**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549




**FORM
      10-QSB**




**x QUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**




**FOR
      THE QUARTERLY PERIOD ENDED MAY 31, 2007**




**o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT**




**FOR
      THE TRANSITION PERIOD FROM ________ TO________**




*COMMISSION
      FILE NUMBER 333-108632*




**NARROWSTEP
      INC.**




(Exact
      name of registrant as specified in its charter)





DELAWARE
              (State
                or other jurisdiction of
              incorporation
                or organization)
            33-1010941
              (I.R.S.
                Employer
              Identification
                No.)





116
      Village Blvd, Suite 200


Princeton,
      New Jersey 08540


United
      States


(Address
      of principal executive offices)




(609)
      951-2221


(Registrant's
      telephone number including area code)




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




Yes
xNo
o





Indicate
      by check mark whether the registrant is an accelerated filer (as


defined
      in Rule 12b-2 of the Exchange Act).




Yes
oNo
x


Indicate
      by check mark whether the registrant is a shell company (as defined
      in


Rule
      12b-2 of the Exchange Act).





Yes
oNo
x




**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
      THE**


**PRECEDING
      FIVE YEARS**




Not
      applicable




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




The
      number of shares outstanding of the issuer's common stock as of May 31, 2007:
      45,348,974 s hares
      of
      common stock




.







**PART
                1 - FINANCIAL INFORMATION****Item
                1 - Financial Statements****NARROWSTEP
                INC. AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED BALANCE SHEETS**May
                31, 2007
            
            
            February
                28, 2007(Unaudited)$
            
            $**Assets**Current
                assets:Cash
                and cash equivalents
            
            
            4,328,212
            
            
            466,870Accounts
                receivable, net of allowance for doubtful accounts of
              $1,522,139
                and $940,534 at May 31, 2007 (unaudited) and
              February
                28, 2007, respecitvely
            
            
            1,415,949
            
            
            1,403,779Prepaid
                expenses and other current assets
            
            
            298,942
            
            
            332,192Total
                current assets
            
            
            6,043,103
            
            
            2,202,841Property
                and equipment, net
            
            
            1,610,274
            
            
            1,234,557Software
                development costs, net
            
            
            125,006
            
            
            149,080Debt
                issuance costs, net
            
            
            157,191
            
            
            -**Total
                Assets**
            
            
            7,935,574
            
            
            3,586,478**Liabilities
                and Stockholders' Equity (Deficit)****Liabilities**Current
                liabilities:Unearned
                revenue
            
            
            461,190
            
            
            384,295Accounts
                payable
            
            
            994,621
            
            
            960,580Net
                obligations under capital leases, current
            
            
            90,666
            
            
            88,110Accrued
                expenses and other current liabilities
            
            
            979,523
            
            
            977,948Total
                current liabilities
            
            
            2,526,000
            
            
            2,410,933Net
                obligations under capital leases - long-term
            
            
            113,032
            
            
            135,470Convertible
                notes and interest payable, net of debt discount of
              $920,034
            
            
            6,402,682
            
            
            -Other
                long term liabilities
            
            
            56,158
            
            
            -**Total
                Liabilities**
            
            
            9,097,872
            
            
            2,546,403**Commitments
                and Contingencies****Stockholders'
                Equity (Deficit)**Common
                stock, $0.000001 par value 450,000,000 shares authorized,45,348,974
                issued and outstanding at May 31, 2007 (unaudited) and
              February
                28, 2007, respectively
            
            
            45
            
            
            45Additional
                paid-in capital
            
            
            21,584,762
            
            
            20,543,688Accumulated
                deficit
            
            
            (
                22,816,451
            )
            
            (
                19,555,533
            )Accumulated
                other comprehensive income (loss)
            
            
            69,347
            
            
            51,875**Total
                Stockholders' Equity (Deficit)**
            
            
            (
                1,162,297
            )
            
            1,040,075**Total
                Liabilities and Stockholders' Equity (Deficit)**
            
            
            7,935,574
            
            
            3,586,478See
                Notes to Condensed Consolidated Financial Statements.







2







**NARROWSTEP
                INC. AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS****AND
                COMPREHENSIVE LOSS (Unaudited)**Three
                Months EndedMay
                31, 2007
            May
                31, 2006$
            $**Revenue**Narrowcasting
                and other
            1,415,160
            836,513Production
                services
            175,633
            308,010Total
                revenue
            1,590,793
            1,144,523**Costs
                and Expenses**Operating
            1,225,791
            422,218Selling,
                general and administrative
            2,645,624
            1,680,563Research
                & development
            798,750
            255,057Total
                operating expenses
            4,670,165
            2,357,838**Operating
                Loss**
            (3,079,372)
            (1,213,315)Interest
                income (expense), net
            (179,643)
            44,099Currency
                exchange income (loss)
            (1,903)
            (589)**Net
                Loss**
            (3,260,918)
            (1,169,805)Foreign
                currency translation adjustment
            17,472
            36,764**Comprehensive
                Loss**
            (3,243,446)
            (1,133,041)**Net
                Loss per Common Share - Basic and Diluted**
            (0.07)
            (0.03)**Weighted-Average
                Number of Shares Outstanding, Basic and Diluted**
            45,348,974
            43,730,360See
                Notes to Condensed Consolidated Financial Statements.





