10QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

^{______________}

FORM 10-QSB

^{______________}

ý QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from: ____________ to ____________

Commission File Number 0-15949

^{______________}

BROADCASTER, INC.

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

______________

DELAWARE	94-2862863
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

9201 Oakdale Avenue, Suite 200, Chatsworth, California 91311

(Address of principal executive offices)

(818) 206-9274

(Issuer’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

As of May 16, 2007, 102,553,762 shares of the issuer’s common stock, par value of $0.001 per share, were outstanding.

Transitional Small Business Disclosure Format (check one): Yes ¨ No ý

BROADCASTER, INC.

AND SUBSIDIARIES

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BROADCASTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	March 31, 2007			Restated June 30, 2006
ASSETS	Unaudited
Current assets:
Cash and cash equivalents	$	7,605		$	12,508
Receivables, less allowances for doubtful accounts, discounts and returns of $0 as of March 31, 2007 and $0 as of June 30, 2006.		558			409
Notes receivable		97			1,604
Other current assets		312			402
Assets related to discontinued operations		8,140			8,224
Total current assets		16,712			23,147
Fixed assets, net		303			286
Intangible assets
Goodwill		73,154			26,897
Other intangible assets, net		16,553			15,615
Total intangible assets		89,707			42,512
Total assets	$	106,722		$	65,945
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short term debt	$	—			50
Short term debt – related party		1,725			1,725
Trade accounts payable		653			1,352
Accrued and other liabilities		1,155			1,696
Liabilities related to discontinued operations		1,641			994
Deferred revenues		385			675
Total current liabilities		5,559			6,492
Unearned contract fees		80			122
Deferred tax		6,114			7,180
Total liabilities		11,753			13,794
Shareholders’ equity
Common stock, no par value; 300,000,000 authorized; 102,294,184 issued and outstanding as of March 31, 2007 and 63,124,518 issued and outstanding as of June 30, 2006.		125,743			76,304
Additional Paid-in Capital		1,887			—
Accumulated deficit		(32,865	)		(24,483	)
Accumulated other comprehensive income		204			330
Total shareholders’ equity		94,969			52,151
Total liabilities and shareholders’ equity	$	106,722		$	65,945

See Notes to Condensed Consolidated Financial Statements

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BROADCASTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME / (LOSS)

(In thousands, except per share amounts)

(Unaudited)

	Three months ended March 31,						Nine months ended March 31,
	2007			Restated 2006			2007			Restated 2006
Net revenues	$	1,226		$	—		$	6,068		$	—
Product costs		2,473			—			5,076			—
Gross margin		(1,247	)		—			992			—
Costs and expenses
Sales and marketing		210			—			3,454			—
General and administrative		2,300			889			6,439			1,948
Research and development		105			—			105			—
Total operating expenses		2,615			889			9,998			1,948
Operating loss		(3,862	)		(889	)		(9,006	)		(1,948	)
Other income and (expense)
Loss on disposal of assets		(104)			—			(104)			—
Interest and other, net		63			83			263			50
Realized gain - securities											689
Unrealized gain - securities											76
Loss before income tax		(3,903	)		(806	)		(8,847	)		(1,133	)
Income tax (benefit) provision		203			—			(241)			—
Loss from continuing operations		(4,106	)		(806	)		(8,606	)		(1,133	)
Income (loss) from discontinued operations, net of tax		(12	)		280			(773	)		(749	)
Income (loss) from the sale of discontinued operations, net of tax		997			776			997			302
Net income (loss)		(3,121	)		250			(8,382	)		(1,580	)
Other comprehensive income (loss)
Unrealized loss on restricted securities
Foreign currency translation adjustments		—			—			—			—
Comprehensive (loss) Income	$	(3,121	)	$	250		$	(8,382	)	$	(1,580	)
Basic and diluted earnings (loss) per share
Loss from continuing operations	$	(.06	)	$	(.03	)	$	(.13	)	$	(.04	)
Income (loss) from discontinued operations, net of income tax	$	—		$	.01		$	(0.1	)	$	(.02	)
Gain (loss) from the sale of discontinued operations, net of income tax	$	.01		$	.03		$	.01		$	.01
Net Income (loss)	$	(.05	)	$	.01		$	(.13	)	$	(.05	)
Shares used in computing basic earnings (loss) per share		70,820			30,144			66,731			30,144
Shares used in computing diluted earnings (loss) per share		70,820			30,144			66,731			30,144

See Notes to Condensed Consolidated Financial Statements

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BROADCASTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Nine Months ended March 31, 2007

(In thousands, except share amounts)

(Unaudited)

	Common Stock				Accumulated deficit			Accumulated other comprehensive income (loss)			Total
	Shares		Amount
Balance at July 1, 2006 (As restated)		63,124,518	$	76,304	$	(24,483	)	$	330		$	52,151
Issuance of common stock related to:
Stock options exercised		1,027,709		1,023								1,023
Acquisitions		1,000,000		984								984
Stock issued for prior year acquisition		36,750,000		47,187								47,187
Fee related to acquisition		50,000		65								65
Warrants exercised		176,837		0								0
Consulting services		115,120		180								180
Stock compensation expense				1,887								1,887
Net loss						(8,382	)					(8,382	)
Foreign currency translation adjustment, net income tax									(126	)		(126	)
Balance at March 31, 2007		102,244,184	$	127,630	$	(32,865	)	$	204		$	(94,969	)

See Notes to Condensed Consolidated Financial Statements

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BROADCASTER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine months ended March 31,
	2007			Restated 2006
Cash flows from operating activities:
Net cash used in operating activities	$	(7,481	)	$	(1,133	)
Cash flows from investing activities:
Proceeds from sale of discontinued operations		1,500			—
Acquisition of intangible assets		(500	)		—
Cash provided by discontinued operations in investing activities		730			11,053
Net cash provided by investing activities		1,730			9,920
Cash flows from financing activities:
Repayments of notes		(50	)		—
Proceeds from warrants and options exercised		1,023			—
Cash used in discontinued operations in financing activities		—			(4,544	)
Net cash provided by financing activities		973			(4,544	)
Effect of exchange rate change on cash and cash equivalents		(125	)		—
Net (increase) decrease in cash and cash equivalents		(4,903	)		5,376
Cash and cash equivalents at beginning of period		12,508			4,347
Cash and cash equivalents at end of the period	$	7,605		$	9,723
SUPPLEMENTAL DISCLOURE OF CASH FLOW INFORMATION
Interest paid	$	38		$	—
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Capital stock issued in conjunction with acquisition of intangible assets		47,187			—

See Notes to Condensed Consolidated Financial Statements

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BROADCASTER, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim condensed consolidated financial statements have been prepared from the records of Broadcaster, Inc., a California corporation, and subsidiaries (“Broadcaster,” “we” or the “Company”) without audit. All significant inter-company balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, which consist of only normal recurring adjustments, to present fairly the financial position at March 31, 2007 and the results of operations and cash flows for the three and nine months ended March 31, 2007 and 2006, have been made. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-KSB, as amended, for the fiscal year ended June 30, 2006. The results of operations for the three and nine months ended March 31, 2007 are not n ecessarily indicative of the results to be expected for any other interim period or for the full year.

Use of Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of our condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Reclassifications

Reclassifications have been made to the amounts reported for the three and nine months ended March 31, 2007 to conform to the current period’s presentation. The amounts reported for the three and nine months ended March 31, 2007 present results of operations of the Software segment as discontinued operations due to the sale of Precision Design on June 9, 2006, and Houseplans, Inc. (“Houseplans”) on May 2, 2007.

2.     STOCK BASED AWARDS

On July 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense in the statement of operations for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). Using the modified prospective transition method of adopting SFAS 123(R), the Company began recognizing compensation expense for stock-based awards granted or modified after June 30, 2006 and awards that were granted prior to the adoption of SFAS 123(R) but were still unvested at June 30, 2006. Under this method of implementation, no restatement of prior periods is required or has been made.

Stock-based compensation expense recognized under SFAS 123(R) in the unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2007 related to stock options was $684,000 and $1,887,000 respectively. The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. As a result of adopting SFAS 123(R), the Company’s loss before income taxes and net loss for the three and nine months ended March 31, 2007 was increased by $684,000 and $1,887,000. The implementation of SFAS 123(R) reduced basic and diluted earnings per share by $0.01 and $0.02 for the three and nine months ended March 31, 2007. The implementation

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of SFAS 123(R) did not have an impact on cash flows from operations during the nine months ended March 31, 2007. SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statements of operations. Prior to July 1, 2006, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method under APB 25 and related interpretations. Stock-based compensation expense recognized in the Company’s statement of operations for the three and nine months ended March 31, 2007 included compensation expense for share-based payment awards granted prior to, but not yet vested as of June 30, 2006, based on the grant date fair value estimated in accordance with the pro forma provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Effective July 1, 2006, as new grants occur, our stock-based compensation expense will also include compensation expense for the share-based payment awards granted subsequent to June 30, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation expense recognized in the consolidated statement of operations for the three and nine months ended March 31, 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to July 1, 2006, the Company accounted for forfeitures as they o ccurred.

On November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” This FSP provides a practical transition election related to the accounting for the tax effects of share-based payment awards to employees, as an alternative to the transition guidance for the additional paid-in capital pool (“APIC pool”) in paragraph 81 of SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the APIC pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R). The guidance in this FSP is effective after November 10, 2005. The Compan y may take up to one year from the later of adoption of SFAS 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. The Company is currently evaluating the transition alternatives.

3.     DISCONTINUED OPERATIONS

Sale of Precision Design

In June 2006, we sold Precision Design, our legacy software business as part of our overall strategy to position the Company solely as an online business. We received a combination of $6.5 million in cash of which $0.5 million was deposited in an escrow to back our representations and warranties in the sale Agreement, and an interest free note of $1.5 million which was paid in full on July 3, 2006. The escrow was released during the quarter. Included in the assets sold were the TurboCad and DesignCAD product lines as well as other design and personal productivity titles.

Operating results of Precision Design, which was formerly included in the Software segment, are as follows:

	Nine months ended March 31,					Three months ended March 31,
(In thousands)	2007		2006			2007		2006
Net revenues	$	—	$	4,451		$	—	$	2,203
Pre-tax loss		—		(712	)		—		(4	)

Sale of Allume

On July 1, 2005, we sold 100% of the issued and outstanding capital stock of Allume to Smith Micro Software, Inc. for $11 million cash and 397,547 unregistered shares of its common stock, having a market value (based on a 10 day trading average covering $4.40) of $1.75 million. A portion of the purchase price, including $1.25 million cash and shares of common stock having a closing date market value of $750,000 was deposited in an indemnity escrow to secure certain representations and warranties included in the stock purchase agreement. The loss on sale of Allume for the quarter ended September 30, 2005 was approximately $843,000. This amount does not include

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the cash or value of the Smith Micro common stock held in escrow at September 30, 2005 and released in subsequent periods. At September 30, 2006, an amount of $312,000 was still held in the indemnity escrow account. This amount is has been released in the quarter and recorded as a gain on sale. The gain on sale of Allume from the date of closing to September 30, 2006 was approximately $302,000, all of which was recognized in fiscal 2006.

Sale of Houseplans

Subsequent to the quarter, on May 2, 2007, we sold 100% of the issued and outstanding capital stock of Houseplans to Kransco Houseplans, LLC, for $8 million. The purchase price is composed of $5 million in cash we received on closing and a note payable of $3 million, paid in installments over a three year period. The note payable consists of eight quarterly payments of $250,000 commencing on March 31, 2008, and a final payment of $1,000,000 payable on March 31, 2010. The note payable bears interest at a rate of 5% and any accrued interest will be paid on each installment.

4.     ACQUISITIONS

AccessMedia Acquisition

On December 16, 2005, Broadcaster and AccessMedia, Inc. entered into a merger agreement whereby Broadcaster agreed to acquire 100% of the outstanding capital stock of AccessMedia. The acquisition was completed on June 1, 2006. Broadcaster accounted for the business combination as a purchase.

The purchase price for accounting purposes of approximately $79.3 million was comprised as follows:

(In thousands)
Description	Amount
Fair value of common stock	$	75,607
Direct transaction costs		3,690
Total	$	79,297

The calculation is based on the issuance of 29,000,000 shares of Broadcaster common stock to the shareholders of AccessMedia on June 1, 2006 and 35,000,000 shares issued for the quarter ending March 31, 2007 as a result of attainment of the earn-outs pursuant to the amended merger agreement. The purchase price includes $32.1 million on June 1, 2006, $9.6 million on December 31, 2006 and $37.6 million in the quarter ended March 31, 2007. We also issued 2,450,000 and 1,750,000 shares of our common stock to Baytree Capital Associates, LLC on June 1, 2006 and the quarter ending March 31, 2007 respectively. Baytree is controlled by a former AccessMedia shareholder. For the shares Baytree received on June 1, 2006 1,450,000 were a financial advisory fee and 1,000,000 shares were for consulting services. For the shares Baytree received in the quarter ended March 31, 2007, 1,750,000 shares were a financial adv isory fee and related to the earn-out. The merger agreement was announced on December 16, 2005.

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The value of AccessMedia’s net tangible and intangible assets is based upon their estimated fair value as of the date of the completion of the business combination. The estimated fair value is independent of the preliminary values historically recorded on the books and records of AccessMedia. The allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values was as follows:

(In thousands)
Description	Amounts (unaudited)
Cash acquired	$	134
Other tangible assets acquired		719
Amortizable intangible assets
Software		9,800
Domain names		80
Media content		5,800
Goodwill		73,088
Liabilities assumed		(3,943	)
Deferred tax liability		(6,381	)
Total	$	79,297

$15,680,000 has been allocated to amortizable intangible assets with useful lives ranging from 10 to 30 years as follows: software – 10 years, domain names and content – 30 years.

The residual purchase price of $73,088,000 has been recorded as goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill will not be amortized and will be tested for impairment at least annually. The agreement provided that 35 million additional shares may be earned and awarded to the shareholders of AccessMedia. Any additional shares earned would be a future addition to goodwill. As of the date of this Report, all of the 35 million earn-out shares have been earned in the quarter ended March 31, 2007. In addition, as part of its consulting agreement, Baytree Capital was to receive 5% of the earn-out shares issued to former AccessMedia shareholders. Therefore, we issued Baytree 1,750,000 shares in the quarter ended March 31, 2007.

During the quarter ended December 31, 2006, our Board of Directors had agreed to amend the definitive merger agreement to include, unique visitors in the calculation of the earn-out of the additional shares. The earn-out is based on revenues from AccessMedia’s broadcaster.com website and is not related to earnings. Under the amendment, each unique visitor is equal to $1.00. Each earn-out issuance received the further approval of Broadcaster’s Board of Directors.

AccessMedia’s acquired technology includes certain additional products with market opportunities. These opportunities were significant contributing factors to the establishment of the purchase price, resulting in the recognition of a significant amount of goodwill. In addition, the acquisition provides an experienced workforce, development of certain technology assets permitting the Company to deliver content to consumers over the Internet, existing business knowledge and practice supporting the proposed products and services, marketing programs and a base level of customers.

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Acquisition of America’s Biggest, Inc. Assets

On September 29, 2006, Broadcaster completed the acquisition of 100% of the assets of America’s Biggest, Inc. The consideration paid to America’s Biggest consisted of 1,000,000 shares of Broadcaster stock and $500,000 in cash.

The allocation of the purchase price to the assets acquired based on their estimated fair values was as follows:

(In thousands)
Description	Amounts (unaudited)
Amortizable intangible assets
Domain names	$	525
Software		350
Customer lists		250
Trademark		150
Marketing materials		209
Goodwill		65
Total	$	1,549

5.     FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of cash and cash equivalents, trade receivables, trade payables and debt approximates carrying value due to the short maturity of such instruments.

