UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-KSB





(Mark
One)





xANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the
fiscal year ended September 30, 2008





oTRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the
transition period from _____ to _____





Commission
file number:  0-27865





ICEWEB,
INC.


(Name of
small business issuer in its charter)




Delaware
            
            13-2640971(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)




45925
      Maries Road, Dulles, VA
            
            20166(Address
      of principal executive offices)
            
            (Zip
      Code)





Issuer’s
telephone number:  (703)
964-8000





Securities
registered under Section 12(b) of the Exchange Act:




None
            
            None(Title
      of each class)
            
            (Name
      of each exchange on which
registered





Securities
registered under Section 12(g) of the Exchange Act:





Common stock, par value
$0.001 per share


(Title of
class)





Check whether the issuer is not
required to file reports pursuant to Section 13 or 15(d) of the Exchange
Act o





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





Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this
form, and no disclosure will be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-KSB. o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)


YesoNox





State
issuer’s revenues for its most recent fiscal year. $16,294,423 for the 12 months
ended September 30, 2008.





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days. As of December 28, 2008 the aggregate
market value of the common stock held by non-affiliates at the closing price of
the registrant’s common stock is approximately $994,000.





State the
number of shares outstanding of each of the issuer’s class of common equity. As
of December 28, 2008, 30,379,369 shares of common stock are
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





If the
following documents are incorporated by reference, briefly describe them and
identify the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) of the Securities Act of 1933 (“Securities Act”). None.





Transitional Small Business Disclosure
Form (check one): YesoNox





When used
in this annual report, the terms “IceWEB,”, the “Company”, “we,” “our,” and “us”
refers to IceWEB, Inc., a Delaware corporation, and our subsidiaries. The
information which appears on our web site at www.iceweb.com is not part of this
annual report.





CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION





Certain
statements in this annual report contain or may contain forward-looking
statements that are subject to known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results to differ
materially from those in the forward-looking statements. Potential risks and
uncertainties include, among other things, such factors as: our high level of
indebtedness and ability to satisfy the same, our history of unprofitable
operations, the continued availability of financing in the amounts, at the times
and on the terms required, to support our future business and capital projects,
the extent to which we are successful in developing, acquiring, licensing or
securing patents for proprietary products, changes in economic conditions
specific to any one or more of our markets, changes in general economic
conditions, our ability to produce and install product that conforms to contract
specifications and in a time frame that meets the contract requirements, and the
other factors and information disclosed and discussed in other sections of this
report.





You
should consider the areas of risk described in connection with any
forward-looking statements that may be made in this annual report. Readers are
cautioned not to place undue reliance on these forward-looking statements and
readers should carefully review this annual report in its entirety, including
the risks described in Part I - Item 1. Description of Business - Risk Factors.
Except for our ongoing obligations to disclose material information under the
Federal securities laws, we undertake no obligation to release publicly any
revisions to any forward-looking statements, to report events or to report the
occurrence of unanticipated events.


2


CONTENTS




PART I
                  Item
      1.
                  Description
      of Business
                  4Item
      2.
                  Description
      of Property
                  12Item
      3.
                  Legal
      Proceedings
                  12Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  12PART II
                  Item
      5.
                  Market
      for Common Equity, and Related Stockholder Matters and Small Business
      Issuer Purchases of Equity Securities
                  12Item
      6.
                  Management’s
      Discussion and Analysis or Plan of Operations
                  13Item
      7.
                  Financial
      Statements
                  F-1Item
      8.
                  Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                  23Item
      8A.
                  Controls
      and Procedures
                  23Item
      8A(T)
                  Controls
      and Procedures
                  23Item
      8B.
                  Other
      Information
                  23PART III
                  Item
      9.
                  Directors,
      Executives Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange Act
                  24Item
      10.
                  Executive
      Compensation
                  29Item
      11.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  34Item
      12.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  36Item
      13.
                  Exhibits
                  37Item
      14.
                  Principal
      Accounting Fees and Services
                  38





3





PART
I











ITEM
1.  DESCRIPTION OF BUSINESS




GENERAL




IceWEB,
Inc., a Delaware corporation (IWEB or the Company) is a storage technology
company headquartered in Sterling, Virginia.




BUSINESS
OF ICEWEB




The Company was originally
founded to serve the commercial and federal markets with network security
products and proprietary on-line software solutions.  In 2008, the
Company narrowed its focus and expanded its capabilities by acquiring INLINE
Corporation, a data storage company specializing in custom designed,
short-production run storage solutions for the Geospatial Information Systems
(GIS) market.




Therefore,
for 2009, the Company has three lines of business: Storage & GIS products,
IT solutions and Online services.  The Company plans to grow its
revenues and profits in both the Storage and solutions businesses while
maintaining its position in the online market.