3


**NARROWSTEP
                INC. AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS**
              **(Unaudited)**Three
                Months EndedMay
                31, 2007
            May
                31, 2006$
            $**Cash
                Flows from Operating Activities**Net
                loss
            (
                3,260,918)
            (
                1,169,805)Adjustments
                to reconcile net loss to net cash used in operating
                activities:Allowance
                for doubtful accounts
            581,605
            -Depreciation
                and amortization
            205,848
            108,301Stock-based
                compensation expense
            81,779
            463,431Interest
                on short-term investment
            -
            (
                29,403)Fair
                value of options and warrants granted to third party
                suppliers
            19,625
            -Changes
                in net cash attributable to changes in operating assets and
                liabilities:Accounts
                receivable, gross
            (
                593,775)
            (
                645,080)Prepaid
                expenses and other current assets
            33,250
            (
                87,233)Unearned
                revenue
            76,895
            -Accounts
                payable, accrued expenses and other current liabilities
            304,489
            439,603**Net
                Cash Used in Operating Activities**
            (
                2,551,202)
            (
                920,186)**Cash
                Flows from Investing Activities**Purchases
                of property and equipment
            (
                528,637)
            (
                282,472)Payments
                for software development costs
            -
            (
                34,317)**Net
                Cash Used in Investing Activities**
            (
                528,637)
            (
                316,789)**Cash
                Flows from Financing Activities**Net
                proceeds from issuance of common stock
            -
            1,472,529Proceeds
                from exercise of stock options and warrants
            -
            6,250Payments
                on capital leases
            (
                19,882)
            (
                13,266)Net
                proceeds from issuance of convertible notes payable
            6,950,130
            -**Net
                Cash Provided by Financing Activities**
            6,930,248
            1,465,513**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            3,850,409
            228,538Effect
                of exchange rates on change in cash
            10,933
            10,147Cash
                and cash equivalents at the beginning of period
            466,870
            2,232,854**Cash
                and Cash Equivalents at the End of the Period**
            4,328,212
            2,471,539See
                Notes to Condensed Consolidated Financial Statements.







4


See




**NARROWSTEP
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)**







**NOTE
      1. PREPARATION OF INTERIM FINANCIAL STATEMENTS**




**Basis
      of Presentation.** Throughout this document, Narrowstep Inc. is referred to as “Narrowstep,” “we”
or the “Company.” The condensed consolidated financial statements have been
      prepared pursuant to the rules and regulations of the Securities and Exchange
      Commission (“SEC”) that permit reduced disclosure for interim periods. We
      believe that these condensed consolidated financial statements include all
      adjustments (consisting only of normal recurring accruals) necessary to present
      fairly the results for the interim periods shown. The results for the interim
      periods are not necessarily indicative of the results of any other interim
      period or for the full year. The reader is referred to the audited consolidated
      financial statements and notes thereto for the year ended February 28, 2007
      filed as part of Narrowstep Inc. and Subsidiaries (collectively, the “Company”)
      Form 10-KSB for such year.




**Principles
      of Consolidation.** The
      condensed consolidated financial statements include the accounts of the Company
      and its wholly-owned subsidiaries. Our subsidiaries operate in the TV over
      the
      Internet services industry both domestically and internationally providing
      various services. All intercompany transactions have been eliminated in
      consolidation.




**Use
      of Estimates.** The
      preparation of the interim condensed consolidated financial statements requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the condensed consolidated financial statements and the reported
      amounts of revenue and expenses during the reporting periods. Actual results
      could differ from those estimates.





**NOTE
      2. LIQUIDITY AND MANAGEMENT’S PLAN**




The
      Company has incurred net losses and negative cash flow from operations since
      inception. The Company, historically, has financed its operations primarily
      through private equity financing. The Company had working capital of $3,517,103
      and cash on hand of $4,328,212 at May 31, 2007. The Company currently does
      not
      have the liquidity or financing available to fund its operations for the next
      12
      months without additional capital being raised or financing being acquired.
      The
      Company’s management team has developed a strategic business plan and is
      actively pursuing various financing options. Management’s operating plan
      includes (a) increasing revenue by expanding its customer base with its superior
      video technology (b) further investing in the TelvOS technology in order to
      enhance it’s product offering and customer experience and (c) to scale the
      business operations in preparation for substantial market growth.







