UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549




FORM
10-Q




x QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For
the quarterly period ended November 30, 2008





o
TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)





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





116
Village Blvd, Suite 200


Princeton,
New Jersey 08540


United
States


(Address
of principal executive offices)




(609)
945-1772


(Issuer’s
telephone number)





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes xNo o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act (Check one).
  Large
accelerated filer oAccelerated
filer o
 Non-accelerated
filer o(Do not
check if a smaller reporting company)
 Smaller
reporting company 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
  State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 136,907,977 shares of common stock, $0.000001
par value.










PART
      1 - FINANCIAL INFORMATIONItem
      1 - Financial StatementsNARROWSTEP
      INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE
SHEETS
  November
      30, 2008
                          
                          
                          February
      29, 2008(Unaudited)$
                          
                          
                          $AssetsCurrent
      assets:Cash
      and cash equivalents
                          
                          
                          667,702
                          
                          
                          
                          4,170,850Accounts
      receivable, net of allowance for doubtful accounts of
    $689,821and
      $767,470 at November 30, 2008 (unaudited) and February 29,
      2008,
                            respectively
                          
                          
                          826,126
                          
                          
                          
                          923,850Prepaid
      expenses and other current assets
                          
                          
                          159,573
                          
                          
                          
                          411,110Total
      current assets
                          
                          
                          1,653,401
                          
                          
                          
                          5,505,810Property
      and equipment, net
                          
                          
                          871,188
                          
                          
                          
                          1,995,504Software
      development costs, net
                          
                          
                          588,041
                          
                          
                          
                          682,060Other
      assets
                          
                          
                          -
                          
                          
                          
                          281,790Total
      Assets
                          
                          
                          3,112,630
                          
                          
                          
                          8,465,164Liabilities
      and Stockholders' EquityLiabilitiesCurrent
      liabilities:Unearned
      revenue
                          
                          
                          78,784
                          
                          
                          
                          31,536Accounts
      payable
                          
                          
                          903,198
                          
                          
                          
                          735,776Net
      obligations under capital leases, current
                          
                          
                          101,533
                          
                          
                          
                          153,322Accrued
      expenses and other current liabilities
                          
                          
                          308,420
                          
                          
                          
                          814,214Total
      current liabilities
                          
                          
                          1,391,935
                          
                          
                          
                          1,734,848Net
      obligations under capital leases, long-term
                          
                          
                          37,455
                          
                          
                          
                          143,408Total
      Liabilities
                          
                          
                          1,429,390
                          
                          
                          
                          1,878,256Commitments
      and ContingenciesStockholders'
      EquityCommon
      stock, $0.000001 par value 450,000,000 shares authorized,
                          
                          
                          137
                          
                          
                          
                          137136,907,977  (unaudited)
      issued and outstanding at November 30, 2008 and137,561,227
      issued and outstanding at February 28, 2008Additional
      paid-in capital
                          
                          
                          41,450,640
                          
                          
                          
                          40,745,085Accumulated
      deficit
                          
                          
                          (
      39,379,348
                          )
                          
                          
                          (
      34,196,475
                          )Accumulated
      other comprehensive income
                          
                          
                          (
      388,189
                          )
                          
                          
                          38,161Total
      Stockholders' Equity
                          
                          
                          1,683,240
                          
                          
                          
                          6,586,908Total
      Liabilities and Stockholders' Equity
                          
                          
                          3,112,630
                          
                          
                          
                          8,465,164
   See
      Notes to Condensed Consolidated Financial Statements.









NARROWSTEP INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OFOPERATIONSAND
      COMPREHENSIVE LOSS
(Unaudited)
  Three
      Months Ended
                                    
                                    
                                    Nine
      Months EndedNovember
      30, 2008
                                    
                                    
                                    November
      30, 2007
                                    
                                    
                                    November
      30, 2008
                                    
                                    
                                    November
      30, 2007$
                                    
                                    
                                    $
                                    
                                    
                                    $
                                    
                                    
                                    $RevenueNarrowcasting
      and other
                                    
                                    
                                    771,567
                                    
                                    
                                    
                                    1,735,539
                                    
                                    
                                    
                                    2,391,981
                                    
                                    
                                    
                                    4,294,654Production
      services
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (20,828
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    296,707Total
      revenue
                                    
                                    
                                    771,567
                                    
                                    
                                    
                                    1,714,711
                                    
                                    
                                    
                                    2,391,981
                                    
                                    
                                    
                                    4,591,361Costs
      and ExpensesOperating
                                    
                                    
                                    643,456
                                    
                                    
                                    
                                    1,516,689
                                    
                                    
                                    
                                    2,356,568
                                    
                                    
                                    
                                    4,104,004Selling,
      general and administrative
                                    
                                    
                                    779,952
                                    
                                    
                                    
                                    2,321,760
                                    
                                    
                                    
                                    4,436,725
                                    
                                    
                                    
                                    8,419,421Research
      & development
                                    
                                    
                                    191,198
                                    
                                    
                                    
                                    716,406
                                    
                                    
                                    
                                    727,788
                                    
                                    
                                    
                                    2,298,454Loss
      (Gain) on disposal of assets
                                    
                                    
                                    4,592
                                    
                                    
                                    
                                    856
                                    
                                    
                                    
                                    69,022
                                    
                                    
                                    
                                    (1,979
                                    )Total
      operating expenses
                                    
                                    
                                    1,619,198
                                    
                                    
                                    
                                    4,555,711
                                    
                                    
                                    
                                    7,590,103
                                    
                                    
                                    
                                    14,819,900Operating
      Loss
                                    
                                    
                                    (847,631
                                    )
                                    
                                    
                                    (2,841,000
                                    )
                                    
                                    
                                    (5,198,122
                                    )
                                    