6.     INTANGIBLE ASSETS

Software Development Costs and License Fees

Costs incurred in the initial design phase of software development are expensed as incurred in research and development. Once the point of technological feasibility is reached, direct production costs are capitalized in compliance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. We cease capitalizing computer software costs when the product is available for general release to customers. Costs associated with acquired completed software are capitalized.

We amortize capitalized software development costs and visual content license fees on a product-by-product basis. The amortization for each product is the greater of the amount computed using (a) the ratio of current gross revenues to the total of current and anticipated future gross revenues for the product or (b) 18, 36, or 60 months, depending on the product. We evaluate the net realizable value of each software product at each balance sheet date and record write-downs to net realizable value for any products for which the carrying value is in excess of the estimated net realizable value.

Other Intangible Assets

Other intangible assets other than goodwill represent Internet domain names, acquired customer lists and contracts, distribution rights and relationships, proprietary plans, trade names and trademarks. These assets are amortized using the straight-line method over the estimated useful lives, generally five to fifteen years.

Impairment of Long-Lived Assets

We review long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess these assets for impairment based on estimated undiscounted future cash flows from these assets. If the carrying value of the assets exceeds the estimated future undiscounted cash flows, a loss is recorded for the excess of the asset’s carrying value over the fair value. We did not recognize any impairment loss for long-lived assets for the six months ended December 31, 2006 and 2005.

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Goodwill

In accordance with SFAS No. 142, Goodwill and Intangible Assets, goodwill is assessed for impairment annually (in our first fiscal quarter) or more frequently if circumstances indicate impairment. We had goodwill in the amount of $73.2 million and $26.9 million as of March 31, 2007 and June 30, 2006, respectively, mainly related to the acquisition of AccessMedia. We have not recognized any impairment related to goodwill for the nine months ended March 31, 2007 and 2006.

7.   DEBT

The following table details our outstanding debt as of March 31, 2007:

(In thousands)	As of March 31, 2007
Short-term
Demand notes payable to related party	$	1,725
Subtotal short-term	$	1,775
Grand total	$	1,725

Demand notes payable consisted of a 4% secured note payable to Mr. Nolan Quan, our principal shareholder, and are secured by the assets of AccessMedia, a subsidiary company.

8.     GAIN / (LOSS) ON MARKETABLE SECURITIES

The following table details the realized and unrealized net loss on marketable securities that we recognized on our condensed consolidated statements of operations and comprehensive income/(loss) for the three and nine months ended March 31, 2006. There were no realized or unrealized gains or losses on marketable securities during the three and nine months ended March 31, 2007

	Gain (loss) on marketable securities for the three months ended March 31, 2006
(In thousands)	Realized					Unrealized					Total
Description				Reversal of unrealized gain / (loss) recognized in prior periods		Unrealized gain / (loss) for the quarter ended March 31, 2006			Sub total Unrealized gain / (loss)
Other stock in investment portfolio	$	—		$	—	$	—		$	—	$	—
Total	$	—		$	—	$	—		$	—	$	—
	Gain (loss) on marketable securities for the nine months ended March 31, 2006
(In thousands)	Realized					Unrealized					Total
Description				Reversal of unrealized gain / (loss) recognized in prior periods		Unrealized gain / (loss) for the nine months March 31, 2006			Sub total Unrealized gain / (loss)
Smith Micro common stock	$	923									$	923
Other stock in investment portfolio	$	(234	)	$	90	$	(14	)	$	76	$	(158	)
Total	$	689		$	90	$	(14	)	$	76	$	765	)

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9.     EARNINGS PER SHARE – POTENTIALLY DILUTIVE SECURITIES

Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of the incremental common shares issuable upon on exercise of stock options and warrants (using the treasury stock method). Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. The following table summarizes the weighted average shares outstanding:

	Three months ended March 31,
	2007			2006
Basic weighted average shares outstanding		70,820			30,043
Total stock options outstanding		8,730			4,761
Less: anti dilutive stock options due to loss		(8,730	)		(4,761	)
Total warrants outstanding		4,181			5,814
Less: anti dilutive warrants due to loss		(4,181	)		(5,814	)
Diluted weighted average shares outstanding		70,820			30,043
	Nine months ended March 31,
	2007			2006
Basic weight average shares outstanding		66,731			29,850
Total stock options outstanding		8,730			4,761
Less: anti dilutive stock options due to loss		(8,730	)		(4,761	)
Total warrants outstanding		4,181			5,814
Less: anti dilutive warrants due to loss		(4,181	)		(5,814	)
Diluted weighted average shares outstanding		66,731			29,850

10.   STOCK-BASED AWARDS

The Company has two stock option plans, The 2004 Incentive Stock Option Plan (the “2004 Plan”) adopted during fiscal 2004 and the 1993 Incentive Option Plan adopted on June 30, 1993 (the “1993 Plan”). The purpose of the 2004 and the 1993 Plans was to further the growth and general prosperity of Broadcaster by enabling our employees to acquire our common stock, increasing their personal involvement in the Company and thereby enabling Broadcaster to attract and retain our employees. The 1993 Plan is no longer used

Broadcaster believes that the ability to grant incentive stock options to its employees is critically important. We hope to offer incentive compensation to such employees on par with those provided by our competition and others in the high-tech industry. In addition, tax laws and incentive compensation policies have changed since adoption of the 1993 Plan. As a result, our Board of Directors has adopted and our shareholders approved the 2004 Plan to permit Broadcaster to offer a wide range of incentives, including incentive and non-statutory stock options and stock purchase rights.

Stock options are granted at an exercise price equivalent to the closing fair market value on the date of grant. All options are granted at the discretion of the Company’s Board of Directors and have a term of not greater than 10 years from the date of grant. Options are exercisable when vested. Vesting requires continuous employment up to the vesting date and the vesting schedule is determined by the Board of Directors at the time of each option grant.

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The 2004 Plan

The 2004 Plan provides for the granting of options to purchase up to an aggregate of 10,500,000 shares of common stock to employees, directors and other service providers of Broadcaster. Any options that expire prior to exercise will become available for new grants from the “pool” of ungranted options. Options that are granted under the 2004 Plan may be either options that qualify as incentive stock options under the Internal Revenue Code (“Incentive Options”), or those that do not qualify as such incentive stock options (“Non-Qualified Options”).

The Incentive Options may not be granted at a purchase price less than the fair market value of the Common Shares on the date of the grant (or, for an option granted to a person holding more than 10% of the Company’s voting stock, at less than 110% of fair market value) and Non-Qualified Options may not be granted at a purchase price less than 85% of fair market value on the date of grant. The term of each option, under the 2004 Plan, which is fixed at the date of grant, may not exceed 10 years from the date the option is granted (by law, an Incentive Option granted to a person holding more than 10% of the Company’s voting stock may be exercisable only for five years). At June 30, 2006, 6,500,000 options were available for future grants under the 2004 Plan. The 6,500,000 shares were approved by Broadcaster shareholders at the Annual Meeting held in May 2006. As of the date of this Report, 1,263,240 options remain available for grant.

The following table summarizes options at March 31, 2007.

	Number of Shares			Weighted Average Exercise Price
Outstanding, June 30, 2005		4,507,929			$1.10
Granted		1,575,500			1.33
Exercised		(904,688	)		0.74
Cancelled		(657,234	)		1.23
Outstanding, June 30, 2006		4,521,507			$1.19
Granted		5,958,000			1.16
Exercised		(1,027,709	)		0.96
Cancelled		(721,240	)		1.22
Outstanding, March 31, 2007		8,730,558			$1.22

The following table summarizes options at March 31, 2007.

	Number of Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value ($000’s)
Outstanding	8,730,558	$1.19	7.98	$1,561
Vested and Expected to Vest	8,270,564	1.19	7.98	1,483
Exercisable	2,952,495	1.19	8.07	510

At March 31, 2007, the Company had $2,523,000 of unrecognized compensation expense, net of forfeitures, related to stock options that will be recognized over the weighted average remaining vesting period of 1.39 years.

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Warrants

Warrants have been granted from time to time in conjunction with financings, debt settlements, Board of Directors and employee compensation and consulting arrangements. The following table summarizes warrant activity for the year ended June 30, 2006 and the nine months ended March 31, 2007.

	Number of Warrants			Average Exercise Price
Outstanding, June 30, 2005		6,398,244			$1.40
Granted		126,250			1.13
Exercised		—			—
Exercised – cashless		(1,987,501	)		—
Expired		—			—
Outstanding, June 30, 2006		4,536,993			$1.72
Granted		—			—
Exercised		—			—
Exercised – cashless		(305,285	)		—
Expired		(50,000	)		—
Outstanding, March 31, 2007		4,181,708			$1.80

The amount of shares issued under the cashless exercise of warrants was 176,837 shares.

Other Information Regarding Stock Options and Warrants

Additional information regarding stock options and warrants outstanding as of March 31, 2007 is as follows:

Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Avg. Remaining Life		Weighted Avg. Exercise Price	Number Exercisable		Weighted Avg. Exercise Price
$0.20-$0.60		87,000		7.1	$0.49		87,000	$0.49
$0.61-$0.71		56,426		6.3	$0.71		56,426	$0.71
$0.72-$1.06		4,566,864		9.2	$0.94		941,614	$0.92
$1.07-$1.44		1,433,250		8.0	$1.21		1,310,562	$1.20
$1.45-$4.17		2,587,018		5.8	$1.66		556,893	$1.82
		8,730,558			$1.19		2,952,495	$1.20

Warrants Outstanding				Warrants Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Avg. Exercise Price	Number Exercisable		Weighted Avg. Exercise Price
$0.20-$0.60		270,000	$0.50		270,000	$0.50
$0.61-$0.71		0	$     0		0	$     0
$0.72-$1.06		2,136,167	$0.82		2,136,167	$0.82
$1.07-$1.44		781,250	$1.17		781,250	$1.17
$1.45-$4.17		600,000	$1.98		600,000	$1.98
$4.18-$20.00		394,291	$9.05		394,291	$9.05
		4,181,708			4,181,708

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Prior to July 1, 2006, the Company had adopted the disclosure only provisions of SFAS 123. Had compensation cost for the stock-based compensation plans been determined based upon the fair value at grant dates for awards under those plans consistent with the method prescribed by SFAS 123, net loss would have been increased to the pro forma amounts indicated below. The pro forma consolidated financial information should be read in conjunction with the related historical information and is not necessarily indicative of actual results.

	Nine months ended March 31,
	2007			2006
(In thousands, except per share amounts)
Net (loss), as reported	$	(8,382	)	$	(1,580	)
Intrinsic compensation charge recorded under APB 25					21
Add: Stock-based compensation included in net income, net of related tax effects		1,887
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,887	)		(249	)
Pro Forma (loss)	$	(8,382	)	$	(1,808	)
Earnings Per Share:
Basic-as reported	$	(0.13	)	$	(0.05	)
Basic-pro forma		(0.13	)		(0.06	)
Diluted-as reported		(0.13	)		(0.05	)
Diluted-pro forma		(0.13	)		(0.06	)

The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted average assumptions:

	Three months ended March 31,
	2007			2006
Risk-free interest rates		4.7	%		4.3	%
Expected dividend yields		—			—
Expected volatility		72	%		72	%
Expected option life (in years)		5			10

	Nine months ended March 31,
	2007			2006
Risk-free interest rates		4.7	%		4.2	%
Expected dividend yields		—			—
Expected volatility		79	%		75	%
Expected option life (in years)		5			10

The weighted average fair value as of the grant date for grants made during the quarter ended March 31, 2007 and 2006 were $1.70 and $0.94, respectively.

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Following Discussion Should Be Read Together with the Information Contained in the Financial Statements and Related Notes Included Elsewhere in this Form 10-QSB.

Overview

We historically operated as a software company. Prior to the acquisition of AccessMedia Networks, Inc. (“AccessMedia”) on June 1, 2006, we operated in two business segments: (i) computer aided design and precision engineering (“Precision Design”) and (ii) house plans and architectural drawings (“Houseplans”). As discussed below, we subsequently disposed of Precision Design and subsequent to the three months ended March 31, 2007, our Houseplans subsidiary. As a result, we now operate in one business segment which we call Broadcaster. This segment comprises of a newly formed subsidiary, Broadcaster Interactive Group (“BIG”) and AccessMedia.

Broadcaster

Prior to November 2006, AccessMedia’s business model consisted of an online entertainment portal that charged users a monthly subscription fee. In November 2006, the Company decided to focus its efforts and resources related to building a user base. Because of this, the Company incorporated BIG, which will focus on building innovative products online and offering our community numerous content offerings. We continue to offer our subscription model. It attracts far less traffic than our free business model, and revenues in the quarter ended March 31, 2007 from our subscription model declined from revenues in the quarter ended December 31, 2006. We do not presently generate revenues from our free business model. We are currently concentrating on building an increasing number of unique monthly visitors and repeat use of broadcaster.com by these visitors.

The Company released iGrab and studioPro as new tools for customers to download and use. In addition the Company anticipates releasing several new tools that will continue to enhance the user experience and provide a safe environment for users.

In 2004, we began exploring various ways to enhance shareholder value, including the further migration of the Company from a traditional or packaged software company to offering downloadable media and content over the Internet. We believe that the growth and reach of the Internet coupled with the predictability of recurring revenues should lead to enhanced shareholder value. As such, during 2005 we began discussions with AccessMedia, a developer of a platform for delivering real-time and interactive media over the Internet through its unique “virtual set-top box” technology. Concurrent with the completion of the acquisition of AccessMedia on June 1, 2006, we changed our name to Broadcaster, Inc.

Highlights for the nine months ended March 31, 2007 consisted of:

·

As a result of our new business model, we recorded 32,383,755 absolute unique visitors for the month of March as tracked by Google Analytics.

·

Release of new innovative products such as iGrab StudioPro and BroadcasterLive.

·

We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), effective July 1, 2006, resulting in a non-cash expense of $1,887,000 for the nine months ended March 31, 2007 and $684,000 for the three months ended March 31, 2007;

·

With the sale of Houseplans which occurred on May 2, 2007, management sale focus and resources will be focused on growing our online business.

·

We completed the move of our headquarters from Northern California to Southern California where AccessMedia is based.

Broadcaster is a free entertainment community that empowers users to create, view and organize compelling and original rich-media content. Since its launch in the quarter ended December 31, 2006, Broadcaster.com has amassed loyal audiences that upload and view millions of video files each month. Broadcaster's ever expanding library content offers a wide variety of full-length movies, music videos, news feeds, original and proprietary content. In addition, Broadcaster offers several multimedia applications that streamline the user's ability to not only find and organize online entertainment but also create their own original podcasts, videos, and live webcasts.

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We provide users with delivery of both short and long form digital entertainment content − giving them the power to download content to their desktop computer, laptop, PSP, video iPod or preferred mobile devices. We enable consumers to easily find, organize, download and enjoy the growing volumes of high quality content available online. Our capabilities span our proprietary media library, media under license, and media readily available on the Internet. We are also in discussions with major studios, cable and television networks, music labels, and game producers to become a gateway for the direct delivery of first run movies, popular television shows, music and online games.

Our innovative products and content offerings redefine the user experience on the Internet. Here is a list of our innovative products and content offerings.

Innovative Products

Broadcaster’s technologies are utilized throughout its product suite to create innovative, leading edge products for the support of video entertainment on demand:

·

BroadcasterLive! – allows the Broadcaster community to enable their webcams and start broadcasting and chatting to the world.

·

Broadcaster’s iGrab – a powerful media search tool that allows users to find, download and organize videos and images to their hard drive.

·

Broadcaster Video – empowers users to upload and share video content within the Broadcaster community. Registered members can leave messages with other community members.

·

Broadcaster’s StudioPRO – allows users to capture and re-broadcast any video playing on their desktop, including live streaming video, pre-recorded video clips, and picture images.

·

Broadcaster’s Deskbar – notifies users of interesting content based upon their preferences; it will be released in the future.