**NOTE
      3. CONVERTIBLE NOTES PAYABLE**





On
      March
      2, 2007, the Company entered into a Purchase Agreement (the “Purchase
      Agreement”) with sixteen accredited investors (the “Investors”) for the sale of
      its 12% Mandatorily Convertible Notes (the “Notes”) and Warrants (the
“Warrants”) for a total purchase price of $7,110,000. The Notes, which mature on
      March 2, 2009, bear interest at 12% per annum, payable at maturity. The Notes
      will mandatorily convert at a 10% discount into the securities issued by the
      Company in any subsequent private placement that results in gross proceeds
      to
      the Company of at least $3,000,000 or, in the event of a sale of the Company
      prior thereto, shares of common stock valued at a discount of 10% to the per
      share price to be paid in the Company sale. The Warrants are exercisable at
      any
      time on or prior to March 2, 2012 for an aggregate of 3,555,000 shares of common
      stock at an exercise price of $0.60 per share, subject to adjustment. The
      Company has the right to force the cash exercise of the Warrants if the common
      stock trades at or above $1.80 per share for at least 20 consecutive trading
      days. Both the Notes and the Warrants contain customary anti-dilution provisions
      in the event of any stock split, reverse stock split, reclassification or
      recapitalization of the Company.




**NOTE
      4. RELATED PARTY TRANSACTIONS**




**Options
      granted to current directors.** The
      Company has granted to Roger Werner, a member of the Board of Directors, options
      to purchase 300,000 shares at an exercise price of $1.18 on March 28, 2006
      which
      are exercisable until March 28, 2016. The Company has granted Rajan Chopra,
      a
      member of the Board of Directors, options to purchase 300,000 shares at an
      exercise price of $0.80 on September 28, 2006 which are exercisable until
      September 28, 2016. The Company has granted to both David McCourt and Jack
      Whyte, members of the board of directors, options to purchase 300,000 shares
      at
      an exercise price of $0.67 per share on June 7, 2006 which are exercisable
      until
      June 27, 2011. All the option granted above fully vested on the date granted.




On
      May
      23, 2006, the Company granted options to purchase 6,000 shares to Dennis
      Edmonds, a member of the Board of Directors, at an exercise price of $0.75
      per
      share. These options vested on the grant date and are exercisable until May
      23,
      2016.






5







**NARROWSTEP
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)**







On
      December 2, 2005, the Company entered into a consultancy agreement with Roger
      L.
      Werner Jr. Pursuant to this agreement, on May 23, 2006, Mr. Werner was granted
      options to purchase 30,000 shares at an exercise price of $0.75 per share,
      for
      consultancy services for the year ended February 28, 2006.




**Options
      granted to former directors.** The
      Company has granted Shelly Palmer, a former member of the Board of Directors,
      options to purchase 6,000 shares at an exercise price of $0.75 per share. These
      options were granted and vested on May 23, 2006 and are no longer exercisable.
      The Company has granted Peter Sidall, a former member of the Board of Directors,
      options to purchase 6,000 shares at an exercise price of $0.75 per share. These
      options were granted and vested on May 23, 2006 and are exercisable until
      December 31, 2007 pursuant to the terms of his separation agreement. The Company
      had granted options to Cliff Webb, a former officer and Board member, options
      to
      purchase 1,000,000 shares at an exercise price of $1.20 per share. The options
      are fully vested and exercisable until December 31, 2007 pursuant to the terms
      of his separation agreement.





**Options
      granted to current officers.** On
      February 8, 2007, the Company granted options to purchase 200,000 shares to
      Lisa
      VanPatten, our Chief Financial Officer, at an exercise price of $0.92 per share.
      These options vest over a three-year period and expire on February 8, 2017.
      On
      April 30, 2007, the Company granted options to purchase 500,000 shares to Lou
      Holder, our Chief Technology Officer, at an exercise price of $0.68 per share.
      These options vest over a three-year period and expire on April 30, 2017.




**Options
      granted to former officers.** The
      Company has granted options to purchase 1,000,000 shares to Steven Crowther,
      our
      former Senior Vice President and Chief Financial Officer, at an exercise price
      of $1.20 per share. 500,000 of these options were granted and vested on March
      1,
      2005 and are exercisable until February 28, 2015. 500,000 of these options
      were
      granted on August 11, 2005, 100,000 of which vested immediately and the
      remaining 400,000 vested on July 1, 2006. These options are exercisable until
      August 11, 2015. On January 17, 2006, the Company granted Steven Crowther
      additional options to purchase 100,000 shares, at an exercise price of $0.90
      per
      share. 50,000 of these options vested immediately on January 17, 2006. In
      connection with the Separation and General Release Agreement between us and
      Mr.
      Crowther, the period during which Mr. Crowther may exercise his vested options
      was extended from September 29, 2006 until June 29, 2007.