                                    
                                    (10,228,539
                                    )Interest
      income
                                    
                                    
                                    4,551
                                    
                                    
                                    
                                    63,487
                                    
                                    
                                    
                                    35,740
                                    
                                    
                                    
                                    150,011Interest
      expense
                                    
                                    
                                    (8,610
                                    )
                                    
                                    
                                    (8,813
                                    )
                                    
                                    
                                    (23,408
                                    )
                                    
                                    
                                    (874,260
                                    )Currency
      exchange income (loss)
                                    
                                    
                                    3,729
                                    
                                    
                                    
                                    (4,864
                                    )
                                    
                                    
                                    2,917
                                    
                                    
                                    
                                    (20,803
                                    )Net
      Loss
                                    
                                    
                                    (847,961
                                    )
                                    
                                    
                                    (2,791,190
                                    )
                                    
                                    
                                    (5,182,873
                                    )
                                    
                                    
                                    (10,973,591
                                    )Foreign
      currency translation adjustment
                                    
                                    
                                    (252,536
                                    )
                                    
                                    
                                    88,850
                                    
                                    
                                    
                                    (426,350
                                    )
                                    
                                    
                                    125,285Comprehensive
      Loss
                                    
                                    
                                    (1,100,497
                                    )
                                    
                                    
                                    (2,702,340
                                    )
                                    
                                    
                                    (5,609,223
                                    )
                                    
                                    
                                    (10,848,306
                                    )Net
      Loss per Common Share - Basic and Diluted
                                    
                                    
                                    (0.006
                                    )
                                    
                                    
                                    (0.02
                                    )
                                    
                                    
                                    (0.04
                                    )
                                    
                                    
                                    (0.14
                                    )Weighted-Average
      Number of Shares Outstanding, Basic and Diluted
                                    
                                    
                                    137,003,235
                                    
                                    
                                    
                                    125,033,232
                                    
                                    
                                    
                                    138,136,029
                                    
                                    
                                    
                                    79,247,649
   See
      Notes to Condensed Consolidated Financial
  Statements.










NARROWSTEP
      INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)




Nine
      Months EndedNovember
      30, 2008
                  
                  
                  November
      30, 2007$
                  
                  
                  $Cash
      Flows from Operating ActivitiesNet
      loss
                  
                  
                  (5,182,873
                  )
                  
                  
                  (10,973,591
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Allowance
      for doubtful accounts
                  
                  
                  (77,649
                  )
                  
                  
                  404,358Depreciation
      and amortization
                  
                  
                  745,224
                  
                  
                  
                  676,603Loss
      on disposal of property and equipment
                  
                  
                  69,022
                  
                  
                  
                  -Stock-based
      compensation expense
                  
                  
                  705,555
                  
                  
                  
                  2,165,658Fair
      value of options and warrants granted to third party
    suppliers
                  
                  
                  -
                  
                  
                  
                  19,625Interest
      on debt issuance
                  
                  
                  -
                  
                  
                  
                  853,200Changes
      in net cash attributable to changes in operating assets and
      liabilities:Accounts
      receivable
                  
                  
                  175,373
                  
                  
                  
                  (262,415
                  )Prepaid
      expenses and other current assets
                  
                  
                  251,537
                  
                  
                  
                  (126,116
                  )Unearned
      revenue
                  
                  
                  47,248
                  
                  
                  
                  (226,225
                  )Accounts
      payable, accrued expenses and other current liabilities
                  
                  
                  (338,372
                  )
                  
                  
                  (355,351
                  )Net
      Cash Used in Operating Activities
                  
                  
                  (3,604,935
                  )
                  
                  
                  (7,824,254
                  )Cash
      Flows from Investing ActivitiesPurchases
      of property and equipment
                  
                  
                  (110,018
                  )
                  
                  
                  (2,177,084
                  )Repayment
      of security deposit
                  
                  
                  281,790Purchase
      of restricted cash-security deposit
                  
                  
                  
                  
                  
                  
                  (281,790
                  )Payments
      for software development costs
                  
                  
                  (168,247
                  )
                  
                  
                  (435,688
                  )Net
      proceeds from sale of property and equipment
                  
                  
                  409,469
                  
                  
                  
                  -Net
      Cash Provided by (Used in) Investing Activities
                  
                  
                  412,994
                  
                  
                  
                  (2,894,562
                  )Cash
      Flows from Financing ActivitiesNet
      proceeds from issuance of common stock
                  
                  
                  -
                  
                  
                  
                  10,094,920Retirement
      of Narrowstep shares
                  
                  
                  -
                  
                  
                  
                  (177,491
                  )Payments
      on capital leases
                  
                  
                  (157,742
                  )
                  
                  
                  (71,716
                  )Net
      Proceeds from issuance of debt instrument
                  
                  
                  -
                  
                  
                  
                  6,950,130Net
      Cash Provided by (Used in) Financing Activities
                  
                  
                  (157,742
                  )
                  
                  
                  16,795,843Net
      Increase (Decrease) in Cash and Cash Equivalents
                  
                  
                  (3,349,683
                  )
                  
                  
                  6,077,027Effect
      of exchange rates on change in cash
                  
                  
                  (153,465
                  )
                  
                  
                  14,978Cash
      and cash equivalents at the beginning of period
                  
                  
                  4,170,850
                  
                  
                  
                  466,870Cash
      and Cash Equivalents at the End of the Period
                  
                  
                  667,702
                  
                  
                  
                  6,558,875Supplemental
      disclosure of non-cash investing activities:Property
      and equipment acquired under capital leases
                  
                  
                  -
                  
                  
                  
                  196,702Supplemental
      disclosure of non-cash financing activities:Debt
      converted to equity
                  
                  
                  -
                  
                  
                  
                  6,950,130Interest
      on debt issuance was paid out with  common
shares
                  
                  
                  -
                  
                  
                  
                  853,200






See
      Notes to Condensed Consolidated Financial Statements.









