a $7.9
      million letter of credit collateralizing a sales agreement between BIO-key
      International, Inc. (BIO-Key), whom the Mobile Government business was sold
      to,
      and Hamilton County, Ohio. The letter of credit provided assurance of
      performance by BIO-Key under the sales agreement. The letter of credit expired
      on December 31, 2006.





**(13)
      DISCONTINUED OPERATIONS**





From
      our
      formation in 1996 until 2004, we owned, acquired and operated a number of mobile
      and wireless communications businesses. These businesses never became
      profitable, and during 2004 we sold these businesses and started a
      mortgage-backed securities, or MBS, business. During 2005, we assembled a
      leveraged portfolio of investments in MBS. However, market conditions for the
      MBS business changed significantly during this period, and the profitability
      of
      our leveraged MBS portfolio declined. We sold our MBS investments in November
      2006, and since that time, we have focused entirely on our IP
      business.




During
      2006, the Company discontinued and sold its MBS segment, generating a gain
      of
      $755,000 on the sale. Income from discontinued operations in 2006 of $2.4
      million was primarily generated by the MBS segment.





During
      2005, we recognized additional losses rlated to the sales of our businesses
      which were sold in 2004. Income from discontinued operations in 2005 reflects
      $225,000 of income from our MBS business.





During
      2004, the Company discontinued and sold its EMS, Transportation and Mobile
      Government segments, recognizing net gains on the sales of $20.8 million. Loss
      from discontinued operations of $44.5 million includes net operating losses
      in
      our Transportation, Mobile Government, EMS and MBS businesses. Also during
      2004,
      the Company recorded goodwill and asset impairment charges of $35.6 million
      related to the Transportation and Mobile Government businesses.





*EMS
      Sale*





On
      January 13, 2004, the Company sold the EMS segment to TeleCommunication
      Systems, Inc.




52




We
      may be
      required to indemnify TCS under the asset purchase agreement for certain
      breaches of representations and warranties and other covenants that we gave
      to
      TCS with respect to the sale of our EMS segment. This liability is limited
      to
      $7.6 million, other than in the case of fraud and with respect to a small number
      of specific representations, such as those relating to taxes owed for periods
      prior to the closing of the sale of the EMS segment. In addition, we remain
      fully liable for any claims that may arise relating to our operation of the
      EMS
      business prior to the date on which TCS acquired that business from us,
      including any liability arising from our past sales of the blackberry devices
      manufactured by Research In Motion (“RIM”).Recently, the US Court of Appeals
      ruled that RIM violated 16 patents owned by intellectual property holding
      company NTP, Inc. (“NTP”). The case was remanded on February 24, 2006 to the
      District Court to determine whether or not RIM should be enjoined selling the
      violating products. It has been reported that the parties have since reached
      a
      settlement agreement.





*Transportation
      Sale*





On
      September 17, 2004, the Company sold its Transportation segment to Geologic
      Solutions, Inc. (f/k/a Slingshot Acquisition Corporation (“Geologic”), an
      affiliate of Platinum Equity Capital Partners L.P., pursuant to an asset
      purchase agreement (the “Asset Purchase Agreement”), for $25.0 million in
      cash.





During
      the fourth quarter of 2004 and in January 2005, the Company and Geologic advised
      each other of significant disagreements over both the working capital adjustment
      and the cash true up. The Company claimed that it was owed approximately $1
      million, and Geologic contended that it was owed approximately $8.1 million.
      The
      parties had periodic discussions during 2005 but were unable to resolve their
      differences. Under the terms of the Asset Purchase Agreement, if not resolved
      by
      agreement, the parties were required to submit the disputed matters to binding
      arbitration before an independent accounting firm. Near the end of the third
      quarter, to avoid the expense and uncertainty of an arbitration proceeding,
      the
      Company agreed to settle the working capital adjustment and the cash true-up
      by
      paying $235,000 to Geologic. On October 14, 2005, the parties entered into
      a
      settlement agreement to reflect this resolution, and the Company paid the
      settlement amount to Geologic on October 17, 2005. As a result of this
      settlement, as of the end of the third quarter, the Company wrote off $738,000
      in amounts due from Geologic that had been recorded as an asset on its balance
      sheet and recorded an additional expense of $235,000. These amounts are included
      in loss from discontinued operations for the third quarter.





Also,
      during the third quarter, Geologic notified the Company of, and the Company
      responded to, various indemnification claims for alleged breaches of
      representations and warranties under the Asset Purchase Agreement. The parties
      have been unable to resolve their disagreement over Geologic’s claim for
      indemnification and on March 13, 2006, Geologic filed a lawsuit against the
      Company in the Supreme Court of the State of New York. Geologic’s claims
      generally involve allegations that the Company failed to provide full disclosure
      regarding certain aspects of the Transportation segment’s business relationships
      with one of its major customers and two of its major suppliers. Geologic
      contends that it had suffered damages in excess of $30 million as a result
      of
      these alleged breaches. Although the Company cannot predict the outcome of
      this
      litigation, the Company believes that the indemnification claims are without
      merit and intends to vigorously defend against them. If the Company were
      unsuccessful in defending against the claims by Geologic, results could have
      a
      material adverse effect on the Company’s business, financial results and
      financial condition.





**(14)
      QUARTERLY FINANCIAL INFORMATION (UNAUDITED)**





**Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter****Ended**
            
            **Ended**
            
            **Ended**
            
            **Ended****March
                31,**
            
            **June
                30,**
            
            **September
                30,**
            
            **December
                31,****In
                thousands, except per share amounts**
            
            **2006**
            
            **2006**
            
            **2006**
            
            **2006**Revenues
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            1,924Operating
                expenses
            
            
            (872
            )
            
            (2,831
            )
            
            (2,568
            )
            
            (4,142
            )Operating
                loss
            
            
            (872
            )
            
            (2,831
            )
            
            (2,568
            )
            
            (2,218
            )Non
                operating income
            
            
            320
            
            
            671
            
            
            1,202
            
            
            1,144Loss
                from continuing operations
              before
                income taxes
            
            
            (552
            )
            
            (2,160
            )
            
            (1,366
            )
            
            (1,074
            )Income
                taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            (81
            )Loss
                from continuing operations
            
            
            (552
            )
            
            (2,160
            )
            
            (1,366
            )
            
            (1,155
            )Income
                from discontinued operations
            
            
            419
            
            
            640
            
            
            544
            
            
            1,510Net
                (loss) income
            
            $
            (133
            )
            $
            (1,520
            )
            $
            (822
            )
            $
            355Loss
                from continuing operations per
              common
                share - basic and diluted
            
            $
            (0.01
            )
            $
            (0.05
            )
            $
            (0.03
            )
            $
            (0.02
            )Loss
                from discontinued operations per
              common
                share - basic and diluted
            
            
            0.01
            
            
            0.02
            
            
            0.01
            
            
            0.03Net
                (loss) income per common
              share
                - basic and diluted
            
            $
            (0.00
            )
            $
            (0.03
            )
            $
            (0.02
            )
            $
            0.01Weighted
                average shares
              outstanding
                - basic
            
            
            44,019
            
            
            44,721
            
            
            46,534
            
            
            47,234Weighted
                average shares
              outstanding
                - diluted
            
            
            44,019
            
            
            44,721
            
            
            46,534
            
            
            49,079




53




**Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter****Ended**
            
            **Ended**
            
            **Ended**
            
            **Ended****March
                31,**
            
            **June
                30,**
            
            **September
                30,**
            
            **December
                31,****2005**
            
            **2005**
            
            **2005**
            
            **2005**Revenues
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Operating
                expenses
            
            
            (1,859
            )
            
            (1,307
            )
            
            (1,065
            )
            
            (1,010
            )Operating
                loss
            
            
            (1,859
            )
            
            (1,307
            )
            
            (1,065
            )
            
            (1,010
            )Non
                operating income
            
            
            662
            
            
            331
            
            
            450
            
            
            247Loss
                from continuing operations
              before
                income taxes
            
            
            (1,197
            )
            
            (976
            )
            
            (615
            )
            
            (763
            )Income
                taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Loss
                from continuing operations
            
            
            (1,197
            )
            
            (976
            )
            
            (615
            )
            
            (763
            )Income
                (loss) from discontinued operations
            
            
            539
            
            
            1,754
            
            
            (220
            )
            
            (3,042
            )Net
                (loss) income
            
            $
            (658
            )
            $
            778
            
            $
            (835
            )
            $
            (3,805
            )Loss
                from continuing operations
              per
                common share - basic and diluted
            
            $
            (0.02
            )
            $
            (0.02
            )
            $
            (0.02
            )
            $
            (0.02
            )Income
                (loss) from discontinuedoperations
              per
                common share - basic and diluted
            
            
            0.01
            
            
            0.04
            
            
            (0.00
            )
            
            (0.07
            )Net
                (loss) income per common
              share
                - basic and diluted
            
            $
            (0.01
            )
            $
            0.02
            
            $
            (0.02
            )
            $
            (0.09
            )Weighted
                average shares outstanding - basic
            
            
            43,991
            
            
            44,009
            
            
            44,019
            
            
            44,019Weighted
                average shares outstanding - diluted
            
            
            43,991
            
            
            44,591
            
            
            44,019
            
            
            44,019





**(15)
      ACQUISITION OF UCC**





On
      June
      6, 2006, NexCen acquired UCC for 2.5 million shares of common stock, plus the
      right to contingent consideration of up to an additional 2.5 million shares
      of
      common stock and up to $10 million in cash if future performance targets are
      met
      within five years (or such shorter period as provided in the merger agreement)
      as follows:





·
            an
                additional 900,000 shares of Company common stock and $3,333,333
                will be
                payable if (i) the 30-day average price of NexCen common stock is
                at least
                $6.00 per share and (ii) the Company’s annualized Adjusted EBITDA (as
                defined in the Merger Agreement) is least $10
                million;





·
            an
                additional 800,000 shares of Company common stock and $3,333,333
                in cash
                will be payable if (i) the 30-day average price is at least $8 per
                share
                and (ii) the Company’s annualized Adjusted EBITDA is at least $20 million;
                and




54




·
            an
                additional 800,000 shares of Company common stock and $3,333,334
                in cash
                will be payable if (i) the 30-day average price is at least $10 per
                share
                and (ii) the Company’s annualized Adjusted EBITDA is at least $30
                million.





As
      of
      December 31, 2006, none of these performance targets have been met, and it
      is
      uncertain as to if and when these targets will be met. In addition, the
      contingent consideration will become payable in full (1) if the average price
      of
      the Company’s stock is $10 per share for 90 consecutive trading days and the
      Company’s annualized Adjusted EBITDA is $10 million or (2) upon a change of
      control of the Company (as defined in the merger agreement). The stock price
      targets are subject to adjustment as set forth in the merger agreement. The
      merger agreement requires the escrow of 900,000 shares of the contingently
      issuable common stock. These shares will not be included in our outstanding
      share count or weighted average outstanding shares until the contingency has
      been resolved.





UCC’s
      results of operations subsequent to the date of acquisition are included in
      the
      Consolidated Statement of Operations. The Company allocated the purchase price
      of the assets acquired and liabilities assumed at the estimated fair values
      at
      the acquisition date. The recorded goodwill will not be deductible for tax
      purposes. The total purchase price in the following table does not include
      amounts for the contingent consideration because it is not considered probable
      that some or all of this consideration will be paid. If additional consideration
      is paid, the amounts will be recorded as additional goodwill.





**Purchase
                price (in thousands) :**Stock
                consideration (2.5 million shares at $4.10)
            
            $
            10,250Options
                and warrants issued
            
            
            827Direct
                acquisition costs
            
            
            1,816Repayment
                of UCC debt
            
            
            1,493Less:
                cash acquired
            
            
            (12
            )Total
                purchase price
            
            $
            14,374**Allocation
                of purchase price****(in
                thousands)****:**Current
                assets
            
            $
            7Other
                assets
            
            
            175Property
                and equipment
            
            
            111Goodwill
            
            
            10,135Intangible
                assets
            
            
            4,634Total
                assets acquired
            
            
            15,062Current
                liabilities
            
            
            688Total
                liabilities assumed
            
            
            688Net
                assets acquired
            
            $
            14,374





At
      the
      time of the merger, each outstanding option to purchase UCC Capital Corp. common
      stock granted under UCC Capital Corp.’s 2003 Amended and Restated Stock Option
      Plan was converted into an option to purchase NexCen’s common stock using an
      exchange ratio as described in the merger agreement. The fair value of these
      options totaled $159,000. In addition, in connection with closing of the merger,
      the Company was obligated to compensate its financial advisor for the
      transaction, Jefferies & Company, Inc., a cash fee of approximately $77,000
      and the issuance of warrants to purchase 440,000 shares of Company common stock
      with an exercise price of $3.19 per share. The fair value of such warrants
      totaled $668,000. The aggregate fair value of the replacement options and
      warrants issued to Jefferies & Company is included as a component of the
      purchase price.





Intangible
      assets consist of a non-compete agreement with an estimated useful life of
      five
      years, and executory contracts including $2.2 million related to a contract
      right to receive an advisory fee following the expected consummation of a
      business combination between two unrelated companies, which were settled in
      2006.




In
        2006,
        the Company recorded $10.1 million of goodwill related to the UCC acquisition,
        which has been determined to have an indefinite useful life and will not
        be
        amortized, but will be tested for impairment on an annual basis. The Company
        also recorded a $1.37 million intangible asset for a non-compete agreement
        with
        our Chief Executive Officer, that is being amortized on a straight-line basis
        over five years. As of December 31, 2006, the net balance of this intangible
        asset is $1.21 million. We expect to record related amortization on this
        asset
        of $274,000 in 2007 through 2010, and $118,000 in 2011.


**(16)
      ACQUISITION OF THE ATHLETE’S FOOT**





On
      November 7, 2006, our NexCen Acquisition Corp. subsidiary acquired Athlete’s
      Foot Brands, LLC, along with an affiliated advertising and marketing fund,
      and
      certain nominal fixed assets owned by an affiliated company. The Athlete’s Foot
      is an athletic footwear and apparel franchisor with 600 retail locations in
      over
      40 countries. The business also provides advertising and marketing support
      for
      the benefit of the franchisees, using a portion of the royalties it receives
      from franchisees. This business operates in our retail franchising vertical.
      The
      purchase price for this acquisition, excluding contingent
      consideration, was $53.1 million, consisting of approximately $42.1 million
      in cash and $9.2 million in our common stock (approximately 1.4 million shares
      which were valued at $6.55 per share), and $1.8 million in other deal related
      costs. At the closing on November 7, 2006, we also issued to one of the sellers
      a three-year warrant to purchase an additional 500,000 shares of our common
      stock at a per share price of $6.49. On March 12, 2007, we borrowed $26.5
      million under a new senior credit facility secured by the assets of The Athletes
      Foot. Under the purchase agreement, we may be required to pay up to an
      additional $8.5 million of cash and stock (in the same proportion as the initial
      acquisition), if the revenue and EBITDA of the acquired business (as defined
      in
      the purchase agreement) for the year ended December 31, 2006 equal or exceed
      performance targets specified in the purchase agreement. The purchase agreement
      requires a stand-alone audit of the 2006 financial results of Athletes Foot
      Brands, LLC to be completed by March 31, 2007. The amount of contingent
      consideration will be calculated based on the 2006 audited financial results.
      Based on available information, the Company estimates the contingent
      consideration will be $4.0 million, and has recorded a liability as of December
      31, 2006, which will be paid in the same proportion of cash and common stock
      as
      the initial consideration.




55




Brands
      results of operations subsequent to the date of acquisition are included in
      the
      Consolidated Statement of Operations. The Company allocated the purchase price
      of the assets acquired and liabilities assumed at the estimated fair values
      at
      the acquisition date.




**Purchase
                price (in thousands):**Stock
                consideration (1.4 million shares)
            
            $
            9,257Cash
                payments
            
            
            40,710Contingent
                consideration
            
            
            4,000Direct
                acquisition costs
            
            
            1,201Seller
                warrant issued
            
            
            572Settlement
                of executory contracts & other items
            
            
            1,349Total
                purchase price
            
            $
            57,089**Allocation
                of purchase price (in thousands):**Cash
            
            $
            162Franchise
                and master development agreements
            
            
            2,600Trademarks
            
            
            49,000Goodwill
            
            
            5,472Operating
                receivables, net
            
            
            1,251Property
                and equipment
            
            
            95Total
                assets acquired
            
            
            58,580Total
                liabilities assumed
            
            
            1,491Net
                assets acquired
            
            $
            57,089





Franchise
      and master development agreements are considered intangible assets and are
      amortized on a straight-line basis over twenty years. Trademarks represent
      the
      present value of future royalty income associated with the ownership of The
      Athlete’s Foot trademark. Goodwill represents the excess of costs over the fair
      value of assets acquired. Goodwill and trademarks acquired in a purchase
      business combination are determined to have an indefinite useful life, and
      accordingly, are not amortized, but instead tested for impairment at least
      annually. Total liabilities assumed include an obligation under a franchisee
      consulting agreement in which we are obligated to pay $200,000 per year through
      2028. The net present value of this liability is $1.45 million. As payments
      are
      made, the variance between the payments and liability reduction will be recorded
      as interest expense.





Prior
      to
      this acquisition, there were executory contracts between UCC and Athlete’s Foot
      Brands, LLC. UCC provided financial advisory services to Athlete’s Foot Brands,
      LLC. UCC earned advisory and loan servicing revenues during the course of the
      arrangement, which terminated with the acquisition. The estimated fair value
      of
      these agreements was recorded when we acquired UCC and the amounts were included
      in intangible assets. The settlement of these agreements was recorded in
      purchase accounting at fair value without recognition of any amounts in our
      statement of operations.




As
        the
        purchase of Athlete’s Foot Brands, LLC was a material acquisition, we are
        providing the pro forma financial information set forth below, which presents
        the combined results as if our acquisitions had occurred on January 1, 2005.
        This pro forma information is not necessarily indicative of the results that
        actually would have occurred nor does it intend to indicate future operating
        results.
 
 **Year
                  Ended**
              
              **Year
                  Ended**(in
                  thousands - except
              
              **December
                  31, 2006**
              
              **December
                  31, 2005**per
                  share amounts)
              
              **(unaudited)**
              
              **(unaudited)**Pro
                  forma royalties and franchise fees
              
              $
              9,925
              
              $
              9,832Pro
                  forma net income
              
              $
              2,683
              
              $
              32,548Pro
                  forma diluted earnings per share
              
              $
              0.06
              
              $
              0.71
 
 In
        2006,
        the Company recorded $5.5 million of goodwill related to the Athlete’s Foot
        Brands, LLC acquisition, and a $49.0 million trademark representing the value
        of
        future royalty income associated with the ownership of The Athlete’s Foot
        trademark, which have been determined to have indefinite useful lives and
        will
        not be amortized, but will be tested for impairment on an annual basis. The
        Company also recorded a $2.6 million intangible asset for franchise agreements
        and master development agreements of The Athlete’s Foot, which is being
        amortized on a straight-line basis over twenty years. As of December 31,
        2006,
        the net balance of this intangible asset is $2.58 million. We expect to record
        related amortization on this asset of $130,000 in 2007 through 2011, and
        $1.9
        million thereafter.


**(17)
      SEGMENT REPORTING**





At
      December 31, 2006, we had only one operating segment - our intellectual property
      business. All of our revenue was royalty and franchise fee revenue generated
      by
      The Athlete’s Foot. In 2006, approximately 53% of this revenue was generated in
      the U.S. As we continue to acquire IP businesses, we expect to have three
      segments in the future including: retail franchising, consumer brand products,
      and quick service restaurants.




56





In
      2005
      and 2004 we only had corporate costs, all other activity is included in
      discontinued operations.




**(18)
      SUBSEQUENT EVENTS**





Acquisition
      of Bill Blass .