The
      Company has granted options to purchase a total of 900,000 shares to Stephen
      Beaumont, our former President and Chief Executive Officer. 200,000 of these
      options were granted on November 15, 2005 at an exercise price of $1.50, 100,000
      vested immediately and the remainder vested on February 1, 2006. The remaining
      options were granted on February 28, 2006, 250,000 at an exercise price of
      $1.00
      per share, which vested immediately, and 450,000 at an exercise price of $1.50
      per share, 225,000 of which vested on June 30, 2006 and 225,000 of which vested
      on December 31, 2006. In connection with the Separation and General Release
      Agreement between us and Mr. Beaumont, the period during which Mr. Beaumont
      may
      exercise his vested options was extended until December 31, 2007.




**Transactions
      with companies in which certain persons hold an interest.** Shelly
      Palmer, a former director of the Company, is the owner of a consulting company,
      SLP Productions Inc. Pursuant to an unwritten agreement between the parties,
      SLP
      Productions billed the Company $38,000 and $36,000 for fiscal year ending
      February 28, 2007 and February 28, 2006, respectively for consulting services.
      As of May 31, 2007 there was no balance in accounts payable.




Narrowstep
      Ltd. has developed a channel for LTR Consultancy. John Goedegebuure, a founder
      and shareholder of Narrowstep Inc., is the Managing Director and a shareholder
      of LTR Consultancy. Total revenue and total receivables from LTR Consultancy
      for
      fiscal year ending February 28, 2007, was $185,480 and $53,614 respectively.
      Total revenue and total receivables from LTR Consultancy for the quarter ending
      May 31, 2007, was $23,250 and $115,150 respectively.




The
      total
      amount in receivables remained unpaid and was fully reserved for at May 31,
      2007.




Pursuant
      to an Investor Relations Agreement with the Company, LTR Consultancy earned
      fees
      for investor relations services of $33,705, for fiscal year ended February
      28,
      2007. Of these fees, $5,892 was unpaid as of May 31, 2007.




On
      December 2, 2005, the Company entered into a consultancy agreement with Roger
      L.
      Werner Jr. Pursuant to this agreement, on May 23, 2006, Mr. Werner was granted
      options to purchase 30,000 shares at an exercise price of $0.75 per share,
      for
      consultancy services for the year ended February 28, 2006. Mr. Werner became
      a
      shareholder of the Company on February 22, 2006 and a director of the Company
      on
      March 28, 2006.




On
      May
      30, 2006, the Company entered into an advisory agreement with Granahan McCourt
      Advisors, LLC. David C McCourt, Chairman of the Board of Directors, Chief
      Executive Officer and Chief Operating Officer, is the beneficial owner of
      Granahan McCourt Advisors, LLC and Granahan McCourt Capital, LLC, a shareholder
      in the Company. Pursuant to this agreement, Granahan McCourt Advisors, LLC
      was
      issued 100,000 shares of common stock on May 30, 2006 and received warrants
      to
      purchase 6,000 shares, with an exercise price equal to $0.95 per share. Mr.
      McCourt became a director of the Company on June 27, 2006, was named as Chairman
      of the Board and interim Chief Executive Officer in December 2006 and was named
      Chief Executive Officer and Chief Operation Officer in June 2007. The Company
      paid




6


**NARROWSTEP
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)**




Granahan
      McCourt Advisors, LLC $80,000 for consulting services and $9,000 to cover out
      of
      pocket expenses for fiscal year ending February 28, 2007. Mr. McCourt
      voluntarily terminated the advisory agreement once he became interim Chief
      Executive Officer and forfeited the remaining balance in the
      contract.




Outdoor
      Channel, a Narrowstep customer, began utilizing our services in May 2007. The
      Chief Executive Officer and President of Outdoor Channel is Roger L. Werner
      Jr.,
      a Director of Narrowstep. We billed Outdoor Channel, $25,700 for the first
      quarter and the balance in accounts receivable at May 31, 2007 is $25,700.




**NOTE
      5. CONCENTRATIONS**




For
      the
      three months ended May 31, 2007, the largest four customers in the aggregate
      accounted for approximately $566,675, or 36% of our revenues for the period.
      For
      the three months ended May 31, 2006, the largest four customers in the aggregate
      accounted for approximately $435,264, or 38% of our revenues for the period.
      The
      accounts receivable balance for the largest four customers was approximately
      $726,000 as of May 31, 2007.




**NOTE
      6. RECLASSIFICATION**




The
      presentation of the May 31, 2006 consolidated statement of operations and
      comprehensive loss has been reclassified to conform to the May 31, 2007
      presentation.




**NOTE
      7. SUBSEQUENT EVENT**




On
      June
      8, 2007, Narrowstep entered into an employment Agreement with David C. McCourt
      under which Mr. McCourt became our Chief Executive Officer and Chief Operating
      Officer. All of Mr. McCourt’s initial compensation will be in the form of equity
      and equity based awards.