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. and
its subsidiaries are referred to as “Narrowstep,” “we” or the
“Company.”  The interim 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 interim condensed consolidated
financial statements include all adjustments 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
29, 2008 filed as part of Narrowstep Inc. and Subsidiaries (collectively, the
“Company”) Form 10-KSB for such year.





Principles of
Consolidation.The interim 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.  GOING CONCERN





The
Company has incurred net losses and negative cash flow from operations since
inception.  We had an accumulated deficit of approximately $39.4
million as of November 30, 2008.  The Company historically has
financed its operations primarily through private equity and convertible debt
financing.  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.  On May
29, 2008, we entered into a definitive merger agreement pursuant to which the
Company will be acquired by Onstream Media Corporation (See Note 3 for more
details). Through November 30, 2008, while we have reduced costs and streamlined
operations pursuant to the Merger Agreement,  we cannot be certain
when we will operate profitably, if ever, and in the event the Merger Agreement
is terminated, we may not be able to continue as a going concern.








NOTE
3.  MERGER





Merger
Agreement





On May
29, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Onstream Media Corporation, a Florida corporation (“Onstream”),
Onstream Merger Corp., a newly formed Delaware corporation and a wholly-owned
subsidiary of Onstream (“Merger Sub”) and W. Austin Lewis IV, as stockholder
representative for the Company’s stockholders.  Pursuant to the terms
and subject to the conditions set forth in the Merger Agreement, Onstream will
acquire the Company by means of a merger of Merger Sub with and into the Company
(the “Merger”), with the Company continuing as the surviving corporation and a
wholly-owned subsidiary of Onstream after the Merger (the “Surviving
Corporation”).





Pursuant
to the Merger Agreement, at the effectiveness of the Merger (the “Effective
Time”), each outstanding share of the Company’s common stock, par value
$0.000001 per share, other than shares held by stockholders who have perfected
their appraisal rights under Delaware law, shares held by Onstream and shares
held by any subsidiary of the Company (collectively, the “Shares to be
Converted”), will be converted into (i) shares of Onstream common stock, par
value $0.0001 per share (“Onstream Common Stock”), based on an exchange ratio
determined as described below and (ii) one contingent value right (a “Contingent
Value Right”) having terms and conditions described below.  Onstream
Common Stock and Contingent Value Rights issued in respect of the Company’s
common stock subject to certain restricted stock awards will be subject to any
vesting conditions contained in such awards.








The
aggregate number of shares of Onstream Common Stock issuable in the Merger in
exchange for the Shares to be Converted will be the greater of (i) the sum of
(A) two (2) times Annualized Company Revenue (as defined in the Merger
Agreement) and (B) the greater of (1) the amount of the Company’s cash and cash
equivalents immediately prior to the Effective Time and (2) 1,500,000 and (ii)
10,500,000.  The exchange ratio will be the amount determined as
described in the prior sentence divided by the Shares to be Converted (the
“Exchange Ratio”).





The final
Exchange Ratio will be determined based on the Company’s consolidated revenues
for the quarter ended May 31, 2008 (as adjusted pursuant to the terms of the
Merger Agreement) and may not be known prior to the Effective
Time.  Accordingly, the Merger Agreement provides that the Shares to
be Converted will receive an aggregate of 10,500,000 shares of Onstream Common
Stock (the “Minimum Exchange Ratio”) upon consummation of the
Merger.  In the event that the final Exchange Ratio exceeds the
Minimum Exchange Ratio, former holders of Shares to be Converted will receive
additional shares of Onstream Common Stock within 30 days after the final
determination of the Exchange Ratio.  No assurance can be given that
the Exchange Ratio will exceed the Minimum Exchange Ratio.





In the
Merger, outstanding shares of the Company’s Series A Preferred Stock, par value
$.000001 per share, will be converted into an aggregate of 600,000 shares of
Onstream Common Stock.





In
connection with the Merger, the Surviving Corporation will assume the Company’s
obligations under its outstanding warrants.  From and after the
Merger, except as summarized below, holders of warrants will have the right to
exercise their warrants for a number of shares of Onstream Common Stock and at
exercise prices appropriately adjusted to give effect to the greater of the
Exchange Ratio and the Minimum Exchange Ratio.  Holders of warrants to
acquire an aggregate of 22,726,400 shares of Company Common Stock issued by the
Company in August 2007 (the “2007 Warrants”) will have the right to exercise
their 2007 Warrants for cash only for an aggregate of 1,000,000 shares of
Onstream Common Stock at an exercise price of $3.50 per share.  In the
event that any of the warrants are exercised prior to the Final Exercise Date
(as defined in the CVR Agreement referenced below), an exercising holder will
also be entitled to receive Contingent Value Rights in an amount equal to the
number of Contingent Value Rights such holder would have received had its
warrants been exercised immediately prior to the Effective Time.  In
connection with the Merger Agreement, holders of a majority of the 2007 Warrants
have entered into an Amendment and Waiver Agreement with the Company (the
“Amendment and Waiver Agreement”) pursuant to which such holders, on behalf of
themselves and all other holders of the 2007 Warrants, agreed to amend the terms
of the 2007 Warrants as provided above and to waive certain antidilution and
other rights.