On
      February 15, 2007, our Blass Acquisition Corp. subsidiary acquired Bill Blass
      Holding Co., Inc. and two affiliated businesses. The Bill Blass label represents
      timeless style, modern American and is an American legacy brand. This business
      operates in our consumer branded products (apparel) vertical.




At
      the
      closing, one of the Bill Blass companies executed a licensing agreement for
      men’s and women’s denim with Designer License Holding Company, LLC. The new
      license replaced a denim license and an activewear license that were terminated
      and had been held by two companies that are affiliated with one of the prior
      owners of Bill Blass.




The
      initial purchase price for this acquisition was $54.6 million, consisting of
      $39.1 million in cash and $15.5 million in our common stock (approximately
      2.2
      million shares which were valued at $7.09 per share, which was the average
      closing price of our common stock for the ten consecutive days that ended on
      December 19, 2006, which is when we signed the agreement to purchase Bill
      Blass). Under the purchase agreement, the sellers will be entitled to receive
      up
      to an additional $16.2 million of consideration, payable in early 2008. The
      additional consideration under the earn-out will be equal to the amount by
      which
      the royalties generated from the Bill Blass trademarks in fiscal 2007,
      multiplied by 5.5, exceed $51.8 million, subject to certain adjustments. The
      total purchase price will not exceed $70.8 million.




Acquisition
      of MaggieMoo’s .




On
      February 28, 2007, we acquired MaggieMoo’s International, LLC (“MaggieMoo’s”).
      The initial purchase price for this acquisition was $16.1 million, consisting
      of
      approximately $10.8 million of cash and debt repayment, and 515,352 shares
      of
      our common stock (valued at $5.3 million, reflecting the average closing price
      of our common stock for the fifteen consecutive days that ended on February
      27,
      2007, of $10.21). Under the purchase agreement, the sellers will be entitled
      to
      receive up to an additional $2.0 million of consideration in the form of an
      earn-out, payable on March 31, 2008. The earn-out will be based on the amount
      royalty payments earned during fiscal 2007 exceed royalty payments earned by
      MaggieMoo’s during fiscal 2006, pursuant to a formula set forth in the purchase
      agreement. MaggieMoo’s is the franchisor of 184 stores located in 36 states
      domestically. Each location features a menu of freshly made super-premium ice
      creams, mix-ins, smoothies, and custom ice cream cakes. This business operates
      in our QSR vertical.




Acquisition
      of the Assets of Marble Slab Creamery, Inc.




Also
      on
      February 28, 2007, we acquired the assets of Marble Slab Creamery, Inc. (“Marble
      Slab”). The purchase price of the acquisition was $21 million, consisting of $16
      million of cash, and the issuance of $5.0 million of notes payable which mature
      on February 28, 2008. The notes accrue interest at an annual rate of 6% per
      annum until maturity, and 8% thereafter, and are payable in cash or common
      stock
      priced at the time of issuance, at the Company’s option. We have deposited $5.0
      million into an escrow account to collateralize the payment of these notes.
      Marble Slab is the franchisor of 336 stores located in 35 states, Puerto Rico,
      Canada and the United Arab Emirates. Since 1983, each Marble Slab
      Creamery **** has
      featured homemade super-premium ice cream that is hand-rolled in freshly baked
      waffle cones. This business operates in our QSR vertical.




57




Entry
      into Bank Credit Facility




On
      March
      12, 2007, NexCen Acquisition Corp. (“the Issuer”) entered into a master loan
      agreement with BTMU Capital Corporation. This master loan agreement provides
      for
      borrowings pursuant to the issuance of a single class of notes to the Issuer
      and
      its wholly-owned subsidiaries (“Co-Issuers”) which are jointly and severally
      liable for payments required under the notes. The assets of the Issuers and
      Co-Issuers are pledged as collateral; security under each Note, and secure
      the
      obligations of the Issuer and all Co-Issuers under all of the notes. The notes
      are non-recourse to the Company. The pledged assets are those of the Issuer
      and
      Co-Issuers (mainly IP assets and the related royalties). Each note is repayable
      in full after five years. The facility has no expiration date and can be
      terminated by the Co-Issuers upon 30 days notice and by BTMU Capital Corporation
      by electing not to fund future advances, however, each note funding maintains
      its respective maturity date. The maximum aggregate amount of borrowings that
      may be outstanding at any one time under the agreement is $150 million. The
      borrowing rate is LIBOR plus an interest rate margin, which ranges from 1.50%
      to
      3.00%. The Company may refinance all or part of the notes with no pre-payment
      penalties. This allows us to refresh available borrowing capacity under the
      facility, such as by completing securitization transactions involving certain
      of
      our acquired IP assets and using the proceeds from these transactions to repay
      notes under the master loan agreement. The borrowing rate is based on 3-month
      LIBOR which is a floating rate. The LIBOR rate resets every 90
      days.




On
      March
      14, 2007, we borrowed $26.5 million under the new credit facility, secured
      by
      the assets of The Athlete’s Foot. In 2007, we intend to incur additional debt
      secured by the assets of Bill Blass, MaggieMoo’s and Marble Slab under the new
      credit facility.




Other.


On
        March
        13, 2007 we signed a definitive purchase agreement to acquire the Waverly
        brand
        from F. Schumacher & Co. (“Schumacher”) for $34.0 million in cash. We also
        agreed to pay $2.75 million in cash and issue a 10-year warrant to purchase
        50,000 shares of our common stock to Ellery Homestyles, LLC, an existing
        Waverly
        licensee, in satisfaction of a right of first refusal held by Ellerly to
        acquire
        the Waverly brand. The warrant will be priced at the market price on the
        date of
        issuance. Waverly is a home décor lifestyle brand for harmonious and tasteful
        decorating. The purchase agreement contains customary representations,
        warranties and covenants. Subject to limited exceptions, the representations
        and
        warranties of Schumacher will survive the closing for 12 months. Specified
        fundamental representations, such as sufficiency of assets and title to assets,
        will survive indefinitely. Indemnification claims by us for breaches of
        representations and warranties **** are
        generally capped at the purchase price and are subject to a $150,000 threshold.
        The closing is subject to the satisfaction of customary conditions for a
        transaction of this typ e. We
        expect
        to close this transaction by the end of April 2007.
  **ITEM
        9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**





None.





**ITEM
      9A. CONTROLS & PROCEDURES**





***Evaluation
      of Disclosure Controls and Procedures***





We
      have
      established disclosure controls and procedures to ensure that material
      information relating to the Company, including its consolidated subsidiaries,
      is
      made known to the officers who certify the Company’s financial reports and to
      other members of senior management and the Board of Directors.





As
      required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, as
      amended (the “Exchange Act”), management carried out an evaluation, with the
      participation of the Company’s chief financial officer and chief executive
      officer, of the effectiveness of the Company’s disclosure controls and
      procedures, as of December 31, 2006. Based on their evaluation as of
      December 31, 2006, the chief executive officer and chief financial officer
      of the Company have concluded that the Company’s disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act)
      are effective to ensure that the information required to be disclosed by the
      Company in the reports that it files or submits under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in SEC rules and forms.




58




***Management’s
      Report on Internal Control Over Financial Reporting***





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rules
      13a-15(f). Under the supervision and with the participation of management,
      including our chief executive officer and chief financial officer, we conducted
      an evaluation of the effectiveness of our internal control over financial
      reporting based on the framework in Internal Control Integrated Framework issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (the
      “COSO Framework”). As noted in the COSO Framework, an internal control system,
      no matter how well conceived and operated, can provide only reasonable assurance
      to management and the Board of Directors regarding achievement of an entity’s
      objectives. Management’s evaluation of the effectiveness of our internal control
      over financial reporting as of December 31, 2006, excluded The Athlete’s Foot,
      which was acquired by the Company on November 7, 2006. The Athlete’s Foot
      consolidated assets and consolidated revenues comprised 2% and 100%,
      respectively, of the consolidated financial statements of the Company for the
      year ended December 31, 2006. Based on the evaluation under the COSO Framework,
      our management concluded that our internal control over financial reporting
      was
      effective as of December 31, 2006. Our report is included in Item 8 of this
      Report. Our management’s assessment of the effectiveness of our internal control
      over financial reporting as of December 31, 2006 has been audited by KPMG
      LLP, an independent registered public accounting firm, as stated in their report
      which is also included in Item 8 of this Report.





***Changes
      in Internal Control Over Financial Reporting and Disclosure Controls and
      Procedures***





During
      the year ended December 31, 2006, no change occurred in the Company’s internal
      control over financial reporting that materially affected, or is likely to
      materially affect, the Company’s internal control over financial reporting. Our
      chief financial officer and corporate controller both left the Company in 2006,
      and were replaced, after a transition period during which the former chief
      financial officer and controller worked together with both the new chief
      financial officer and the new controller. Both the new chief financial officer
      and the new corporate controller have prior experience serving as financial
      officers of publicly traded SEC reporting companies. We acquired The Athlete’s
      Foot in November 2006 and Bill Blass, MaggieMoo’s and Marble Slab in February
      2007. We are in the process of incorporating The Athlete’s Foot, Bill Blass,
      MaggieMoo’s and Marble Slab financial reporting processes with and into our
      existing system of financial reporting controls. The Company’s internal control
      over financial reporting will likely be materially affected by incorporating
      appropriate internal controls over financial reporting to account for these
      acquisitions.





**ITEM
      9(B). OTHER INFORMATION**





None.




**PART
        III**
 
 **ITEM
        10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
        GOVERNANCE**
 
 **Directors
        and Executive Officers of the Registrant**
 
 The
        following table shows, as of April 30, 2007, the names and ages of NexCen’s
        directors and executive officers. Each director will continue in office until
        the next annual meeting or until his earlier resignation, removal or death.
        As
        we have previously reported, Mr. Semans plans to retire from the board of
        directors prior to the next annual meeting of stockholders and Mr. Oros plans
        to
        step down as Chairman before the end of this year.
 
 **Name**
              
              **Age**
              
              **Position**David
                  S. Oros
              
              47
              
              Chairman
                  of the BoardRobert
                  W. D’Loren
              
              49
              
              Director,
                  President, and Chief Executive OfficerDavid
                  B. Meister
              
              49
              
              Senior
                  Vice President and Chief Financial OfficerJames
                  Haran*
              
              46
              
              Executive
                  Vice President, M&A and OperationsCharles
                  A. Zona
              
              57
              
              Executive
                  Vice President, Brand Management and LicensingJames
                  T. Brady
              
              66
              
              DirectorJack
                  B. Dunn IV
              
              56
              
              DirectorEdward
                  J. Mathias
              
              65
              
              DirectorJack
                  Rovner
              
              52
              
              DirectorTruman
                  T. Semans
              
              80
              
              DirectorGeorge
                  P. Stamas
              
              56
              
              Director
 
 *Mr.
        Haran will be an executive officer effective as of May 1, 2007. Accordingly,
        the
        disclosure regarding Mr. Haran for the fiscal year ended December 31, 2006
        is
        being provided solely for informational purposes.
 
 ***David
        S. Oros*** ** founded
        the Company in 1996, and currently serves as our chairman. From 1996 until
        June
        2006, Mr. Oros served as our Chief Executive Officer. From 1994 until 1996,
        Mr.
        Oros was President of NexGen Technologies, L.L.C., a wireless software
        development company that contributed all of its assets to the Company. From
        1992
        until 1994, he was President of the Wireless Data Group at Westinghouse
        Electric. Prior to that, from 1982 until 1992 Mr. Oros was at Westinghouse
        Electric directing internal research and managing large programs in advanced
        airborne radar design and development. Mr. Oros received a B.S. in mathematics
        and physics from the University of Maryland, and holds a U.S. patent for
        a
        multi-function radar system. Mr. Oros currently serves on the board of directors
        for Smart Video TM d/b/a
        uVuMobile **,** the
        University of Maryland School of Nursing, the Baltimore’s Port Discovery
        Children’s Museum, and on the board of trustees for the University of Maryland
        Baltimore Foundation, Inc. Mr. Oros is also a managing partner for Global
        Domain
        Partners, LLC.
 
 ***Robert
        W. D'Loren*** was
        elected a director and appointed Chief executive officerof the Company on
        June
        6, 2006. He was appointed President on August 9, 2006. Prior to that, he
        served
        as President and chief
        executive officer of
        UCC
        Capital Corporation, where he pioneered intellectual property and whole company
        securitization finance and was responsible for developing many of the structures
        and credit enhancement products currently being utilized in the market today.
        Prior to forming UCC, Mr. D'Loren served as President and Chief Operating
        Officer of CAK Universal Credit Corporation, an intellectual property finance
        company. From 1985 to 1997, Mr. D'Loren founded and served as President and chief
        executive officer of
        the
        D'Loren Organization, a real estate investment, lending, and restructuring
        firm
        responsible for aggregate transactions in excess of $2 billion. Prior to
        that,
        Mr. D'Loren served as an asset manager for Fosterlane Management where he
        managed $1.8 billion of Class A commercial real estate assets, and previously
        served as a manager with Deloitte & Touche. Mr. D'Loren has served as a
        director or board advisor to Business Loan Express, The Athlete's Foot, Bike
        Athletic Company, Bill Blass Ltd., Candies Inc., Iconix Brand Group, and
        currently serves on the board of The Longaberger Company.
 
 ***David
        B. Meister*** has
        served as Senior Vice President and Chief Financial Officer since joining
        the
        Company on September 12, 2006. In his role, Mr. Meister is responsible for
        all
        financial functions of the company, along with treasury management, investor
        relations, human resources and information technology. Prior to his appointment,
        he worked with the company as a consultant since July 2006. Before joining
        the
        company, Mr. Meister served as Chief Financial Officer and Senior Vice President
        of Barrington Broadcasting Corporation and Double O Radio Corporation from
        January 2005 until June 2006. From 2002 through December 2004, Mr. Meister
        was
        Vice President of Buccino & Associates, a turnaround consulting and crisis
        management firm, and from 1999 to 2001, Mr. Meister served as Senior Vice
        President - Finance and Operations of eChips, Inc., a joint venture of four
        Fortune 500 companies in the electronic components industry. Mr. Meister
        began
        his career with Ernst & Young, LLP, and then spent 10 years at Reliance
        Group Holdings Inc. and Telemundo Group, Inc., a company he helped to launch.
        Mr. Meister earned his BA in Political Science from the University of Rochester
        and an MBA from the William E. Simon Graduate School of Business Administration
        at the University of Rochester. Mr. Meister is a Certified Public
        Accountant.
 59
 ***James
        Haran*** joined
        the Company on June 6, 2006 as Executive Vice President of M&A. Prior to
        joining NexCen, Mr. Haran served for nine years as the Chief Credit Officer
        of
        UCC Capital Corporation. Mr. Haran has a broad range of business experience
        in
        structured finance, M&A and consulting. For the past eight years his focus
        has been on maximizing value and creating leveraged opportunities for IP
        centric
        companies and assets. These industries include apparel and footwear,
        franchising, and entertainment. Mr. Haran played a key role in the BCBG Max
        Azria transaction, winner of the Institutional Investor's Securitization
        News
        2004 Deal of the Year Award. Prior to joining UCC, Mr. Haran was a Partner
        at
        Sidney Yoskowitz and Company P.C., a regional diversified certified public
        accounting firm. During his tenure, which began in 1987, his focus was on
        real
        estate and financial services companies. Mr. Haran served his clients on
        an
        array of strategic and operational levels. Mr. Haran is a Certified Public
        Accountant and holds a Bachelor of Science degree from State University of
        New
        York, at Plattsburgh.
 
 ***Charles
        A. Zona*** joined
        the Company on December 11, 2006 as Executive Vice President of Brand Management
        and Licensing. Prior to joining the Company, Mr. Zona was a licensing consultant
        for three years for clients such as The J. Peterman Company, Chris-Craft
        Boats
        and XOR. Before that, he served as the Senior Vice President of Consumer
        Products for The National Football League Properties where he was responsible
        for developing a new consumer products (apparel, hardlines and accessories)
        licensing business model. Preceding his position with the NFL, he served
        as
        President of Salant Menswear Group which included Perry Ellis Dress
        Furnishings/Accessories and Private Label denim. Earlier, he served, for
        nine
        years, as President of Nautica Dress Furnishings/State of Maine Menswear
        Division. Mr. Zona began a 19-year career in retail at Stern Brothers Department
        Stores and Bambergers that concluded as a Senior Vice President at Lord and
        Taylor. He holds a BS degree in Industrial Relations from Seton Hall
        University.
 
 ***James
        T. Brady*** was
        elected director of the Company on June 28, 2002. Mr. Brady has served as
        the
        Managing Director - Mid-Atlantic, for Ballantrae International, Ltd., a
        management consulting firm, since 2000 and was an independent business
        consultant from May 1998 until 2000. From May 1995 to May 1998, Mr. Brady
        was
        the Secretary of the Maryland Department of Business and Economic Development.
        Prior to May 1995, Mr. Brady was a managing partner with Arthur Andersen
        LLP in
        Baltimore, Maryland. Mr. Brady is a director of McCormick & Company, Inc.,
        Constellation Energy Group and T. Rowe Price Group. Mr. Brady received a
        B.A.
        from Iona College.
 
 ***Jack
        B. Dunn IV*** was
        elected director of the Company on June 28, 2002. Since October 1995, Mr.
        Dunn
        has been Chief executive officerof FTI Consulting, Inc, a multi-disciplined
        consulting firm with practices in the areas of financial restructuring,
        corporate finance, forensic accounting, litigation consulting and economic
        consulting. He joined FTI in 1992 as Executive Vice President and Chief
        Financial Officer and has served as a director of FTI since May 1992 and
        as
        chairman of the board from December 1998 to September 2004. Mr. Dunn is a
        director of Pepco Holdings, Inc., a public utility company, and is a limited
        partner of the Baltimore Orioles. Prior to joining FTI, he was a member of
        the
        board of directors and a managing director of Legg Mason Wood Walker, Inc.
        and
        directed its Baltimore corporate finance and investment banking activities.
        He
        received a B.A. from Princeton University and a J.D. from the University
        of
        Maryland Law School.
 
 ***Edward
        J. Mathias*** was
        elected director of the Company on June 28, 2002. Mr. Mathias has been a
        managing director of The Carlyle Group, a Washington, D.C. based private
        merchant bank, since 1994. Mr. Mathias served as a managing director of T.
        Rowe
        Price Associates, Inc., an investment management firm, from 1971 to 1993.
        He
        received a B.A. from the University of Pennsylvania and an M.B.A. from Harvard
        University.
 
 ***Jack
        Rovner*** was
        elected director of the
        Company on
        October 31, 2006. Mr. Rover has built a solid track record as one of the
        music
        industry's most bankable "turn-around" men. He has led the venerable RCA
        Record
        label, co-founded Vector Recordings and has partnered to lead Vector Management
        - one of the most successful artist management and independent labels in
        the
        industry. Preceding his work at RCA and Vector, Mr. Rovner was senior vice
        president of Marketing at BMG North America and reported directly to the
        chairman of BMG Worldwide and directed marketing efforts for company-owned
        properties. As senior vice president of Arista Records from 1991 to 1994,
        he
        oversaw all brand marketing which yielded record-breaking sales for artists
        Whitney Houston and Kenny G. Mr. Rovner's career began at Columbia Records.
        From
        1981 until his departure in 1991 from the office of Vice President of Marketing,
        he worked on all creative marketing aspects for Bruce Springsteen's Grammy
        Award
        winning recording *Born
        in the USA* ,
        as well
        as projects for The Rolling Stones, Wynton Marsalis, and Pink Floyd. Mr.
        Rovner
        developed his passion for brand marketing and music while a student at the
        University of Iowa, where he was awarded a B.A. in Communication
        Studies.
 