·

Broadcaster’s Parental Control– assures that only authenticated users are able to access mature content while surfing anywhere on the Internet; it will be released in the future.

Content Offerings

·

User-Generated Content – as one of its most popular features, Broadcaster Video offers users the ability to upload and share their own clips and short movies with other users within the Broadcaster community and around the Internet.

·

On Demand Entertainment – users can search countless movie and music facts and reviews. In addition, users can download or stream full-length movies, television shows, music videos and hi-definition content.

·

Breaking News– users can access real-time news articles, photos and video downloads covering everything from entertainment and sports to world news and celebrity gossip.

·

Music – In addition to hundreds of thousands of artist profiles and album reviews, users can watch over 6,000 music videos and listen to over 600,000 sample MP3s.

·

Games and Mobile Media– Broadcaster offers a variety of interactive computer games and flash videos. Users can also download viral videos, podcasts and vodcasts directly to their PSP, iPod or mobile device by accessing our Mobile Media channel.

Sale of Houseplans, Inc

Subsequent to the quarter, on May 2, 2007, we sold 100% of the issued and outstanding capital stock of Houseplans to Kransco Houseplans, LLC, for $8 million. The purchase price is composed of $5 million in cash on closing and a note payable of $3 million, paid in installments over a three year period. The note payable consists of eight quarterly payments of $250,000 commencing on March 31, 2008, and a final payment of $1,000,000 payable on March 31, 2010. The note payable bears interest at a rate of 5% and any accrued interest will be paid on each installment.

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Acquisition of AccessMedia

We completed the merger with AccessMedia (the “Merger”) on June 1, 2006 pursuant to which we issued 29,000,000 shares of our common stock and agreed to issue up to an additional 35,000,000 shares of our common stock upon achievement of certain revenue milestones to the former shareholders of AccessMedia. An additional 2,450,000 shares of Broadcaster common stock were issued in payment of Merger related fees.

During the quarter ended December 31, 2006, our Board of Directors amended the revenue milestone to include unique visitors with each visitor equal to $1.00. The Company accomplished the first milestone in the quarter ended December 31, 2006. In the quarter ended March 31, 2007, the Company accomplished the remaining four milestones and an additional 28,000,000 shares of common stock have been issued.

AccessMedia is led by seasoned Internet entrepreneurs. This team has been one of the foremost innovators of technologies, marketing, and advertising strategies for Internet-based consumer media offerings, and until now this team has operated in a private company environment. Additionally, this team has been a leader in providing web site development, traffic, database management, and hosting for many of the largest worldwide media companies.

As required by the merger agreement, we are required to issue Baytree Capital 5% of all shares issued under the AccessMedia earn-out. Baytree Capital is a company controlled by one of our principal shareholders and a former AccessMedia shareholder. As a result of the 28,000,000 shares of common stock earned by former AccessMedia shareholders in the quarter, we issued Baytree Capital 1,400,000 additional shares of common stock in the quarter ended March 31, 2007.  Our Goodwill also increased by approximately $37,632,000 for the quarter ended March 31, 2007.

Sale of Precision Design

In June 2006, we sold Precision Design, our legacy software business as part of our overall strategy to position the Company solely as an online business. We received a combination of $6.5 million in cash and an interest free note of $1.5 million, which was paid in full on July 3, 2006. $0.5 million of the purchase price is deposited in an indemnity escrow to secure certain representations and warranties included in the asset purchase agreement. Included in the assets sold were the TurboCad and DesignCAD product lines as well as other design and personal productivity titles. We received the escrow in the quarter ended March 31, 2007.

Critical Accounting Policies

Those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition are discussed below.

Our significant accounting policies are more fully described in the notes to our consolidated financial statements. The policies discussed immediately below, are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management to determine the appropriate assumptions to be used in the determination of certain estimates.

Revenue Recognition

Revenues are recognized in accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With Respect to Certain Transactions. Revenue is recognized when persuasive evidence of an arrangement exists, product or service has been delivered, the fee is fixed and determinable, and collection of the resulting account is probable.

·

Subscription revenues are recognized ratably over the contract period.

·

Revenues related to the display of advertisements on the Internet as impressions (the number of times that an advertisement appears in pages viewed by users) are delivered, as long as no significant obligations remain at the end of the period. To the extent that significant obligations remain at the end of a period, the Company will defer recognition of the corresponding revenues until the remaining guaranteed amounts are achieved.

·

Revenues from the display of text-based links to the websites of its advertisers are recognized as the click-throughs (the number of times a user clicks on an advertiser’s listing) occur.

·

For software and content delivered via the Internet, revenues are recorded when the customer downloads the software, activates the subscription account or is shipped the content. For online media revenue when payment is collected.

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Impairment

Property, equipment, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenues. We account for the impairment and disposition of long-lived assets in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In accordance with SFAS 144, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

In accordance with SFAS No. 142, Goodwill and Intangible Assets, goodwill is being assessed for impairment annually or more frequently if circumstances indicate impairment. The Company’s assessment of goodwill at September 30, 2006 indicated that no impairment existed at that date.

Stock Based Awards

On July 1, 2006, the Company adopted SFAS 123(R) which requires the measurement and recognition of compensation expense in the statement of operations for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

Results of Operations

The following tables set forth our results of operations that reflect the sale of Houseplans and include only results from continuing operations for the three and nine months ended March 31, 2007 and 2006.

Three Months Ended March 31, 2007 compared to the Three Months Ended March 31, 2006.

	Three months ended March 31,
(In Thousands)	2007			2006
Net revenues	$	1,226		$	—
Product cost		2,473			—
Gross margin		(1,247	)		—
Operating expenses
Sales & marketing		210			—
General & administrative		2,300			889
Research & development		105			—
Total operating expenses		2,615			889
Operating loss		(3,862	)		(889	)
Other income (expenses)
Interest expense		(18)			—
Interest income		81			83
Gain on sale of assets		(104)			—
Realized Gain - securities					—
Unrealized Gain - securities					—
		(41	)		83
Loss before income tax		(3,903	)		(806	)
Income tax benefit (provision)		203			—
Loss from continuing operations		(4,106	)		(806	)
Gain (Loss) from discontinued operations, net of income tax		(12	)		206
Gain (Loss) from the sale of discontinued operations, net of income tax		997			776
Loss	$	(3,121	)	$	250

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	Nine months ended March 31,
(In Thousands)	2007			2006
Net revenues	$	6,068		$	—
Product cost		5,076			—
Gross margin		992			—
Operating expenses
Sales & marketing		3,454			—
General & administrative		6,439			1,948
Research & development		105			—
Total operating expenses		9,998			1,948
Operating loss		(9,006	)		(1,948	)
Other income (expenses)
Interest expense		(56	)		(108	)
Interest income		319			158
Gain on sale of assets		(104	)		—
Realized Gain - securities		(6	)		689
Unrealized Gain - securities		6			76
		159			815
Loss before income tax		(8,847	)		(1,133	)
Income tax benefit (provision)		(241	)		—
Loss from continuing operations		(8,606	)		(1,133	)
Gain (Loss) from discontinued operations, net of income tax		(773	)		(749	)
Gain (Loss) from the sale of discontinued operations, net of income tax		997			302
Loss	$	(8,382	)	$	(1,580	)

All of the numbers which follow are approximate and have been rounded to the nearest thousand dollars.

Net Revenues

With the sale of Houseplans, we have two operating subsidiaries. AccessMedia operates our subscription model and BIG operates our free model. AccessMedia generated revenues of $1,226,000 and $6,068,000 for the three and nine months ended March 31, 2007. The revenues in the three months ended March 31, 2007 decreased 35% from the quarter ended December 31, 2006. Due to the change in business model, we expect this trend to continue since the revenues are from the subscription model. Revenues include software sales, Internet media advertising sales and the sale of text-based Internet links. Sales of downloaded products are recognized ratably over the term of the license sold. Sales of advertisements are recognized upon the delivery of the impressions guaranteed. Sales of click-throughs are recognized upon delivery of the click-throughs guaranteed. BIG, which operates our free entertainment portal, does not expect to generate revenues until fiscal 2 008.

Gross Margin

Our consolidated gross margin was($1,247,000) and $992,000for the three and nine months ended March 31, 2007 respectively. The decrease in gross margin is a result in the change of our business model. We expect our gross margins to decrease until July 2007 at which time we expect to begin generating revenues from BIG.

AccessMedia’s cost of revenues consists of costs related to the products and services AccessMedia provides to customers. These costs include materials, salaries and related expenses for product support personnel, depreciation and maintenance of equipment used in providing services to customers and facilities expenses. The cost of revenues increased as a function of increasing activity over the periods and as result of amortization of assets acquired during 2005. Alchemy Communications, Inc., a company controlled by Mr. Nolan Quan, our principal shareholder, provides us with services including Internet connectivity, hosting services, programming services and equipment and office facilities. During the three and nine months ended March 31, 2007, product costs included $322,000 and $633,000 related to these services.

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BIG’s cost of revenues consists of costs related to the development of tools and the broadcaster.com website.

Sales and Marketing

Sales and marketing expenses were $210,000 and $3,454,000 for the three and nine months ended March 31, 2007. This was principally due to the Merger with AccessMedia, and the launch of BIG.

Sales and marketing expense for BIG consists primarily of salaries and related expenses for sales, support and marketing personnel, commissions, costs and expenses for customer acquisition programs and referrals, a portion of facilities expenses and depreciation and amortization of equipment. BIG’s expense levels have increased because of staffing and costs involved in testing and prototyping BIG’s programs for selling its software, advertising and text-based links. BIG anticipates that sales and marketing expense will continue to increase in absolute dollars as BIG adds sales and marketing personnel and increases its customer acquisition activities.

General and Administrative

General and administrative expense consists primarily of salaries and related expenses for administrative, finance, legal, human resources and executive personnel, fees for professional services and costs of accounting and internal control systems to support its operations. Expenses have increased primarily due to the addition of personnel in management and administration to support the increasing activity levels and as a result of amortization of assets acquired during 2006. Additionally, the adoption of SFAS 123 R resulted in an expense of $684,000 and $1,887,000 for the three and nine months ended March 31, 2007. We expect we will incur approximately $1,267,740 of non-cash stock option expense over the next six quarters related to the fair value of options unvested at March 31, 2007.

We anticipate that general and administrative expense will continue to increase in absolute dollars as BIG builds its management team and hires additional administrative personnel and incurs increased costs such as professional fees. BIG expects to secure a number of services from a related party (Alchemy Communications) at a market rate. During the three and nine months ended March 31, 2007, general and administrative expenses included $88,000 and $139,000 related to services provided by Alchemy Communications, a company controlled by Mr. Nolan Quan, our principal shareholder.

Research and Development

Our research and development expenses consist primarily of salaries and benefits for research and development employees and payments to independent contractors, mainly our third party contract development teams.

Interest and Other, Net

Interest and other, net, was a net gain of $263,000 for the nine months ended March 31, 2007. This was due to an increase in cash balances and a reduction in debt obligations resulting from the deployment of proceeds from the sale of Precision Design.

Provision for State and Federal Income Taxes

We recorded income tax benefit of $241,000 for the nine months ended March 31, 2007. The tax benefit for the nine months ended March 31, 2007 primarily represented the release of deferred tax provision on amortization of intangible assets offset by accrued Canadian income taxes.

We have not recorded a tax benefit for domestic tax losses because of the uncertainty of realization. We adhere to SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Consistent with our past practice, we have recorded a full valuation allowance at December 31, 2006 as the realizability of our net operating loss carry-forwards is not determinable.

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Discontinued Operations

(Loss) from discontinued operations, net of income tax

Sale of Allume

On July 1, 2005, we sold all of the issued and outstanding capital stock of Allume to Smith Micro for an aggregate sales price of $12.8 million made up as follows:

(In millions)
Description	Amount
Cash	$	11.0
Fair value of 397,547 unregistered shares of our Smith Micro common stock		1.8
Total	$	12.8

The fair value of the common stock was based on the five-trading-day average price of Smith Micro’s common stock surrounding the date the business combination was announced.

At closing an indemnity escrow was established to secure certain representations and warranties included in our stock purchase agreement with Smith Micro. The following sale proceeds were deposited into the escrow.

(In millions)
Description	Amount
Cash	$	1.25
170,398 unregistered shares of our Smith Micro common stock		0.784
Total	$	2.034

The value of the common stock was based on the date of closing.

On November 2, 2005, we replaced the shares of Smith Micro common stock in escrow with cash, as permitted by the escrow agreement.

On November 10, 2005, we sold 100% of our holdings of Smith Micro shares at a gain of $923,000 which was shown in Other Income as Realized Gain on Securities in the December quarter.

Pursuant to the stock purchase agreement, Smith Micro released $500,000 plus interest of $7,000 and $750,000 plus interest of $26,000 of the escrowed cash to us in December 2005 and March 2006, respectively. These amounts, when released, added to our calculation of gain or loss on the sale.

As a result of this sale we recorded a loss on the sale of discontinued operations of $843,000 during the three months ended September 30, 2005. This loss calculation does not consider the remaining cash held in escrow of approximately $0.3 million. The balance of escrow was released in the 3^rd quarter, and was recorded as a gain on sale in the quarter.

Sale of Precision Design

On June 9, 2006, Broadcaster sold substantially all of the assets used in the operation of the segment of our business referred to as the Precision Design Software Business. The assets were sold to IMSI Design, LLC, a California limited liability company (the “Purchaser”) which was newly formed for the purpose of the acquisition.

In consideration for the transfer of the assets, the Purchaser paid $6,500,000 in cash, of which $500,000 was deposited in an escrow to back our representations and warranties in the sale Agreement, and the Purchaser delivered its promissory note, due July 3, 2006, in the principal amount of $1,500,000. In addition, the Purchaser assumed certain liabilities, and agreed to perform a number of contracts that were associated with the Precision Design Software Business.

As a result of this sale, we have categorized the assets, liabilities and operations of the Precision Design as discontinued operations for the twelve months ended June 30, 2006.

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Basis of Presentation of Sale of Houseplans

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its applicatio n. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Sale of Houseplans

Subsequent to the quarter, on May 1, 2007, we sold 100% of the issued and outstanding capital stock of Houseplans to Kransco Houseplans, LLC, for $8 million. The purchase price is composed of $5 million in cash on closing and a note payable of $3 million, paid in installments over a three year period. The note payable consists of eight quarterly payments of $250,000 commencing on March 31, 2008, and a final payment of $1,000,000 payable on March 31, 2010. The note payable bears interest at a rate of 5% and any accrued interest will be paid on each installment.

Liquidity and Capital Resources

Net cash used in operating activities was ($7,715,000) for the nine months ended March 31, 2007 in contrast to ($1,133,000) for the nine months ended March 31, 2006.

Net cash provided by investing activities was $1,730,000 for the nine months ended March 31, 2007 in contrast to $9,920,000 in the nine months ended March 31, 2006. A principal factor for the nine months ended March 31, 2007 consisted of $1,500,000 received from the sale of Precision Design. For the nine months ended March 31, 2006, the principal factor consisted of $9,466,000 received from the sale of Allume offset by ($1,807,000) used in discontinuing operations and investing activities from the same sale.

Our net cash used in financing activities for the nine months ended March 31, 2007 was ($4,544,000) consisting of cash used in discontinuing operations and financing activities.

At March 31, 2007, we had $7,605,000 in cash which is sufficient to meet all of our working capital needs during this current fiscal year and beyond. We have no material indebtedness, other than a note payable to a related party discussed in Related Party Transactions below.

Our March 31, 2007 cash position represents a $1,861,000 decrease from the $9,466,000 balance as of December 31, 2006 and a $4,903,000 decrease from the $12,508,000 balance as of June 30, 2006. Working capital at March 31, 2007 was $11,154,000. This represents a decrease of $655,000 over the working capital at December 31, 2006 of $11,910,000 and a decrease of $5,501,000 over working capital at June 30, 2006 of $16,655,000.