The
Contingent Value Rights will be issued pursuant to the terms of a Contingent
Value Rights Agreement to be entered into among Onstream, Mr. Lewis as the CVR
Representative and Interwest Transfer Co., as Rights Agent, in the form attached
to the Merger Agreement (the “CVR Agreement”).  Pursuant to the terms
and subject to the conditions set forth in the CVR Agreement, the Contingent
Value Rights will be converted into shares of Onstream Common Stock in the event
that the Company reaches certain revenue targets for the initial 12-month and
subsequent 6-month periods following the Merger; provided, however, that the
maximum number of shares of Onstream Common Stock issuable in the Merger,
including those pursuant to the Contingent Value Rights and the conversion of
the Company’s Series A Preferred Stock, will not exceed
20,000,000.  The number of shares of Onstream Common Stock issuable
upon the conversion of each Contingent Value Right will depend on a number of
factors, including the Company’s business meeting the revenue targets set forth
in the CVR Agreement and the number of warrants, if any, exercised prior to the
final determination of the consideration, if any, to be paid pursuant to the CVR
Agreement.  The conversion of Contingent Value Rights into Onstream
Common Stock will occur in two stages, shortly following the final determination
of whether the initial 12-month and subsequent 6-month targets have been
met.





The
Contingent Value Rights will not be transferable by the holders thereof except
by operation of law in limited circumstances.  The Company does not
expect a market to develop for the Contingent Value Rights.  No
assurance can be given that the Contingent Value Rights will result in the
issuance of additional shares of Onstream Common Stock.





The
Merger Agreement contains customary representations and warranties of the
Company, Onstream and Merger Sub.  The Merger Agreement also contains
customary covenants, including covenants regarding operation of the business of
the Company and its subsidiaries prior to the closing of the
Merger.








In
addition, the Company has agreed to use its commercially reasonable efforts to
operate its business in accordance with a restructuring plan attached as an
exhibit to the Merger Agreement (the “Restructuring Plan”), which is designed to
significantly reduce or eliminate substantial costs related to Company’s
facility leases, selling, general and administrative expenses, public company
and headquarters costs, and other professional fees and
services.  Specifically, the Restructuring Plan is a transitional
business plan that the Company will follow until the close of the
Merger.  The Restructuring Plan includes a detailed four month cash
operating budget for the Company beginning June 2008.  The budget
consists of a breakdown of cash proceeds to the Company from customer
receivables, equipment sales and additional investments and a breakdown of
various cash operating expenses and other cash payments out from the
Company.  The Restructuring Plan also lists certain employees and
contractors that will be terminated prior to the closing of the Merger as well
as certain employees that will enter into one-year employment contracts with the
Company.  The Company is responsible for the funding of all salaries
and benefits for the terminated employees and consultants, as well as the cost
of any severance, from pre-closing cash.  The Restructuring Plan
further sets forth an approval process that the Company will follow for travel,
telephone, communication and other various operating expense
purchases.  The Restructuring Plan also requires that the Company send
its weekly reports, such as accounts receivable, payroll and accounts payable,
to Onstream for review at least three days prior to payment.  Pursuant
to the Restructuring Plan, the Company may not enter into any contracts, hire
any new employees or make any purchases greater than $1,000.00 without first
obtaining Onstream’s approval.  The Restructuring Plan also effects a
reorganization of management in that certain of the Company’s departments are
required to report to the senior manager of the equivalent department at
Onstream.  The Restructuring Plan also requires that, at the closing
of the Merger, the Company’s current assets (excluding cash) will exceed the
Company’s current liabilities, as determined on a basis consistent with the
Company’s previously issued financial statements.  Lastly, the
Restructuring Plan states that proceeds from the sale of equipment (as set forth
in the operating budget described above) will be limited to equipment located at
the Company’s California POP (Point of Presence) located in the Company’s
internal content delivery network (CDN), which was shut down during April
2008.





In
connection with the conditions to closing set forth in the Merger Agreement, we
have entered into subscription agreements (the “Subscription Agreements”) with
three of our major stockholders, including Mr. Lewis and David C. McCourt, our
Chairman and Interim Chief Executive Officer.  Under the Subscription
Agreements, the three stockholders agreed to purchase immediately prior to the
Merger shares of a to-be-established Series A Preferred Stock at a purchase
price of $100,000 per stockholder.  In connection therewith, each such
stockholder is expected to receive 10,000 shares of Series A Preferred
Stock.  Holders of the Series A Preferred Stock will be entitled to
such dividends, if any, as may be declared by our Board of Directors out of
funds legally available therefore (no such dividends are expected to be paid
under the terms of the Restructuring Plan), will not have any voting rights
(except to the extent required by applicable law), will have no right to convert
the Series A Preferred Stock into shares of our common stock or any other of our
securities and will have no right to force our redemption or repurchase of the
Series A Preferred Stock.   It is expected that we will file a
certificate of designations establishing the terms of the Series A Preferred
Stock with the Secretary of State of Delaware shortly prior to the closing of
the Merger.  The sale of the Series A Preferred Stock pursuant to the
Subscription Agreements is exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.





The
Merger is subject to customary closing conditions, including obtaining the
approval of the Company’s and Onstream’s stockholders.  The Merger
Agreement may be terminated under certain specified events.  If the
Merger Agreement is terminated under certain circumstances specified in the
Merger Agreement, the Company may be required to pay a termination fee of
$377,000 to Onstream.  Both the Company and Onstream have entered into
voting agreements (“Voting Agreements”) pursuant to which several significant
stockholders have agreed to vote their shares in favor of the adoption of the
Merger Agreement.  Pursuant to the Voting Agreements, the holders of
approximately 35% of the Company’s common stock presently outstanding and
approximately 42% of the Onstream Common Stock presently outstanding have agreed
to vote their shares in favor of the adoption of the Merger
Agreement.