**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





For
      ease
      of reading, Narrowstep Inc. is referred to as “Narrowstep,” “we” or the
“Company” throughout this document and the names of the particular subsidiaries
      providing the services generally have been omitted. Narrowstep is a holding
      company whose subsidiaries operate in the TV over the Internet services industry
      both domestically and internationally providing production and distribution
      services and equipment. You should read this discussion in conjunction with
      the
      condensed consolidated financial statements, accompanying notes and management’s
      discussion and analysis of financial condition and results of operations
      included in our Annual Report on Form 10-KSB for the year ended February 28,
      2007.




**Consolidated
      revenues** for the
      three months ended May 31, 2007 increased $446,270, or 39%, to $1,590,793 from
      $1,144,523 for the three months ended May 31, 2006 as follows:




**Narrowcasting
      and other revenues** for
      the
      three months ended May 31, 2007 was $1,415,160, an increase of $578,647, or
      69%,
      over the $836,513 reported for the three months ended May 31, 2006. This
      increase in narrowcasting revenues resulted primarily from a net increase in
      customers. Narrowcasting revenues also include one-time implementation fees,
      which will continue to contribute to revenue as more customers are added. The
      increase in customers resulted primarily from a 180% increase in customers
      located in the United States compared to the three months ended May 31, 2006
      (see geographical distribution below). We have identified further penetration
      of
      the US market as a key goal of our strategic plan and expect the amount of
      narrowscasting services from US customers to continue to increase as a
      percentage of total narrowscasting revenues.




**Production
      services revenues** for the
      three months ended May 31, 2007 was $175,633, a decrease of $132,377, or 43%,
      compared to $308,010 for the three months ended May 31, 2006. As previously
      disclosed, our strategic plan is to focus our resources on narrowscasting and
      to
      deemphasize production services as a revenue source of our business. Consistent
      with this plan, revenues from this segment continue to decline as we continue
      to
      fulfill current obligations and execute on our plan to exit this business
      segment.











7






**NARROWSTEP
      INC. AND SUBSIDIARIES**





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Continued**








**Geographical
      distribution of consolidated revenues:**





Three
                Months EndedMay
                31, 2007
            May
                31, 2006
            Percent$
            $
            ChangeUnited
                States
            226,349
            80,872
            180%Europe,
                Middle-East and Africa
            1,339,108
            1,006,102
            33%Asia
                Pacific
            -
            39,401
            -100%Internet
                Sales
            25,336
            18,148
            40%Total
            1,590,793
            1,144,523
            39%








**Consolidated
      costs and expenses** for the
      three months ended May 31, 2007 were $4,670,165, an increase of $2,312,327,
      or
      98%, compared to $2,357,838 for the three months ended May 31, 2006 as
      follows:





**Operating
      expenses** includes
      the cost of bandwidth, direct labor, sub-contracted labor, consulting fees
      and
      depreciation. For the three months ended May 31, 2007 these costs were
      $1,225,791, a 190% increase over the $422,218 reported in the three months
      ended
      May 31, 2006. The increase resulted primarily from increased headcount to meet
      customer support needs and to begin building our internal Content Delivery
      Network (CDN) system.




**Selling,
      general and administrative expenses** includes
      employee compensation and related costs for personnel engaged in marketing,
      direct and reseller sales support functions, the executive team and back office
      help. For the three months ended May 31, 2007 these costs were $2,645,624,
      a 57%
      increase over the $1,680,563 reported for the three months ended May 31, 2006.
      The increase is primarily due to increased headcount primarily in direct sales
      as we build infrastructure to support a higher level of sales. SG&A expenses
      were also adversely impacted by a large increase in bad debt. This increase
      primarily resulted from the failure of a number of narrowcasting customers
      to
      have sufficient capital to sustain their business models as well as non-payments
      by several production services customers. We are pursing collection efforts
      where appropriate. The Company has implemented new controls and procedures
      aimed
      at minimizing bad debt expense in future periods.




**Research
      & Development expenses** include
      employee compensation, stock options and depreciation and any related costs
      for
      personnel primarily focused on research and development efforts. For the three
      months ended May 31, 2007 these costs were $798,750, a 213% increase over the
      $255,057 reported for the three months ended May 31, 2006. We have recently
      hired developers to further enhance the TelvOS system and to add new
      functionality. Aside from adding new capabilities to the TelvOS system, new
      employees were also needed in order to maintain the system and support our
      growing customer base.




**LIQUIDITY
      AND CAPITAL RESOURCES**




**Net
      cash used in operating activities** was
      approximately $2,551,202 for the three months ended May 31, 2007 and
      approximately $920,186 for the three months ended May 31, 2006. The increase
      in
      cash used in operations was due primarily to an increase in our net loss. This
      increase was primarily due to an increase in sales and marketing expenses as
      we
      sought to build our narrowcasting customer base and an increase in the
      operations and development to enhance the CDN and TelvOS system
      capabilities.




**Net
      cash used in investing activities** was
      approximately $528,637 for the three months ended May 31, 2007 and approximately
      $316,789 for the three months ended May 31, 2006. The increase over the prior
      year period resulted from capital equipment purchased for our
      network.