We may seek, in the future, additional equity and/or debt financing to sustain our growth strategy. However, we believe that we have sufficient funds to support our operations at least for the next 12 months, based on our current cash position, equity sources and borrowing capacity.

Related Party Transactions

When we acquired AccessMedia on June 1, 2006, we acquired its demand note payable of $1,725,000 payable to Mr. Nolan Quan, who became our principal shareholder in conjunction with the AccessMedia acquisition. The note pays below market interest of 4% per annum. Mr. Quan controlled AccessMedia and controls Alchemy Communications which provides us with services described under “Results of Operations,” above. Mr. Quan controls four limited liability companies that are our principal shareholders. They provide no other services to us. The remaining shareholder of AccessMedia was Mr. Michael Gardner. Mr. Gardner is the sole managing member

22

of Baytree Capital which received 2,450,000 shares of our common stock in connection with the Merger, consisting of 1,450,000 shares as a financial advisory fee and 1,000,000 shares as a consulting fee. Baytree Capital continues to provide consulting services, and earned 5% of the AccessMedia earn-out shares. These services consist primarily of managerial advice, strategic advice, capital markets advice and working with our lawyers in connection with, among other things, our filings with the Securities and Exchange Commission. Mr. Sean Deson, our new Chairman of the Board, is a managing director of, but does not control, Baytree Capital.

Risk Factors

Our business is subject to a number of risk factors which investors should review before deciding to purchase or sell our common stock, including the risk factors found in our annual report on Form 10-KSB, as amended, for the year ended June 30, 2007 and those listed below.

If Viacom Inc. wins its recently filed copyright infringement case, or if we face similar litigation, it may have several adverse affects upon our business and future operating results.

On March 13, 2007, Viacom Inc. announced that it has sued YouTube and Google, Inc. in the U.S. District Court for the Southern District of New York for massive intentional copyright infringement of Viacom's entertainment properties. The suit seeks more than $1 billion in damages, as well as an injunction prohibiting the defendants from further copyright infringement. The Digital Millennium Copyright Act, or DMCA, has safe harbor provisions that provide independent service providers cannot be held liable for infringing material posted by one of its users if it takes down the material once it is notified. The defendants claim they are covered under the DMCA’s safe harbor because they immediately respond to notices to remove allegedly infringing content and further assert that they are protected by the doctrine of fair use. Our business model is similar to that of the defendants. There is a risk that our users may, without proper authority, upload and publish content that is the property of a third party and therefore infringe the copyright of such third party. In addition, because of our focus on automation, like the defendants, our operations do not usually involve any human-based review of content prior to publishing on the site. Although our website’s terms of use specifically require customers to represent that they have the right and authority to reproduce the content they provide and that the content is in full compliance with all relevant laws and regulations, we do not have the ability to determine the accuracy of these representations on a case-by-case basis.

Therefore, a judgment in favor of Viacom, or similar litigation against us, has a number of risks including:

·

Significantly increasing the likelihood of similar litigation being filed against us and may be an adverse legal precedent;

·

We may be subject to expensive copyright litigation;

·

We may incur substantial penalties if we are found to have violated any copyrights;

·

Any adverse result may require us to remove a number of videos and decrease our ability to sell advertising which is directly dependent upon the number of repeat users of our website;

·

If we become legally obligated in the future to perform manual review of all content uploaded to our website, we will encounter increased costs that will materially affect our results of operations.

Because our only business is our online entertainment unit, if that business does not result in the generation of material revenues, we may need future financing and be required to change our business.

Because of the recent sale of Houseplans, Inc., our wholly-owned subsidiary, we are now solely dependent upon our remaining business, Broadcaster.com, an online entertainment community, for revenue. We changed our online business model late last year and now the only revenue we will generate will be from the future sale of advertising. There can be no assurances we will attract sufficient users to our website to be able generate material revenue from advertising. If we are unable to generate material revenue from broadcaster.com, our future operating results and financial condition will be adversely affected.

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Forward-Looking Statements

This quarterly report on Form 10-QSB contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including our growth and profit opportunities, the initiation of advertising revenues, and our liquidity. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements other than statements of historical facts included or incorporated by reference in this report, including statements regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans, and objectives, are forward-looking statements. When used in this report, the words “will,” “believe,” “anticipate,” “plan,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we cannot assure you that these plans, intentions, or expectations will be achieved. Actual results may differ materially from those stated in these forward-looking statements as a result of a variety of factors including acceptance by consumers of our current and future products, including the continued growth of our new business model, the repeated usage of our free website, the acceptance by advertisers of our website metrics, our ability to complete development of new products, the risk factors contained in our Form 10-KSB, as amended, for the year ended June 30, 2006 and the risk factors contained in this Report. We do not undertake any duty to update these forward-looking statements.

ITEM 3 - CONTROLS AND PROCEDURES

(a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as of March 31, 2007, the end of the period covered by this quarterly report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.

(b) We have evaluated our accounting procedures and control processes in place as of March 31, 2007 related to material transactions to ensure they are recorded timely and accurately in the financial statements. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

As previously reported, our subsidiary, AccessMedia, was named as one of a number of co-defendants in a suit filed by the FTC on August 8, 2006. Management continues to believe that the claims are without merit and intends to defend the actions vigorously. While our management believes there is no legal basis for liability, due to the uncertainty surrounding the litigation process, no reasonable estimate of loss is available. In addition, AccessMedia was also named as one of a number of co-defendants in a suit filed by the Washington State Attorney General on or about August 8, 2006. This was settled on April 19, 2007.

We were served with a lawsuit by the shareholders of America’s Biggest Inc., which was filed on March 16, 2007 in the Superior Court in Santa Clara, California. The lawsuit alleges a number of theories, including breach of contract. The plaintiffs claim they were entitled to further consideration than what was originally negotiated. Management believes that the claims are without merit and intends to defend the actions vigorously. While our management believes there is no legal basis for liability, due to the uncertainty surrounding the litigation process, no reasonable estimate of loss is currently available.

As previously reported, our subsidiary, AccessMedia was named as one of a number of defendants in a suit filed by the Washington State Attorney General on or about August 8, 2006. This matter was fully and resolved on April 19, 2007 when AccessMedia entered into a final settlement agreement, together with all other named defendants, which did not include any finding or admission of wrongdoing.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

Not Applicable

ITEM 5 - OTHER INFORMATION

Not Applicable

ITEM 6 - EXHIBITS

Exhibits

The following exhibits are filed as part of, or incorporated by reference into this Report:

Number	Exhibit Title
10.1	Houseplans, Inc. Stock Purchase Agreement(1)(2)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

———————

(1)

Portions of Section 3.4 have been redacted and are the subject of a Confidential Treatment Request.

(2)

In accordance with SEC rules, we have omitted Exhibits A through F from the Stock Purchase Agreement as schedules and will provide copies to the Commission upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BROADCASTER, INC.

Date: May 21, 2007

By:	/s/ Martin Wade, III
Martin Wade, III
Chief Executive Officer
By:	/s/ Blair Mills
Blair Mills
Chief Financial Officer (Principal Accounting Officer)

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EXHIBIT INDEX

Number	Exhibit Title
10.1	Houseplans, Inc. Stock Purchase Agreement(1)(2)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

———————

(1)

Portions of Section 3.4 have been redacted and are the subject of a Confidential Treatment Request.

(2)

In accordance with SEC rules, we have omitted Exhibits A through F from the Stock Purchase Agreement as schedules and will provide copies to the Commission upon request.

EX-10.1

EXHIBIT 10.1

The confidential portions of this exhibit have been filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request in accordance with Rule 406 under the Securities Act of 1933, and Rule 24b-2, under the Securities Exchange Act of 1934. Redacted portions of this exhibit are marked by an ***.

STOCK PURCHASE AGREEMENT

This STOCK PURCHASE AGREEMENT (this “Agreement”) is made and entered into by and between Broadcaster, Inc., a California corporation (“Seller”), Kransco Houseplans, LLC, a California limited liability company (“Parent”), and Houseplans Acquisition Corp., Inc., a California corporation (“Purchaser”) and a wholly-owned subsidiary of Parent, to be effective as of April 30, 2007.

RECITALS

WHEREAS, Seller is the owner of all of the issued and outstanding shares of capital stock (the “Shares”) of Houseplans, Inc., a California corporation (the “Company”); and

WHEREAS, The Company is the sole holder of all of the issued and outstanding shares (the “Weinmaster Shares”) of Weinmaster Homes, Ltd., a corporation formed under the laws of the Province of British Columbia, Canada (“Weinmaster”); and

WHEREAS, On the terms and subject to the conditions set forth in this Agreement, Seller wishes to sell the Shares to Purchaser, and Purchaser desires to purchase the Shares from Seller.

AGREEMENT

NOW, THEREFORE, in consideration of the premises, representations and warranties and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Purchaser and Seller, the parties hereto agree as follows.

ARTICLE 1
DEFINED TERMS

1.1

Certain Defined Terms.  As used in this Agreement, the following terms shall have the meanings set forth below.

“Affiliate” means an entity in which Seller or Purchaser, as applicable, owns at least 50% of the voting or ownership interests or an entity that is directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with Seller or Purchaser, as applicable.

1

“Business Day” shall mean a day which is not a Saturday, a Sunday, or any other day in which banks in San Francisco, California, are authorized by law to be closed.

“Claims” means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, and demands, and the associated costs of defense, court costs and fees, costs of appeal, and reasonable fees and expenses of attorneys, accountants, and experts.

“Code” means the Internal Revenue Code of 1986, as amended.

“Disclosure Schedules” means the set of Schedules provided by the parties hereto pursuant to Articles 4, and 5, by which the individual representations and warranties of such parties may be supplemented.

“Encumbrance” includes any mortgage, deed of trust, lien, pledge, charge, security interest, option to purchase, or first refusal right.  

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“GAAP” means U.S. generally accepted accounting principles, as in effect during the relevant period or periods, consistently applied.

“Governmental Agency” means any administrative or regulatory agency, board, body, bureau, commission, department, or other authority created or authorized by any federal, state, local, or foreign government or governmental body.

“Houseplans Business” means the business of (i) marketing or selling, anywhere in the United States or Canada, proprietary or licensed architectural plans designed or suitable for construction or renovation of residential structures and/or (ii) owning or operating a website which provides access to such plans.

“Knowledge” means (i) actual knowledge in good faith (without any duty of inquiry) of Martin Wade, Blair Mills, Kathryn, Felice, Marvin Mauer, or Bill Harris and (ii) the knowledge that any of the foregoing officers of Seller or the Company would reasonably be expected to have given their respective positions and length of service with Seller or the Company, as applicable.

“Liability” means any liability for Taxes, Losses, and any civil or criminal liability (whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, and due or to become due), including but not limited to the associated costs of defense, court costs and fees, costs of appeal, and reasonable fees and expenses of attorneys, accountants, and experts.

“Losses” means Claims, Liabilities, costs, damages, liens, penalties, fines, interest, amounts paid in settlement, and fees (including reasonable attorneys’ fees).

2

“Material Adverse Effect” means any event, circumstance or condition that has been or would reasonably be expected to be materially adverse to the business, operations or financial condition of the Company and Weinmaster, taken as a whole; provided, however, that none of the following shall be taken into account in determining if a Material Adverse Effect has occurred:  any event, circumstance or condition (a) attributable to conditions affecting the industries in which the Company or Weinmaster operate or the U.S. economy as a whole; (b) resulting from an outbreak or escalation of hostilities involving the United States, the declaration by the United States of a national emergency or war, or (c) resulting from the compliance with the terms of, or the taking of any action required by, this Agreement.

“Material Contracts” means all contracts and agreements, whether written or oral, to which the Company or Weinmaster is a party or by which either of them or any of their assets are bound, which involved in the fiscal year ended June 30, 2006 or are reasonably expected to involve in the fiscal year ended June 30, 2007 payments by or to the Company or Weinmaster, or liability on the part of either of them, of Twenty-Five Thousand Dollars ($25,000) or more per annum; provided, however, that any series of related contracts or agreements having an aggregate cost or value in excess of that amount shall be deemed to be “Material Contracts” for purposes of this Agreement.

“Net Current Assets” as of any date means current assets minus current liabilities and long term liabilities, but excluding the Company’s deferred income taxes and inter-company accounts payable, all as determined in accordance with GAAP, consistently applied.

“Person” means any corporation, general or limited partnership, limited liability company, joint venture, or other entity, any government body or Governmental Agency, and any human being.

“Related Agreements” means the Promissory Note and the Security Agreement.

“Related Party” means any (a) Person controlling, controlled by, or under common control with, a party, (b) officer, director, manager, or other controlling Person of a party hereto or an entity described in clause (a), above, or (c)  spouse or immediate family member of any of the Persons described in clauses (a) or (b), above.

“Tax” means any U.S. or foreign national, federal, state, provincial, or local income, gross receipts, payroll, employment, excise, severance, stamp, occupation, premium, customs duties, franchise, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax, including any interest, penalty, or addition thereto, whether or not disputed.

3

ARTICLE 2
SALE OF THE SHARES; PURCHASE PRICE

2.1

Purchase and Sale of Shares.  On the terms and subject to the conditions set forth in this Agreement, at the Closing provided for in Article 3, below, (a) Seller shall sell, convey, assign, transfer, and deliver to Purchaser all of Seller’s right, title and interest in and to the Shares, and (b) Purchaser shall purchase, and accept delivery from Purchaser of, the Shares and such interests therein, in each case free and clear of all Encumbrances, except as provided herein or in the Related Agreements.

2.2

Purchase Price.  Subject to the adjustments set forth in Section 2.3, below, the aggregate consideration to be paid for the Shares (the "Purchase Price") shall consist of (i) the amount of cash specified in paragraph (a), below (the “Cash Payment”), and (ii) the Promissory Note described in paragraph (b), below the “Promissory Note”).

(a)

Cash Payment.  At the Closing, Purchaser shall deliver to Seller Five Million Dollars ($5,000,000), in cash, via wire transfer of immediately available funds to the account described in Section 3.4, below.

(b)

Promissory Note.  At the Closing, Purchaser shall deliver to Seller a secured promissory note in the principal amount of Three Million Dollars ($3,000,000) in the form attached hereto as Exhibit A. The Promissory Note shall be secured by a Security Agreement in the form attached hereto as Exhibit B (the “Security Agreement”).

2.3

Purchase Price Adjustment.  

(a)

Closing Date Balance Sheet; Draft Adjustment Report.  Not later than sixty (60) days after the Closing Date, Purchaser shall deliver to Seller a balance sheet of the Company as of the close of business on the Closing Date (the “Closing Date Balance Sheet”), which shall have been prepared at Purchaser’s expense and in accordance with GAAP, together with a written statement (the “Draft Adjustment Report”) including Purchaser’s (i) computation of the Net Current Assets as of the Closing Date (the “Closing Date Net Assets”) and (ii) proposed adjustment, if any, to be made to the Purchase Price in accordance with this Section.

(b)

Adjustment to the Purchase Price.  The Purchase Price shall be adjusted upward or downward, on a dollar-for-dollar basis, to the same extent that the amount of the Closing Date Net Current Assets, as reflected on the Closing Date Balance Sheet, exceeds or is less than Two Hundred Thousand Dollars ($200,000), as agreed to by the Seller and Purchaser or as determined by the  Arbiter, as the case may be, and as set forth in clause (c), below (the “Net Asset Adjustment”).

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(c)

Mechanics of the Purchase Price Adjustment.  

(i)

For a period of up to thirty (30) days beginning after Seller’s receipt of the Closing Date Balance Sheet and the Draft Adjustment Report (the “Initial Review Period”), Seller and Purchaser shall cooperate with each other to resolve any disagreements between them with respect to the Draft Adjustment Report. During the pendency of any dispute hereunder, Purchaser shall grant Seller and its accountants reasonable access to all work papers, schedules, and calculations used in the preparation of the Closing Date Balance Sheet.