Merger
Agreement-Amendment




On August
13, 2008, Narrowstep, Onstream and Merger Sub entered into an amendment to the
Merger Agreement (the "Amendment"). Pursuant to the Amendment, among other
things, the aggregate number of shares of Onstream Common Stock initially
issuable in the Merger in exchange for each outstanding share of Company Common
Stock, other than Shares to be Converted was reduced from 10,500,000 to
9,100,000 shares. In addition, the calculation of the aggregate number of
Onstream Common Stock initially issuable in the Merger in exchange for the
Shares to be Converted was modified to limit the value attributed to
Narrowstep's cash balances at closing to a maximum of $600,000. Further,
Narrowstep agreed to increase the aggregate value of its Series A Preferred
Stock, from at least $300,000 to $1,000,000 and to increase the number of shares
of Onstream Common Stock from 600,000 to 2,000,000 shares into which the Series
A Preferred Stock will convert. In order to assure that this condition would be
satisfied, the Company entered into additional subscription agreements (the
"Additional Subscription Agreements") with five of its existing stockholders.
The sale of the Series A Preferred Stock pursuant to the Additional Subscription
Agreements is exempt from registration pursuant to   Section 4(2)
of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.









In
accordance with the terms of the Amendment, the CVR Agreement was revised.
Pursuant to those revisions, among other things, the relevant revenue
measurement time periods were changed so that the initial revenue measurement
time period will now commence on the 180th day following the date of closing of
the Merger, rather than at closing and the second year revenue period will now
commence on the 18th month anniversary of the closing date. In addition, the
revenue target for the first revenue time period was reduced from $4,500,000 to
$4,250,000, if the Minimum Exchange Ratio is used. The definition of Second Year
Revenue Shares was also revised so that if the First Year Revenue is less than
$4,250,000, no additional shares of Onstream Common Stock will be issuable in
respect of Second Year Revenue.




The
Amendment also extends the date by which the parties may terminate the Merger
Agreement (the "Termination Date") if the Merger has not been completed by
November 30, 2008.




On
September 15, 2008, Narrowstep, Onstream and Merger Sub entered into a second
amendment to the Merger Agreement ("the Second Amendment"), dated effective
September 12, 2008. Pursuant to the Second Amendment, among other things, the
aggregate number of shares of Onstream Common Stock, initially issuable in the
Merger in exchange for each outstanding share of Narrowstep Common Stock, other
than the Shares to be Converted was amended from 9,100,000 to 8,100,000 shares.
There was no change in the potential total share consideration of 20,000,000
shares, including the shares potentially available under the CVR Agreement
(9,900,000), and the additional number of shares of Onstream Common Stock
(2,000,000) into which the shares of Narrowstep's Series A Preferred Stock, will
convert at the time of the Merger.




In
accordance with the terms of the Second Amendment, the CVR Agreement was
revised. Pursuant to those revisions, among other things, the revenue target for
the first revenue measurement time period (the twelve months commencing on the
180th day following the date of closing of the Merger) was reduced from
$4,250,000 to $4,000,000, if the Minimum Exchange Ratio (as defined in the
Merger Agreement) is used. The definition of Second Year Revenue Shares was also
revised so that if the First Year Revenue is less than $4,000,000, additional
shares of Onstream Common Stock might be issuable in respect of Second Year
Revenue, but only to the extent that Second Year Revenue, which is for a six
month period commencing on the 18th month anniversary of the closing date,
exceeds $2,000,000 (50% of the $4,000,000 annual threshold).




In
accordance with the terms of the Second Amendment, and notwithstanding anything
to the contrary contained in the CVR Agreement, Onstream may require Narrowstep
to promptly make certain identified adjustments to its operations and the entity
prior to the Effective Time, based solely upon Onstream's evaluation of certain
items identified in the Second Amendment. In the event that the certain
identified adjustments are made prior to the Effective Time as a result of
Onstream's directives, the $4,000,000 thresholds discussed in the previous
paragraph will be replaced with $2,000,000, provided that Narrowstep takes all
reasonable actions within its power to carry out those directives. In addition,
the waiting period` of three months after the Effective Date (in the CVR
Agreement provision that provides the amounts that the future projected revenues
from the Narrowstep business, as determined in good faith by Onstream's Board of
Directors, if not exceeded would allow Onstream to terminate the Narrowstep
business) was eliminated, subject to Onstream's evaluation of certain items
identified in the Second Amendment.




On
September 23, 2008, Onstream filed Form S-4 Registration Statement under the
Securities Act of 1933 with the Securities and Exchange Commission, however,
such Registration Statement has not yet been declared as effective.




As
indicated in the Second Merger Amendment, the Merger Agreement may be terminated
under certain specified events, including by either Onstream or Narrowstep if
the Effective Time has not occurred on or prior to November 30, 2008. Onstream
and Narrowstep are currently negotiating to extend this termination date, which
negotiations may result in changes to other terms of the
transaction.







NOTE
4.  SALE OF COMMON STOCK





On August
8, 2007, we closed a private financing with a number of accredited investors for
the sale of common stock and warrants for a total purchase price of $10,510,000.
Pursuant to the financing we sold a total of 42,040,000 shares of common stock
at a purchase price of $0.25 per share. We also issued warrants to purchase an
aggregate of 21,020,000 shares of common stock at an exercise price of $0.50 per
share, subject to adjustment.  The warrants are exercisable at any
time on or prior to August 8, 2012.  The warrants contain customary
anti-dilution provisions in the event of any stock split, reverse stock split,
reclassification or recapitalization of the Company.  In addition, the
exercise price and the number of shares issuable upon the exercise of the
warrants are subject to adjustment on a full-ratchet basis in the event that we
issue or are deemed to have issued shares of common stock at an effective
purchase price of less than $0.50 per share, subject to certain
exceptions.  In the financing, we issued to the placement agents
warrants to purchase an aggregate of 1,706,400 shares of common
stock.  Those warrants have the same terms as the warrants issued in
the financing, except that the warrants issued to the placement agents have a
cashless exercise right.