**Net
      cash provided by financing activities** was
      $6,930,248 for the three months ended May 31, 2007 and approximately $1,465,513
      for the three months ended May 31, 2006. The increase resulted primarily from
      the sale of convertible notes issued March 2, 2007 as described
      below.




We
      had
      $4,328,212 in cash and cash equivalents available at May 31, 2007 and available
      bank overdraft facilities of $59,300.




We
      have
      financed our operations from inception through private equity financing. From
      inception through May 31, 2007, we sold an aggregate of 45,348,974 shares of
      our
      common stock for gross proceeds of approximately $14.8 million. In addition,
      we
      have granted options and issued shares in lieu of cash in payment to third
      parties for services rendered and in connection with the acquisition of
      Sportshows Television, Ltd. To a lesser extent, we have also used capital leases
      to fund some of our equipment acquisitions. We have incurred significant losses
      since our inception and, at May 31, 2007, had an accumulated deficit of
      approximately $22.8 million.







8




**NARROWSTEP
      INC. AND SUBSIDIARIES**





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Continued**




An
      overdraft facility is a line of credit arrangement, negotiated with a bank
      and
      usually reviewable on an annual basis, whereby the bank's customer is permitted
      to take its checking account into a debit balance on a pre-agreed interest
      basis
      up to an agreed amount. Amounts utilized under overdraft facilities are payable
      on demand. At May 31, 2007 and February 28, 2007, the overdraft facilities
      consisted of approximately $19,800 and $19,600, respectively, with Barclays
      Bank
      PLC and $39,500 and $39,000, respectively, with National Westminster Bank PLC
      (NatWest). Neither facility was utilized on May 31, 2007 or February 28, 2007.
      The interest rate on the Barclays facility is 5.75% above Barclays' variable
      base rate (which base rate was 5.25% per annum as of May 31, 2007). The interest
      rate on the NatWest facility is 5.75% above NatWest's variable base rate (which
      base rate was 5.25% per annum as of May 31, 2007). The Barclays overdraft
      facility was renewed on February 17, 2007. The NatWest overdraft facility was
      renewed on May 31, 2006.




Our
      current ratio (current assets divided by current liabilities) relates to our
      ability to pay our short-term debts as they become due. At May 31, 2007, our
      current ratio was 2.4, compared to 0.9 at February 28, 2007. Our current ratio
      fluctuates primarily as we use cash to develop our business and raise additional
      funds from private equity financing from time to time.





On
      March
      2, 2007, the Company entered into a Purchase Agreement (the “Purchase
      Agreement”) with sixteen accredited investors (the “Investors”) for the sale of
      its 12% Mandatorily Convertible Notes (the “Notes”) and Warrants (the
“Warrants”) for a total purchase price of $7,110,000. The Notes, which mature on
      March 2, 2009, bear interest at 12% per annum, payable at maturity. The Notes
      will mandatorily convert at a 10% discount into the securities issued by the
      Company in any subsequent private placement that results in gross proceeds
      to
      the Company of at least $3,000,000 or, in the event of a sale of the Company
      prior thereto, shares of common stock valued at a discount of 10% to the per
      share price to be paid in the Company sale. The Warrants are exercisable at
      any
      time on or prior to March 2, 2012 for an aggregate of 3,555,000 shares of common
      stock at an exercise price of $0.60 per share, subject to adjustment. The
      Company has the right to force the cash exercise of the Warrants if the common
      stock trades at or above $1.80 per share for at least 20 consecutive trading
      days. Both the Notes and the Warrants contain customary anti-dilution provisions
      in the event of any stock split, reverse stock split, reclassification or
      recapitalization of the Company.




With
      the
      completion of this financing we have sufficient working capital to fund our
      operations for the next four to six months. Management will continue to pursue
      various financing options in order to fully fund our longer term cash
      requirements. We also are making efforts to improve our financial position
      by
      evaluating ongoing operating expenses, increasing our effort to collect
      outstanding receivables and continuing to focus on increasing sales. The
      Company’s management team has developed a strategic business plan and is
      actively pursuing various financing options. Management’s operating plan
      includes (a) increasing revenue by expanding its customer base with its superior
      video technology (b) further investing in the TelvOS technology in order to
      enhance its product offering and customer experience and (c) to scale the
      business operations in preparation for substantial market growth.





As
      of May
      31, 2007, our principal capital commitments consisted of obligations outstanding
      under capital leases as shown in the table below:




Three
                  Months Ended
                May
                  31, 2007$Amounts
                  payable:Within
                  12 months
              
              
              104,977Between
                  one and two years
              
              
              92,774Between
                  two and three years
              
              
              27,128Total
                  future commitment
              
              
              224,879Less:
                  finance charges allocated to future periods
              
              
              (
                  21,181
              )Present
                  Value
              
              
              203,698




**Off
      balance sheet arrangements** We
      have
      no off-balance sheet arrangements that have had or are reasonably likely to
      have
      a current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources.