(ii)

If Seller and Purchaser agree on a Net Asset Adjustment, they shall each sign and deliver to the other a written statement thereof (the “Net Asset Adjustment Statement”), which shall be attached to this Agreement as Exhibit C hereto and thereupon become a part of this Agreement, and the Purchase Price shall be adjusted accordingly. Upon such execution, the Net Asset Adjustment Statement shall be conclusive and binding upon Purchaser and Seller and be effected as set forth below.

(iii)

If Seller and Purchaser do not reach agreement on a Net Asset Adjustment during the Initial Review Period, then Seller shall have until five (5) Business Days after the end of the Initial Review Period (the "Dispute Notice Period") in which to give Purchaser written notice of its objections to Purchaser’s Draft Adjustment Report (the “Dispute Notice”) in which it shall set forth in reasonable detail (A) its objections to the Closing Date Balance Sheet and/or the Draft Adjustment Report, (B) the nature and dollar amount of the items being disputed (collectively, the “Disputed Items”) and (C) its calculation of the Disputed Items, the Closing Date Balance Sheet and the Net Asset Adjustment.

(iv)

If Seller does not so deliver a Dispute Notice within the Dispute Period, then (A) it shall be deemed to have waived any objections or disagreements with respect to Purchaser’s Draft Net Asset Adjustment Report and the Net Asset Adjustment contained therein, both of which shall thereafter be deemed to have been accepted and agreed to by Seller as delivered by Purchaser, (B) the Draft Net Asset Adjustment Report shall be attached to this Agreement as Exhibit C as the Net Asset Adjustment Statement (whether or not executed as such), and (C) the Purchase Price shall be adjusted accordingly as provided below.

(v)

Following timely delivery of a Dispute Notice as provided above, the issue or issues identified therein shall be referred for resolution to the San Francisco, California office of a national or major regional accounting firm selected by mutual agreement (or, failing such agreement, by lot) after eliminating any accounting firm which has previously rendered any services to or for the benefit of either of the parties hereto or their Related Parties (the “Arbiter”). In connection therewith, Purchaser and Seller shall (A) deliver to the Arbiter the Closing Date Balance Sheet, the Draft Adjustment

5

Report and the Dispute Notice, (B) each execute engagement letters and other documents reasonably required by the Arbiter, (C) each provide the Arbiter with such additional information and material as the Arbiter may reasonably request, and (D) each be permitted to submit such data and information to the Arbiter as they deem appropriate, including, without limitation, a presentation of the facts, accounting authorities, and principles supporting its position with respect to the dispute.

(vi)

Within thirty (30) days of its appointment, the Arbiter shall make its determination with respect to the issues raised in the Dispute Notice and deliver to the parties a written statement of its determination and the principal basis therefor (the “Arbiter’s Statement”).  In making such determination, the Arbiter shall act as an expert and not as an arbitrator. The determination of the Arbiter shall be final and conclusive as between the parties, absent fraud or manifest error.  All expenses and fees of the Arbiter shall be shared equally by Purchaser and Seller.

(d)

Within five (5) Business Days after the parties have either received the Arbiter’s Statement or resolved the issue by mutual agreement, a final adjustment to the Purchase Price shall be made as follows:

(i)

If the amount of the Closing Date Net Current Assets as so determined is greater than Two Hundred Thousand Dollars ($200,000), then Purchaser shall pay to Seller an amount equal to such excess, by wire transfer of immediately available funds to an account specified by Seller; or

(ii)

If the amount of the Closing Date Net Current Assets as so determined is less than Two Hundred Thousand Dollars ($200,000), then Seller shall pay to Purchaser an amount equal to such deficiency, by wire transfer of immediately available funds to an account specified by Purchaser.

ARTICLE 3
CLOSING

3.1

Closing.  The closing of the transactions provided for in this Agreement (the "Closing") shall take place at Purchaser’s offices in San Francisco, by original, facsimile, or electronic mail transmission of executed documents all of which shall be deemed to be original documents for purposes of the Closing.  The Closing shall take place after all the conditions set forth in this Article 3 shall have been satisfied or waived by the respective party entitled to waive such conditions, on May 2, 2007 or as soon thereafter as is practicable.  The date upon which the closing shall actually take place is herein referred to as the “Closing Date.”

3.2

Documents to be Delivered by Seller.  At or prior to the Closing, Seller shall, as a condition precedent to Purchaser’s obligation to close (unless Purchaser shall waive the receipt of any of the following items in writing), deliver to Purchaser the following documents:

6

(a)

One or more certificates representing the Shares, with all necessary stock transfer stamps (if any are required) affixed thereto, accompanied by an executed stock transfer power duly endorsed in blank with signature guaranteed and such other documents as may be necessary to effect the transfer of the Shares to Purchaser free and clear of all liens, other than liens created by this Agreement or the Related Agreements;

(b)

One or more certificates representing the Weinmaster Shares and representing that the Company is the sole owner thereof;

(c)

The Security Agreement, in the form attached hereto as Exhibit B, duly executed by Seller; and

(d)

An agreement, a copy of which is attached hereto as Exhibit D, between IMSI Design, LLC, a Delaware limited liability company (“IMSI Design”), as sublessor, and the Company, as sublessee (the “Sublease”), subletting to the Company that certain office space, as specified therein, which is currently used by the Company as its headquarters and located at 100 Rowland Way, Suite 300, Novato, California 94945 (the “Premises”), duly executed by IMSI Design and approved by CA-Golden Gate Plaza Limited Partnership, LLC, a Delaware limited liability company (the “Landlord”), as landlord under the Master Lease for the Premises.

3.3

Documents to be Delivered by Purchaser.  At or prior to the Closing, Purchaser shall, as a condition precedent to Seller’s obligation to close (unless Seller shall waive the receipt of any of the following items in writing), deliver to Seller the following documents:

(a)

Confirmation that the Cash Payment described in Section 2.2(a), above, has been made as provided in Section 3.4, below;

(b)

The Promissory Note described in Section 2.2(b), above, in the form attached hereto as Exhibit A, duly executed by Purchaser; and

(c)

The Security Agreement, in the form attached hereto as Exhibit B, duly executed by Purchaser and, pursuant to the Security Agreement, the certificates representing the Shares, accompanied by a duly executed stock power in blank.  

3.4

Method of Delivery of the Cash Payment.  The Cash Payment shall be paid on the Closing Date by wire transfer, to the following account:

****

****

****

****

****

****

****

****

7

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLER

Seller hereby makes to Purchaser the representations and warranties set forth in this Article 4, each of which is, except as set forth in the Schedules attached hereto (the “Disclosure Schedules”), true and correct in all material respects as of the date hereof. All exceptions to the following representations and warranties shall be set forth in the Disclosure Schedules, clearly numbered to correspond to the Sections and paragraphs of this Article 4 to which they relate. Not later than three (3) Business Days prior to the Closing Date, Seller has delivered to Purchaser written copies of all Schedules required or intended to be provided to the Buyer on the Closing Date as provided in this Article (the "Preliminary Closing Schedules"). Except as specifically identified, (by redlining or otherwise) in the D isclosure Schedules, there are no differences between the Preliminary Closing Schedules and the Disclosure Schedules.

4.1

Organization.  

(a)

Seller and the Company are corporations duly organized, validly existing and in good standing under the laws of the State of California. Each of them is (i) duly qualified to do business as foreign corporations in each jurisdiction where the character of the property owned, licensed or leased by them or the business conducted or nature of their activities makes such qualification necessary, and (ii) in good standing in each such jurisdiction, except in each case where the failure to be so qualified or in good standing would not have a Material Adverse Effect.

(b)

Weinmaster is a corporation duly organized, validly existing and in good standing under the laws of the Province of British Columbia, Canada. It is duly qualified to do business as a foreign corporation in each jurisdiction where the character of the property owned, licensed or leased by it or the business conducted or nature of its activities makes such qualification necessary and is in good standing in each applicable jurisdiction, except in each case where the failure to be so qualified or in good standing would not cause a Material Adverse Effect.  

4.2

Power and Authority.  

(a)

Seller has the requisite corporate power and authority to execute, deliver and perform this Agreement and any other agreement or certificate issued by it in connection with the transactions contemplated hereby.

(b)

Each of the Company and Weinmaster have the corporate power and authority to own their respective assets and to conduct their respective businesses as presently owned and conducted.

4.3

Execution and Enforceability.  This Agreement has been duly and validly executed and delivered by Seller and constitutes the valid and binding obligation of Seller enforceable against Seller in accordance with its terms,

8

assuming the due execution and delivery of this Agreement by Purchaser and except to the extent that such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors’ rights generally and (b) general equitable principles.  No approval of the shareholders of Seller is required under any applicable law or Seller’s organizational documents, and the consummation of the transactions contemplated hereby will not give rise to any dissenters’ rights or other valid claims from Seller’s stockholders. Immediately after the Closing, Purchaser shall have sole ownership of, and title to, the Shares, without any Encumbrance except as provided herein or in the Related Agreements.

4.4

Subsidiaries.  Other than Weinmaster, the Company has no subsidiaries, and the assets of the Company do not include any stock, partnership interest, joint venture interest or other equity interest in any Person aside from the shares it holds in Weinmaster.  Weinmaster has no subsidiaries, and its assets do not include any stock, partnership interest, joint venture interest or other equity interest in any Person.

4.5

Capitalization.  The authorized capital stock of the Company consists of one hundred thousand (100,000) shares of common stock having no par value (the “Common Stock”), of which 1,000 shares are issued and outstanding.  All of the outstanding shares of Common Stock have been duly and validly issued, and are fully paid and non-assessable.  The Company does not have outstanding any (a) securities convertible into or exchangeable for its capital stock, or (b) options, warrants, agreements, or other rights to subscribe for or purchase any shares of its capital stock, or (c) other agreements, calls, commitments, or claims of any character relating to its capital stock.  

4.6

Title to Stock.  

(a)

Seller is the record and beneficial owner of the Shares, free and clear from any Encumbrances whatsoever.  Seller is not a party to any (i) option, warrant, purchase right, or other contract or commitment (other than this Agreement) that could (A) require Seller to sell, transfer or otherwise dispose of any capital stock of the Company or (B) otherwise limit its ability to transfer and sell the Shares to Purchaser hereunder freely and without Encumbrance, or (ii) voting trust, proxy or other agreement or understanding with respect to the voting of any capital stock of the Company.  At the Closing, Purchaser will acquire from Seller all of Seller’s right, title, and interest in and to the Shares, free of any Encumbrances whatsoever, except for any liens created by or through Purchaser.

(b)

The Company is the record and beneficial owner of the Weinmaster Shares, free and clear from any Encumbrances whatsoever. Neither the Company nor Weinmaster is a party to any (i) option, warrant, purchase right, or other contract or commitment that could require either of them to sell, transfer or otherwise dispose of any capital stock of Weinmaster or otherwise limit, encumber, or condition the Company’s ownership of the

9

Weinmaster Shares or (ii) voting trust, proxy or other agreement or understanding with respect to the voting of any of Weinmaster’s capital stock. Upon consummation of the transactions contemplated hereby, the Company will hold all right, title, and interest in and to the Weinmaster Shares free of any Encumbrances whatsoever.

4.7

No Breach, Default, Violation or Consent.  The execution, delivery and performance by Seller of this Agreement and the Related Agreements does not and will not:

(a)

Violate the charter or bylaws of Seller or the Company;

(b)

Breach or result in a default (or an event which, with the giving of notice or the passage of time, or both, would constitute a default) under, require any third party consent under, result in the creation of any lien on the assets of Seller or the Company under, or give to others any rights of termination, acceleration, suspension, revocation, cancellation or amendment of any permit or any material agreement to which Seller or the Company is a party or by which Seller or the Company or any of their assets is bound;

(c)

Breach or otherwise violate any governmental order, decision or award which names Seller or the Company or is directed to Seller or the Company or any of their assets;

(d)

Violate any law, rule or regulation; or

(e)

Require any consent or other action by, or any filing, registration or qualification with, any Person;

except in the case of clauses (b) through (e) above, for such matters as would not, individually or in the aggregate, have a Material Adverse Effect.  

4.8

Filings.  The Company and Weinmaster have each filed all reports required by applicable laws, rules and regulations to be filed with the appropriate governmental authorities since January 1, 2004, except where the failure to make such filings has not resulted and is not expected to result in a Material Adverse Effect.  The filings which were made complied as to form in all material respects with the applicable published rules and regulations of the applicable governmental authorities, except where the failure to do so does not result in a Material Adverse Effect.

4.9

Financial Statements.  

(a)

Seller has delivered to Purchaser copies of the Company’s and Weinmaster’s financial statements described below (collectively, the "Financial Statements"), all of which are attached hereto as Exhibit E:

(i)

Balance sheets and related statements of income, retained earnings, and changes in financial condition for the fiscal year ended June 30, 2006 (the “2006 Financial Statements”); and

10

(ii)

Balance sheets and related statements of income, retained earnings, and changes in financial condition on a monthly consolidating basis for (A) the six (6) month period ended December 31, 2006 and (B) each calendar month ended after December 31, 2006 and within fifteen (15) days prior to the Closing Date (collectively, the “Interim Financial Statements”).

(b)

Except as clearly set forth in the Financial Statements, the notes or schedules thereto, or in Schedule 4.9 hereto, with respect to the periods represented by the  Financial Statements:

(i)

Each and all of the Financial Statements have been prepared: (A) in accordance with GAAP on a consistent basis and (B) from and are consistent with the books of account and records of Seller and of the Company or Weinmaster, as appropriate;

(ii)

The 2006 Financial Statements are complete and present fairly in all material respects (based on a materiality threshold appropriate for a consolidated entity) and in accordance with GAAP the financial condition, results of operations, and cash flows of the Company or Weinmaster, as appropriate, as at the dates and for the periods stated therein;

(iii)

Each and all of the Interim Financial Statements are complete and present fairly in all material respects and in accordance with GAAP the financial condition, results of operations, and cash flows of the Company or Weinmaster, as appropriate, as entities separate from Seller, as at the dates and for the periods stated therein; and

(iv)

There is no material cost or liability of any nature that is required by GAAP to be reflected and reserved against in the Financial Statements which is not fully reflected and reserved against therein.

4.10

Tax Returns; Taxes.  All Tax and information returns required to have been filed prior to the date of this Agreement by the Company or by Weinmaster (either separately or as part of a consolidated group) have been duly filed, and each such return correctly reflects all Tax liability and all other information required to be reported thereon. All income, franchise, and other Taxes to which the Company and/or Weinmaster may be subject for all periods prior to the Closing Date have been fully paid or accrued for either (a) by the Company and/or Weinmaster (in which case such payments and/or accruals appear on the appropriate Financial Statements), or (b) by Seller, in which case Seller will pay in full when due all such Taxes on behalf of the Company and/or Weinmaster, as appropriate.

4.11

Liabilities.  Except as and to the extent otherwise disclosed in the Financial Statements, the Company has no liabilities of the kind which are required to be set forth in the Financial Statements in accordance with GAAP, other than liabilities incurred in the ordinary course of business consistent with past practice since December 31, 2006.

11

4.12

Compliance with Laws; Permits.  To Seller’s Knowledge, the Company has not violated or failed to comply with any law, rule or regulation or any final and non-appealable order, decree or award to which it or any of its properties or assets is subject, except where the failure to comply with any such law, rule or regulation has not resulted and is not expected to result in a Material Adverse Effect.  Since January 1, 2004, the Company and Weinmaster have each obtained all government licenses and permits (collectively, the “Permits”) that are necessary for the conduct of its business as presently conducted except to the extent that the failure to obtain such Permits does not result in a Material Adverse Effect.  All such Permits are in full force and effect; no violations or notices of failure to comply ha ve been issued or recorded in respect of any such Permits; and there are no proceedings pending or, to Seller’s Knowledge, threatened, to revoke, suspend or limit any such Permit. To Seller’s Knowledge, neither the Company nor any of its officers or agents has made any illegal or improper payments to, or provided any illegal or improper inducement for, any governmental official or other Person in an attempt to influence any such Person to take or to refrain from taking any action relating to the Company.