 ***Truman
        T. Semans*** was
        appointed director of the Company by board resolution on September 19, 2002.
        Mr.
        Semans is founder and since 1993 has been Vice Chairman of Brown Investment
        Advisory & Trust Company, or Brown Advisory, a full-service firm providing
        investment advisory services to families and individuals of substantial wealth.
        Prior to founding Brown Advisory, Mr. Semans joined Alex. Brown & Sons in
        August 1974 as general partner, and was a member of the executive committee,
        the
        Vice Chairman of the Board and a member of the Executive and Organization
        Committee. He graduated from Princeton University and attended the University
        of
        Virginia Law School.
 
 60
 ***George
        P. Stamas*** was
        elected a director of the Company on October 20, 1999. Since January 2002,
        Mr.
        Stamas has been a senior partner with the law firm of Kirkland and Ellis
        LLP.
        Also, since November 2001, Mr. Stamas has been a venture partner with New
        Enterprise Associates. From December 1999 until December 2001, Mr. Stamas
        served
        as the vice chairman of the board and managing director of Deutsche Banc
        Alex.
        Brown (now Deutsche Bank Securities). Mr. Stamas is counsel to, and a limited
        partner of, the Baltimore Orioles baseball team and also of Lincoln Holdings,
        which holds interests in the Washington Wizards and Washington Capitals.
        Mr.
        Stamas also serves on the board of directors of FTI Consulting, Inc. He received
        a B.S. in economics from the Wharton School of the University of Pennsylvania
        and a J.D. from the University of Maryland Law School.
 
 **Election
        of Officers**
 
 Our
        board
        elects our officers on an annual basis, and our officers serve until their
        successors are duly elected and qualified. No family relationships exist
        among
        any of our officers or directors.
 
 **Election
        of Directors**
 
 Our
        board
        of directors is currently comprised of eight directors. At each annual meeting
        of stockholders, the successors to the directors then serving are elected
        to
        serve from the time of their election and qualification until the next annual
        meeting following their election or until their successors have been duly
        elected and qualified, or until their earlier death, resignation or removal.
        All
        of our current directors have been elected to serve until the annual meeting
        of
        stockholders to be held in 2007.
 
 Mr.
        Rovner was introduced to the board of directors through Mr. D’Loren and was
        subsequently elected to the board at the Company’s 2006 annual meeting. Under
        the terms of the agreement by which the Company acquired UCC, the Company
        granted Mr. D’Loren a one-time right to nominate two persons to the board of
        directors, provided that such nominees were approved by the Nominating Committee
        of the board of directors and satisfied the prerequisite requirements for
        independence. Mr. Rover was one of those two nominees.
 
 **Corporate
        Governance**
 
 ***Committees
        of the Board of Directors***
 
 Our
        bylaws authorize our board of directors to appoint one or more committees,
        each
        consisting of one or more directors. The board of directors currently has
        four
        standing committees: an Audit Committee, a Nominating Committee, a Governance
        Committee and a Compensation Committee, each of which has adopted written
        charters which are all currently available on our website.
 
 *Audit
        Committee*
 
 The
        Audit
        Committee’s responsibilities include:
 
 ·
            appointing,
                replacing, overseeing and compensating the work of a firm to serve
                as the
                registered independent public accounting firm to audit the Company's
                financial statements;  ·
            discussing
                the scope and results of the audit with the independent registered
                public
                accounting firm and reviewing with management and the independent
                registered public accounting firm the Company's interim and year-end
                operating results;  ·
            considering
                the adequacy of the Company's internal accounting controls and audit
                procedures;  ·
            reviewing
                and approving, as appropriate, related party transactions for potential
                conflict of interest situations;  ·
            approving
                (or, as permitted, pre-approving) all audit and non-audit services
                to be
                performed by the independent registered public accounting firm;
                and  ·
            providing
                an avenue of communication among the independent auditors, management,
                employees and the board.  The
        Audit
        Committee currently consists of Messrs. Brady, Semans and Mathias, with Mr.
        Brady serving as its chairman. The board of directors has determined that
        the
        members of the Audit Committee satisfy the “independence” and “financial
        literacy” requirements for audit committee members as set forth by the SEC and
        as adopted in the Nasdaq listing standards.
 
 61
 The
        board
        of directors has also determined that Mr. Brady is an audit committee financial
        expert, as defined by Item 407 of Regulation S-K and as required by Nasdaq
        Rule
        4350(d), and is independent of management, as defined by Rule 10A-3(b)(1)
        of the
        Securities Exchange Act of 1934, as amended and Nasdaq Rule 4200(a)(15) and
        as
        required by Nasdaq Rule 4350(d). We believe Mr. Brady is qualified to be
        an
“audit committee financial expert” because he has the following attributes: (i)
        an understanding of generally accepted accounting principles, or GAAP, and
        financial statements, (ii) the ability to assess the general application
        of such
        principles in connection with accounting for estimates, accruals and reserves,
        (iii) experience preparing, auditing, analyzing or evaluating financial
        statements that present a breadth and level of complexity of accounting issues
        that are generally comparable to the breadth and complexity of issues that
        can
        reasonably be expected to be raised by NexCen’s financial statements, and
        experience actively supervising one or more persons engaged in such activities,
        (iv) an understanding of internal controls over financial reporting and (v)
        an
        understanding of audit committee functions. Mr. Brady has acquired these
        attributes by means of having held various positions that provided the relevant
        experience, including 33 years with Arthur Andersen (including twenty years
        as
        an audit partner) and membership on the audit committees of several public
        companies since 1998. Mr. Brady also serves on the audit committees of three
        other public companies, but the board of directors has determined that such
        service does not affect his independence, responsibilities or duties as a
        member
        of the Audit Committee.
 
 As
        a
        result of Mr. Semans’ March 2007 announcement of his intention to retire from
        the board of directors in the near future, the Nominating Committee is reviewing
        candidates for election to the board of directors who are qualified to serve,
        and interested in serving, on the Audit Committee. Mr. Semans has agreed
        to
        remain on the board of directors until a suitable replacement is found and
        has
        joined the board of directors and the Audit Committee.
 
 *Nominating
        Committee*
 
 The
        Nominating Committee's responsibilities include:
 
 ·
            identifying,
                evaluating and recommending nominees to serve on the board of directors
                and committees of the board of directors;  ·
            conducting
                searches for appropriate directors and evaluating the performance
                of the
                board of directors and of individual directors;
                and  ·
            screening
                and recommending to the board of directors individuals qualified
                to become
                the chief executive officer of the Company or to become senior executive
                officers of the Company.  The
        members of the Nominating Committee are Messrs. Dunn, Brady and Mathias.
        Mr.
        Dunn currently serves as its chairperson.
 
 *Governance
        Committee*
 
 The
        Governance Committee’s responsibilities include:
 
 ·
            assessing
                the policies, procedures and performance of the board of directors
                and its
                committees;  ·
            developing,
                evaluating and recommending to the board of directors any changes
                or
                updates to the Company’s Code of Ethics or Senior Financial Officers Code
                of Ethical Conduct;  ·
            making
                such other recommendations to the board of directors regarding affairs
                relating to the directors and senior officers of the Company as the
                Governance Committee deems appropriate;  ·
            developing
                and recommending to the board of directors corporate governance principles
                applicable to the Company; and  ·
            taking
                a leadership role in shaping the corporate governance of the
                Company.  The
        members of the Governance Committee are Messrs. Dunn,
        Brady, Mathias, Rovner, Semans and Stamas.
 
 *Compensation
        Committee*
 
 The
        Compensation Committee's responsibilities include:
 
 ·
            setting
                the chief executive officer's compensation based on the achievement
                of
                corporate objectives;  ·
            reviewing
                and recommending approval of the compensation of the Company's other
                executive officers;  ·
            administering
                our stock option and stock incentive
                plans;  ·
            reviewing
                and making recommendations to theboard
                of directorswith respect to the Company’s overall compensation objectives, policies
                and practices, including with respect to incentive compensation and
                equity
                plans; and  62
  ·
            evaluating
                the chief executive officer's performance in light of corporate
                objectives.  The
        members of the Compensation Committee are Messrs. Mathias, Dunn and Rovner,
        with
        Mr. Mathias currently serving as its chairperson.
 
 **Compensation
        Committee Interlocks and Insider Participation**
 
 None
        of
        the members of our Compensation Committee is or has ever been an officer
        or
        employee of NexCen or any of its subsidiaries. None of our executive officers
        serve as a member of the board of directors or a compensation committee of
        any
        entity that has one or more executive officers serving on our board of directors
        or our Compensation Committee.
 
 **Director
        Independence**
 
 Each
        of
        our directors, other than Messrs. Oros, D’Loren and Stamas, qualifies as
“independent” in accordance with the published listing requirements of Nasdaq
        Global Market. The Nasdaq Global Market independence definition includes
        a
        series of objective tests, such as, that the director is not an employee
        of the
        company and has not engaged in various types of business dealings with the
        company. Our board of directors has not adopted any supplemental independence
        standards. However, as required by Nasdaq Global Market rules, the board
        of
        directors has made a subjective determination with respect to each director
        as
        to whether any relationships exist which, in the opinion of the board of
        directors, would interfere with the exercise of independent judgment by that
        director in carrying out the responsibilities of a director, regardless of
        whether the director otherwise satisfies the published independence standards
        of
        the Nasdaq Global Market. In making these determinations, the directors reviewed
        and discussed information provided by the directors and management with regard
        to each director’s business and personal activities as they relate to NexCen and
        NexCen’s management. Messrs. Oros and D’Loren are employed by the Company, and,
        as such, neither qualifies as an independent director under the Nasdaq Global
        Market standards. The board of directors further also determined that Mr.
        Stamas
        should not be considered an independent director in view of the business
        relationship between the company and Kirkland & Ellis LLP, which is the
        Company’s primary outside counsel and of which Mr. Stamas is a partner. Mr.
        Stamas’ business relationship with the Company is described in Item 13 under the
        caption “Certain Relationships and Related Party Transactions.” The
        board of directors made this decision despite the fact that this business
        relationship does not cause Mr. Stamas to be deemed non-independent under
        the
        Nasdaq Global Market standards. As a result, Mr. Stamas does not serve on
        any of
        the Company’s standing committees, other than the Governance Committee. All
        members of the Audit Committee, Compensation Committee and Nominating Committee
        are independent directors.
 
 In
        connection with the independence determination for Mr. Dunn, the directors
        considered that in 2006, FTI
        Consulting, Inc. (FTI) provided due diligence services to the Company totaling
        approximately $15,000 in connection with the acquisition of UCC. Since 1992,
        Mr.
        Dunn has served as a director of FTI, and as its President and Chief Executive
        Officer. The
        board
        of directors has determined that Mr. Dunn should be considered an independent
        director in view of the fact that the services were immaterial to FTI and
        of a
        one-time nature. The board of directors intends to continue to monitor any
        relationships that the directors have with the Company’s service providers.
        Other than the consulting services provided by FTI, the board of directors
        did
        not consider and was not aware of any other transactions, relationships or
        arrangements that would effect the determination of our directors’ independence
        under the Nasdaq Global Market standards.
 
 **Section
        16(a) Beneficial Ownership Reporting Compliance**
 
 Section
        16(a) of the Exchange Act requires our officers (as defined in regulations
        issued by the SEC) and directors, and persons who own more than ten percent
        of
        our common stock, to file with the SEC initial reports of ownership and reports
        of changes in ownership of our common stock (including options and warrants
        to
        acquire common stock). Officers, directors and greater than ten percent
        stockholders are required by SEC regulation to furnish us with copies of
        all
        Section 16(a) forms they file.
 
 Based
        solely on a review of the copies of such reports of ownership received by
        us and
        certifications from our executive officers and directors, we believe that
        during
        fiscal year 2006 all filing requirements applicable to our executive officers,
        directors and such greater than ten percent stockholders were complied with
        on a
        timely basis, except for a late report on Form 4 by each of Messrs. Oros
        and
        Reymann filed on May 16, 2006 and May 18, 2006 reporting the grant of 150,000
        and 50,000 shares of restricted stock made to Messrs. Oros and Reymann,
        respectively, on May 5, 2006 under our 1999 Equity Incentive Plan.
 
 **Corporate
        Governance Policies**
 
 We
        have
        adopted a general code of ethics for our business. We have also adopted a
        code
        of ethical conduct that applies solely to our principal executive officer,
        principal financial officer, principal accounting officer, controller and
        persons performing similar functions. The board of directors is responsible
        for
        reviewing and authorizing waivers from both the code of ethics and code of
        ethical conduct for senior financial officers, and we will file any waivers
        from, or amendments to, these codes on our website at www.nexcenbrands.com,
        the
        content of which website is not incorporated by reference into or considered
        a
        part of this document. In 2006 no waivers were reviewed or authorized. Both
        the
        general code of ethics and the code of ethical conduct for senior financial
        officers, as well as the charters for our Audit, Nominating, Governance and
        Compensation Committees, are available on our website. This information is
        also
        available in print upon written request to our corporate secretary at the
        address of our corporate headquarters office in New York City. We have not
        adopted any formal, written governance policies or principles.
 
 63
 **ITEM
        11. EXECUTIVE COMPENSATION**
 
 **Compensation
        Discussion and Analysis**
 
 ***Overview
        and Objectives***
 
 In
        2006,
        we transformed our company by exiting the mortgage-backed securities business
        that we had operated since 2004 to focus on a new intellectual property
        business. As part of this transformation, we transitioned to a new senior
        management team. As a result of these activities, our compensation programs
        and
        policies for our named executives in 2006 had several different
        objectives:
 
 ·
            Provide
                reasonable financial incentives for outgoing managers to remain in
                place
                for a period of time to effect an orderly transition of the management
                of
                the business;  ·
            Provide
                reasonable severance packages for outgoing managers, through a combination
                of current cash payments, continued benefits and long-term equity
                awards,
                in recognition of their long-standing service to the Company and
                their
                significant contributions to identifying and initiating the new
                intellectual property business strategy;
                and  ·
            Provide
                new senior managers with a combination of current compensation and
                long-term opportunities sufficient to attract outstanding senior
                executives and provide them with incentives to (1) build and manage
                our
                business so that we become profitable and (2) create substantial
                value for
                our stockholders over the long term.  We
        began
        the business and management transition during 2006 and are continuing to
        develop
        our compensation programs and policies in 2007, as we build both our business
        and our senior management team. As a result, we expect that we may make material
        adjustments and refinements to our compensation policies and programs in
        2007.
 
 Our
        current compensation programs are intended to reward our named executives
        for
        growing our business profitably. They also are intended to encourage the
        retention of executives who contribute significantly to improved business
        performance, overall growth and increased stockholder value. The components
        of
        our compensation programs for named executives include salary, annual bonus,
        equity incentive compensation and benefits.
  We
        have
        paid salaries that are at or slightly below the median level in the marketplace,
        reflecting our goal of conserving cash as we acquire businesses and seek
        to
        build a profitable operation. To enable us to attract and retain superior
        individuals, however, we have offered generous performance-based annual bonus
        opportunities and equity incentive awards. In the case of our chief executive
        officer, on whom our business is dependent, we have agreed to a compensation
        package that, by component and in the aggregate, based upon our review of
        relevant market information, will be at the top of the marketplace if certain
        performance levels are achieved. We believe that this compensation package
        was
        necessary to attract and retain our chief executive officer.
 
 ***Process
        for Determining Compensation***
 
 *General.*  Our
        Compensation Committee plays an integral role in shaping the Company’s overall
        compensation objectives, policies and practices. The Compensation Committee
        is
        responsible for, among other things, reviewing and recommending approval
        of the
        compensation of our executive officers; administering our equity incentive
        and
        stock option plans; reviewing and making recommendations to the board of
        directors with respect to incentive compensation and equity incentive and
        stock
        option plans, and evaluating our chief executive officer's performance in
        light
        of corporate objectives, and setting our chief executive officer's compensation
        based on the achievement of corporate objectives.
 
 We
        rely
        on our judgment in making compensation decisions, based upon a review of
        the
        Company’s performance, the executive’s performance and responsibilities, the
        Company’s and the executive’s achievement of business objectives, plans and
        specified goals, and the executive’s contributions to the development of the
        Company’s business and its long-term prospects for growth and success. We take
        into account information about market levels of compensation provided by
        our
        compensation consultant, Towers Perrin, in setting compensation levels and
        programs for new executives. Towers Perrin uses information from relevant
        published compensation surveys, as well as public filings for similar peer
        companies. We also consider a named executive’s current and past compensation
        levels in determining whether to make any discretionary awards or any
        adjustments to compensation of a continuing executive. In this process, our
        objective is to keep annual salaries at or below median levels, but to provide
        annual bonus opportunities and equity incentive awards that offer opportunities
        to earn overall compensation above median levels, if the Company and the
        executive deliver superior performance.
  64
 In
        general, we have not developed or adhered to any strict formulas in setting
        compensation or in establishing compensation packages. We expect that over
        time,
        the annual salaries of the named executive officers will be less than 50%
        of
        each person’s overall annual compensation and a significantly smaller portion of
        such compensation over a period of years, taking into account the value of
        incentive equity awards. In 2006, because we did not pay any annual bonuses
        to
        the named executives who are continuing with the Company, and because none
        of
        their incentive equity awards had vested, salaries represented a large
        proportion of their overall annual compensation. We expect that this will
        change
        in future years.
 
 *Participation
        of the Chief Executive Officer*  *and
        Other Executives* .
        We do
        not currently have a human resources department. Our chief executive officer
        participates in discussions with the Compensation Committee regarding
        compensation decisions about all named executives other than himself. Except
        for
        the chief executive officer, no other named executive participates directly
        in
        discussions with the Compensation Committee about compensation matters, although
        they do discuss these matters with the chief financial officer. We expect
        to
        rely heavily on the recommendations of the chief executive officer on these
        matters, particularly with respect to the allocation of the annual bonus
        pool. ****
 
 *Role
        of the Compensation Consultant.* To
        assist the Compensation Committee in fulfilling its responsibilities, the
        Compensation Committee has retained an independent compensation consultant,
        Towers Perrin. The consultant reports directly to the Compensation Committee.
        Other than the work Towers Perrin performs for the Compensation Committee
        and
        the board of directors, Towers Perrin has not provided any consulting services
        to NexCen or its executive officers.
 
 In
        assisting the Compensation Committee, Towers Perrin presents the committee
        with
        peer group benchmarking data and information about other relevant market
        practices and trends, and makes recommendations to the Compensation Committee
        regarding target levels for various elements of total compensation for executive
        officers and directors of the Company. Towers
        Perrin’s recommendations are presented to and considered by the Compensation
        Committee in their deliberations on compensation matters.
 
 In
        2006
        Towers Perrin was retained by the Compensation Committee to provide a
        compensation study to benchmark and assist in the development of the
        compensation packages for Mr. D’Loren and Mr. Haran. The compensation study
        evaluated the reasonableness of the base salary, annual bonus and stock option
        grants proposed for Mr. D’Loren employment as our new chief executive officer in
        comparison to the competitive market. The compensation study was presented
        to
        the Compensation Committee and the board of directors and was considered
        by each
        in their deliberations and discussions on Mr. D’Loren’s compensation
        package.
  For
        2007,
        Towers Perrin has been retained by the Compensation Committee to assist in
        a
        review of executive officer and director compensation. In the 2007 review, Towers
        Perrin obtained peer group benchmarking data primarily from a group of companies
        with revenue of $30 to $200 million regardless of industry, and
        secondly from a group of companies that have a similar business strategy
        to us,
        regardless of revenue size. While the data may not result in a statistical
        random sampling, we believe it will provide valuable data regarding the
        compensation levels and practices of peer companies with whom we compete
        for key
        executive talent.
 