**NARROWSTEP
      INC. AND SUBSIDIARIES**





**Item
      3. Controls and Procedures**




As
      of the
      end of the period covered by this report, the Company's management, with the
      participation of the Company's chief executive officer and chief financial
      officer, evaluated the effectiveness of the Company's disclosure controls and
      procedures (as such term is defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934, as amended (the "Exchange Act")). Based on such
      evaluation, our chief executive officer and chief financial officer have
      concluded that our disclosure controls and procedures were effective as of
      May
      31, 2007 to ensure that the information required to be disclosed by us in the
      reports that we file or submit under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the Commission's
      rules and forms.




There
      have not been any changes in the Company's internal control over financial
      reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act)
      during the last fiscal quarter to which this report relates that have materially
      affected, or are reasonably likely to materially affect, the Company's internal
      control over financial reporting.





On
      May
      24, 2007, in connection with its audit of our consolidated financial statements
      for the year ended February 28, 2007, Rothstein, Kass & Company, P.C., our
      independent registered public accounting firm, informed us and our audit
      committee of certain deficiencies in our internal controls over financial
      reporting that they considered to be a material weakness and significant
      deficiencies. The material weakness was as follows:




9





·
            We
                did not record the stock-based compensation expense on certain stock
                options, issued to one of our directors, on a timely basis. As a
                result of
                this, our third quarter interim financial statements were
                misstated.





The
      significant deficiencies were as follows:





·
            We
                did not record a sufficient allowance for bad debts related to a
                customer’s accounts receivable balance that was in
                question.





·
            We
                were recording invoices billed to certain customers in such a manner
                that
                the result was to recognize revenues on a cash basis, which is not
                in
                accordance with accounting principals generally accepted in the United
                States.





Inferior
      internal controls could harm our operating results or cause us to fail to meet
      our reporting obligations and could also cause our current and potential
      stockholders to lose confidence in our reported financial information, which
      could have a negative effect on the price of our stock.




In
      response to the deficiencies in our internal controls identified by Rothstein,
      Kass & Company, P.C. we restated our results for the fiscal third quarter
      ended November 30, 2006 and for the fiscal year ended February 28, 2007. We
      have
      taken appropriate steps to correct these deficiencies in our internal controls
      identified by Rothstein, Kass & Company, P.C.




We
      will
      be documenting and testing our internal control procedures in order to satisfy
      the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Pursuant
      to
      Section 404, beginning with our fiscal year ending February 29, 2008, we will
      be
      required to include in our annual report on Form 10-KSB a management assessment
      of the effectiveness of our internal controls over financial reporting. For
      the
      fiscal year ending February 28, 2009, a report by our independent registered
      public accounting firm will be included addressing these assessments. We are
      exposed to increased costs associated with complying with these requirements,
      and will be spending management time and resources to document and test our
      internal controls in anticipation of Section 404 reporting requirements. In
      addition, we cannot assure you that we will not in the future identify material
      weaknesses or significant deficiencies in our internal controls over financial
      reporting that we have not discovered to date.




If
      we are
      not able to complete testing of all of our internal controls, or if during
      the
      course of our testing we identify deficiencies that we are not able to remediate
      in time, we and/or our independent registered public accounting firm may not
      be
      able to complete our/its respective assessments before the deadline for
      compliance with the requirements of Section 404 of the Sarbanes-Oxley Act.
      If we
      fail to timely complete our evaluation and testing in order to allow for the
      assessment by our management, or if our independent registered public accounting
      firm cannot timely attest to our management's assessment, we could be subject
      to
      regulatory scrutiny and a loss of public confidence in our internal controls,
      which could harm our business and our stock price. Further, if our independent
      registered public accounting firm is not satisfied with our internal controls
      over financial reporting or with the level at which they are documented,
      designed, operated or reviewed, it may decline to attest to management's
      assessment or may issue a qualified report identifying a material weakness
      in
      our internal controls. This could result in significant additional expenditures
      responding to the Section 404 internal control audit, a diversion of management
      attention and a decline in our stock price.



















**NARROWSTEP
      INC. AND SUBSIDIARIES**









**CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




This
      report contains forward-looking statements including, without limitation, in
      the
      discussion under the caption "Management's Discussion and Analysis of Financial
      Condition and Results of Operations." Any and all statements contained in this
      report that are not statements of historical fact may be deemed forward-looking
      statements. Terms such as may, might, would, should, could, project, estimate,
      pro forma, predict, potential, strategy, anticipate, attempt, develop, plan,
      help, believe, continue, intend, expect, future, and similar terms and terms
      of
      similar import (including the negative of any of the foregoing) may be intended
      to identify forward-looking statements. However, not all




forward-looking
      statements may contain one or more of these identifying terms. Forward-looking
      statements in this report may include, without limitation, statements regarding
      (i) a projection of revenues, income (including income/loss), earnings
      (including earnings/loss) per share, capital expenditures, dividends, capital
      structure, or other financial items, (ii) the plans and objectives of management
      for future operations, including plans or objectives relating to our products
      or
      services, (iii) our future financial performance, including any such statement
      contained in a discussion and analysis of financial condition by management
      or
      in the results of operations included pursuant to the rules and regulations
      of
      the Securities and Exchange Commission, and (iv) the assumptions underlying
      or
      relating to any statement described in subparagraphs (i), (ii), or
      (iii).