Storage & GIS
Products.   These products simplify how enterprises
retain, access, manage and protect their data.   Demand for data
storage is ever-growing and ubiquitous as data files in all market sectors have
become larger and richer with video and multimedia content.  This
growth is particularly strong in the already billion dollar GIS market that is
projected to grow ten-fold over the next decade.   Therefore,
IceWEB’s strategic direction is to grow its share and profits in this market
based upon its own proprietary designs and its strategic relationships with its
GIS software OEMs such as ESRI, the world-wide leader in GIS application
software.




IceWEB
and ESRI have collaborated to create ultra-high performance INLINE/ESRI GIS
systems that allow customers to analyze data in ways never before
possible.  IceWEB designs, manufactures and, in concert with its OEM
partners, markets these systems to organizations all over the
world.




In
addition to the Company’s line of hardware/software storage products, customers
can choose from a broad range of warranty and service
programs.  INLINE productsrange from storage
servers, to NAS (Network Attached Storage) and SAN (Storage Area Network)
solutions.  OEM/Custom products are focused on the GIS
markets.




Core
      Products
                  Models
                  GISServers
                  Enterprise
      & Workgroup
                  GIS
      Server,
                    GIS
      Workgroup Server
                    GIS
      MLPSAN
                  Fibre
      Channel and IPNAS
                  Engines
      – Gateways into storage subsystems.
                  GIS
      Data Appliance
                    MLP
      Data ApplianceAppliances
      – Fully bundled NAS with storage
                  GIS
      Appliance
                    GIS
      DatabaseGIS
      products utilize the latest  storage server, SAN and NAS
      technology





IT
Solutions.  IceWEB provides IT network infrastructure security
solutions to government and commercial organizations.  The products
come from the Company’s strategic partners which include RSA Security, ISS, Blue
Coat, F5 Networks, McAfee and Cisco.  IceWEB will continue to invest
in this business in 2009.  Solutions include:




Security
information management, firewall implementation, management and
monitoring


Intrusion
detection, intrusion, prevention, anti-virus, anti-spam


Wide area
network optimization, user authentication, remote access control




Online Services.  In
December 2005, IceWEB launched IceMAILTM a
packaged software service that provides network –hosted groupware, email,
calendaring and collaboration functionality.  Customers are
organizations wishing to use Microsoft Exchange and Outlook without having to
procure, maintain and manage their own equipment and
software.   Online services were subsequently expanded to include
IcePORTALTM which
provides customers with a complete Intranet portal and IceSECURETM a
hosted email encryption service.  These products continue to provide
predictable monthly revenues for the Company; however the Company has no plans
to make new investments in this business in 2009.




4


Customers. GIS applications
allow customers to acquire, view, understand, interpret and visualize data in
ways that reveal relationships, patterns and trends in the form of maps, globes,
reports and charts.  IceWEB’s core GIS focus is complimented by its
network infrastructure security solutions which are offered in partnership with
a wide range of OEM technology leaders.   OEM customers include
ESRI, Highwinds Solutions, Stryker Imaging and SAIC.




Commercial
customers include enterprise companies, small to medium sized businesses (SMB)
and OEM partners.  IceWEB serves Federal Government markets through
GSA, GWAC and BPA agreements with customers in the US Departments of Defense
(DOD), Homeland Security (DoHS), the National Aeronautics and Space
Administration (NASA) and the National Science Foundation (NSF).




Customer Support and
Service.Quality and responsive customer support
services can turn first-time customers into perpetual
customers.  These services can also provide the Company with an
ever-growing, predictable revenue stream.




All INLINE products are sold with the
Company’s ‘Bronze’ warranty which includes telephone technical support during
normal business hours and parts repair or replacement when returned to
factory.  ‘Silver’ coverage supplements ‘Bronze’ by providing next
business day shipment for any user replaceable parts falling under
warranty.




‘Gold’ coverage provides U.S. customers
with a special toll-free number for technical support.  In addition
these customers receive, when necessary, on-site assistance during 9 to 5 during
the normal work week.  ‘Platinum’ services receive all other services
plus the added protection of on-site service with 4 hour
response.




In addition, the Company provides
factory-authorized services for ESRI customers.   For customers
with sensitive or classified data such as the Department of Defense, the Company
keeps magnetic hard drive platters ready for mailing in event of failure in the
field (these customers cannot return defective hard drives due to security
reasons).




Sales &
Marketing.IceWEB storageand GISproducts are soldto end users via the Company’s own
direct sales force and by its OEM partner sales organization.  These
OEMs help market and sell our products with the assistance of our sales
force.Ourmarketing effortsincrease brand awareness and uncoverqualifiedprospects for our direct sales
force.  Marketing includestradeshows, advertising, public relations and
Internet.