 *Equity
        Grant Practices.* The
        exercise price of each stock option awarded to our senior executives under
        our
        long-term incentive plan is the closing price of NexCen common stock on the
        date
        of grant, which is the date on which the option (including all of its material
        terms) is approved by the Compensation Committee. The Compensation Committee
        is
        required to approve all grants of all awards under our long-term incentive
        plan.
        Our board of directors previously had delegated to our chief executive officer,
        acting as a board committee of one, the authority to make grants of up to
        40,000
        shares per individual pursuant to our long-term incentive plans, subject
        to his
        duty to report periodically to the Compensation Committee on awards granted
        by
        him. In October 2006, we terminated that authority after concluding that
        the
        Compensation Committee should consider and decide on all incentive equity
        awards.
 
 We
        have
        not granted incentive equity awards on a regular annual basis in the last
        several years. Until 2006, we had not granted any incentive equity awards
        to our
        named executive officers since 2002. We have typically granted stock options
        to
        new employees when they begin working for the Company. These grants are usually
        made after the date on which employment commences because our Compensation
        Committee has been unable to meet in time to approve a grant on an earlier
        date.
        We are currently considering the adoption of a policy to specify particular
        dates on which equity incentive awards would be granted. Such dates would
        take
        into account the dates on which we expect to announce quarterly earnings
        and
        would be intended to avoid the grant of any stock options in advance of the
        public announcement of material information about the Company. It has been
        our
        policy not to grant stock options in advance of public announcements of material
        information. Our long-term incentive plan does not permit the re-pricing
        of
        options.
 
 65
 In
        the
        past, we have made periodic grants of restricted stock. In 2006, as an incentive
        for our then-current named executives to identify and implement a new business
        strategy for the Company, we granted a total of 150,000 shares of restricted
        stock to our former chief executive officer (who is now our Chairman) and,
        50,000 shares of restricted stock to our former chief financial officer.
        Vesting
        of those shares was subject to the acquisition of a business (or businesses)
        that would serve as the foundation for a new business strategy for our Company.
        In the case of our former chief financial officer, his 50,000 shares vested
        when
        we acquired UCC. In the case of our former chief executive officer, his 150,000
        shares will vest in three 50,000 share amounts in each of June 2007, June
        2008
        and June 2009 (the first three anniversaries of the date on which we acquired
        UCC). We have not made other restricted stock awards recently, and we are
        currently evaluating whether to award restricted stock, stock options or
        a
        combination of the two in future incentive equity awards. Our decision will
        take
        into account tax, economic, and employee incentive aspects of the different
        award types.
 
 *2006
        Option Exercise Extension Program* .
        As part
        of our transformation to a new IP-centric business model, we transitioned
        management of the Company to a new senior management team and relocated our
        corporate office to New York City (from Baltimore). At the end of 2006, we
        closed the Baltimore office, and a number of historic employees (including
        certain officers) left the Company. Some changes to the composition of our
        board
        of directors also began to occur, in response to the changes in our
        business.
 
 Our
        employees and directors held certain vested options that had been issued
        under
        our equity incentive plans. Pursuant to these plans and the customary option
        grant agreements that had been used historically, option holders typically
        have
        90 days following the termination of employment, or the termination of the
        service relationship (in the case of a director), with the Company to exercise
        vested stock options, after which time such options would be forfeited
        automatically. Upon review of the situation, and taking into account the
        unusual
        corporate transformation the Company was undergoing and the long-standing
        and
        dedicated service of the small group of remaining employees, the Compensation
        Committee determined that it was appropriate to provide employees and directors
        with a one-time opportunity to elect to extend the post-employment or
        post-service exercise period of vested options
 
 The
        Compensation Committee adopted an option extension program, consistent with
        Section 409A of the Internal Revenue Code, pursuant to which existing employees
        and directors of the Company were given a one-time opportunity to propose
        to the
        Compensation Committee, prior to December 31, 2006, an extension schedule
        for
        their vested options, which would govern their ability to exercise vested
        options after ceasing to be employed by the Company or ceasing to be a director
        of the Company. The Compensation Committee recommended this program to the
        board
        of directors, which approved the parameters of the program, and the details
        of
        the program were communicated to the Company’s six employees and eight
        directors.
  Four
        of
        the Company’s employees, including one named executive officer (Mr. Reymann) and
        one of the Company’s directors (Mr. Beese) proposed option extension schedules
        to the Compensation Committee. (Mr. Reymann left the Company in mid-December
        2006 and stepped down as an executive officer in September 2006, and Mr.
        Beese
        resigned as a director in October 2006.) The Compensation Committee reviewed
        the
        proposed schedules and, after consultation with its outside professional
        advisors, concluded that the proposed schedules were consistent with the
        requirements of the overall program, as adopted by the board of directors,
        and
        were consistent with the requirements of Section 409A. As a result of this
        option extension program, approximately 300,000 vested options that would
        have
        expired in 2006 and early 2007 were extended for periods of between one and
        five
        years. In each case, a person’s option extension arrangement identifies a future
        calendar year (defined as January 1 of such year through the last day of
        that
        same calendar year) in which such options may be exercised, with options
        not
        exercised during the year expiring at the earlier of the end of that particular
        calendar year or ten years from the date of the original option grant. The
        option extension program allows for different exercise periods for different
        options. So, for example, a person with 1,000 vested options who adopted
        an
        extension schedule may be entitled to exercise 250 of those options within
        90
        days of leaving the Company, 500 options during calendar year 2008 and 250
        options during calendar year 2009 (assuming the applicable options do not
        expire
        before the end of the applicable extended option period).
 
 The
        purpose of this extension program was to provide long-standing employees
        and
        directors with an opportunity to realize additional value from their existing
        long-term equity incentive grants as partial compensation for their service
        to
        the Company and in recognition of the fact that their departure from the
        Company
        was not voluntary, was due to changes in the Company’s business (rather than any
        dissatisfaction with their performance) and represented a change (since the
        time
        of award grant) in both the Company’s and the employee’s (or the director’s)
        expectation regarding the potential value of the long-term incentive awards.
        In
        2006, the Company recorded charges of $82,000 and $37,000 to restructuring
        charges and stock based compensation, respectively, related to the extension
        program.
 
 The
        Company has since changed the terms of its standard option grant to directors.
        Such grants now provide that once vested, options awarded to directors are
        exercisable at any time until their expiration date (which is typically ten
        years from the grant date), regardless of when the director ceases to serve
        as a
        director of the Company (as long as such departure is after the vesting date
        of
        the granted options).
 
 *Share
        Ownership Guidelines* .
        We do
        not currently have any requirements for any of our executive officers or
        other
        employees to own specified amounts of NexCen common stock. As a result of
        his
        prior ownership of UCC, our chief executive officer currently owns approximately
        2.4 million shares of our common stock, which he received as consideration
        for
        his interest in UCC when we purchased UCC in 2006. Our chief executive officer
        also currently holds a warrant to acquire 125,000 shares of our common stock
        and
        options to acquire approximately 2.7 million shares of our common
        stock.
 
 66
 *Compensation
        Deduction Limit* .
        Section
        162(m) of the Internal Revenue Code generally limits the compensation that
        a
        corporation can deduct for payments to a chief executive officer and the
        four
        other most highly compensated executive officers to $1 million per officer
        per
        year. However, compensation that is “performance-based,” as defined by Section
        162(m), is exempt from this limitation on deductibility. In general,
        compensation attributable to the exercise of stock options granted with an
        exercise price at or above the market price of the underlying stock at the
        time
        of the grant qualify as performance-based compensation. In 2006, we did not
        pay
        our chief executive officer or our four other most highly compensated executive
        officers compensation in excess of $1 million (excluding compensation in
        respect
        of exercised options that we believe qualifies as performance-based
        compensation).
 
 We
        expect
        to award annual bonuses over the next several years under our 2006 Management
        Bonus Plan. The
        2006
        Management Bonus Plan is designed so that amounts paid thereunder can qualify
        as
        performance-based compensation under Section 162(m) where the Compensation
        Committee sets performance targets for eligible participants and such targets
        are met. Tax rules require the Company to  obtain
        stockholder approval of the material terms of performance-based compensation
        plans, such as the 2006 Management Bonus Plan. We obtained stockholder approval
        of the 2006 Management Bonus Plan in October 2006.
 
 The
        Compensation Committee may award compensation that is not exempt from the
        limitations on deductibility under section 162(m) where it believes such
        compensation is in the best interests of NexCen and its stockholders, balancing
        tax efficiency with long-term strategic goals. In this regard, the Compensation
        Committee may take into account the impact of the Company’s net tax loss carry
        forwards on the Company’s status as a taxpayer. If the Company generates taxable
        earnings, its net tax loss carry forwards are expected to be available to
        offset
        most of the federal (and in some cases, state) income taxes that the Company
        would otherwise be required to pay. Accordingly, the loss of compensation
        deductions under certain circumstances may not be material to the Company;
        however, the Compensation Committee will still consider whether there would
        be
        material benefits to paying non-deductible compensation in such
        circumstances.
  For
        fiscal 2007, the Compensation Committee has decided not to adopt performance
        or
        award targets under the 2006 Management Bonus Plan. Accordingly, any bonus
        payments awarded under the 2006 Management Bonus Plan will not qualify as
        “performance based” compensation under Section 162(m). In reaching this
        decision, the Compensation Committee took the following factors into
        account:
 
 ·
            Because
                of the substantial recent changes to the Company’s business, the large
                number of recent acquisitions, and the fact that the new business
                has not
                yet been operated for a full fiscal year, the Compensation Committee
                did
                not believe it could identify reliable and appropriate performance
                targets
                for 2007 that would ensure an appropriate award of incentive
                compensation; 
 ·
            Because
                the total bonus pool available under the 2006 Management Bonus Plan
                is
                capped at 5% of the Company’s net income in the applicable fiscal year,
                and because the largest portion of that pool that can be awarded
                to any
                one person is 50% (which is the specified award percentage for Mr.
                D’Loren), the Compensation Committee does not expect that any awards
                for
                2007 that may be made under the 2006 Management Bonus Plan will be
                sufficient to result in any one individual receiving 2007 compensation
                that is not performance-based in excess of $1 million;
                and 
 ·
            Should
                any covered individual end up receiving 2007 compensation that is
                not
                performance-based in excess of $1 million, the amount above $1 million
                is
                likely to be minimal and should not affect the Company’s liability for
                2007 federal income taxes.  The
        Compensation Committee plans in future years (after fiscal 2007) to structure
        awards under the 2006 Management Bonus Plan so that they qualify as
“performance-based” compensation under Section 162(m). For fiscal 2007, however
        the Compensation Committee will retain discretion to make aggregate awards
        up to
        the full amount of the bonus pool (5% of fiscal 2007 net income) based upon
        a
        review of both the Company’s and the eligible executive’s performance in fiscal
        2007. To the extent the Compensation Committee identifies eligible individuals
        and any target award levels in advance; these will be publicly disclosed
        as
        required by applicable SEC rules.
 
 ***Elements
        of Compensation***
  For
        2006,
        the principal components of compensation for our named executive officers
        consisted of:
 
 ·
            Base
                salary;  ·
            Equity-based
                awards;  ·
            Cash
                bonuses;  ·
            Perquisites
                and other personal benefits; and  ·
            Other
                compensation.  67
 
 These
        principal elements have been chosen to create a flexible package that can
        reward
        both our short and long-term performance, while providing the executive with
        a
        competitive compensation package. In 2006, we changed our business strategy
        to
        focus on a new IP-centric business model. As part of our transformation,
        we
        installed a new senior management team. Other than for the chief executive
        officer for whom we negotiated a detailed employment arrangement in connection
        with the acquisition of UCC, a company that he controlled and which gave
        us the
        platform for our new strategy, we have not yet formulated formal long-term
        compensation policies and approaches. We expect to develop a comprehensive
        program in 2007 now that we have completed several acquisitions consistent
        with
        our new business strategy which have established the foundation of our new
        IP
        business. We believe that this foundation will begin to give us the necessary
        insight to understand the critical elements to our financial and operational
        success for which we can set appropriate metrics for short and long-term
        compensation. (Our new long-term compensation policies and approaches will
        apply
        both to the named executive officers and more generally to our employee base.)
        For continuing executives other than the chief executive officer, agreements
        were negotiated in 2006 that included competitive base salaries, discretionary
        bonus opportunities, basic benefit packages, and modest severance arrangements
        as required to attract the new executives and were based on negotiations
        between
        the new executive, on the one hand, and the chief executive officer and the
        Compensation Committee, on the other.
  *Base
        salary.* We
        provide named executive officers and other employees with a base salary to
        compensate them for basic services rendered during the fiscal year. Initial
        base
        salary ranges for our named executive officers were determined for each
        executive based on negotiations between the new executive, on the one hand,
        and
        the Company, on the other.
 
 For
        2007,
        Towers Perrin has been retained by the Compensation Committee to assist in
        a
        review of executive officer compensation. During its review of base salaries
        for
        executives, the Compensation Committee will consider:
 
 ·
            Market
                data provided by our outside consultant, Towers
                Perrin;  ·
            Internal
                review of the executive’s compensation, both individually and relative to
                other executive officers; and  ·
            Individual
                performance of the executive.  Until
        a
        formal long-term compensation policy and approach is adopted, the Compensation
        Committee expects to review salary levels at least annually, as well as upon
        a
        promotion or other change in job responsibility. Merit based increases to
        salaries, if any, will be based on the Compensation Committee’s review and
        overall assessment of an individual’s performance.
 
 *Equity-based
        awards.* We
        provide equity-based compensation to promote our long-term growth and
        profitability. Equity-based awards not only provide directors, executive
        officers, and employees with incentives to maximize stockholder value and
        otherwise contribute to our long-term success, but they also allow us to
        attract, retain and reward the best available individual for positions of
        responsibility.
 
 Awards
        of
        stock options and restricted stock are made under our 2006 Equity Incentive
        Plan, which was approved by our stockholders in October 2006. Prior to October
        2006, equity-based awards were made under two prior long-term incentive plans.
        With adoption of the 2006 Equity Incentive Plan, no further awards will be
        issued under these older plans. Shares of restricted stock are issued subject
        to
        a vesting schedule and cannot be sold until and to the extent the shares
        have
        vested. Stock options are issued at an exercise price of no less than fair
        market value on the date of grant and are subject to vesting requirements,
        which
        may include time-based vesting, performance-based vesting, or both.
        Historically, we have not issued any options subject to performance-based
        vesting. In 2006, we awarded restricted stock to our former chief executive
        officer and chief financial officer, and awarded stock options to the three
        current named executive officers and Mr. Haran in connection with their
        employment agreements. The Compensation Committee administers the 2006 Equity
        Incentive Plan and has not delegated any grant authority.
 
 *Cash
        bonuses.*  **** We
        provide cash bonus compensation to motivate, reward and retain key executives.
        Under the 2006 Management Bonus Plan bonuses are paid out of a pool determined
        to be 5% of the Company’s net income. The chief executive officer has a
        contractual right to 50% of this pool and the other half is allocated to
        senior
        executives based on performance achievements determined by the chief executive
        officer and the Compensation Committee. The Company reported net loss for
        2006
        and as a result there was no bonus pool for 2006.
 
 *Perquisites
        and other personal benefits.* We
        provide certain executive officers with perquisites and other personal benefits
        that we and the Compensation Committee believe are reasonable and consistent
        with our overall compensation program to better enable us to attract and
        retain
        superior employees for key positions. Perquisites are generally granted as
        part
        of our executive recruitment and retention efforts. During 2006, our chief
        executive officer received a limited amount of perquisites and other personal
        benefits that we paid on his behalf. These perquisites and other personal
        benefits included, among other things:
 
 ·
            Payments
                of life and disability insurance
                premiums;  ·
            Car
                expenses; and  68
 ·
            Club
                dues.  *Other
        Compensation.* In
        addition to the compensation discussed above, we also provide our named
        executive officers with customary employee benefits, available to all employees,
        including health, disability and life insurance. In 2006, we matched
        contributions made by our former chief executive officer and chief financial
        officer (Messrs. Oros and Reymann) pursuant to a 401(k) plan. The other named
        executive’s contributions were not matched as they participated under a
        different 401(k) plan. **** In
        general, these benefits are substantially the same as those available to
        all of
        our employees.
  ***Compensation
        for Outgoing Named Executives in 2006***
 
 Our
        long-time chief executive officer and chief financial officer relinquished
        their
        positions with NexCen in 2006, although our chief executive officer has
        continued as Chairman of the Company. We did not make any changes to their
        base
        salaries in 2006, and we did not award them any annual cash bonuses in 2006.
        We
        concluded that in light of the performance of the MBS business and our
        expectation that a management transition would occur once we identified and
        implemented a new or additional business strategy, no change in current
        compensation was warranted. However, in early 2006 we began to discuss with
        each
        of them potential changes to their respective employment agreements that
        we
        believe would provide them with reasonable severance arrangements and incentives
        to remain with the Company during what we expected would likely be a period
        of
        business and management transition. We finalized the amendments in early
        May
        2006 and, at the same time, granted them shares of restricted stock, as
        discussed below. The amendments are described below under the caption
“Employment Agreements.”
 
 These
        revised employment agreements and restricted stock grants were intended to
        achieve several objectives:
 
 ·
            reward
                them for their long-standing service and contributions to the Company,  ·
            provide
                them with a significant incentive to carry out a successful change
                in the
                Company’s business strategy,  ·
            encourage
                them to be supportive of a change in the senior management of the
                Company,
                and  ·
            offer
                them a reasonable severance package that we concluded was consistent
                with
                market practice and appropriate in light of their service to the
                Company
                and the Company’s situation.  ***Compensation
        of Our Former Chief Executive Officer*** **.**
        In 2006, Mr. Oros’ annual salary remained at $200,000, which is the same as it
        has been since 1999. He was not awarded any cash bonus in 2006.
 
 In
        June
        2006, Mr. Oros relinquished his position as chief executive officer, remaining
        as Chairman. Under the terms of his amended employment agreement, we requested
        that he also continue as an employee, to provide advice and guidance to our
        new
        chief executive officer and to assist him with the management and business
        transition processes. Mr. Oros has continued to receive his annual salary
        of
        $200,000 during this period. The amended employment agreement also provides
        for
        a revised termination and severance arrangement. If we subsequently terminate
        Mr. Oros’ employment without “Cause” (as defined in his existing employment
        agreement) or because of his death or “Disability” (as defined in his existing
        employment agreement), he will receive a lump-sum severance
        payment equal to $600,000, less the aggregate amount of salary paid to him
        since
        June 2006. In such event, Mr. Oros also is entitled to continue receiving
        group
        health and medical benefits for up to three years following termination of
        his
        employment.
  The
        purpose of this amended contractual arrangement was to provide Mr. Oros with
        a
        severance package – in the
        form of
        continuing salary or a lump-sum departure payment, at the Company’s
        option –
        equal to three years of annual salary, plus continuing insurance benefits
        for
        three years. In exchange for this severance arrangement, Mr. Oros agreed
        to
        abide by a non-competition covenant. Mr. Oros was the chief executive officer
        of
        the Company from its inception in 1996 until June 2006, and we concluded
        that a
        reasonable severance arrangement was appropriate in light of his years of
        dedicated service to the Company. We believe that the severance arrangement
        is
        appropriate as compared to severance arrangements provided to chief executives
        of companies similar to NexCen and is reasonable under the circumstances,
        taking
        into account NexCen’s size, stage of development and financial resources and Mr.
        Oros’ contributions to the Company over an extended period of time.
 