4.13

Litigation.  There is no action, suit, proceeding, investigation or governmental approval process pending or, to Seller’s Knowledge, threatened against the Company or Weinmaster, or affecting any of the properties or assets of either, which individually or in the aggregate would have a Material Adverse Effect.

4.14

Real Property.

(a)

Neither the Company nor Weinmaster owns any real property.

(b)

To Seller’s Knowledge, (i) IMSI Design is the current tenant of the premises described in Section 3.2(d), above, pursuant to that certain Office Lease Agreement, dated as of January 31, 2007, between IMSI Design and the Landlord (the “Master Lease”), (ii) a true and complete copy of the Master Lease is attached to this Agreement as Exhibit F, (iii) the Master Lease is valid and binding on the parties thereto and is in full force and effect, (iv) no party thereto is in material breach thereunder, (v) no event has occurred which, with due notice or lapse of time or both, would constitute such a lapse or breach, and (vi) no material controversy, claim, dispute, or disagreement exists between the parties to the Master Lease.

(c)

Seller has provided true and complete copies of all leases and subleases to which either the Company or Weinmaster is a party, a complete list of which is attached as part of Schedule 4.14(c), including but not limited to the Sublease, a copy of which is attached hereto as Exhibit D.  All such leases and subleases are valid and in full force and effect.  Neither the Company nor, to Seller’s Knowledge, any other party thereto is in material breach under the leases or subleases therein listed, and no event has occurred

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which, with due notice or lapse of time or both, would constitute such a lapse or breach.  To Seller’s Knowledge, no amount due under the leases remains unpaid, and no material controversy, claim, dispute or disagreement exists between the parties to the leases.  Seller does not owe any brokerage commissions or finder’s fees with respect to the leases.

4.15

Personal Property.  Schedule 4.15 describes, by type and physical location, all personal property of the Company and of Weinmaster. The Company and Weinmaster each have (a) good and marketable title to all assets purported to be owned by it and (b) good leasehold title to all personal property purported to be leased by it.  

4.16

Intellectual Property.  

(a)

Schedule 4.16(a) sets forth a correct and complete list of all patents, registered and unregistered trademarks, service marks, logos, corporate and trade names, domain names, and all registered copyrights, which are owned by the Company and/or Weinmaster (such intellectual property, together with all inventions, discoveries, techniques, processes, methods, formulae, designs, computer software, trade secrets, confidential information, know-how and ideas which are owned by the Company, being referred to in this Agreement as the “Owned Intellectual Property”).  To Seller’s Knowledge, no Person is infringing upon or misappropriating any of the Owned Intellectual Property, or making any use thereof which infringes upon the lawful rights of the Company or Weinmaster therein.

(b)

Schedule 4.16 (b) sets forth a correct and complete list of all licenses or other agreements pursuant to which the Company has the right to use any intellectual property owned by others (excluding “shrink wrap” or “click wrap” or similar licenses or agreements applicable to software applications that are generally available to the public at a cost of less than $25,000) (such intellectual property being referred to herein as the “Third Party Intellectual Property”).  The Company and/or Weinmaster has valid licenses to all of the Third Party Intellectual Property currently being used by the Company or Weinmaster.  

(c)

To Seller’s Knowledge, neither the Company nor Weinmaster has ever (i) infringed upon, misappropriated, or unlawfully used any intellectual property owned or used by any other Person within the past six (6) years or (ii) received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of, any intellectual property owned or used by any other Person since January 1, 2004.

4.17

Material Contracts.  

(a)

Schedule 4.17(a) sets forth a correct and complete list of all of the Material Contracts, and all the contracts or agreements related to the supply of designs for sale by the Company and/or Weinmaster, to which the Company or Weinmaster are parties or by which either of them is bound. Seller

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has previously delivered to Purchaser complete and correct copies of each contract (other than designer agreements which are not Material Contracts) required to be listed on Schedule 4.17(a), and any amendments thereto, except that Schedule 4.17(a) contains a complete and correct description of all Material Contracts that are oral.  

(b)

Each Material Contract is in full force and effect and is enforceable against the Company or Weinmaster, as applicable, and, to the Knowledge of Seller, the other parties thereto, in accordance with its terms, except to the extent that such enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and general equitable principles.  

(c)

Neither the Company nor (to Seller’s Knowledge) any other party is in material default under any Material Contract, and no event has occurred which constitutes, or with the lapse of time or the giving of notice or both would constitute, a material default by the Company or (to Seller’s Knowledge) by any other party under any such contract.  To Seller’s Knowledge, there are no material disputes or disagreements between the Company and any other party with respect to any such contract.

(d)

Each other party to each Material Contract has consented or been given notice (where such consent or the giving of such notice is necessary) sufficient that such contract shall remain in full force and effect following the consummation of the transactions contemplated by this Agreement without any modification in the rights or obligations of the Company thereunder.  

4.18

Employee Benefit Plans and Other Arrangements.

(a)

Schedule 4.18(a) sets forth (i) a true and correct list of the name, job title, current salary, and location of employment of each of the current employees and independent contractors (other than independent contractors who are designers or other suppliers of house plans, floor plans, and the like), including employees who are also directors or officers, of the Company and Weinmaster (the "Employees") and (ii) the names of all directors and officers of the Company and Weinmaster, whether or not such persons are Employees or Former Employees (as that term is defined below).

(b)

Schedule 4.18(b) sets forth a true and correct list of the name, responsibilities, current compensation, and location of all consultants and independent contractors to the Company and/or Weinmaster (the “Contractors”).

(c)

The relevant Financial Statements reflect the accrual of all obligations for salaries, medical, severance, and other benefits and other compensation of any kind with respect to Employees, Former Employees, and Contractors to the extent required by GAAP, including, but not limited to, all commissions and other fees payable to salespeople, sales representatives, and other agents.

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(d)

Complete and correct copies of all (i) written agreements (and summaries of all oral agreements) with or concerning Employees, (ii) Material Contracts with Contractors, and (iii) written employment policies and practices as now in effect, have previously been delivered to Purchaser, and a list of all such agreements, practices, and policies, whether written or oral, is included on Schedule 4.18(d).

(e)

There are no outstanding loans or payroll advances from the Company or Weinmaster to any of their respective Employees, Former Employees, or Contractors.

(f)

Except as would not reasonably be expected to result in a Material Adverse Effect, to Seller's Knowledge, the Company and Weinmaster have complied, at all times and in all material respects, with:

(i)

All applicable laws, statutes, rules, and regulations with respect to Employees, Former Employees, and Contractors in each of the jurisdictions in which such Employees or Former Employees are or were located, and there have been no claims made or, to Seller's Knowledge, threatened against the Company or Weinmaster arising out of, relating to, or alleging any violation of any of the foregoing (and, to Seller's Knowledge, there is no basis for any such claim); and

(ii)

The employment eligibility verification form requirements, paperwork provisions, employee recordkeeping (including but not limited to obtaining and keeping I-9 Forms in proper order).

(g)

There are no material controversies, strikes, slowdowns, lockouts, work stoppages, picketing, grievances, unfair labor practice charges, complaints, disputes, or other proceedings pending, or to Seller's Knowledge investigations or other proceedings pending or threatened, between the Company or Weinmaster and any of their respective Employees, Former Employees, or Contractors.

(h)

For purposes of this Agreement, a "Benefit Plan" shall mean any employee benefit plan, program, or arrangement which since January 1, 2004 has been maintained or contributed to by Seller, the Company, and/or Weinmaster for the benefit of or relating to any of Employees or former employees of the Company and/or Weinmaster, or their covered dependents, survivors or beneficiaries (each a "Former Employee"), and which is legally binding on the Company or Weinmaster, or in respect of which either of them has any liability or obligation. Schedule 4.18(h) sets forth a complete and correct list of all such Benefit Plans.

(i)

With respect to each such Benefit Plan:

(i)

Except as set forth in Schedule 4.18(i)(i), neither the Company nor Weinmaster is a party to, or provides, (A) any employee pension benefit plan, as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including but not limited to any or

15

"multi-employer plan," within the meaning of Sections 3(37) or 4001(a)(3) of ERISA, (B) any other benefit plan subject to Title IV of ERISA or Section 412 of the Code, or (C) any Benefit Plan which is intended to meet the requirements of a "qualified plan" under Code §401(a); and neither of them, has ever maintained, contributed to, or participated in, or has any liability (whether contingent or otherwise) with respect to, any such plan.

(ii)

Except as would not reasonably be expected to result in a Material Adverse Effect, or as set forth in Schedule 4.18(i)(ii), (A) each such Benefit Plan has been maintained, funded, and administered in accordance with its terms and complies in form and in operation in all respects with the applicable requirements of ERISA, the Code, and other applicable laws, and (B) all required reports and descriptions have been timely filed and/or distributed in accordance with the applicable laws and regulations, including but not limited to ERISA, COBRA, and the Code.

(j)

The Seller has heretofore delivered to Purchaser complete and correct copies of the following documents, where applicable: (i) the text of any written Benefit Plan and of any related trust, insurance, or other material contracts, (ii) the most recent summary plan description and all other descriptions distributed to Employees or set forth in any manuals or other documents, (iii) the most recent statement of plan assets that is intended to meet the requirements of Section 401(a) of the Code, (iv) all annual reports, financial statements, and opinions required to be filed with any Governmental Agency at any time during the five (5) years prior to the date of this Agreement, and (v) copies of all correspondence with Governmental Agencies during the five (5) years prior to the date of this Agreement with respect to any Benefit Plan.

4.19

Insurance.  Schedule 4.19 contains a complete list of each insurance policy now carried by, or covering, the Company or Weinmaster with respect to their or its current or previous operations, business, directors, officers, and Employees; and a complete and correct copy of each such policy has previously been delivered to Purchaser. All such policies are in full force and effect, and no notice of cancellation has been given with respect to any such policy. All premiums due thereon have been paid in a timely manner.

4.20

Powers of Attorney.  No Person holds any power of attorney from the Company or Weinmaster

4.21

Books and Records.  All of the records, data, information, databases, systems, and controls maintained, operated, or used by the Company or Weinmaster in connection with the conduct or administration of its business (including all means of access thereto and therefrom) are either owned or licensed by the Company or Weinmaster, as appropriate, and have been made available to Purchaser (and any such licenses are in force and the licensee is not in material breach thereof).

4.22

Stock Books and Ledgers.  The stock certificate books and stock ledgers of the Company and Weinmaster are complete and correct in all

16

material respects, and accurately reflect all transactions in their capital stock as of and through the Closing Date.  

4.23

Product Warranties.  Neither the Company nor Weinmaster has (a) any express and unexpired product warranty with respect to any product currently or previously produced, distributed, or sold by it; (b) received notice of any claim (actual or threatened) against it based on any such product warranty; or (c) any Knowledge of any such (actual or threatened) claim. The Company and Weinmaster do not make and have not made any express warranties to its customers with respect to any of the products that it produces, distributes, or sells.

4.24

Material Adverse Changes.  Except as set forth in Schedule 4.24 hereto, since December 31, 2006 the Company and Weinmaster:

(a)

Have carried on their businesses in the ordinary course and consistent with past practice, and

(b)

Have not

(i)

Incurred any obligation or liability (whether absolute, accrued, contingent or otherwise), except pursuant to the terms of this Agreement or except in the ordinary course of business and consistent with past practice;

(ii)

Suffered any damage, destruction or loss of physical property or goods resulting in costs or expenses in excess of Ten Thousand Dollars ($10,000), whether or not covered by insurance;

(iii)

Mortgaged, pledged or subjected to any lien, charge or other Encumbrance any of their assets, tangible or intangible;

(iv)

Sold or transferred any of its assets or canceled or compromised any of its debts, except, in each such case, in the ordinary course of business and consistent with past practice, or waived any claims or rights of a material nature; or

(v)

Experienced the loss or departure of, or any significant dispute with, any of the following designers: (i) Atlanta Plan Source, Inc., (ii) Design Basics, Inc., (iii) Fillmore Design Group, (iv) House Plan Gallery, Inc., (v) Nelson Design Group, LLC, or (vi) any other designer who or which has produced plans resulting in gross sales by the Company and/or Weinmaster in excess of One Hundred Twenty-Five Thousand Dollars (US$125,000) during the fiscal year then ended or either of the two (2) prior fiscal years.

4.25

Brokers or Finders.  Neither the Company nor Seller has employed or retained, or has any liability to, any broker, agent or finder on account of this Agreement or the transactions contemplated hereby.

4.26

No False or Misleading Statements.  This Agreement, including the exhibits and certificates which are a part hereof, does not to the Knowledge of Seller contain any representation, warranty, or information made by Seller or

17

provided by or on its behalf that is false or misleading with respect to any material fact.

4.27

Reliance.  Seller’s representations and warranties made in this Article 4 are made with the understanding and expectation that Purchaser is relying thereon in entering into and performing its obligations under this Agreement, and the same shall not be affected in any respect whatsoever by any investigation heretofore or hereafter conducted by or on behalf of Purchaser, whether in contemplation of this Agreement or otherwise.

ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PURCHASER

Purchaser hereby makes to Seller the representations and warranties set forth in this Article 5, each of which is, except as set forth in the Disclosure Schedules, true and correct in all material respects as of the date hereof. All exceptions to the following representations and warranties are set forth in the Disclosure Schedules, clearly numbered to correspond to the Sections and paragraphs of this Article to which they relate.

5.1

Organization.  Purchaser is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of California.  

5.2

Power and Authority.  Purchaser has the requisite power and authority as a limited liability company to execute, deliver and perform this Agreement and any other agreement or certificate issued by Purchaser in connection with the purchase of the Shares.

5.3

Execution and Enforceability.  This Agreement has been duly and validly executed and delivered by Purchaser and constitutes the valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, assuming the due execution and delivery of this Agreement by Seller and except to the extent that such enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors’ rights generally and general equitable principles.  

5.4

No Conflict.  Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will directly or indirectly (with or without notice or lapse of time):  (a) conflict with or violate any provision of Purchaser’s charter, operating agreement or other governing instruments, or any legal requirement or order which is either applicable to, binding upon or enforceable against Purchaser; or (b) result in any breach of or default under any material mortgage, contract, agreement, indenture, trust, written agreement or other instrument which is either binding upon or enforceable against Purchaser.

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5.5

No Litigation.  There are no existing suits or litigation pending or threatened against Purchaser or its properties which could affect Purchaser’s ability to enter into this Agreement or consummate the transactions contemplated hereby.  Purchaser has not filed any voluntary petition in bankruptcy, nor been served with or otherwise received notice of any involuntary petition in bankruptcy having been filed against it.  

5.6

Purchase Price.  Purchaser has and will have at the Closing sufficient available funds to pay the Cash Consideration at the Closing.

5.7

Purchaser’s Review.  Purchaser has reviewed and has had access to all documents, records and information which it has desired to review, and has had the opportunity to ask questions, and has received sufficient answers, in connection with its decision to enter into this Agreement and to consummate the transactions contemplated hereby.  

5.8

Brokers or Finders.  Except as described in Schedule 5.8, Purchaser has not employed or retained, or has any liability to, any broker, agent or finder on account of this Agreement or the transactions contemplated hereby.  Seller shall have no liability for any payments due to any broker, agent or finder employed or retained by Purchaser.

5.9

No False or Misleading Statements.  This Agreement, including the exhibits and certificates which are a part hereof, does not to the actual knowledge of Purchaser contain any representation, warranty, or information made by Purchaser or provided by or on its behalf that is false or misleading with respect to any material fact.