NOTE
5.  CONVERTIBLE NOTES PAYABLE





On March
2, 2007, the Company entered into a Purchase Agreement (the “Purchase
Agreement”) with a number of 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% of 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.  In connection
with the August 8, 2007 financing, the full amount of the Notes was
automatically converted into an aggregate of 35,392,003 shares of common stock
at a conversion price of $0.225 per share.








NOTE
6. RELATED PARTY TRANSACTIONS





Options granted to current
directors. On January 10, 2008, the Company granted Jon Harrington, a
member of the board of directors, 300,000 restricted shares which he transferred
to Omni Capital.  The Company also granted 300,000 restricted shares
to Roger L. Werner, Jr. and 500,000 to Jack Whyte.  All the shares
granted on January 10, 2008 have the following vesting schedule: 25% vested upon
grant, the remaining vest in equal installments on the first of every month
beginning February 1, 2008 with the last vesting date to be September 1,
2008.





Options granted to former
officers.  On February 8, 2007, the Company granted options to
purchase 200,000 shares to Lisa VanPatten, the Company’s then Chief Financial
Officer, at an exercise price of $0.92 per share.  All such options
shall be expired as of January 31, 2009,   On April 30, 2007, the
Company granted options to purchase 250,000 shares to Lou Holder, the Company’s
then Chief Technology Officer, at an exercise price of $0.68 per share. All such
options expired as of December 1, 2008.




On June
8, 2007, the Company entered into an employment agreement with David C. McCourt
pursuant to which the Company granted Mr. McCourt 1,250,000 shares of restricted
stock units which vested monthly until November 30, 2007 and 2,500,000 shares of
restricted stock which vested based on the Company’s meeting certain performance
milestones.  All of the restricted stock units and shares of
restricted stock granted to Mr. McCourt in 2007 pursuant to his employment
agreement have fully vested as of November 30, 2007, as determined by the
Company’s Compensation Committee.  Mr. McCourt elected to issue back
to the Company 336,000 shares of restricted stock with an approximate value of
$177,000 to cover the taxes due on the vested restricted stock that the Company
paid for on behalf of Mr. McCourt.  On December 18, 2007, the Company
granted Mr. McCourt 1,250,000 restricted shares which fully
vested.  Mr. McCourt elected to issue back to the Company 992,000
shares of restricted stock with an approximate value of $140,000 to cover the
taxes due on the vested restricted stock that the Company paid for on behalf of
Mr. McCourt.





On
January 10, 2008, the Company granted Lisa VanPatten 500,000 shares of
restricted stock, Lou Holder 750,000 shares of restricted stock, David C.
McCourt 900,000 shares of restricted stock and Barak Bar-Cohen 1,000,000 shares
of restricted stock which vest upon $4M EBITDA attainment, or upon change of
control in the event of separation of employment.  Also on this date,
pursuant to the June 8, 2007 employment agreement between the Company and Mr.
McCourt, the Company granted 2,500,000 shares of restricted stock to Mr. McCourt
which are subject to vesting upon the Company’s meeting certain targets
established by the Company’s Compensation Committee.  None of these
shares of restricted stock have vested to date.On March 24, 2008,
pursuant to the employment agreement, the Company granted Mr. McCourt 1,250,000
shares of restricted stock units which vest monthly up until November 1, 2009.
On March 25, 2008, the Company granted Barak Bar-Cohen an additional 1,000,000
shares of restricted stock which had the same vesting schedule as those
restricted shares granted on January 10, 2008, however such shares were canceled
on July 2, 2008.










Transactions with companies in which
certain persons hold an interest.Outdoor Channel, a customer
of the Company, began utilizing the Company’s services in May
2007.  The Chief Executive Officer and President of Outdoor Channel is
Roger L. Werner Jr., a member of the Company’s board of
directors.  The Company billed Outdoor Channel, $67,705 for the fiscal
year ended February 29, 2008 and the balance in accounts receivable at February
29, 2008 is $6,459. The Company billed Outdoor Channel, $51,136 for the nine
months ended November 30, 2008 and the balance in accounts receivable at
November 30, 2008 is $5,500.





In
connection with the Company’s August 2007 financing, Mr. McCourt purchased
4,000,000 shares of common stock and warrants to purchase 2,000,000 shares of
common stock for a total purchase price of $1,000,000.  In addition,
Mr. McCourt entered into a lock up agreement pursuant to which he and certain
entities controlled by him agreed for a period of nine months from August 8,
2007 not to sell, dispose or otherwise transfer any shares of common stock owned
by them, subject to certain exceptions.





On May
29, 2008, we entered into a definitive merger agreement pursuant to which our
company will be acquired by Onstream Media Corporation.  In connection
with the conditions to closing set forth in the Merger Agreement, we have
entered into subscription agreements (the “Subscription Agreements”) with three
of our major stockholders, including Mr. Lewis and David C. McCourt, our
Chairman and Interim Chief Executive Officer for the purchase of preferred stock
upon the consummation of the Merger. For a more complete discussion regarding
the Merger, see Note 3.






NOTE
7.  LOSS (GAIN) ON DISPOSAL OF ASSETS




Loss
(Gain) on disposal of assetsincludes the write off
of computer equipment disposed of due to the reduction of employees, the
termination of office space leased at Carnegie Center in New Jersey and the sale
of production equipment associated with Sportshows Ltd. during the first three
quarters.







NOTE
8. CONCENTRATIONS




The
largest four customers in the aggregate accounted for $480,684, or 62% of our
revenues for the three months ended November 30, 2008 and $902,912 or
38% of our revenues for the nine months ended November 30,
2008.  The largest four customers in the aggregate accounted for
$769,722, or 45% of our revenues for the three months ended November 30, 2007
and $1,656,458 or 36% of our revenues for the nine months ended November 30,
2007. The accounts receivable balance for the largest four customers during the
quarter was $274,879 as of November 30, 2008.