 In
        2006,
        as discussed above, Mr. Oros also received a grant of 150,000 shares of
        restricted stock, which will vest in three increments of 50,000 shares in
        each
        of June 2007, June 2008 and June 2009, subject to accelerated vesting under
        certain circumstances as described below under the heading “Employment
        Agreements.” In October 2006, Mr. Oros was granted 25,000 stock options priced
        at $6.77 per share, which was the closing price of NexCen’s common stock on that
        date. The options will vest in full in October 2007, if Mr. Oros remains
        employed by the Company at such time. Each of the non-management directors
        also
        received a grant of 25,000 stock options on this same day, at the same per
        share
        price and with the same vesting terms. The board of directors decided to
        award
        these options to Mr. Oros, despite the fact that he was an employee of the
        Company at the time, because he had ceased to serve as a member of the senior
        executive management team (as his continuing positions were as Chairman and
        as a
        non-executive adviser to the senior management team) and would not be entitled
        to receive any annual bonuses or long-term incentive awards that might be
        paid
        to senior executives. On March 23, 2007, the Company announced that Mr. Oros
        plans to step down as Chairman by the end of the year, but will remain as
        a
        director and an employee.
  69
 ***Compensation
        of Our Former Chief Financial Officer.*** In 2006,
        Mr. Reymann’s annual salary remained at $180,000, which is the same as it has
        been since 2002. He was not awarded any cash bonus in 2006.
 
 In
        September 2006, Mr. Reymann stepped down as chief financial officer. He remained
        with the Company to assist in a management transition through mid-December
        2006.
        Under the terms of an amended employment agreement that we negotiated with
        Mr.
        Reymann in 2006, upon his departure from the Company, he received a lump-sum
        severance payment of $360,000, plus continued group health and medical benefits
        for two years. In addition, all of Mr. Reymann’s options were vested as of the
        date his employment with the Company ended. See “Outstanding Equity Awards at
        Fiscal Year-End Table” for details of Mr. Reymann’s stock options.
 
 We
        amended Mr. Reymann’s employment agreement in 2006 to provide for this severance
        package (equivalent to two years of annual salary plus continuing insurance
        benefits for two years) and to provide him with accelerated option vesting
        in
        light of his many years of dedicated service to the Company. He served as
        the
        Company’s chief financial officer since 1998. In exchange for the severance
        arrangement, Mr. Reymann agreed to abide by a non-competition covenant. We
        believe that the severance arrangement is appropriate as compared to severance
        arrangements provided to senior executives of companies similar to NexCen
        and is
        reasonable under the circumstances, taking into account NexCen’s size, stage of
        development and financial resources and Mr. Reymann’s contributions to the
        Company over an extended period of time.
 
 In
        2006,
        as discussed above, Mr. Reymann also received a grant of 50,000 shares of
        restricted stock. All of these shares vested in June 2006, when we acquired
        UCC.
 
 ***Compensation
        for Non-Management Directors*** .
        Non-management directors’ compensation is set by the board of directors at the
        recommendation of the Compensation Committee. Non-management directors’
compensation is designed to fairly pay directors for work required in a company
        of our size and scope and to align directors’ interests with the long-term
        interest of our stockholders. Non-management directors’ compensation is
        comprised of cash compensation and equity compensation.
 
 In
        March
        2006, the board of directors approved increases in the compensation payable
        to
        non-management directors. The compensation includes an annual retainer of
        $20,000 and a fee of $1,500 for each board meeting attended. In 2006, upon
        the
        recommendation of the Compensation Committee, non-management directors were
        granted 25,000 nonqualified options to purchase shares of our common stock.
        In
        their deliberations, the Compensation Committee was advised by management
        and
        Towers Perrin that the proposed option grants were consistent with the market
        generally and the practices of comparable companies. Prior to the grant in
        2006,
        no options had been granted to our directors since 2002.
 
 In
        addition to board retainer and attendance fees, the chairperson of each board
        committee (other than the Audit Committee) receives an additional retainer
        of
        $2,500. The chairperson of the Audit Committee receives a $12,500 annual
        retainer. Audit Committee members also receive a fee of $2,500 for each Audit
        Committee meeting they attend.
 
 For
        2007,
        Towers Perrin has been retained by the Compensation Committee to assist in
        a
        review of director compensation. During its review of director compensation,
        the
        Compensation Committee will consider market data provided by our outside
        consultant, Towers Perrin, and an internal review of compensation payable
        to
        non-management directors for a company of our size and scope.
 
 **Compensation
        Committee Report**
 
 The
        Compensation Committee has reviewed the Compensation Discussion and Analysis
        and
        discussed that Analysis with management. Based on its review and its discussions
        with management, the Committee has recommended to our board of directors
        that
        the Compensation Discussion and Analysis be included in the Company’s Annual
        Report on Form 10-K/A for 2006 and the Company’s 2007 proxy statement. This
        Report is provided by the following independent directors, who comprise the
        Compensation Committee:
 
 Edward
        J. Mathias (Chairman)
 Jack
        B. Dunn IV
 Jack
        Rovner
  **Summary
        Compensation Table**
 
 The
        table
        below summarizes the total compensation paid to or earned by each of our
        named
        executive officers, including our former chief executive officer, our former
        chief financial officer and Mr. Haran for the fiscal year ended December
        31,
        2006.
 
 70
 Since
        we
        reported net loss for fiscal year ended December 31, 2006, our named executive
        officers, including our former chief executive officer, our former chief
        financial officer and Mr. Haran, were not entitled to receive payments which
        would be characterized as “Non-Equity Incentive Plan Compensation” pursuant to
        our 2006 Management Bonus Plan. Additionally, the board of directors did
        not
        award any payments which would be characterized as “Bonus” payments. We also
        have no defined benefit plans, actuarial plans, or non-qualified deferred
        compensation plans.
 
 **Name
                  and**
                **Principal
                  Position**
              
              **Year**
              
              **Salary**
                **($)**
              
              **Bonus**
                **($)**
              
              **Stock**
                **Awards**
                **($)**
              
              **Option
                  Awards**
                **($)**
              
              **Non-Equity**
                **Incentive**
                **Plan**
                **Compensation**
                **($)**
              
              **Change
                  in Pension**
                **Value
                  and**
                **Nonqualified**
                **Deferred**
                **Compensation**
                **Earnings**
                **($)**
              
              **All
                  Other Compensation**
                **($)**
              
              **Total**
                **($)****(1)**
              
              
              
              **(2)**
              
              
              
              **(3)**
              
              **(4)**
              
              
              
              
              
              **(5)****Robert
                  W. D’Loren**
                ******Chief
                  Executive Officer**
              
              
              2006
              
              $
              427,083
              
              
              **-**
              
              
              **-**
              
              $
              701,406
              
              
              -
              
              
              -
              
              $
              40,162
              
              $
              1,168,651**David
                  B. Meister**
                ******Chief
                  Financial Officer**
              
              
              2006
              
              $
              69,375
              
              
              **-**
              
              
              **-**
              
              $
              40,671
              
              
              -
              
              
              -
              
              
              -
              
              $
              110,046**James
                  Haran**
                **Executive Vice President**
              
              
              2006
              
              $
              338,542
              
              
              **-**
              
              
              **-**
              
              $
              145,117
              
              
              -
              
              
              -
              
              
              -
              
              $
              483,659**Charles
                  Zona**
                ******Executive
                  Vice President**
              
              
              2006
              
              $
              18,182
              
              
              **-**
              
              
              **-**
              
              $
              10,994
              
              
              -
              
              
              -
              
              
              -
              
              $
              29,176**David
                  Oros**
                **Chairman
                  & Former Chief Executive Officer**
              
              
              2006
              
              $
              207,692
              
              
              **-**
              
              $
              111,502
              
              $
              37,020
              
              
              -
              
              
              -
              
              
              -
              
              $
              356,214**David
                  Reymann**
                **Former
                  Chief Financial Officer**
              
              
              2006
              
              $
              180,000
              
              
              **-**
              
              $
              205,000
              
              
              -
              
              
              -
              
              
              -
              
              $
              376,443
              
              $
              761,443
 
 (1)
              Mr.
                  D’Loren, Mr. Meister and Mr. Zona became named executive officers
                  on June
                  6, 2006, September 12, 2006 and December 11, 2006, respectively.
                  Mr.
                  Reymann ceased to be a named executive officers on September 12,
                  2006. Mr.
                  Oros remains an executive Chairman of the Company while Mr. Reymann
                  remained as an employee to assist in management transition through
                  mid-December 2006. Mr. Haran became an employee of the Company
                  on June 6,
                  2006.(2)
              The
                  amounts included for Mr. D’Loren, Mr. Meister, Mr. Haran and Mr. Zona is
                  based on a base salary of $750,000, $225,000, $375,000 and $300,000,
                  respectively, pro rated from their start dates of June 6, 2006,
                  September
                  12, 2006, June 6, 2006 and December 11, 2006, respectively. Mr.
                  Meister’s
                  amount does not include $29,000 which was paid to Mr. Meister for
                  services
                  as a consultant with the Company from July 2006 until September
                  2006. The
                  amount for Mr. Haran includes a deferred bonus of $125,000 from
                  UCC
                  Capital that the Company assumed upon the acquisition. The amount
                  included
                  for Mr. Oros and Mr. Reymann is based on a base salary of $200,000
                  and
                  $180,000, respectively. The amount for Mr. Oros includes an additional
                  $7,692 which arose when the company changed payroll systems and
                  trued-up
                  the payroll to coincide with the calendar year end of December
                  31,
                  2006.(3)
              In
                  2006, Messrs. Oros and Reymann received restricted stock as part
                  of their
                  agreements to transition the company to a new management
                  team.(4)
              For
                  the year ended December 31, 2006, Messrs. D’Loren, Meister, Haran and Zona
                  received option awards pursuant to the the terms of their employment
                  agreements. Mr. Oros’ option awards include the options
                  received as part of a stock option grant to purchase 25,000 shares
                  given to all directors except Mr. D’Loren on October 31, 2006.(5)
              For
                  2006, Mr. D’Loren received a total of $40,162 in all other compensation
                  which included insurance premiums for life and long term disability
                  of
                  $28,830, car expenses of $9,842 and club dues of $1,490. For David
                  Reymann
                  the amount represents a severance payment of two years salary that
                  was
                  payable to him under his employment agreement because of a Trigger
                  Event
                  (as discussed below in “Employment Agreements” under the caption
                  “Employment Agreements for Former Chief Executive Officer and Former
                  Chief
                  Financial Officer”) that occurred in 2006 and accrued vacation
                  benefits.
 
 71
 
 **Grants
        of Plan-Based Awards Table**
 
 During
        fiscal year ended December 31, 2006, we granted stock options and restricted
        stock awards to our named executive officers, Mr. Haran and our former chief
        executive officer and former chief financial officer under our long-term
        equity
        incentive plans. Information
        with respect to each of these awards on a grant-by-grant basis is set forth
        in
        the table below. All of our stock options were granted with an exercise price
        equal to the fair market value of our common stock on the date of grant.
        Under
        our long-term equity incentive
        plans, air market value is defined as the closing sale price of our common
        stock
        on the date of grant.
  **Estimated
                  Future Payouts**
                **Under
                  Non-Equity**
                **Incentive
                  Plan Awards**
              **Estimated
                  Future Payouts**
                **Under
                  Equity Incentive**
                **Plan
                  Awards**
              **All
                  Other**
                **Stock**
                **Awards:**
                **Number**
                **of**
                **Shares**
                **of
                  Stock**
                **or
                  Units**
                **(#)**
              **All
                  Other**
                **Option**
                **Awards:**
                **Number**
                **of**
                **Securities**
                **Underlying
                  Options**
                **(#)(1)**
              **Exercise**
                **or**
                **Base**
                **Price**
                **of
                  Option**
                **Awards**
                **($/Sh)**
                **($)**
              **Closing**
                **Price**
                **of**
                **Common**
                **Stock
                  Units**
                **on
                  Date**
                **of
                  Grant**
                **($)**
              **Grant**
                **Date**
                **Fair**
                **Value**
                **of
                  Stock**
                **and
                  Option**
                **Awards****Name**
              **Grant**
                **Date**
              **Threshold
                  ($)**
              **Target**
                **($)**
              **Maximum**
                **($)**
              **Threshold**
                **(#)**
              **Target**
                **(#)**
              **Maximum**
                **(#)****Robert
                  W. D’Loren**
              **06/06/06**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **2,811,976**
              **$4.10**
              **$4.10**
              **$3,388,354****David
                  B. Meister**
              **09/12/06**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **200,000**
              **$6.08**
              **$6.08**
              **$369,935****James
                  Haran**
              **06/06/06**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **581,788**
              **$4.10**
              **$4.10**
              **$701,039****Charles
                  Zona**
              **12/11/06**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **250,000**
              **$6.96**
              **$6.96**
              **$528,592****David
                  Oros (2)**
              **05/05/06**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **150,000**
              **-**
              **$0.00**
              **$4.10**
              **$480,769****10/31/06**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **25,000**
              **$6.77**
              **$6.77**
              **$57,713****David
                  Reymann (3)**
              **05/05/06**
              **-**
              **-**
              **-**
              **-**
              **-**
              **-**
              **50,000**
              **-**
              **$0.00**
              **$4.10**
              **$205,000**
 
 
 (1)
              Mr.
                  D’Loren’s amount includes a warrant to purchase 125,000 shares that has
                  the same terms as the options. The warrant was not granted under
                  our
                  long-term equity incentive plans.(2)
              Mr.
                  Oros was granted 150,000 shares of restricted stock on May 5, 2006.
                  This
                  award was initially approved in March 2006, but final terms were
                  not
                  agreed and the shares were not awarded until May 5. Mr. Oros’ shares vest
                  in three equal annual installments of 50,000 shares on each of
                  the first
                  three anniversaries of June 6, 2006, which was the date on which
                  we
                  acquired UCC, and which our board of directors determined was a
“Trigger
                  Event” (as defined in Mr. Oros’ restricted stock grant agreement) that
                  initiated the three-year vesting. However, vesting remains subject
                  to Mr.
                  Oros’ continued employment on each vesting date.(3)
              Mr.
                  Reymann was granted 50,000 shares of restricted stock on May 5,
                  2006. This
                  award was initially approved in March 2006, but final terms were
                  not
                  agreed and the shares were not awarded until May 5. The shares
                  vested in
                  full on June 6, 2006, which was the date on which we acquired UCC,
                  and
                  which our board of directors determined was a “Trigger Event” (as defined
                  in Mr. Reymann’s restricted stock grant
                  agreement).
 
 
 72
  **Outstanding
        Equity Awards at Fiscal Year-End Table**
 
 The
        following table sets forth information with respect to outstanding equity-based
        awards at December 31, 2006 for our named executive officers, Mr. Haran and
        our
        former chief executive officer and former chief financial officer.
  **Option
                    Awards**
              
              **Stock
                  Awards****Name**
              **Number
                  of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options**
                **(#)**
                **Exercisable**
              **Number
                  of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options**
                **(#)**
                **Unexercisable**
              **Equity**
                **Incentive**
                **Plan
                  Awards:**
                **Number**
                **of
                  Securities**
                **Underlying**
                **Unexercised**
                **Unearned**
                **Options**
                **(#)**
              **Option
                  on Exercise Price**
                **($)**
              **Option**
                **Expiration**
                **Date**
              
              **Number
                  of**
                **Shares
                  or**
                **Units
                  of Stock**
                **That
                  Have**
                **Not
                  Vested**
                **(#)**
              **Market
                  Value**
                **of
                  Shares**
                **or
                  Units**
                **of
                  Stock**
                **That
                  Have**
                **Not
                  Vested**
                **($)**
              **Equity**
                **Incentive**
                **Plan**
                **Awards:**
                **Number**
                **of
                  Unearned**
                **Shares,**
                **Units
                  or**
                **Other**
                **Rights
                  That**
                **Have
                  Not**
                **Vested**
                **(#)**
              **Equity**
                **Incentive**
                **Plan**
                **Awards:**
                **Market
                  or**
                **Payout**
                **Value
                  of**
                **Unearned**
                **Shares,**
                **Units
                  or**
                **Other**
                **Rights
                  That**
                **Have
                  Not**
                **Vested**
                **($)****Robert
                  W. D’Loren**
              **-**
              **2,811,976****(1)**
              **-**
              **4.10**
              **06/05/2016**
              
              **-**
              **-**
              **-**
              **-****David
                  B. Meister**
              **-**
              **200,000****(2)**
              **-**
              **6.08**
              **09/11/2016**
              
              **-**
              **-**
              **-**
              **-****James
                  Haran**
              
              **581,788
                  (3)**
              
              **4.10**
              **06/05/2016****Charles
                  Zona**
              **-**
              **250,000****(4)**
              **-**
              **6.96**
              **12/10/2016**
              
              **-**
              **-**
              **-**
              **-****David
                  Oros**
              **100,000**
                **12,600**
                **18,000**
                **-**
                **-**
                **655,000**
                **157,500**
              **-**
                **-**
                **-**
                **-**
                **25,000****(5)**
                **-**
                **-**
              **-**
                **-**
                **-**
                **-**
                **-**
                **-**
                **-**
              **2.95**
                **16.00**
                **8.54**
                **-**
                **6.77**
                **1.60**
                **4.00**
              **06/27/2012**
                **10/24/2009**
                **07/24/2011**
                **-**
                **10/30/2016**
                **06/21/2009**
                **08/31/2009**
              
              **-**
                ****
                
                **150,000****(6)**
                **-**
                **-**
              **1,084,500****(7)**
                **-**
                **-**
                **-**
              **-**
              **-****David
                  Reymann**
              **32,500**
                **50,000**
                **30,000**
                **5,416
                  (8)**
                  **20,834
                    (9)**
              **-**
                **-**
                **-**
                **-**
                **-**
              **-**
                **-**
                **-**
                **-**
                **-**
              **8.00**
                **8.54**
                **3.75**
                **1.60**
                **1.49**
              **12/31/2008**
                **12/31/2008**
                **12/31/2007**
                **12/31/2007**
                **12/31/2007**
              
              **-**
              **-**
              **-**
              **-**
 
 (1)
              Includes
                  a warrant to purchase 125,000 shares which has the same terms as
                  the
                  options. The warrant and the options vest in equal amounts on the
                  three
                  anniversaries of grant: June 2007, June 2008 and June 2009. For
                  additional
                  information with respect to accelerated vesting of this award,
                  see
                  “Employment Agreements - Robert W. D’Loren.”(2)
              Options
                  vest in equal amounts on the three anniversaries of grant: September
                  2007,
                  September 2008 and September 2009. For additional information with
                  respect
                  to accelerated vesting of this award, see “Employment Agreements - David
                  B. Meister.”(3)
              Options
                  vest in equal amounts on the three anniversaries of grant: June
                  2007, June
                  2008 and June 2009. For additional information with respect to
                  accelerated
                  vesting of this award, see “Employment Agreements - James
                  Haran.”(4)
              Options
                  vest in equal amounts on the three anniversaries of grant: December
                  2007,
                  December 2008 and December 2009. For additional information with
                  respect
                  to accelerated vesting of this award, see “Employment Agreements - Charles
                  A. Zona.(5)
              Options
                  vest in full on October 31, 2007.(6)
              The
                  restricted stock vests in three equal annual installments of 50,000
                  shares
                  on each of the first three anniversaries of June 6, 2006, subject
                  to Mr.
                  Oros’ continued employment with the Company on each vesting date. For
                  additional information with respect to accelerated vesting of this
                  award,
                  see “Employment Agreements - David S. Oros.”(7)
              This
                  represents the 150,000 shares subject to vesting multiplied times
                  our
                  stock price on December 31, 2006.(8)
              Exercised
                  on February 20, 2007.
 (9)
                Exercised
                    on April 16, 2007.
 73
 
 **Option
        Exercises and Stock Vested Table**
 
 The
        following table sets forth certain information regarding exercise of options
        and
        vesting of restricted stock held by the named executive officers, Mr. Haran
        and
        our former chief executive officer and former chief financial officer during
        the
        year ended December 31, 2006.
 