10




The
      forward-looking statements are not meant to predict or guarantee actual results,
      performance, events, or circumstances and may not be realized because they
      are
      based upon our current projections, plans, objectives, beliefs, expectations,
      estimates, and assumptions and are subject to a number of risks and
      uncertainties and other influences, many of which we have no control over.
      Actual results and the timing of certain events and circumstances may differ
      materially from those described by the forward-looking statements as a result
      of
      these risks and uncertainties. Factors that may influence or contribute to
      the
      inaccuracy of the forward-looking statements or cause actual results to differ
      materially from expected or desired results may include, without limitation,
      our
      inability to obtain adequate financing, insufficient cash flows and resulting
      illiquidity, our dependence upon significant customers, our inability to expand
      our business, government regulations, increased competition, changing customer
      preferences, stock illiquidity, failure to implement our business plans or
      strategies, and ineffectiveness of our marketing program and our acquisition
      opportunities. A description of some of the risks and uncertainties that could
      cause our actual results to differ materially from those described by the
      forward-looking statements in this report appears under the caption "Risk
      Factors" and elsewhere in the most recent Registration Statement on Form SB-2
      and Form 10-KSB that we have filed with the Securities and Exchange
      Commission.




Because
      of the risks and uncertainties related to these factors and the forward-looking
      statements, readers are cautioned not to place undue reliance on the
      forward-looking statements. We disclaim any obligation to update these
      forward-looking statements or to announce publicly the results of any revisions
      to any of the forward-looking statements contained in this report to reflect
      any
      new information or future events or circumstances or otherwise unless required
      to do so under applicable federal securities laws.




Readers
      should read this report and the following discussion and analysis in conjunction
      with the financial statements and the related notes contained in this report
      and
      the other documents we file from time to time with the Securities and Exchange
      Commission.







**PART
      II - OTHER INFORMATION**





**Item
      2. Unregistered Sales of Securities and Use of
      Proceeds**




On
      March
      2, 2007, the Company entered into a Purchase Agreement (the “Purchase
      Agreement”) with sixteen accredited investors (the “Investors”) for the sale of
      its 12% Mandatorily Convertible Notes (the “Notes”) and Warrants (the
“Warrants”) for a total purchase price of $7,110,000. The Notes, which mature on
      March 2, 2009, bear interest at 12% per annum, payable at maturity. The Notes
      will mandatorily convert at a 10% discount into the securities issued by the
      Company in any subsequent private placement that results in gross proceeds
      to
      the Company of at least $3,000,000 or, in the event of a sale of the Company
      prior thereto, shares of common stock valued at a discount of 10% to the per
      share price to be paid in the Company sale. The Warrants are exercisable at
      any
      time on or prior to March 2, 2012 for an aggregate of 3,555,000 shares of common
      stock at an exercise price of $0.60 per share, subject to adjustment. The
      Company has the right to force the cash exercise of the Warrants if the common
      stock trades at or above $1.80 per share for at least 20 consecutive trading
      days. Both the Notes and the Warrants contain customary anti-dilution provisions
      in the event of any stock split, reverse stock split, reclassification or
      recapitalization of the Company.







On
      March
      8, 2007 the Company issued warrants to purchase 50,000 shares at an exercise
      price of $0.91 and they are exercisable until March 8, 2012. These warrants
      were
      issued for professional services.




11




**NARROWSTEP
      INC. AND SUBSIDIARIES**












**Item
      6. Exhibits**




EXHIBIT
                  31.1
              CERTIFICATION
                  FILED PURSUANT TO EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED
                  PURSUANT
                  TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002EXHIBIT
                  31.2
              CERTIFICATION
                  FILED PURSUANT TO EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED
                  PURSUANT
                  TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002EXHIBIT
                  32.1
              CERTIFICATION
                  OF CHIEF EXECUTIVE OFFICER FURNISHED PURSUANT TO 18 U.S.C. SECTION
                  1350,
                  AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
                  2002EXHIBIT
                  32.2
              CERTIFICATION
                  OF CHIEF FINANCIAL OFFICER FURNISHEDPURSUANT TO 18 U.S.C. SECTION
                  1350, AS
                  ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
                  2002


12




**SIGNATURES**




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




**NARROWSTEP
      INC.**




Date: July
              13, 2007
            By:
            /s/ David
              McCourtDavid McCourtChief
              Executive Officer





Date: July
                13, 2007
              By:
              /s/ Lisa
                VanPattenLisa VanPattenChief
                Financial Officer




13