Item
2.Management’s Discussion and
Analysis or Plan of Operation.





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 distribution services
and equipment.  One should read this discussion in conjunction with
the interim 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 29, 2008.





Consolidated revenuesfor the
three months ended November 30, 2008 decreased by $943,144, or 55%, to
$771,567 as compared to $1,714,711 for the three months ended November 30,
2007. Consolidated revenuesfor the nine months
ended November 30, 2008 decreased by $2,199,380 or 48%, to $2,391,981as compared
to $4,591,361 for the nine months ended November 30, 2007 as
follows:




Narrowcasting revenuesfor the
three months ended November 30, 2008 decreased by $963,972, or 56%, to $771,567
as compared to $1,735,539 for the three months ended November 30,
2007.  Narrowcasting revenuesfor the nine months
ended November 30, 2008 decreased by $1,902,673, or 44%, to $2,391,981 as
compared to $4,294,654 for the nine months ended November 30, 2007. The decrease
in revenue resulted primarily from an increase in net customers lost,
particularly in Europe.Revenues were negatively
impacted by the non-renewal of several large customer contracts which expired
during the first quarter.  The Company re-negotiated the contract of
its largest customer which resulted in a significant decrease in the overall
value of the contract as compared to the previous year.  Revenues also
declined as a result of our previously announced exit from the production
services business.










Geographical
distribution of consolidated revenues (unaudited):





Nine
      Months EndedNovember
      30, 2008
                  
                  
                  November
      30, 2007
                  
                  
                  Percent$
                  
                  
                  $
                  
                  
                  ChangeUnited
      States
                  
                  
                  756,452
                  
                  
                  
                  671,467
                  
                  
                  
                  13
                  %Europe,
      Middle-East and Africa
                  
                  
                  1,537,881
                  
                  
                  
                  3,789,082
                  
                  
                  
                  -59
                  %Asia
      Pacific
                  
                  
                  88,204
                  
                  
                  
                  109,908
                  
                  
                  
                  -20
                  %Internet
      Sales
                  
                  
                  9,444
                  
                  
                  
                  20,904
                  
                  
                  
                  -55
                  %Total
                  
                  
                  2,391,981
                  
                  
                  
                  4,591,361
                  
                  
                  
                  -48
                  %





Consolidated costs and expensesfor the three months ended November 30, 2008 decreased by $2,936,513, or
64% to $1,619,198 as compared to $4,555,711 for the three months ended November
30, 2007. Consolidated costs and
expensesfor the
nine months ended November 30, 2008 decreased by $7,229,797, or 49%, to
$7,590,103 as compared to $14,819,900 for the nine months ended November 30,
2007 as follows:





Operating expensesinclude the
cost of bandwidth, direct labor, sub-contracted labor, consulting fees and
depreciation.  For the three months ended November 30, 2008, these
costs were $643,456, a 58% decrease over the $1,516,689 reported in the three
months ended November 30, 2007.  Operating expenses for the nine
months ended November 30, 2008 were $2,356,568, a 43% decrease over the
$4,104,004 reported in the nine months ended November 30, 2007.  The
decrease resulted primarily from headcount reductions in customer support and
production services related to the restructuring and streamlining of sales
support and our previously announced decision to exit the production
business.




Selling, general and administrative
expensesinclude 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 November 30,
2008, these costs were $779,952, a 66% decrease over the $2,321,760 reported for
the three months ended November 30, 2007. Selling, general and administrative
expenses for the nine months ended November 30, 2008 were $4,436,725, a 47%
decrease over the $8,419,421 reported for the nine months ended November 30,
2007.  The decrease resulted primarily from headcount reductions in
sales and administrative staff.  Due to our efforts in establishing
policies and procedures to lower bad debt expense, there was also a significant
reduction in bad debt expenses as compared to the previous
year.  Partially offsetting
this decrease was a settlement payment made in connection with the cancellation
of our lease at Carnegie Center during the first quarter. The Company decided to
exit this lease because of the reduction in headcount and to reduce facility
expenses going forward.





Research & development expensesinclude employee compensation, stock options and depreciation and any
related costs for personnel primarily focused on research and development
efforts.  For the three months ended November 30, 2008, these costs
were $191,198 a 73% decrease over the $716,406 reported for the three months
ended November 30, 2007.  Research & development expenses for the nine
months ended November 30, 2008, were $727,788 and a 68% decrease over the
$2,298,454 reported for the nine months ended November 30, 2007. The decrease
came primarily from reductions in consulting costs and in employee
headcount.  Many of the projects launched last year were completed in
the third and fourth quarter of the fiscal year ended February 29,
2008.  Current initiatives are being managed by the existing
staff.





Loss (Gain) on disposal of assetsincludes the write off of computer equipment disposed of due to the
reduction of employees, the termination of office space leased at Carnegie
Center in New Jersey, and the sale of production equipment associated with
Sportshows Ltd during the first three quarters.





Liquidity and Capital
Resources




Net cash used in operating activitieswas $3,604,935 for the nine months ended November 30, 2008, compared to
$7,824,254 for the nine months ended November 30, 2007.  The decrease
in cash used in operations was due primarily to the decrease in our net
loss.  Our net loss for the period decreased significantly for the
reasons described above.







Net cashprovided by (used in)investing activitieswas
$412,994 for the nine months ended November 30, 2008, compared to $2,894,562 for
the nine months ended November 30, 2007.  This increase resulted
primarily from the reduction in our capital equipment purchases as well as
proceeds from the sale of assets no longer in operation.




Net cash provided by (used in)
financing activitieswas ($157,742) for the nine months ended November
30, 2008, compared to $16,795,843 for the nine months ended November 30,
2007.  The decrease is primarily attributable to the issuance of the
Company’s 12% mandatorily convertible notes issued March 2, 2007 and the private
equity raise on August 8, 2007 as described below.