 **Option
                  Awards**
              **Stock
                  Awards****Name**
              **Number
                  of Shares**
                **Acquired
                  on Exercise**
                **(#)**
              **Value
                  Realized**
                **on
                  Exercise**
                **($)**
              **Number
                  of Shares**
                **Acquired
                  on Vesting**
                **(#)**
              **Value
                  Realized**
                **On
                  Vesting**
                **($)
                  (1)****Robert
                  W. D’Loren**
              -
              -
              -
              -**David
                  B. Meister**
              -
              -
              -
              -**James
                  Haran**
              -
              -
              -
              -**Charles
                  Zona**
              -
              -
              -
              -**David
                  Oros**
              -
              -
              -
              -**David
                  Reymann**
              -
              -
              50,000
              $205,000
  (1)
              Included
                  in this column is the aggregate dollar amount realized by the named
                  executive officer upon exercise of the restricted stock. The amount
                  is
                  calculated at the closing stock price on the date of exercise multiplied
                  by the number of shares exercised and acquired.
 
 
 ***Compensation
        for Continuing Named Executives in 2006***
 
 We
        discuss here the compensation of those individuals who were named executive
        officers at December 31, 2006, all of whom remain with the Company at the
        date
        of this Report. For each continuing named executive officer, we negotiated
        employment agreements prior to their hire in 2006. In each case, we provide
        competitive base salaries, discretionary bonus opportunities, basic benefit
        packages and modest severance arrangements. The overall philosophy of our
        compensation policy is reflected in each agreement. See the section captioned
        “Employment Agreements” for more in-depth information. The compensation of our
        former chief executive officer (who is now our Chairman) and our former chief
        financial officer are discussed above.
 
 *Compensation
        for Chief Executive Officer* ***.*** In 2006,
        the compensation of Mr. D’Loren, the president and chief executive officer was
        based on his employment agreement entered into on June 6, 2006. In
        determining the salary and other forms of compensation for Mr. D’Loren, the
        Compensation Committee retained a compensation consultant, Towers Perrin,
        to
        assist in the development of Mr. D’Loren’s compensation package. As discussed
        above in “Role of the Compensation Consultant” Towers Perrin provided the
        Compensation Committee with a compensation study to benchmark the compensation
        package for Mr. D’Loren. The compensation study evaluated the reasonableness of
        the base salary, annual bonus and stock option grants proposed for Mr. D’Loren
        in comparison to the competitive market for which we competed for Mr. D’Loren’s
        services. The compensation study indicated that initial overall compensation
        levels fell between the 50th and 75th percentile of the competitive market.
        In
        year three (of the three year employment agreement), the study found that
        overall compensation levels fell between the 75th and 90th percentile of
        the
        competitive market. The Compensation Committee and the board of directors
        favored a package weighted toward incentive based compensation, which was
        believed to tie more directly than base to increases in stockholder value.
        The
        Compensation Committee and board of directors also took into consideration
        Mr.
        D’Loren’s substantial experience and in particular his performance in the
        intellectual property industry. The Compensation Committee and board of
        directors also gave significant weight to the responsibilities of Mr. D’Loren,
        including his expected role to implement the new IP strategy through sourcing
        and successfully integrating. The Compensation Committee and board of directors
        believes that Mr. D’Loren’s compensation package as our principal executive
        officer reflects appropriate incentives for significant performance during
        2007
        and future years in building the company.
 
 *Compensation
        for executive officers.* Compensation of our other executive officers has been determined based on
        recommendations made by the chief executive officer to the Compensation
        Committee. The objective of our compensation program is to attract and retain
        talented executives. As mentioned above, the Company will be more fully
        developing its compensation programs in 2007 to reflect the growth and change
        in
        the company’s business.
 
 74
 Compensation
        amounts for named executive officers are determined according to the position
        of
        the named executive officer. Relatively greater emphasis is typically placed
        on
        the equity-based components of compensation so as to put a greater portion
        of
        total pay based on company and individual performance. We believe the
        combination of a base compensation lower than median, coupled with an
        opportunity to significantly enhance overall individual compensation if
        individual and company performance will yield an attractive compensation
        program
        that facilitates our recruitment and retention of talented
        executives.
 
 *Post-termination
        compensation.* We have
        entered into employment agreements with each of the named executive officers.
        Each of these agreements provides for certain payments and other benefits
        if the
        executive's employment terminates under certain circumstances, including,
        in the
        event of a “change of control”. See sections captioned “Employment Agreements"
        and “Potential Payments Upon Termination or Change of Control” for a description
        of the severance and change of control benefits.
  **Employment
        Agreements**
 
 ***Employment
        Agreements for Continuing Named Executives in 2006***
 
 *Robert
        W. D’Loren*
 
 Simultaneous
        with the acquisition of UCC in June 2006, we entered into an employment
        agreement with Mr. D’Loren. Pursuant to the terms of Mr. D’Loren’s employment
        agreement, Mr. D’Loren will receive an initial annual base salary of $750,000,
        subject to periodic review and upward adjustment, as well as various perquisites
        and benefits, including a monthly car allowance. For each calendar year during
        the term of the employment agreement, Mr. D’Loren will be entitled to receive an
        incentive bonus equal to 50% of amounts awarded under the 2006 Management
        Bonus
        Plan (the “Annual Bonus”). No Annual Bonus was paid in 2006. Unless otherwise
        agreed, the Annual Bonus will be payable 50% percent in cash and 50% in
        restricted shares of NexCen’s common stock that will vest in three equal
        installments over three years following the date of their issuance.
 
 On
        June
        6, 2006, as specified in Mr. D’Loren’s employment agreement, we granted Mr.
        D’Loren options to purchase an aggregate of 2,686,976 shares of our common
        stock
        under the terms of the Company’s 1999 Equity Incentive Plan. See
        “Outstanding Equity Awards at Fiscal Year-End” table for details of Mr.
        D’Loren’s stock options. Under
        Mr. D’Loren’s employment agreement, if Mr. D’Loren’s employment with NexCen is
        terminated without “Cause” (as defined in Mr. D’Loren’s employment agreement),
        or if he resigns for “Good Reason” (as defined in Mr. D’Loren’s employment
        agreement), or if a Change of Control (as defined in Mr. D’Loren’s employment
        agreement) occurs, all unvested options and restricted shares issued to Mr.
        D’Loren pursuant to the 2006 Management Bonus Plan will vest
        immediately.
 
 In
        addition, in accordance with the terms of Mr. D’Loren’s employment agreement, we
        issued to Mr. D’Loren a ten-year warrant to purchase 125,000 shares of our
        common stock, at an exercise price of $4.10 per share. The terms, including
        regular and accelerated vesting, of the warrant are identical to those of
        the
        option grant he received at closing.
 
 The
        initial term of Mr. D’Loren’s employment agreement is three years, and it renews
        automatically for successive one-year periods beginning June 6, 2009, unless
        either party provides at least 90 days’ advance written notice of a decision not
        to renew. If we do not renew Mr. D’Loren’s employment agreement at the end of
        any term, Mr. D’Loren will be entitled to receive his then current base salary
        for two years. If (i) we terminate Mr. D’Loren’s employment without “Cause” or
        (ii) Mr. D’Loren terminates his employment for Good Reason, he will be entitled
        to receive a severance package consisting of (1) any earned but unpaid base
        salary through the date of employment termination and any declared but unpaid
        annual bonus and (2) an amount equal to his Base Salary (at the rate then
        in
        effect) for the greater of the remainder of the initial three-year term or
        two
        years. The severance will be payable over a six-month period or such shorter
        period as is required to comply with Section 409A of the Internal Revenue
        Code
        and applicable regulations adopted thereunder. Mr. D’Loren also will be entitled
        to continue to participate in NexCen’s group medical plan on the same basis as
        he previously participated or receive payment of, or reimbursement for, COBRA
        premiums (or, if COBRA coverage is not available, reimbursement of premiums
        paid
        for other medical insurance in an amount not to exceed the COBRA premium)
        for a
        two-year period following termination, subject to termination of this
        arrangement if a successor employer provides him with health insurance
        coverage.
 
 If
        Mr.
        D’Loren’s employment is terminated without Cause (or if he resigns for Good
        Reason) within one year of a Change of Control (as defined in Mr. D’Loren’s
        employment agreement), he will be entitled to receive the same severance
        as
        described above for termination without Cause or resignation for Good Reason,
        except that instead of the amount described in clause (2) of the prior
        paragraph, Mr. D’Loren will be entitled to receive an amount equal $100 less
        than three times the sum of (i) Mr. D’Loren’s base salary (at the rate in effect
        on the date of termination) and (ii) the Annual Bonus (which, for this purpose,
        will be deemed to equal the product of (A) the percentage of the 2006 Management
        Bonus Plan that Mr. D’Loren was awarded in the most recently completed fiscal
        year, multiplied by (B) four times the net income reported by NexCen in the
        last
        complete fiscal quarter prior to the effective date of termination of Mr.
        D’Loren’s employment). However, if the severance payment owed to Mr. D’Loren,
        plus any other payments or benefits, either cash or non-cash, that Mr. D’Loren
        has the right to receive from NexCen would constitute an “excess parachute
        payment” (as defined in Section 280G of the Internal Revenue Code of 1986), then
        his severance will be reduced to the largest amount that will not result
        in
        receipt by Mr. D’Loren of an “excess parachute payment.”
 
 75
 During
        the term of employment and for two years thereafter, or one year if Mr.
        D’Loren’s employment is terminated without Cause or if he resigns for Good
        Reason, Mr. D’Loren has agreed not to compete with NexCen. In addition, for two
        years following the term of employment, Mr. D’Loren has agreed not to solicit
        any customer or supplier to cease doing business with NexCen, or to solicit
        or
        hire any employee of NexCen or any of its subsidiaries.
 
 *David
        B. Meister*
 
 In
        September 2006, Mr. Meister joined the Company as Senior Vice President,
        Chief
        Financial Officer, Treasurer and Secretary.
 
 Pursuant
        to the terms of the employment agreement, Mr. Meister will receive an initial
        annual base salary of $225,000, subject to periodic review and upward
        adjustment, as well as customary employee perquisites and benefits. For each
        calendar year during the term of the employment agreement, Mr. Meister will
        be
        entitled to receive a performance-based bonus pursuant to the 2006 Management
        Bonus Plan based on achieving annual performance goals recommended by the
        Chief
        Executive Officer and subject to review and confirmation by the Compensation
        Committee or board of directors.
 
 On
        September 12, 2006, as contemplated by the employment agreement, Mr. Meister
        was
        granted options to purchase an aggregate of 200,000 shares of the Company’s
        common stock under the terms of the Company’s 1999 Equity Incentive Plan. See
        “Outstanding Equity Awards at Fiscal Year-End” table for details of Mr.
        Meister’s stock options. Under
        Mr. Meister’s employment agreement, if his employment with the Company is
        terminated without “Cause” (as defined in the employment agreement), or if he
        resigns for “Good Reason” (as defined in the employment agreement), or if a
        Change of Control (as defined in the employment agreement) occurs, all unvested
        options will immediately vest and become fully exercisable.
 
 The
        initial term of the employment agreement is three years, and it renews
        automatically for successive one-year periods beginning September 12, 2009,
        unless either party provides at least 90 days’ advance written notice of a
        decision not to renew. If (i) the Company terminates Mr. Meister’s employment
        without “Cause” or does not renew the employment agreement at the end of any
        term or (ii) Mr. Meister terminates his employment for Good Reason, he will
        be
        entitled to receive a severance package consisting of (1) any earned but
        unpaid
        base salary through the date of employment termination and any declared but
        unpaid annual bonus and (2) an amount equal to his base salary (at the rate
        then
        in effect) for one year. The severance will be payable over a six-month period
        or such shorter period required to comply with Section 409A of the Internal
        Revenue Code and applicable regulations adopted thereunder. He also will
        be
        entitled to continue to participate in the Company’s group medical plan on the
        same basis as he previously participated or receive payment of, or reimbursement
        for, COBRA premiums (or, if COBRA coverage is not available, reimbursement
        of
        premiums paid for other medical insurance in an amount not to exceed the
        COBRA
        premium) for a one-year period following termination, subject to termination
        of
        this arrangement if a successor employer provides him with health insurance
        coverage.
 
 If
        Mr.
        Meister’s employment is terminated without Cause or if he resigns for Good
        Reason within a year of a Change of Control (as defined in the employment
        agreement), he will be entitled to receive the same severance as described in
        the preceding paragraph, however, the amount of severance will be increased
        to
        equal $100 less than two times the sum of (i) Mr. Meister’s base salary (at the
        rate in effect on the date of termination) and (ii) the annual bonus paid
        to Mr.
        Meister in the year prior to such Change in Control. However, if the severance
        payment owed to Mr. Meister would constitute an “excess parachute payment” (as
        defined in Section 280G of the Internal Revenue Code of 1986), then his
        severance will be reduced to the largest amount that will not result in receipt
        by the Mr. Meister of an “excess parachute payment.”
 
 During
        the term of employment and for two years thereafter, or one year if Mr.
        Meister’s employment is terminated without Cause or if he resigns for Good
        Reason, Mr. Meister has agreed not to compete with the Company. In addition,
        for
        two years following the term of employment, Mr. Meister has agreed not to
        solicit, induce or attempt to induce any customer or supplier to cease doing
        business with the Company, to solicit or hire any employee of the Company
        or any
        of its subsidiaries or in any way interfere with the relationship between
        any
        customers, suppliers, licensee, employee or business relation of the Company
        and
        the Company.
 
 *James
        Haran*
 
 Simultaneous
        with the acquisition of UCC in June 2006, we entered into an employment
        agreement with Mr. Haran. Pursuant to the terms of Mr. Haran’s employment
        agreement, Mr. Haran will receive an initial annual base salary of $375,000,
        subject to periodic review and upward adjustment. For each calendar year
        during
        the term of the employment agreement, Mr. Haran will be entitled to receive
        an
        incentive under the 2006 Management Bonus Plan (the “Annual Bonus”). No Annual
        Bonus was paid in 2006.
 
 76
 On
        June
        6, 2006, as specified in Mr. Haran’s employment agreement, we granted Mr. Haran
        options to purchase an aggregate of 581,788 shares of our common stock under
        the
        terms of the Company’s 1999 Equity Incentive Plan. See
        “Outstanding Equity Awards at Fiscal Year-End” table for details of Mr.
        Haran’s stock
        options. Under
        Mr. Haran’s employment agreement, if Mr. Haran’s employment with NexCen is
        terminated without “Cause” (as defined in Mr. Haran’s employment agreement), or
        if he resigns for “Good Reason” (as defined in Mr. Haran’s employment
        agreement), or if a Change of Control (as defined in Mr. Haran’s employment
        agreement) occurs, all unvested options issued to Mr. Haran pursuant to the
        employment agreement will vest immediately.
 
 The
        initial term of Mr. Haran’s employment agreement is three years, and it renews
        automatically for successive one-year periods beginning June 6, 2009, unless
        either party provides at least 30 days’ advance written notice of a decision not
        to renew. If we do not renew Mr. Haran’s employment agreement at the end of any
        term, Mr. Haran will be entitled to receive his then current base salary
        for
        18-months. If (i) we terminate Mr. Haran’s employment without “Cause” or (ii)
        Mr. Haran terminates his employment for Good Reason, he will be entitled
        to
        receive a severance package consisting of (1) any earned but unpaid base
        salary
        through the date of employment termination and any declared but unpaid annual
        bonus and (2) an amount equal to his Base Salary (at the rate then in effect)
        for 18-months. The severance will be payable over a six-month period or such
        shorter period as is required to comply with Section 409A of the Internal
        Revenue Code and applicable regulations adopted thereunder. Mr. Haran also
        will
        be entitled to continue to participate in NexCen’s group medical plan on the
        same basis as he previously participated or receive payment of, or reimbursement
        for, COBRA premiums (or, if COBRA coverage is not available, reimbursement
        of
        premiums paid for other medical insurance in an amount not to exceed the
        COBRA
        premium) for a one year period following termination, subject to termination
        of
        this arrangement if a successor employer provides him with health insurance
        coverage.
 
 If
        Mr.
        Haran’s employment is terminated without Cause (or if he resigns for Good
        Reason) within one year of a Change of Control (as defined in Mr. Haran’s
        employment agreement), he will be entitled to receive the same severance
        as
        described above for termination without Cause or resignation for Good Reason,
        except that instead of the amount described in clause (2) of the prior
        paragraph, Mr. Haran will be entitled to receive an amount equal $100 less
        than
        two times the sum of (i) Mr. Mr. Haran’s base salary (at the rate in effect on
        the date of termination) and (ii) the Annual Bonus, if declared, in the year
        prior to the Change of Control. However, if the severance payment owed to
        Mr.
        Haran, plus any other payments or benefits, either cash or non-cash, that
        Mr.
        Haran has the right to receive from NexCen would constitute an “excess parachute
        payment” (as defined in Section 280G of the Internal Revenue Code of 1986), then
        his severance will be reduced to the largest amount that will not result
        in
        receipt by Mr. Haran of an “excess parachute payment.”
 
 During
        the term of employment and for two years thereafter, or one year if Mr. Haran’s
        employment is terminated without Cause or if he resigns for Good Reason,
        Mr.
        Haran’s has agreed not to compete with NexCen. In addition, for two years
        following the term of employment, Mr. Haran has agreed not to solicit any
        customer or supplier to cease doing business with NexCen, or to solicit or
        hire
        any employee of NexCen or any of its subsidiaries.
 
 *Charles
        A. Zona*
 
 In
        December 2006, Mr. Zona joined the Company as Executive
        Vice President, Brand Management and Licensing . Prior to
        his appointment, Mr. Zona worked with the Company as a consultant since November
        2006.
 
 Pursuant
        to the terms of the employment agreement, Mr. Zona will receive an initial
        annual base salary of $300,000, subject to annual review and upward adjustments
        (but not decreases), as
        well
        as customary employee perquisites and benefits .
        Mr.
        Zona will also be eligible to receive a performance-based bonus pursuant
        to the 2006 Management Bonus Plan based on
        achieving annual performance goals recommended by the President and Chief
        Executive Officer and subject to review and confirmation by the Compensation
        Committee or board of directors.
 
 On
        December 11, 2006, as contemplated by the employment agreement, Mr. Zona
        was
        granted options to purchase a total of 250,000 shares of the Company’s common
        stock pursuant to the terms of the Company’s 2006 Equity Incentive Plan. See
“Outstanding Equity Awards at Fiscal Year-End” table for details of Mr. Zona’s
        stock options. Under Mr. Zona’s employment agreement, if his employment with the
        Company is terminated without “Cause” (as defined in the employment agreement),
        or if he resigns for “Good Reason” (as defined in the employment agreement), or
        if a Change of Control (as defined in the employment agreement) occurs, all
        unvested options will immediately vest and become fully
        exercisable.
 
 The
        initial term of the employment agreement is three years, and it renews
        automatically for one-year periods, unless either party gives the other party
        90
        days prior written notice of a decision not to renew. If the Company terminates
        Mr. Zona’s employment (i) without Cause, or (ii) if Mr. Zona resigns for Good
        Reason, or (iii) if the Company fails to renew the term, Mr. Zona will be
        entitled to receive (1) any unpaid base salary including any declared but
        unpaid
        annual bonus and (2) an amount equal to his base salary (at the rate then
        in
        effect) for a six-month period. Mr. Zona also will be entitled to continue
        to
        participate in the Company’s group medical plan on the same basis as he
        previously participated or receive payment of, or reimbursement for, COBRA
        premiums for a one-year period following his termination, subject to termination
        of coverage if a successor employer provides him with health
        insurance.
 
 77
 Notwithstanding
        the foregoing, if Mr. Zona’s employment is terminated within one year following
        a Change of Control by the Company without Cause or by Mr. Zona with Good
        Reason, Mr. Zona shall be entitled to receive the same severance as described
        in
        the preceding paragraph, however, the amount of severance will be changed
        to an
        amount equal to $100 less then two times the sum of (i) Mr. Zona’s base salary
        (at the rate then in effect) and (ii) the annual bonus paid to Mr. Zona in
        the
        year prior to such Change in Control. However, if the lump sum severance
        owed to
        Mr. Zona would constitute an “excess parachute payment” (as defined in Section
        280G of the Internal Revenue Code of 1986), then his severance will be reduced
        to the largest amount that will not result in receipt by Mr. Zona of an “excess
        parachute payment.”
 