Research and
Development.Continued investment in product research
and development is critical to the Company’s business.  The Company
has skilled engineers with extensive experience in the fields of computing,
storage, distributed systems, network system design, and GIS
applications.  R&D is conducted at the Company’s headquarters inDulles, VA.




Manufacturingisconductedat Company headquarters inDulles, VA.  In addition the
CompanyutilizesXyratex Technology Limited for the
assembly, quality control, packaging and shippingfor some of its
products.  Xyratex procures themajority of the componentsfor suppliers pre-qualified byIceWEB.Xyratexand IceWEB collaborate to ensure that third-party suppliers can
provide sufficient components to satisfy product delivery schedules.Allfinal test procedures conducted by
Xyratexare approved by
IceWEBand finished
productssamples are
inspected and tested by IceWEB to ensure that all finished goods meet IceWEB’srigorous quality
standards.




Competition.The market forIceWEB storageis highly competitive andlikely to become even more competitive
inthe future.Establishedcompanies have historically dominated
the storage market, including EMC, Network Appliance, Dell, Hewlett-Packard, Sun
Microsystems, Hitachi Data Systems and IBM.




In addition there is additional
competition from smaller companies such asCompellent Technologies and LeftHand
Networks.In the future,new competitorswill emergeas well as increased competition, both
domestically and internationally, from other established storage
companies.Theprincipal competitivemarketfactors are:




•
            Industry
      credibility.




•
            Product scalability, performance
      and reliability




•
            Ease of installation and
      management;




•
            Software
      functionality;




•
            Total cost of
      ownership;




•
            Customer
      support




•
            Market
    presence




IceWEB competes effectively across all
of thesefactors. In
particular,the Company’sproduct architecture
provides significant competitive advantages in terms of performance,
scalability, ease of management and low total cost of ownership.  OEM partnersprovidethe Companywith a significant number of reference
accounts which address
credibility and helps marketing tonew customers.




Many of the competitorshave longer operating histories, bettername recognition, larger
customer bases and significantly greater financial, technical, sales and
marketing resources than we have.Competitors may also be able to devote
greater resources to the development, promotion, sale and support of their
products.Competitors may also have more extensive
customer bases and broader customer relationships thanthe Companyincluding relationships with potentialIceWEBcustomers.




5


Intellectual
Property




Success in the Company’s technological
marketsdepends, in part,
uponthe Company’sability to obtain and
maintain proprietary protection foritsproducts, technology and
know-how.  This
must be accomplished withoutinfringing the proprietary rights of
others andwhile
simultaneouslypreventingothers from infringing uponthe Company’s ownproprietary rights.




IceWEB seeksto protectitsproprietary positionsby, among other methods, filing patent
applications.Patent
efforts are focusedin the
United States and, when justified by cost and strategic importance, we file
related foreign patent applications in jurisdictions such as the European Union
and Japan. As of September 30, 2008,we hadapplied for three provisionalU.S. patents.




Pending patent applications relate tothe rapid ingestion of
massive amounts of video and otherdata and other network storage
concepts.It is
unknown if any ofthepatent applicationswill issue as patents.  The
patentapplications may be
opposed, contested, circumvented, designed around by a third party, or found to
be invalid or unenforceable.




Copyright law, trademarks and trade secret agreements
are also used to protect andmaintain proprietary
positions.   The Company’sproprietaryinformation is protected byinternal and external controls,
including contractual agreements with employees, end-users and channel partners.There is noassurance that these parties will abide
by the terms of their agreements.




Trademarksare used on some of the IceWEBproductsand thesedistinctive marks may be an important
factor in marketingthe
products.  Inline® andInlinelogo trademarkshave been registeredin the United
States.







Our
History


We were originally formed under the
laws of the State of Delaware in February 1969. For many years, we were a
wholesaler of custom one, two, three and four-color processed commercial
printing, as well as disposable and durable office equipment including stock
paper, fax paper, fax and copy machines, computers, file cabinets and safes. We
conducted our business throughout the United States of America and Puerto Rico
from our headquarters in New York.





In March
1999, we changed the focus of our business and closed a transaction by which we
acquired 100% of the outstanding capital stock of North Orlando Sports
Promotions, Inc., a privately held Florida corporation. From 1999 until July
2001, we operated a variety of Internet-related services, however, we were
unable to generate positive cash flow from these Internet-related
businesses.