5.10

Reliance.  Purchaser’s representations and warranties made in this Article 5 are made with the understanding and expectation that Seller is relying thereon in entering into and performing its obligations under this Agreement, and the same shall not be affected in any respect whatsoever by any investigation heretofore or hereafter conducted by or on behalf of Seller, whether in contemplation of this Agreement or otherwise.

ARTICLE 6
POST-CLOSING COVENANTS

6.1

Confidentiality.  

(a)

As used in this Section the “Confidential Information” of a party hereto means all information concerning or related to the business, operations, financial condition, or prospects of such party or any of its Affiliates, regardless of the form in which such information appears and whether or not such information has been reduced to a tangible form, and specifically includes (i) all information regarding the officers, directors, employees, equity holders, customers, suppliers, distributors, sales representatives and licensees of such party and its Affiliates, in each case whether present or prospective, (ii) all inventions, discoveries, trade secrets,

19

processes, techniques, methods, formulae, ideas and know-how of such party and its Affiliates, (iii) all financial statements, audit reports, budgets and business plans or forecasts of such party and its Affiliates and (iv) this Agreement and the transactions contemplated thereby; provided, however, that the Confidential Information of a party hereto does not include (A) information which is or becomes generally known to the public through no act or omission of the other party and (B) information which has been or hereafter is lawfully obtained by the other party from a source other than the party to whom such Confidential Information belongs (or any of its Affiliates or their respective officers, directors, employees, equity holders or agents) so long as, in the case of information obtained from a third party, such third party wa s or is not, directly or indirectly, subject to an obligation of confidentiality owed to the party to whom such Confidential Information belongs or any of its Affiliates at the time such Confidential Information was or is disclosed to the other party.

(b)

Except as otherwise permitted by paragraph (c) below, each party hereto agrees that it will not, without the prior written consent of the other party, disclose or use for its own benefit any Confidential Information of the other party.

(c)

Notwithstanding paragraph (b) above, each of the parties is permitted to:

(i)

Disclose Confidential Information of the other party to its officers, directors, employees, equity holders, lenders, agents and Affiliates, but only to the extent reasonably necessary in order for such party to perform its obligations and exercise its rights and remedies under this Agreement, and such party will take all such action as are necessary or desirable in order to ensure that each of such persons or entities maintains the confidentiality of any Confidential Information that is so disclosed;

(ii)

Make additional disclosures of or use for its own benefit Confidential Information of the other party, but only if and to the extent that such disclosures or use are specifically contemplated by this Agreement; and

(iii)

Disclose Confidential Information of the other party to the extent, but only to the extent, required by applicable laws, rules or regulations; provided, however, that prior to making any disclosure pursuant to this clause (iii), the disclosing party will notify the affected party of the same, and the affected party will have the right to participate with the disclosing party in determining the amount and type of Confidential Information of the affected party, if any, which must be disclosed in order to comply with laws, rules or regulations.

6.2

Non-Compete; Non-Solicit.  

(a)

Non-Competition.  Neither Seller nor any of its Affiliates will, for a period of three (3) years after the Closing Date (the “Restricted Period”), sell (or provide services in connection with) any design or software products in

20

competition with the Houseplans Business, or knowingly enter into any advertising agreement with any Person who or which promotes products in competition with the Houseplans Business.

(b)

No Inducement or Solicitation.  During the Restricted Period:

(i)

Neither Seller nor any of its Affiliates will (A) induce or attempt to induce any employee of Purchaser or its Affiliates to leave the employ of Purchaser or its Affiliates, or (B) induce or attempt to induce any customer, supplier or other business relation of Purchaser or its Affiliates to cease doing business with Purchaser or its Affiliates; and

(ii)

Neither Purchaser nor any of its Affiliates will, induce or attempt to induce any employee or independent contractor of Seller or its Affiliates to leave the employ of Seller or its Affiliates or cease providing services thereto.

6.3

Non-Disparagement.  For a period of three (3) years after the Closing Date:

(a)

Seller will not, and will not authorize any of its officers, directors, or employees (except as may be required by law or any judicial process) to (i) publicly or privately disparage Purchaser, the Company, Weinmaster, or any of their respective management, personnel, products, or services, or (ii) discuss any of them with third parties in a manner which amounts to defamation thereof or which questions their reputation or integrity, or otherwise casts them in a false light; and

(b)

Purchaser will not, and will not authorize any of its officers, directors, or employees (except as may be required by law or any judicial process) to (i) publicly or privately disparage Seller or any of its management personnel, products, or services, or (ii) discuss Seller with third parties in a manner which amounts to defamation of Seller or any such person or which questions their reputation or integrity, or otherwise casts them in a false light.

6.4

Section 338(h)(10) Election.

(a)

As used in this Agreement:

(i)

The term “Section 338(h)(10) Election” means an election described in Section 338(h)(l0) of the Code with respect to Purchaser’s acquisition of the Shares pursuant to this Agreement, including any corresponding election under state or local law pursuant to which a separate election is permissible with respect to that transaction; and

(ii)

The term “Tax Return” means any report, return, information return, form, declaration, claim for refund, statement, or other information (including any schedule, attachment, or amendment thereto) required to be supplied to a Governmental Agency in connection with any Tax; and

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(iii)

The term “Section 338 Forms” means all returns, documents, statements, and other forms that are required to be submitted to any federal, state, county or other local Tax authority in connection with a Section 338(h)(l0) Election. Section 338 Forms shall include, without limitation, any “statement of section 338 election” and IRS Form 8023 (together with any schedules or attachments thereto) that are required pursuant to Treasury Regulations Sections 1.338-1 or 1 .338(h)(l0)-l, or any successor provisions thereto.

(b)

Seller and Purchaser shall jointly make a Section 338(h)(l0) Election with respect to the sale of the Shares hereunder in accordance with applicable laws and under any comparable provision of state, local, or foreign law for which a separate election is permissible, and in connection therewith shall (i) each take all necessary steps to properly make such election effective in accordance with all such applicable laws, (ii) cooperate in good faith with each other in the preparation and timely filing of any and all Tax Returns required to be filed by either of them or the Company, including the exchange of information and the joint preparation and filing of Form 8023 and related schedules, (iv) report the sale of the Shares hereunder in a manner consistent with such election, and (v) take no position contrary thereto unless required to do so by applicable tax law pur suant to a determination as defined in Section 1313(a) of the Code, and then only upon prior written notice to the other party of the taking of any such position and the reason(s) therefor.

(c)

Purchaser shall be responsible for the preparation and filing of all Section 338 Forms (as hereinafter defined) in accordance with applicable tax laws and the terms of this Agreement, and shall deliver such Section 338 Forms to Seller at least forty-five (45) days prior to the date on which they are required to be filed.  Seller shall execute and deliver to Purchaser such documents or forms (including executed Section 338 Forms) as are requested by Purchaser and are required by any laws in order to properly complete the Section 338 Forms at least twenty (20) days prior to the date such forms are required to be filed. Seller shall provide Purchaser with such information as Purchaser may reasonably request in order to prepare the Section 338 Forms no later than thirty (30) days after Purchaser’s request for such information. Notwithstanding the foregoing, Purchaser shall (i) provide Seller an opportunity to review and comment on any Section 338 Forms at least two (2) Business Days prior to filing such forms and (ii) include in such forms all comments reasonably proposed by Seller.

(d)

The Purchase Price and any other relevant items shall be allocated in accordance with Section 338(b)(5) of the Code and the Treasury Regulations thereunder. Seller and Purchaser shall jointly agree upon the fair market value of Seller’s assets (the “Valuation”). All values contained in the Valuation shall be used by each party in preparing the forms referred to in Section 5.5(b) above and all other relevant Tax Returns.

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(e)

Notwithstanding any other provision of this Agreement to the contrary, Seller agrees that any income and gain it may recognize as a result of, and in accordance with, the making of the Section 338(h)(l0) Election will be included in its consolidated federal income tax return and any resulting tax liability will be paid by Seller, as the common parent of Seller’ consolidated group.

(f)

Purchaser agrees that it will pay and be responsible for, and will indemnify and save Seller harmless from and against, any Taxes imposed on Seller by any federal, state or local Tax authority, including but not limited to costs incurred by Seller in connection with the preparation or restatement of any Tax Return, in each case (i) resulting from Purchaser’s election to treat the purchase of the Shares as an asset acquisition under the statutes of any such Tax authority and (ii) that Seller would not have incurred except for Purchaser’s Section 338(h)(10) Election; provided, however, that in no event shall Purchaser’s obligations under this Section 6.4(f) exceed an aggregate of One Hundred Thousand Dollars ($100,000); and provided, further, that Seller shall (A) provide Purchaser with reasonable advance written notice of an y proposed filing that is related to the covenant set forth in this Section 6.4, including copies of the relevant sections and schedules thereof, (B) consult with Purchaser as to any such filing, Tax Return, or amended Tax Return, and (C) upon Purchaser’s written request, make such changes therein or adjustments thereto as Purchaser may reasonably propose and which do not have the effect of materially increasing any Tax on Seller.

6.5

Tax and Audit Cooperation.

(a)

After the Closing, Seller and Purchaser shall cooperate fully with each other and make available or cause to be made available to each other in a timely fashion such Tax data, prior Tax Returns and filings and other information as may be reasonably required for the preparation by Purchaser or Seller of any Tax Returns, elections, consents, or certificates required to be prepared and filed by Purchaser or Seller and any audit or other examination by any Governmental Agency, or judicial or administrative proceeding relating to liability for Taxes. Without limiting the generality of the foregoing, each of Purchaser and Seller shall retain copies of all Tax Returns, supporting work schedules, and other records relating to tax periods or portions thereof ending prior to or including the Closing Date until the later of (i) the expiration of the statute of limitations fo r the taxable periods to which such Tax Returns and other documents relate, without regard to extensions except for extensions obtained by that party or its Affiliates or extensions regarding which such party has received written notice from another party, or (ii) six (6) years following the due date (without extensions) for such Tax Returns; provided, however, that neither party hereto will dispose of its copies without first notifying the other party and providing such other party with a reasonable period of time to assume possession of such copies. In addition, without limiting the generality of the foregoing, each party shall make its personnel and those of its Affiliates

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reasonably available for deposition and testimony in any tax controversy or proceeding. Purchaser shall cooperate with Seller to the extent reasonably necessary for Seller’s preparation of its financial statements and Tax Returns and in the sharing of financial and accounting information with respect thereto or with respect to any audit, examination, or other proceeding with respect thereto.

(b)

After the Closing, Seller and Purchaser shall cooperate fully with each other and make available or cause to be made available to each other in a timely fashion such financial data and other information as may be reasonably required for the preparation by Purchaser of its year-end internal audit for the fiscal year ending June 30, 2007, and any other filings required to be prepared and filed by Seller or Purchaser with any Governmental Agency. Without limiting the generality of the foregoing, Seller shall retain copies of all financial data and other financial records relating to the Company and Weinmaster for at least six (6) years following the date of this Agreement. The parties shall cooperate with each other to the extent reasonably necessary for the preparation of their respective financial statements and accounting information with respect thereto or with r espect to any audit.

(c)

No information or documentation provided pursuant to this Section shall be disclosed by the recipient thereof to any Person except its accountants and relevant tax authorities or as required by applicable law (in which case the disclosing party shall consult in good faith with the other party prior to making any such disclosure).

6.6

Tax Related Covenants.  Without the prior written consent of’ Purchaser, which consent shall not be unreasonably withheld, Seller shall not make or change any election, change any annual accounting period, adopt or change any accounting method, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment relating to the Company or Weinmaster, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to the Company or Weinmaster, or take any other similar action relating to the filing of any Tax Return or the payment of any Tax, if such election, adoption, change, amendment, agreement, settlement, surrender, consent, or other action would have the effect of increasing the Tax liability of Purchaser, the Company, o r Weinmaster for any period ending after the Closing Date or decreasing any Tax attribute of the Company or Weinmaster existing on the Closing Date.

6.7

Access to Information and Records.  

(a)

From and after the Closing Date, Seller shall provide to Purchaser reasonable access to, and the ability to make copies of, all those books and records (including but not limited to financial records, and all other documents) that are in its possession and that relate to the Company and/or Weinmaster or the conduct of their business prior to the Closing Date;

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provided, that such access shall be during normal business hours and any such copies shall be made and delivered at Purchaser’s expense.

(b)

From and after the Closing Date, Seller shall provide to Purchaser reasonable access to all information, systems, and data storage media (and all such data, systems, or media maintained by third parties) relating to any Benefit Plan to which the Company or Weinmaster, or any or their Employees or Former Employees contribute or have contributed or which otherwise currently or previously relate to or operate for the benefit of any of such Employees or Former Employees, and the ability to make copies of all relevant documents and data; provided, that such access shall be during normal business hours and any such copies shall be made and delivered at Purchaser’s expense.

(c)

Purchaser acknowledges and agrees that:

(i)

The business records of the Company and Weinmaster relating to their operations prior to the Closing Date will be acquired by Purchaser in connection with the consummation of the Share Purchase, (B) certain business records of Seller are located on the Premises and (C) representatives of Seller may from time to time require access to or copies of such records;

(ii)

For a period of one hundred twenty (120) days after the Closing Date (or such other reasonable period as may be required to complete an audit of Seller’s 401(k) Plan), Purchaser will, during normal business hours, (A) provide or cause to be provided to Seller’s representatives access to or copies of such records, and (B) allow Seller’s representatives access to Ms. Annie Verde for the purpose of obtaining data and information necessary to complete an audit of Seller’s 401(k) Plan; and

(iii)

Purchaser will not, within six (6) years after the Closing Date, destroy any business records of Seller, the Company, or Weinmaster prepared prior to the Closing Date without first notifying Seller and affording Seller the opportunity to remove or copy such records.  For purposes of the preceding sentence, any notice from Purchaser shall be deemed to be adequate notice if not responded to in writing by Seller within sixty (60) days.

6.8

Guarantee.  Parent hereby irrevocably and unconditionally guarantees the full, faithful, timely and complete performance and satisfaction of all terms, conditions and obligations of Purchaser set forth in this Agreement and the Related Agreements.

6.9

Cooperation.  From and after the Closing Date, each of Seller and Purchaser shall provide, execute, and deliver to the other party all such further documents and instruments, and take all such further actions, as may reasonably be requested of it by the other party to confirm and assure the rights and obligations provided for in this Agreement, including in connection with maintaining or demonstrating Purchaser’s interest in the Shares,

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including perfecting Seller’s rights under the Security Agreement, any request by any Governmental Agency for information about Seller, the Shares, the Company, or Weinmaster, and/or any action by a Governmental Agency involving the Company or Weinmaster.

ARTICLE 7
INDEMNIFICATION

7.1

Survival.  

(a)

Except as otherwise provided in this Article 7, (i) the representations and warranties made by the parties in this Agreement shall survive the Closing until 11:59 p.m. (California time) on the date that is the first anniversary of the Closing Date, and (ii) the covenants of the parties in this Agreement shall survive until the earlier of the date when fully performed or the date of expiration of the applicable statute of limitations. The date on which any party's right to indemnification under this Article 7 shall terminate as provided herein shall be referred to in this Agreement as the "Indemnity Termination Date."

(b)

Notwithstanding paragraph (a), above:

(i)

Any claim for indemnification under this Agreement which is made in good faith and in writing prior to the expiration of such claim on the Indemnity Termination Date shall survive such expiration until mutually resolved or otherwise determined hereunder, as applicable, and the Indemnity Termination Date for all purposes hereunder shall automatically be extended with respect to such claim (but not any other claims) until such claim is so mutually resolved or otherwise determined hereunder, and any such claim not so made in writing prior to the expiration of such claim on the relevant Indemnity Termination Date shall be deemed to have been waived; and

(ii)

The representations and warranties made in Section 4.10, above (the “Tax Representations”) shall survive the Closing for a period of five (5) years.