 During
        the term of employment and for one year thereafter, or six months if Mr.
        Zona’s
        employment is terminated without Cause or if he resigns for Good Reason,
        Mr.
        Zona has agreed not to compete with the Company. In addition, for one year
        following the term of employment, Mr. Zona has agreed not (i) to solicit,
        induce
        or attempt to induce any customer, supplier, licensee, or other business
        relation of the Company or any of its subsidiaries to cease doing business
        with
        the Company or any of its subsidiaries, (ii) to solicit, induce or attempt
        to
        induce any employee of the Company or any of its subsidiaries to terminate
        such
        employee’s employment with the Company or (iii) in any way interfere with the
        relationship between any customer, supplier, licensee, employee or business
        relation and the Company or any of its subsidiaries.
 
 ***Employment
        Agreements for Former Chief Executive Officer and Former Chief Financial
        Officer***
 
 *David
        S. Oros*
 
 On
        May 5,
        2006, we entered into a new employment agreement with Mr. Oros to provide
        for
        Mr. Oros’ continued part-time employment by NexCen if he ceased to serve as
        NexCen’s chief executive officer following the occurrence of a “Trigger Event”
(as such term is defined in his restricted stock grant agreement). As a result
        of the acquisition of UCC in June 2006, the board of directors determined
        that a
        Trigger Event had occurred. As a result, Mr. Oros is continuing employment
        with
        us for up to a three-year period at a base salary of $200,000 per year. Under
        the terms of this arrangement, Mr. Oros is not required to devote more than
        250
        hours per year to NexCen. In addition, if, at any time, Mr. Oros’ employment is
        terminated by NexCen without “Cause” (as defined in his existing employment
        agreement) or because of his death or “Disability” (as defined in his existing
        employment agreement), he will receive a lump-sum severance payment equal
        to
        $600,000, less any salary paid to him since June 2006. In the event of such
        a
        termination, Mr. Oros also is entitled to continue receiving group health
        and
        medical benefits for up to three years following termination of his employment.
        Severance payments are to be paid on a schedule that complies with the
        requirements of Section 409A of the Internal Revenue Code of
 1986,
        as
        amended. In the amendment, Mr. Oros also has agreed to a non-competition
        covenant.
 
 On
        May 5,
        2006, we also granted 150,000 shares of restricted stock to Mr. Oros, which
        is
        governed by the terms of his restricted stock grant agreement. This grant
        was
        made pursuant to the NexCen’s 1999 Equity Incentive Plan. Mr. Oros’ shares vest
        in three equal annual installments of 50,000 shares on each of the first
        three
        anniversaries on the date of the Trigger Event that occurred in June 2006,
        subject to Mr. Oros’ continued employment with NexCen on each vesting date. In
        addition, all otherwise unvested restricted shares will vest on an accelerated
        basis upon the occurrence of a “Change of Control” (as defined in the 1999
        Equity Incentive Plan), or upon termination of employment by NexCen without
        “Cause,” death or “Disability,” or upon resignation for “Good Reason” (with all
        such terms as defined in the restricted stock grant agreement). Any shares
        that
        are unvested on May 5, 2013 will be forfeited, and unvested shares also will
        be
        forfeited upon a termination by NexCen of employment for “Cause” or resignation
        without “Good Reason.”
 
 *David
        C. Reymann*
 
 On
        May 5,
        2006, we entered into a new employment agreement with Mr. Reymann to provide
        that all of his outstanding unvested options and restricted stock would vest
        automatically upon the occurrence of a Trigger Event, which occurred upon
        the
        acquisition of UCC in June 2006. In addition, Mr. Reymann’s severance
        arrangement was revised so that if his employment is terminated by NexCen
        without “Cause” (as defined in his existing employment agreement), his Death or
        Disability (as defined in his existing employment agreement) or if he terminated
        his employment for “Good Reason” (as defined in the amendment), he would be
        entitled to receive a lump-sum severance payment equal to the greater of
        (a)
        two-times his then-current annual salary or (b) $360,000. In such event,
        Mr.
        Reymann also would be entitled to continue receiving group health and medical
        benefits for two years following termination of his employment. Severance
        payments are to be paid on a schedule that complies with the requirements
        of
        Section 409A of the Internal Revenue Code of 1986, as amended. In the amendment,
        Mr. Reymann also agreed to extend the duration of the non-competition and
        non-solicitation covenants in his existing employment agreement from one
        to two
        years following termination of his employment with NexCen. Upon the hiring
        of
        Mr. Meister as Chief Financial Officer in September 2006, Mr. Reymann became
        a
        financial officer of the company and continued to provide services to the
        company on a transitional basis until December 15, 2006. At the end of the
        transition period, Mr. Reymann received the severance benefits described
        above
        based on his right to terminate for “Good Reason” as a result of no longer
        serving as the Company’s chief financial officer.
 
 78
 On
        May 5,
        2006, we also granted 50,000 shares of restricted stock to Mr. Reymann which
        vested upon the Company’s acquisition of UCC on June 6, 2006. See “Grants of
        Plan-Based Awards” table for details of Mr. Reymann’s restricted stock
        grant.
 
 **Potential
        Payments Upon Termination or Change-of-Control**
 
 As
        noted
        above under “Employment Agreements,” we have entered into employment agreements
        with each of our named executive officers and Mr. Haran. These agreements
        provide for certain payments and other benefits if a named executive officer’s
        or Mr. Haran’s employment with us is terminated under circumstances specified in
        his agreement, including a “Change of Control” of the Company. A named executive
        officer’s rights upon the termination of his or her employment will depend upon
        the circumstances of the termination.
 
 The
        receipt of the payments and benefits to the named executive officers and
        Mr.
        Haran under their employment agreements are generally conditioned upon their
        complying with customary non-solicitation, non-competition, confidentiality,
        non-interference and non-disparagement provisions. By the terms of such
        agreements, the executives acknowledge that a breach of some or all of the
        covenants described herein will entitle us to injunctive relief restraining
        the
        commission or continuance of any such breach, in addition to any other available
        remedies.
 
 The
        following table provides the term of such covenants following the termination
        of
        employment as it relates to each named executive officer, Mr. Haran and our
        former chief executive officer:
 
 **Covenant**
              **Robert
                  D’Loren**
              **David
                  B. Meister**
              **James
                  Haran**
              **Charles
                  Zona**
              **David
                  Oros****Confidentiality**
              Employment
                  term and
                thereafter
              Employment
                  term and
                thereafter
              Employment
                  term and
                thereafter
              Employment
                  term and
                thereafter
              Indefinitely**Non-solicitation**
              Employment
                  term and
                24months
                  thereafter
              Employment
                  term and
                24months
                  thereafter
              Employment
                  term and
                24months
                  thereafter
              Employment
                  term and
                12months
                  thereafter
              Employment
                  term and
                6months
                  thereafter**Non-competition**
              Employment
                  term and
                24months
                  thereafter
              Employment
                  term and
                24months
                  thereafter
              Employment
                  term and
                24months
                  thereafter
              Employment
                  term and
                12months
                  thereafter
              Employment
                  term and
                6months
                  thereafter**Non-interference**
              N/A
              N/A
              N/A
              N/A
              N/A**Non-disparagement**
              Indefinitely
              Indefinitely
              Indefinitely
              Indefinitely
              N/A
 
 ***Termination
        Payments (Other than in Connection with a
        Change-of-Control)***
 
 The
        table
        below includes a description and the amount of estimated payments and benefits
        that would be provided by us (or our successor) to each of the named executive
        officers, Mr. Haran and our former chief executive officer under each employment
        agreement, assuming that a termination circumstance occurred as of December
        31,
        2006 and a “Change of Control” had not occurred. See “Employment Agreements”
included above for additional details for the named executive officers, Mr.
        Haran and our former chief executive officer.
 
 **Estimated
                  Amount of Termination Payment to:****Termination
                  Event**
              **Type
                  of Payment**
              **Robert
                  D’Loren**
              **David
                  B. Meister**
              **James
                  Haran**
              **Charles
                  Zona**
              **David
                  Oros**Termination
                  for Cause, death or disability
              Payment
                  of accrued but unused
                vacation
                  time
              $28,835
              $5,240
              $10,091
              -
              $18,269Termination
                  without Cause or by
                executive
                  for Good Reason
              Lump
                  Sum Severance Payment
              $1,812,500
              $225,000
              $562,500
              $150,000
              $483,333Termination
                  without Cause or by
                executive
                  for Good Reason
              Pro
                  rata portion
                of
                  Bonuses (1)
              -
              -
              -
              -
              -Death,
                  termination without Cause, or
                termination
                  by executive for Good Reason
              Continued
                  coverage under medical,
                dental,
                  hospitalization and life
                insurance
                  plans (2)
              $80,065
              $11,202
              $11,202
              $11,202
              $27,073
 
 (1)
              The
                  bonuses payable upon a termination event are based on the actual
                  bonus
                  paid in the prior year. Since no bonuses were paid in the prior
                  year, no
                  amount is shown here.
  79
  (2)
              Calculated
                  at current insurance premium rates in effect at December 31, 2006
                  for the
                  period of time of the benefit:
                
                Robert
                  D’Loren - 2 years
                
                David
                  Meister - 1 year
                
                James
                  Haran - 1 year
                
                Charles
                  Zona - 1 year
                
                David
                  Oros - approximately 2.5 years
 
 ***Termination
        in Connection with a Change of Control***
 
 The
        employment agreements with each of Messrs. D’Loren, Meister, Haran and Zona
        provide that, if, within twelve months following a “Change of Control,” their
        employment is terminated without “Cause” or they terminate their employment for
“Good Reason” as all such terms are defined in each employment agreement, we are
        obligated to make a lump-sum severance payment. A “Change of Control” is defined
        in each employment agreement by reference to our 1999 Equity Incentive Plan,
        which is defined to include a change in majority of our board of directors,
        consummation of certain mergers, the sale of all or substantially all of
        our
        assets or the acquisition of at least 80% of the undiluted total voting power
        of
        our then-outstanding securities. In addition, if within 12 months following
        a
        change of control, our named executive officers or Mr. Haran are terminated
        without “Cause” or they terminate their employment for “Good Reason,” then all
        unvested stock options, shares of restricted stock and other equity awards
        shall
        vest immediately, and remain exercisable for the lesser of 180 days after
        termination and the remaining term of the applicable grant. See “Employment
        Agreements” included above for additional details regarding Change of Control
        payments.
 
 For
        Mr.
        D’Loren, the severance payment is equal to $100 less than three times the sum
        of
        Mr. D’Loren’s base salary plus a bonus amount calculated as the percentage of
        the bonus pool that Mr. D’Loren received in the prior fiscal year multiplied
        times five percent of the annualized net income for the quarter immediately
        preceding the executive’s separation. For each of Messrs. Meister, Haran and
        Zona, the separation amount is calculated the same as for Mr. D’Loren, except
        that the amount is multiplied times two. For each of our named executive
        officers and Mr. Haran, in the event that the foregoing calculation, together
        with all other can and non-cash amounts that the executive has the right
        to
        receive from us would result in the severance payment being treated as an
        “excess parachute payment” within the meaning of Section 280G of the Internal
        Revenue Code, then the payment is reduced automatically to the largest amount
        that will not result in the payment being treated as an “excess parachute
        payment.” Since this formula is intended to avoid the lump sum being treated as
        a parachute payment subject to an excise tax under the tax code. Accordingly,
        we
        do not provide for any “gross-up” payments to cover federal excise taxes in the
        event that the severance payments were treated as a parachute
        payment.
 
 The
        employment agreement with Mr. Oros’ provides that if Mr. Oros’ employment is
        terminated without “Cause” (as defined in his existing employment agreement), he
        will receive a lump-sum severance payment equal to $600,000, less any salary
        paid to him since June 2006. In the event of such a termination, Mr. Oros
        also
        is entitled to continue receiving group health and medical benefits for up
        to
        three years following termination of his employment.
 
 The
        following table quantifies the estimated maximum amount of payments and benefits
        under our employment agreements and agreements relating to awards granted
        under
        our equity incentive and stock option plans to which the named executive
        officers would be entitled upon termination of employment if we terminated
        their
        employment without cause on December 31, 2006, assuming a Change of Control
        occurred on that date. We have assumed that these payments would not result
        in
        the aggregate severance payments being treated as an “excess parachute payment,”
so we therefore have not reduced the aggregate amount calculated under the
        base
        formula.
  **Name**
              
              **Cash
                  Severance**
                **Payment**
                **($)**
              
              **Continuation
                  of**
                **Medical/Welfare
                  Benefits (Present Value)**
                **($)(1)**
              
              **Value
                  of Accelerated**
                **Vesting
                  of Equity**
                **Awards**
                **($)(2)**
              
              **Total
                  Termination**
                **Benefits**
                **($)**Robert
                  W. D’Loren
              
              $
              2,249,900
              
              $
              70,518
              
              $
              2,745,308
              
              $
              5,065,726David
                  B. Meister
              
              $
              449,900
              
              $
              10,479
              
              $
              332,806
              
              $
              793,185James
                  Haran
              
              $
              749,900
              
              $
              10,479
              
              $
              567,995
              
              $
              1,328,374Charles
                  Zona
              
              $
              599,900
              
              $
              10,479
              
              $
              518,947
              
              $
              1,129,326David
                  Oros
              
              $
              483,333
              
              $
              27,073
              
              $
              426,545
              
              $
              936,951
 
 80
 (1)
              Calculated
                  at the present value of insurance premiums to be paid over the
                  benefit
                  period.(2)
              This
                  amount represents the unamortized portion of the expense related
                  to each
                  respective named executive officer’s and Mr. Haran’s equity awards as of
                  December 31, 2006.
 
 **Director
        Compensation**
 
 The
        following table sets forth compensation information for 2006 for each member
        of
        our board of directors who is not also an employee. Directors who are employees
        (Messrs. D’Loren and Oros) do not receive additional compensation for serving on
        the board. See “Summary Compensation” table and “Grants of Plan-Based Awards”
table for disclosures related to Messrs. D’Loren and Oros.
 
 **Name**
              
              **Fees
                  Earned**
                **or
                  Paid**
                **in
                  Cash**
                **($)**
              
              **Stock**
                **Awards**
                **($)**
              
              **Option**
                **Awards**
                **($)**
              
              **Non-Equity**
                **Incentive
                  Plan Compensation**
                **($)**
              
              **Change
                  in**
                **Pension
                  Value**
                **and
                  Nonqualified**
                **Deferred
                  Compensation**
                **Earnings**
              
              **All
                  Other**
                **Compensation**
                **($)**
              
              **Total**
                **($)****James
                  T. Brady**
              
              $
              54,500
                  (1
              **)**
              
              -
              
              $
              37,020
              
              
              -
              
              
              -
              
              
              -
              
              $
              91,520**Jack
                  B. Dunn, IV**
              
              $
              33,000
                  (2
              )
              
              -
              
              $
              37,020
              
              
              -
              
              
              -
              
              
              -
              
              $
              70,020**Edward
                  J. Mathias**
              
              $
              30,000
                  (3
              )
              
              -
              
              $
              37,020
              
              
              -
              
              
              -
              
              
              -
              
              $
              67,020**Jack
                  Rovner**
              
              $
              8,000
                  (4
              )
              
              -
              
              $
              10,642
              
              
              -
              
              
              -
              
              
              -
              
              $
              18,642**Truman
                  T. Semans**
              
              $
              42,000
                  (5
              )
              
              -
              
              $
              10,642
              
              
              -
              
              
              -
              
              
              -
              
              $
              52,642**George
                  P. Stamas**
              
              $
              27,500
                  (6
              )
              
              -
              
              $
              37,020
              
              
              -
              
              
              -
              
              
              -
              
              $
              64,520
  The
        grants of non-qualified options to purchase 25,000 shares given to the
        non-management directors in 2006 had a grant date fair value of $57,713
        each.
 
 (1)
              Includes
                  a $20,000 annual retainer, $10,500 in board attendance fees, a
                  $12,500
                  retainer as chairman of the Audit Committee and $11,500 in Audit
                  Committee
                  meeting fees. Mr. Brady has been the chairman and a member of the
                  Audit
                  Committee throughout the fiscal year ended December 31,
                  2006.(2)
              Includes
                  a $20,000 annual retainer, $10,500 in board attendance fees and
                  a $2,500
                  retainer as chairman of the Nominating Committee. Mr. Dunn has
                  been the
                  chairman of the Nominating Committee throughout the fiscal year
                  ended
                  December 31, 2006.(3)
              Includes
                  a $20,000 annual retainer, $7,500 in board attendance fees and
                  a $2,500
                  retainer as chairman of the Compensation Committee. Mr. Mathias
                  has been
                  the chairman of the Compensation Committee throughout the fiscal
                  year
                  ended December 31, 2006 and a member of the Audit Committee since
                  October
                  31, 2006. Mr. Mathias’ amount does not include any Audit Committee meeting
                  fees.(4)
              Includes
                  $3,000 in board attendance fees. Mr. Rover was elected to the board
                  of
                  directors on October 31, 2006 and consequently was paid $5,000
                  which
                  represents a pro rata amount of the $20,000 annual retainer for
                  services
                  provided in November and December of 2006.(5)
              Includes
                  a $20,000 annual retainer, $10,500 in board attendance fees and
                  $11,500 in
                  Audit Committee meeting fees. Mr. Semans has been a member of the
                  Audit
                  Committee throughout the fiscal year ended December 31,
                  2006.(6)
              Includes
                  a $20,000 annual retainer and $7,500 in board attendance
                  fees.
 