We had
$667,702 in cash and cash equivalents available at November 30, 2008 and
available bank overdraft facilities of $15,368.




We have
financed our operations primarily through private sales of our equity and
convertible debt securities since inception.  From our inception date
through November 30, 2008, we issued an aggregate of 122,780,977 shares of our
common stock for gross proceeds of approximately $32.4 million.  In
addition, we have granted options and issued shares in lieu of cash as payment
to third parties for services rendered.  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 November 30, 2008, we had an accumulated deficit of
approximately $39.4 million.




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 November 30, 2008 and February 29, 2008, the overdraft
facilities consisted of approximately $15,368 with Barclays Bank PLC
(“Barclays”) and $34,400 with Barclays and $39,700, respectively, with National
Westminster Bank PLC (“NatWest”).  Neither facility was utilized on
November 30, 2008 or February 29, 2008 and as of November 30, 2008, the NatWest
facility has been canceled.  The interest rate on the Barclays
facility is 5.75% above Barclays’ variable base rate (which base rate was 5.0%
per annum as of November 30, 2008).  The Barclays overdraft facility
was renewed on March 20, 2008 and shall expire on March 20, 2009.





Our
current ratio (current assets divided by current liabilities) relates to our
ability to pay our short-term debts as they become due.  At November
30, 2008, our current ratio was 1.2, compared to 4.4 at November 30,
2007.  Our current ratio fluctuates primarily because we use cash to
develop our business and raise additional funds from private financing from time
to time.





On August
8, 2007, we closed a private financing with a number of accredited investors for
the sale of common stock and warrants for a total purchase price of $10,510,000.
Pursuant to the financing we sold a total of 42,040,000 shares of common stock
at a purchase price of $0.25 per share. We also issued warrants to purchase an
aggregate of 21,020,000 shares of common stock at an exercise price of $0.50 per
share, subject to adjustment.  The warrants are exercisable at any
time on or prior to August 8, 2012.  The warrants contain customary
anti-dilution provisions in the event of any stock split, reverse stock split,
reclassification or recapitalization of the Company.  In addition, the
exercise price and the number of shares issuable upon the exercise of the
warrants are subject to adjustment on a full-ratchet basis in the event that we
issue or are deemed to have issued shares of common stock at an effective
purchase price of less than $0.50 per share, subject to certain
exceptions.  In the financing, we issued to the placement agents
warrants to purchase an aggregate of 1,706,400 shares of common
stock.  Those warrants have the same terms as the warrants issued in
the financing, except that the warrants issued to the placement agents have a
cashless exercise right.





On March
2, 2007, the Company entered into a Purchase Agreement (the “Purchase
Agreement”) with a number of 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.  In connection
with the August 8, 2007 financing, the full amount of the Notes was
automatically converted into an aggregate of 35,392,003 shares of common stock
at a conversion price of $0.225 per share.








We
believe we will have sufficient working capital to fund our operations for the
next two to three months.  In the event that the Merger Agreement is
terminated, we will need to raise further funds to continue operations
thereafter.  We are unable to determine if such funding will be
available, and if available, what terms such funding may require.




As of
November 30, 2008, our principal capital commitments consisted of obligations
outstanding under capital leases as shown in the table below
(unaudited):





November
      30, 2008$Amounts
      payable:Within
      12 months
                  
                  
                  110,515Between
      one and two years
                  
                  
                  38,948Between
      two and three years
                  
                  
                  -Total
      future commitment
                  
                  
                  149,463Less:
      finance charges allocated to future periods
                  
                  
                  (
      10,475
                  )Present
      Value
                  
                  
                  138,988








Off balance sheet
arrangementsWe 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.





Item 3. Controls and
Procedures




We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in the reports filed or submitted under Securities
Exchange Act of 1934, as amended (the “Exchange Act”) is recorded,
processed, summarized and reported, within the time period specified in the
SEC’s rules and forms.  Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports filed under the Exchange Act is
accumulated and communicated to management, including Mr. McCourt, the Company’s
Interim Chief Executive Officer, as appropriate, to allow timely decisions
regarding required disclosure.  In establishing and maintaining the
disclosure controls and procedures, management recognized that any controls and
procedures have inherent limitations.  Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.




As of the
end of the period covered by this report, the Company's management, under the
supervision of and with the participation of the Company's interim chief
executive officer and principal 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 Exchange Act).  Based on such evaluation, our
interim chief executive officer and principal financial officer have concluded
that our disclosure controls and procedures were effective as of November 30,
2008.





Due to
changes in staffing level, the Company has addressed control procedures and
there has been no significant change in the Company’s internal controls over
financial reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to affect, our internal controls over
financial reporting.











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).




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 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





While
Narrowstep has historically held its Annual Meeting of Shareholders in September
of each year, Narrowstep did not hold an annual meeting in 2008 due to the
pending merger with Onstream.  The Company expects to administer any
relevant business in conjunction with a special meeting of the shareholders
where a vote on the merger is to take place. Narrowstep expects to file a notice
of the special meeting of the shareholders immediately following the Securities
and Exchange Commission’s declaration of Onstream S-4 Registration Statement as
effective.




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 PRINCIPAL FINANCIAL OFFICER FURNISHED PURSUANT TO 18 U.S.C. SECTION
      1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
      2002















SIGNATURES




In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.








NARROWSTEP
INC.






By:
            /s/
      David C. McCourtDated:  1/14/2009
            
            
            David
      C. McCourtInterim
      Chief Executive OfficerBy:
            /s/
      Richard LepikDated:  1/14/2009
            
            
            Richard
      LepikPrincipal
      Financial Officer