7.2

Indemnification by Seller.  Seller will indemnify and hold harmless Purchaser from and against any and all Losses that constitute, or arise out of or in connection with any:

(a)

Material breach or material inaccuracy of a representation or warranty under Article 4, above; or

(b)

Default by Seller in the performance or observance of any of its covenants or agreements hereunder.

7.3

Indemnification by Purchaser.  Purchaser will indemnify and hold harmless Seller from and against any and all Losses that constitute, or arise out of or in connection with any:

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(a)

Material breach or material inaccuracy of a representation or warranty under Article 5; or

(b)

Default by Purchaser in the performance or observance of any of its covenants or agreements hereunder.  

7.4

Third Party Claims.  If any legal action is initiated against a party hereto (each an “Indemnitee”) by any third party, and such Indemnitee intends to seek indemnification from Seller or Purchaser (each an “Indemnitor”) as applicable, under this Article 7 on account of its involvement in such legal action, then such Indemnitee will give prompt notice to the applicable Indemnitor of such legal action.  The failure to so notify such Indemnitor will not relieve such Indemnitor of its obligations under this Article 7, but will reduce such obligations by the amount of damages or increased costs and expenses attributable to such failure to give notice.  Upon receipt of such notice, such Indemnitor will diligently defend against such legal action on behalf of such Indemnitee at its own expense using counsel reasonabl y acceptable to such Indemnitee; provided, however, that if such Indemnitor fails or refuses to conduct such defense, or such Indemnitee has been advised by counsel that it may have defenses available to it which are different from or in addition to those available to such Indemnitor, or that its interests in such legal action are adverse to such Indemnitor's interests, then such Indemnitee may defend against such legal action at such Indemnitor's expense.  Such Indemnitor or Indemnitee, as applicable, may participate in any legal action being defended against by the other at its own expense, and will not settle any legal action without the prior consent of the other, which consent will not be unreasonably withheld.  Such Indemnitor and Indemnitee will cooperate with each other in the conduct of any such legal action.

7.5

Notice of Indemnification Claims.  No indemnification claim will be deemed to have been asserted until the applicable Indemnitor has been given notice by the Indemnitee of the amount of such claim and the facts on which such claim is based.

7.6

Limitations on Indemnification Provisions.  

(a)

Notwithstanding any other provision hereof, no Indemnitor will have any indemnification obligations under this Article 7 unless and until the amount of all Losses (other than Losses arising out of a breach of the Tax Representations) claimed by the party seeking indemnification (whether arising from third party claims or otherwise) exceed Twenty-Five Thousand Dollars ($25,000) in the aggregate (the “General Indemnity Threshold”); provided, however, that if the accumulated amount of all indemnity obligations of any party required to provide indemnification hereunder (other than Losses arising out of a breach of the Tax Representations) exceeds the General Indemnity Threshold, then the Indemnifying Party shall be obligated to pay the full amount of such obligations, including the portion thereof which is less than the General Indemnity Thresh old.

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(b)

Notwithstanding any other provision hereof, Seller will have no indemnification obligations under this Article 7 for Losses arising out of or in connection with a breach of the Tax Representations unless and until the amount of all such Losses claimed by Purchaser (whether arising from third party claims or otherwise) exceed Fifty Thousand Dollars ($50,000) in the aggregate (the “Tax Indemnity Threshold”); provided, however, that if the accumulated amount of all indemnity obligations of Seller as a result of Losses arising out of a breach of the Tax Representations exceeds Tax Indemnity Threshold, then Seller shall be obligated to pay the full amount of such obligations, including the portion thereof which is less than the Tax Indemnity Threshold.

(c)

Solely for the purpose of determining whether the applicable Indemnity Threshold has been met, it is the intention of the parties hereto that any materiality standards which are contained in individual paragraphs of Sections 4 or 5, above, be disregarded.

(d)

Any payment made by an Indemnitor to an Indemnitee pursuant to this Article 7 in respect of any claim will be (i)  net of any insurance proceeds payable to the Indemnitee in respect of such claim and (ii) reduced by an amount equal to any tax benefits obtainable by the Indemnitee which are attributable to such claim;

(e)

No Indemnitee will be entitled to recover from an Indemnitor, for any Losses as to which indemnification is provided under this Agreement, any amount in excess of the actual damages, court costs, and reasonable attorney fees suffered by such Indemnitee, and the parties waive any right to recover lost profits, consequential, special, punitive, or exemplary damages arising in connection with or with respect to the indemnification provisions hereof;

(f)

Notwithstanding any provision in this Agreement to the contrary, in no event shall an Indemnitor have any indemnification obligations under this Agreement for Losses in an aggregate amount in excess of (A) with respect to Losses other than those arising out of a breach of the Tax Representations, Six Hundred Thousand Dollars ($600,000) (the “General Indemnity Cap”), or (B) with respect to Losses arising out of a breach of the Tax Representations, Two Million Dollars ($2,000,000) (the “Tax Indemnity Cap”).

(g)

With respect to any claim for indemnification by Purchaser against Seller hereunder, upon the final determination of the validity thereof (whether by agreement among the parties, arbitration, or legal process) Purchaser may offset the amount of Losses for which it is entitled to indemnification pursuant to this Article 7 (but subject to paragraph (f), above) against the then-outstanding principal balance of the Promissory Note, and any interest then due thereunder (an “Indemnity Offset”); provided, however, that

28

(i)

Pending such final determination Purchaser shall continue to make payments of principal and interest as provided in the Promissory Note;

(ii)

Each such Indemnity Offset shall be applied first to payment of interest then accrued on the unpaid principal balance of the Promissory Note, with the remainder applied to the last payment or payments of principal then remaining due under the Promissory Note;

(iii)

Upon such determination of validity, the amount of interest due under the Note shall be recalculated as though the original principal balance of the Promissory Note had been reduced by the full amount of the Indemnity Offset from the date of issuance of the Promissory Note, and all amounts of interest previously paid under the Promissory Note that are in excess of the amount actually due following the said reduction shall be credited against any remaining principal or interest thereafter due under the Promissory Note; and

(iv)

If the Indemnity Offset exceeds the amount of principal and interest then due under the Promissory Note Seller shall pay to Purchaser the full amount of such excess, in cash, not later than thirty (30) days after the date on which Purchaser makes written demand therefor.

(h)

Each Person entitled to indemnification hereunder shall take all reasonable steps to mitigate all Losses after becoming aware of any event which could reasonably be expected to give rise to any Losses that may be indemnifiable or recoverable hereunder.  

7.7

Exclusive Remedy.  The indemnification obligations of the parties under Section 6.4(f), above, and this Article 7 shall constitute the sole and exclusive remedies of such parties for the recovery of Losses with respect to matters arising under this Agreement, of any kind or nature; provided, however, that the terms of this Article 7 shall not be construed as limiting in any way whatsoever any remedy for equitable relief to which Purchaser or the Seller may be entitled.

ARTICLE 8
GENERAL PROVISIONS

8.1

Expenses.  Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of any representatives (including legal, accounting, financial advisory, etc.).  

8.2

Publicity.  Each party hereto shall obtain the other’s written consent (such consent not to be unreasonably withheld or delayed) prior to any publication, presentation, public announcement or press release concerning the relationship between the parties or the existence or terms of this

29

Agreement, except as may otherwise be required by applicable legal requirements.

8.3

Notices.  All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given as follows. If delivered: (a) via hand-delivery, on the date of delivery (with written confirmation of receipt); (b) by U.S. mail, upon the date three (3) Business Days after mailing (certified or registered mail, airmail if out of state or international), (c) via facsimile, upon transmission if sent during the recipient’s normal business hours, otherwise at the opening of business on the next following Business Day, in either case with electronic confirmation of receipt; or (d) by a nationally recognized overnight delivery service, when received by the addressee (with confirmation of receipt).  Notices given under this Agreement shall be addressed  as follows (provided, however, that any party hereto may change its address upon notice duly given to the other parties as provided above):

In the case of Seller:

Broadcaster,  Inc.

9201 Oakdale Ave., Suite 200

Chatsworth, CA 91311

Fax:

(818) 332-0052

Attn:

Chief Financial Officer

With a copy to (which shall not constitute notice) to:

Paul, Hastings, Janofsky & Walker LLP

3579 Valley Centre Drive

San Diego, CA 92130

Fax:

(858) 720-2555

Attn:  Carl R. Sanchez, Esq.

Claudia K. Simon, Esq.

In the case of Purchaser or Parent:

Houseplans Acquisitions Corp. Inc.

177 Steuart Street, Suite 700

San Francisco, CA 94105

Fax:

(415) 817-0606

Attn:

Stephen Williamson, President

With a copy to (which shall not constitute notice) to:

Boone Law Group

44 Montgomery Street, Suite 3585

San Francisco, CA 94104

Fax:

(415) 358-9797

Attn:  Philip S. Boone, Jr., Esq.

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8.4

Further Assurances.  The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents (provided that such documents do not and would not create any liability or obligation of such party) and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

8.5

Waiver.  The rights and remedies of the parties to this Agreement are cumulative and not alternative.  Neither the failure nor any delay by any party hereto in exercising any right, power or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party hereto, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party, (b) no wai ver that may be given by a party hereto will be applicable except in the specific instance for which it is given, and (c) no notice to or demand on one party hereto will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

8.6

Entire Agreement and Modification.  This Agreement, together with the exhibits, schedules, certificates and instruments attached hereto, which documents are incorporated herein by reference, supersedes all prior agreements between the parties with respect to the subject matter hereof and thereof and constitutes a complete and exclusive statement of the terms of the agreement between the parties with respect to the subject matter hereof and thereof.  This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment.

8.7

Assignments, Successors, and No Third-Party Rights.  Neither party to this Agreement may assign any of its rights or obligations hereunder to any other party without the prior written consent of the other party.  This Agreement will apply to, be binding in all respects upon, and inure to the benefit of, the successors and permitted assigns of the parties.  Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision hereof.  This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns.

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8.8

Severability.  If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect.  Any invalidity or unenforceability of any provision in any jurisdiction shall not invalidate or render invalid or unenforceable such provision in any other jurisdiction.  Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

8.9

Construction; Section Headings.  The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation.  All references to “Article” or “Articles,” “Section” or “Sections” refer to the corresponding Article, Articles, Section or Sections of this Agreement.  All words used in this Agreement will be construed to be of such gender or number as the circumstances require.  Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms.  Each party to this Agreement acknowledges that such party has caused this Agreement to be reviewed and/or had the opportunity to have it approved by legal counsel of such party’s own choice.  The parties have nego tiated the provisions of this Agreement, and any presumption that an ambiguity contained in this Agreement shall be construed against the party that caused this Agreement to be drafted shall not apply to the interpretation of this Agreement.  

8.10

Time of Essence.  With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

8.11

Governing Law.  This Agreement shall be governed by and construed in accordance with the substantive and procedural laws of the State of California, without giving effect to any principles of conflicts of law or choice of law of that or any other jurisdiction.  

8.12

Arbitration; No Jury Trial.  

(a)

Except as specifically provided in Sections 2.3, above, and 8.13, below, all disputes which arise out of or in connection with this Agreement or the Related Agreements and which are not informally resolved shall be arbitrated under the commercial arbitration rules of Judicial Arbitration and Mediation Service/Endispute Service ("JAMS"). Any such arbitration shall be conducted within the City and County of San Francisco, California or at a location mutually agreed to by the parties which shall be not more than one hundred (100) miles thereof.  In order to commence arbitration, a party shall give a written arbitration demand to the other party or parties in accordance with Section 8.3, above, and any such demand shall become effective on the date specified in Section 8.3.

(b)

Except as provided below, the arbitration shall be conducted by one (1) arbitrator mutually agreed upon by the parties or appointed by JAMS.  If the parties cannot agree on the arbitrator within twenty (20) days

32

after the date the arbitration demand has become effective, an arbitrator appointed by JAMS shall be used. The arbitration shall be conducted in accordance with the then-existing arbitration rules of JAMS, or as otherwise agreed by the parties.

(c)

Any decision by the arbitrator shall be binding and final on the parties.  Damages or other remedies awarded in the arbitration proceeding may be entered in any court of competent jurisdiction for purposes of enforcement. In his or her discretion, the arbitrator may award one of the parties all or part of its costs and expenses of arbitrating (including attorneys' fees and disbursements).  

(d)

EACH PARTY HERETO ACKNOWLEDGES THAT THIS AGREEMENT TO ARBITRATE RESULTS IN A WAIVER OF HIS OR ITS RIGHT TO A COURT OR JURY TRIAL FOR ANY CLAIM ARISING OUT OF OR BASED ON THIS AGREEMENT,THE RELATED AGREEMENTS, OR THE RELATIONSHIP OF THE PARTIES HEREUNDER AND THEREUNDER, AS WELL AS ANY OTHERWISE APPLICABLE RIGHTS TO DISCOVERY AND APPEAL. BEFORE SIGNING THIS AGREEMENT AND AGREEING TO BINDING ARBITRATION, EACH SUCH PARTY IS ENTITLED, AND HAS BEEN GIVEN A REASONABLE OPPORTUNITY, TO SEEK THE ADVICE OF INDEPENDENT COUNSEL.  

8.13

Injunctive Relief; Venue; Jurisdiction.  

(a)

Injunctive Relief.  Subject to paragraph (b), below, nothing in this Agreement shall prevent any party hereto from seeking or obtaining from a court injunctive relief to protect its rights hereunder.

(b)

Venue; Jurisdiction.  Any action for injunctive relief, and any other action or proceeding arising from, out of, or in connection with this Agreement or the relationships of the parties hereunder which is for any reason not conducted in accordance with Section 8.12, above, shall be brought only in the State or Federal Courts located in the State of California. The parties hereto each consent to the jurisdiction and venue of such courts and waive any objection they might otherwise have, on any basis whatever, to such jurisdiction and/or venue.

8.14

Counterparts.  This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.  Counterpart signature pages delivered by facsimile or e-mail will be deemed to be valid and binding for all purposes.  

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

[SIGNATURES COMMENCE ON THE FOLLOWING PAGE]

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STOCK PURCHASE AGREEMENT

IN WITNESS WHEREOF, the parties have executed and delivered this Stock Purchase Agreement as of the date first written above.

SELLER:

BROADCASTER, INC.,

a California corporation

By:  /s/Martin R. Wade, III

Martin R. Wade, III

Chief Executive Officer

PURCHASER:

HOUSEPLANS ACQUISITION CORP., INC.,

a California corporation

By:  /s/ Stephen Williamson

Stephen Williamson

President

PARENT:

KRANSCO HOUSEPLANS, LLC,

a California limited liability company

By:  /s/ Stephen Williamson

Stephen Williamson

Manager

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LIST OF EXHIBITS

Exhibit A

Promissory Note

Exhibit B

Security Agreement

Exhibit C

Net Asset Adjustment Statement

Exhibit D

Sublease

Exhibit E

Financial Statements

Exhibit F

Master Lease

35

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Martin Wade, III, certify that:

1.

I have reviewed this Form 10-QSB of Broadcaster, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)):

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

6.

I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls or in other factors that could significantly affect internal controls subsequent to the date or our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 21, 2007

/s/ Martin Wade III

Martin Wade, III,

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Blair Mills, certify that:

1.

I have reviewed this Form 10-QSB of Broadcaster, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)):

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

6.

I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls or in other factors that could significantly affect internal controls subsequent to the date or our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 21, 2007

/s/ Blair Mills

Blair Mills,

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Broadcaster, Inc. (the “Company”) on Form 10-QSB for the period ending March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Martin Wade, III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1.

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Martin Wade III

Martin Wade, III,

Chief Executive Officer

Date:  May 21, 2007

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Broadcaster, Inc. (the “Company”) on Form 10-QSB for the period ending March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Blair Mills, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1.

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Blair Mills

Blair Mills,

Chief Financial Officer

(Principal Financial Officer)

Date:  May 21, 2007

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.