 **ITEM
        12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
        STOCKHOLDER MATTERS**
 
 The
        following table sets forth certain information with respect to beneficial
        ownership of our common stock as of April 20, 2007, as to:
 
 ·
            each
                of our directors and named executive officers
                individually;  ·
            all
                our directors and executive officers as a group;
                and  ·
            each
                other person (or group of affiliated persons) known by us to own
                beneficially more than 5% of our outstanding common
                stock.  81
 For
        the
        purposes of calculating percentage ownership as of April 20, 2007, 50,525,395
        shares were issued and outstanding and, for any individual who beneficially
        owns
        shares of restricted stock that will vest or shares represented by options
        that
        are or will become exercisable within 60 days of April, 20, 2007, those shares
        are treated as if outstanding for that person, but not for any other person.
        In
        preparing the following table, we relied upon statements filed with the SEC
        by
        beneficial owners of more than 5% of the outstanding shares of our common
        stock
        pursuant to Section 13(d) or 13(g) of the Exchange Act, unless we knew or
        had
        reason to believe that the information contained in such statements was not
        complete or accurate, in which case we relied upon information which we
        considered to be accurate and complete. Unless otherwise indicated, the address
        of each of the individuals and entities named below is: c/o NexCen Brands,
        Inc.,
        1330 Avenue of the Americas, 34th Floor, New York, NY 10019.
  Beneficial
                  Ownership
                of
                  SharesName
                  and Address -
              
              
              Number
              
              
              PercentDirectors
                  and executive officers:David
                  S. Oros (1)
              
              
              2,397,868
              
              
              4.52
              %Robert
                  W. D’Loren (2)
              
              
              3,318,754
              
              
              6.25
              %James
                  Haran (3)
              
              
              539,027
              
              
              1.02
              %David
                  B. Meister
              
              
              -
              
              
              *David
                  C. Reymann (4)
              
              
              184,296
              
              
              *Charles
                  A. Zona
              
              
              -
              
              
              *James
                  T. Brady (5)
              
              
              102,500
              
              
              *Jack
                  B. Dunn IV (5)
              
              
              100,000
              
              
              *Edward
                  J. Mathias (6)
              
              
              156,700
              
              
              *Jack
                  Rovner
              
              
              25,000
              
              
              *Truman
                  T. Semans (7)
              
              
              30,000
              
              
              *George
                  P. Stamas (8)
              
              
              146,868
              
              
              *All
                  directors and named executive officers as a group (11
                  Persons)
              
              
              7,001,013
              
              
              13.19
              %5%
                  stockholders:Telcom-ATI
                  Investors, LLC (9)
                211
                  N. Union St., Suite 300
                Alexandria,
                  VA 22314
              
              
              2,902,027
              
              
              5.47
              %
  *
              Less
                  than 1%
 
 
 (1)
              Includes
                  exercisable warrants to purchase 812,500 shares of the Company’s common
                  stock, 50,000 shares of restricted stock that will become exercisable
                  within 60 days of April 20, 2007, and exercisable options to purchase
                  130,600 shares of the Company’s common stock. Includes 216,989 shares of
                  the Company’s common stock owned by NexGen Technologies, L.L.C. over which
                  Mr. Oros exercises voting and investment control by virtue of his
                  position
                  as managing member of NexGen. Excludes 900,000 shares of common
                  stock held
                  in escrow on behalf of the former UCC security holders as earn-out
                  consideration pursuant to a merger agreement over which Mr. Oros
                  exercises
                  voting control by virtue of a proxy granted to him.(2)
              Includes
                  578,941shares
                  of the Company’s common stockowned
                  by Mr. D’Loren, of which 102,666 shares are held in escrow to satisfy
                  indemnification claims made by the Company against former stockholders
                  of
                  UCC Capital Corp. and UCC Consulting Corp, collectively “UCC”) and 153,249sharesheld
                  in escrow until such time (if any) as future performance targets
                  provided
                  in the UCC merger agreement are satisfied. Includes options to
                  purchase
                  937,235 shares of common stock that will become exercisable within
                  60 days
                  of April 20, 2007.Excludes
                  268,654 shares of common stock owned by the Robert D’Loren Family Trust
                  dated March 29, 2002 (the “Trust”), the beneficiaries of which are two
                  minor children of Mr. D’Loren. The Trust is irrevocable, the trustee is
                  not a member of Mr. D’Loren’s immediate family, and the trustee has
                  independent authority to vote and dispose of the shares held by
                  the Trust.
                  Excludes 96,715 shares of the Company’s common stock owned by the Trust
                  and held in escrow and that until and unless earned are subject
                  to
                  forfeiture if certain performance targets as outlined in the UCC
                  merger
                  agreement are not met. Mr. D’Loren expressly disclaims beneficial
                  ownership of all shares owned by the Trust. Includes 1,325,359
                  shares of
                  the Company’s common stock owned by D’Loren Realty, LLC (“Realty”) for
                  which Mr. D’Loren is the sole Member-Manager and possesses full voting and
                  dispositive power. Includes 477,129 shares of common stock owned
                  by Realty
                  and held in escrow and that until and unless earned are subject
                  to
                  forfeiture if certain performance targets as outlined in the UCC
                  merger
                  agreement are not met. Excludes 1,413,423 shares of common stock
                  held in
                  escrow on behalf of Athlete’s Foot Marketing Associates, LLC to secure
                  indemnification obligations pursuant to a purchase agreement over
                  which
                  Mr. D’Loren exercise voting control by virtue of a proxy granted to
                  him.
  82
  (3)
              Includes
                  options to purchase 193,929 shares of common stock that will become
                  exercisable within 60 days of April 20, 2007.(4)
              Includes
                  exercisable options to purchase 112,500 shares of common
                  stock.(5)
              Includes
                  exercisable options to purchase 100,000 shares of common
                  stock.(6)
              Includes
                  exercisable options to purchase 100,000 shares of common stock,
                  19,000
                  shares of common stock held indirectly in a retirement account
                  and 4,700
                  shares of common stock held as custodian for Ellen
                  Mathias.(7)
              Includes
                  30,000 shares of common stock held jointly by Mr. Semans and his
                  wife.(8)
              Includes
                  exercisable options to purchase 135,600 shares of common
                  stock.(9)
              Based
                  solely on reports filed with the SEC as of February 8, 2005. Includes
                  2,154,338 shares beneficially owned by CCM Master Qualified Fund,
                  L.L.C.,
                  (“CCM”), Coghill Capital Management, L.L.C., (“Coghill Management”), which
                  serves as the investment manager of CCM, and Clint D. Coghill who
                  is the
                  managing member of Coghill Management.
 **Securities
        Authorized for Issuance Under Equity Compensation
        Plans**
 
 See
        Item
        5 of Part II of this Form 10-K/A for information regarding securities authorized
        for issuance under equity compensation plans.
 
 **ITEM
        13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
        INDEPENDENCE**
 
 **Certain
        Relationships and Related Party Transactions**
 
 We
        have
        engaged in the following transactions or there are currently proposed
        transactions with the following persons:
 
 •
              directors
                  or executive officers;
 •
              beneficial
                  owners of 5% or more of NexCen’s common
                  stock;
 •
              immediate
                  family members of the above; and
 •
              entities
                  in which the above persons have substantial
                  interests.
 
 The
        Company receives legal services from Kirkland & Ellis LLP, which is
        considered a related party because a partner at that firm, George P. Stamas,
        is
        a member of the Company’s board of directors. For the years ended December 31,
        2006, 2005 and 2004 expenses related to Kirkland & Ellis LLP were
        approximately $1.7 million, $640,000, and $2.1 million, respectively. For
        the
        years ended December 31, 2006 and 2005, the Company had outstanding payables
        due
        to Kirkland & Ellis LLP of approximately $492,000 and $45,000,
        respectively.
  **Procedures
        for Approval of Related Party Transactions**
 
 The
        Company’s Code of Ethics, applicable to all directors, officers, and employees,
        sets forth policies to address potential related party transactions. If a
        director or officer believes any
        material transaction or relationship could reasonably be expected to give
        rise
        to a conflict of interest ,
        the
        director or officer must disclose the potential conflict to the Company’s Audit
        Committee. The Audit Committee, pursuant to its charter, reviews and
        pre-approves all potential conflicts of interest and all related party
        transactions.
  **Director
        Independence**
 
 See
        Item
        10 of Part III of this Form 10-K/A for information regarding director
        independence.
 
 83
 **ITEM
        14. PRINCIPAL ACCOUNTING FEES AND SERVICES**
 
 **Audit
        Fees** ****
 
 The
        aggregate fees for professional services rendered for NexCen by KPMG LLP,
        NexCen’s independent auditor, for the years ended December 31, 2006 and 2005
        were:
 
 **2006**
              
              **2005**Audit
                  Fees
              
              $
              310,000
              
              $
              223,000Audit-Related
                  Fees
              
              126,264
              
              —Tax
                  Fees
              
              
              76,544
              
              
              28,300Total
                  Fees
              
              $
              512,808
              
              $
              251,300
  “Audit
        Fees” include time billed to NexCen for professional services rendered for the
        annual audit for NexCen’s consolidated financial statements, the quarterly
        reviews of the consolidated financial statements for fiscal years 2006 and
        2005
        and the audit with respect to management’s assessment of the effectiveness of
        internal control over financial reporting as of December 31, 2006 and 2005
        and
        the effectiveness of internal control over financial reporting as of December
        31, 2006 and 2005.
 
 The
        aggregate amount billed for all tax fees for the years ended December 31,
        2006
        and 2005 (see chart above under heading “Tax Fees”) principally covered tax
        planning, tax consulting and tax compliance services provided to
        NexCen.
 
 “Audit
        Related Fees” include professional services performed by KPMG, LLP related to
        the UCC and The Athlete’s Foot acquisitions, and Form 8-K and Form S-3 filings
        with the SEC.
 
 NexCen
        does not use its independent auditor as its internal auditor nor does it
        have an
        internal auditor.
 
 No
        other
        professional services were rendered or fees were billed by KPMG for the most
        recent fiscal year or for the year ending December 31, 2006 and
        2005.
 
 The
        audit
        committee has adopted policies and procedures for the pre-approval of the
        above
        fees. All requests for services to be provided by KPMG are submitted to the
        audit committee. Requests for all non-audit related services require
        pre-approval from the entire audit committee. A schedule of approved services
        is
        then reviewed and approved by the entire audit committee at each audit committee
        meeting.


84
  **PART
      IV**





**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**





FINANCIAL
      STATEMENTS AND SCHEDULES





The
      following financial statements required by this item are included in the Report
      beginning on page 32.





Report
                of Management on Internal Control over Financial Reporting
            32Reports
                of Independent Registered Public Accounting Firm
            33Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            35Consolidated
                Statements of Operations and Comprehensive
              Loss
                for the years ended December 31, 2006, 2005, and 2004
            36Consolidated
                Statements of Stockholders’ Equity for the years
              ended
                December 31, 2006, 2005 and 2004
            37Consolidated
                Statements of Cash Flows for the years ended
              December 31,
                2006, 2005 and 2004
            38Notes
                to Consolidated Financial Statements
            39





All
      other
      schedules are omitted because they are not applicable or the required
      information is shown in the Audited Consolidated Financial Statements or the
      notes thereto.





EXHIBITS





The
      following exhibits are filed herewith or are incorporated by reference to
      exhibits previously filed with the SEC.





Exhibit
      Index




*2.1
            
            Agreement
                and Plan of Merger dated June 5, 2006, by and among UCC Capital Corp.,
                UCC
                Consulting Corp., UCC Servicing, LLC, Aether Holdings, Inc., AHINV
                Acquisition Corp., the holders of UCC Shares identified therein and
                Robert
                W. D’Loren, as the Security holders’ Representative. (Designated as
                Exhibit 2.1 to the Form 8−K filed on June 7, 2006)*2.2
            
            Equity
                Interest and Asset Purchase Agreement dated August 21, 2006, by and
                among,
                Aether Holdings, Inc., NexCen Franchise Brands, Inc., NexCen Franchise
                Management, Inc., Athlete’s Foot Marketing Associates, LLC, Athlete’s Foot
                Brands, LLC, Robert J. Corliss, Donald Camacho, Timothy Brannon and
                Martin
                Amschler. (Designated as Exhibit 2.1 to the Form 8−K filed on August 22,
                2006)*2.3
            
            Stock
                Purchase Agreement dated December 19, 2006, by and among, NexCen
                Brands,
                Inc., Blass Acquisition Corp., Haresh T. Tharani, Mahesh T. Tharani
                and
                Michael Groveman, Bill Blass Holding Co., Inc., Bill Blass International
                LLC and Bill Blass Licensing Co., Inc. (Designated as Exhibit 2.1
                to the
                Form 8−K filed on December 21, 2006)*2.4
            
            Asset
                Purchase Agreement dated March 13, 2007, by and among NexCen Brands,
                Inc.,
                WV IP Holdings, LLC and F. Schumacher & Co. (Designated as Exhibit 2.4
                to the Form 10-K filed on March 16, 2007)*3.1
            
            Certificate
                of Incorporation of NexCen Brands, Inc. (Designated as Exhibit 3.1
                to the
                Form 10-Q filed on August 5, 2005)*3.2
            
            Certificate
                of Amendment of Certificate of Incorporation dated October 31, 2006.
                (Designated as Exhibit 3.1 to the Form 8−K filed on November 1,
                2006)*3.3
            
            By-laws
                of Aether Holdings, Inc. (Designated as Exhibit 3.2 to Form 10-Q
                filed on
                August 5, 2005)*4.1
            
            Form
                of Common Stock Certificate (Designated as Exhibit 4.3 to the Form
                S-8
                filed on December 1, 2006)*9.1
            
            Voting
                Agreement dated November 7, 2006, by and between NexCen Brands, Inc.
                and
                Robert Corliss. (Designated as Exhibit 9.1 to the Form 8−K filed on
                November 14, 2006)*9.2
            
            Voting
                Agreement dated November 7, 2006, by and between NexCen Brands, Inc.
                and
                Athlete’s Foot Marketing Associates, LLC. (Designated as Exhibit 9.2 to
                the Form 8−K filed on November 14, 2006)*10.1
            
            Letter
                Agreement dated January 23, 2006, by and among Aether Systems, Inc.
                and
                BIO−key International, Inc. (Designated as Exhibit 10.1 to the Form 8−K
                filed on January 27, 2006)*10.2
            
            Amendment
                No. 1 to the Secured Subordinated Promissory Note dated January 23,
                2006,
                payable to Aether Systems, Inc by BIO−key International, Inc. (Designated
                as Exhibit 10.2 to the Form 8−K filed on January 27,
                2006)*10.3
            
            Amendment
                No. 1 to Employment Agreement dated May 5, 2006, by and between Aether
                Holdings, Inc. and David Oros. (Designated as Exhibit 10.3 to the
                Form
                10−Q filed on May 10, 2006)




85




*10.4
            
            Amendment
                No. 1 to Employment Agreement dated May 5, 2006, by and between Aether
                Holdings, Inc. and David Reymann. (Designated as Exhibit 10.4 to
                the Form
                10−Q filed on May 10, 2006)*10.5
            
            Restricted
                Stock Grant Agreement dated May 5, 2006, by and between Aether Holdings,
                Inc. and David Oros. (Designated as Exhibit 10.5 to the Form 10−Q filed on
                May 10, 2006)*10.6
            
            Restricted
                Stock Grant Agreement dated May 5, 2006, by and between Aether Holdings,
                Inc. and David Reymann. (Designated as Exhibit 10.6 to the Form 10−Q filed
                on May 10, 2006)*10.7
            
            Employment
                Agreement dated as of June 5, 2006, by and between Aether Holdings,
                Inc.
                and Robert W. D’Loren. (Designated as Exhibit 10.1 to the Form 8−K filed
                on June 7, 2006)*10.8
            
            Stock
                Purchase Warrant issued to Robert D’Loren, dated June 5, 2006. (Designated
                as Exhibit 10.2 to the Form 8−K filed on June 7, 2006)*10.9
            
            Stock
                Purchase Warrant issued to Jefferies & Company, Inc., dated June 5,
                2006. (Designated as Exhibit 10.3 to the Form 8−K filed on June 7,
                2006)*10.10
            
            2006
                Management Bonus Plan. (Designated as Exhibit 10.4 to the Form 8−K filed
                on June 7, 2006)*10.11
            
            Stock
                Option Grant Agreement by and between Aether Holdings, Inc. and Robert
                W.
                D’Loren. (Designated as Exhibit 10.5 to the Form 8−K filed on June 7,
                2006)*10.12
            
            Registration
                Rights Agreement dated as of June 5, 2006, by and among Aether Holdings,
                Inc. and the stockholders listed on Exhibit A thereto. (Designated
                as
                Exhibit 10.6 to the Form 8−K filed on June 7, 2006)*10.13
            
            Employment
                Agreement dated as of September 12, 2006, by and between Aether Holdings,
                Inc. and David B. Meister. (Designated as Exhibit 10.1 to the Form
                8−K
                dated September 13, 2006)*10.14
            
            2006
                Long-Term Equity Incentive Plan. (Designated as Exhibit 10.1 to the
                Form
                8−K filed on November 1, 2006)*10.15
            
            Form
                of 2006 Long-Term Equity Incentive Plan Director Stock Option Award
                Agreement  (Designated as Exhibit 10.15 to the Form 10-K filed
                on March 16, 2007)*10.16
            
            Form
                of 2006 Long-Term Equity Incentive Plan Employee/Management Stock
                Option
                Award Agreement  (Designated as Exhibit 10.16 to the Form 10-K
                filed on March 16, 2007)*10.17
            
            Addendum
                to Stock Option Agreement dated October 31, 2006, by and between
                Aether
                Holdings, Inc. and J. Carter Beese, Jr. (Designated as Exhibit 10.3
                to the
                Form 8−K filed on November 1, 2006)*10.18
            
            Employment
                Agreement dated December 11, 2006, by and between NexCen Brands,
                Inc. and
                Charles A. Zona. (Designated as Exhibit 10.1 to the Form 8−K filed on
                December 13, 2006)*10.19
            
            Security
                Agreement dated March 12, 2007, by and among NexCen Acquisition Corp.,
                the
                subsidiary borrowers parties thereto and BTMU Capital Corporation. 
                (Designated as Exhibit 10.19 to the Form 10-K filed on March 16,
                2007)*10.20
            
            Note
                Funding Agreement dated March 12, 2007, by and among NexCen Acquisition
                Corp., the subsidiary borrowers parties thereto, Victory Receivables
                Corporation and BTMU Capital Corporation.  (Designated as
                Exhibit 10.20 to the Form 10-K filed on March 16,
                2007)*10.21
            
            Common
                Stock Warrant dated November 7, 2006, issued by NexCen Brands, Inc.
                to
                Robert Corliss. (Designated as Exhibit 4.1 to the Form 8−K filed on
                November 14, 2006)*10.22
            
            Registration
                Rights Agreement dated November 7, 2006, by and among NexCen Brands,
                Inc.,
                Robert Corliss and Athlete’s Foot Marketing Associates, LLC. (Designated
                as Exhibit 4.2 to the Form 8−K filed on November 14,
                2006)*10.23
            
            Addendum
                to Stock Option Agreement dated December 28, 2006, by and between
                NexCen Brands, Inc. and David Reymann.  (Designated as
                Exhibit 10.23 to the Form 10-K filed on March 16,
                2007)10.24
            
            Employment
              Agreement
              dated as of June 6, 2006, by and between Aether Holdings, Inc.
              and James Haran.*21.1
            
            Subsidiaries
                of NexCen Brands, Inc.  (Designated as Exhibit 21.1 to the Form 10-K
                filed on March 16, 2007)23.1
            
            Consent
                of KPMG LLP31.1
            
            Certification
                pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
                of the Sarbanes−Oxley Act of 2002 for Robert W.
                D’Loren.31.2
            
            Certification
                pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
                of the Sarbanes−Oxley Act of 2002 for David B. Meister.**32.1
            
            Certifications
                pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
                Sarbanes−Oxley Act of 2002 for Robert W. D’Loren and David B.
                Meister.




_________________________


*Incorporated
      by reference




**
      These
      certifications are being furnished solely pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 and are not being filed as part this Amendment
      No. 1 to theAnnual Report on Form 10-K or as a separate disclosure
      document.





86





**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the Registrant has duly caused this report on Form 10-K/A to be signed
      on its behalf by the undersigned, thereunto duly authorized on April 30,
      2007.





**NEXCEN
                BRANDS, INC.***By:*
            /s/
                Robert W. D’Loren*ROBERT
                W. D’LOREN**President
                and Chief Executive Officer*





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





87





**SIGNATURE**
            
            **TITLE**
            
            **DATE**/s/
                David S. Oros
            
            Chairman
                of the Board
            
            April
                30, 2007DAVID
                S. OROS/s/
                Robert W. D’Loren
            
            Director,
                President, and
            
            April
                30, 2007ROBERT
                W. D’LOREN
            
            Chief
                Executive Officer/s/
                David B. Meister
            
            Senior
                Vice President and Chief Financial Officer, and
            
            April
                30, 2007DAVID
                B. MEISTER
            
            Principal
                Financial and Accounting Officer/s/
                Jack Rovner
            
            Director
            
            April
                30, 2007JACK
                ROVNER/s/
                James T. Brady
            
            Director
            
            April
                30, 2007JAMES
                T. BRADY/s/
                George P. Stamas
            
            Director
            
            April
                30, 2007GEORGE
                P. STAMAS/s/
                Jack B. Dunn, IV
            
            Director
            
            April
                30, 2007JACK
                B. DUNN, IV/s/
                Edward J. Mathias
            
            Director
            
            April
                30, 2007EDWARD
                J. MATHIAS/s/
                Truman T. Semans
            
            Director
            
            April
                30, 2007TRUMAN
                T. SEMANS





88