In May
2001, we executed an Agreement and Plan of Reorganization and Stock Purchase
Agreement with Disease S.I., Inc. Under the terms of the agreement, we acquired
100% of the issued and outstanding stock of Disease S.I., Inc. in exchange for
750,000 shares of our common stock. The transaction was accounted for as a
reverse acquisition under the purchase method for business combinations.
Accordingly, the combination of the two companies was recorded as a
recapitalization of Disease S.I., Inc., pursuant to which Disease S.I., Inc. was
treated as the continuing entity. Disease S.I., Inc. was a developmental stage
biopharmaceutical clinical diagnostics company planning to employ a broad array
of technologies to detect, identify and quantify substances in blood or other
bodily fluids and tissues. It intended to derive revenues from patent
sub-licensing fees, royalties from pharmaceutical sales, appropriate milestone
payments and research and development contracts.





Following
completion of the acquisition of Disease S.I., Inc., it became apparent to us
that it would be in our best long-term interest that the Internet operations be
conducted apart from the biopharmaceutical clinical diagnostics operations. On
July 24, 2001, we sold a former officer and director 100% of our subsidiary
North Orlando Sports Promotions, Inc., in exchange for the assumption of all
liabilities related to North Orlando Sports Promotions, Inc. and its operations
estimated at approximately $112,000, and which included the forgiveness of
$91,500 in accrued compensation. Included in the sale along with the capital
stock of North Orlando Sports Promotions, Inc. were fixed assets, rights to
several domain names and various contractual rights and
obligations.





On
November 27, 2001, we acquired 9,050,833 shares of the common stock of
Healthspan Sciences, Inc., a privately held California corporation in exchange
for 5,000 shares of our common stock in a private transaction exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2) of
that act. This agreement was rescinded on March 21, 2002. Pursuant to the
rescission, Healthspan Sciences, Inc. returned all 5,000 shares of our common
stock issued in the exchange and we returned all 9,050,833 shares of Healthspan
Sciences, Inc. which we had received.





On March
21, 2002, we executed an Agreement and Plan of Merger with IceWEB
Communications, Inc., a Delaware corporation and its stockholders. Founded in
2000, IceWEB Communications, Inc. enabled interactive communications and
education on the web. In June 2001, it had acquired the assets in bankruptcy of
Learning Stream, Inc., a provider of streaming services. Pursuant to the
agreement, each of the 22,720,500 shares of common stock of IceWEB
Communications, Inc. issued and outstanding immediately prior to the merger were
converted into the right to receive 0.13375 shares of our common stock, for an
aggregate of 303,888 shares of common stock. Each of the warrants to purchase an
aggregate of 680,125 shares of IceWEB Communications, Inc. common stock issued
and outstanding immediately prior to the merger were converted into the right to
receive one warrant to purchase 0.13375 shares of our common stock upon exercise
of said warrant.


6


In June
2003, we acquired 100% of the capital stock of Interlan Communications, Inc., a
privately held corporation, in exchange for 25,000 shares of our common stock.
In June 2003, we also acquired 100% of the capital stock of Seven Corporation in
exchange for 37,500 shares of our common stock and cash consideration of
$123,000. As described later in this section, we sold Seven Corporation company
in February 2007.





In
October 2003, we acquired 19% of the capital stock of Iplicity, Inc. of
Virginia, together with substantially all of its assets including software
licenses, source code, potential patents and trademarks for a combined stock and
cash value of approximately $632,000 which included the issuance of 191,381
shares of our common stock and cash consideration of $65,500.





In May
2004, we acquired substantially all of the assets of DevElements, Inc. of
Virginia, including software licenses, source code, potential patents and
trademarks, cash, hardware, and equipment. As consideration for the purchase of
the assets, we paid DevElements $100,000 and agreed to the assumption of
liabilities up to an aggregate of $150,000. In exchange for the 19% interest in
DevElements, we issued to the stockholders of DevElements 187,500 shares of our
common stock and options to purchase 187,500 shares of common stock exercisable
at a price of $27.20 per share and expiring May 13, 2009. We issued to the
stockholders options to purchase 6,250 shares, which were contingently
exercisable upon the satisfaction of certain performance criteria. The
performance criteria, which required contracts, task orders and other work
assignments involving billing of at least $840,000 during the six-month period
ending November 13, 2004, was not met and the options were
cancelled.





On
October 18, 2004, we entered into a non-binding letter of intent to acquire 100%
of the issued and outstanding stock of Plan Graphics, Inc. The transaction was
subject to approval by the Plan Graphics, Inc. stockholders, and certain terms
and conditions, including terms and conditions which are customary to this type
of transaction. On April 29, 2005 the letter of intent expired without a
definitive agreement having been executed or all conditions precedent to the
closing having been completed.





In March
2006 we acquired PatriotNet, Inc., an Internet service provider, for total
consideration of $290,000 of which $190,000 was paid in cash and $100,000 was
paid through the issuance of 100,000 shares of our common stock. We granted
Patriot Computer Group, Inc., the seller in the transaction, certain piggyback
registration rights for the 100,000 shares of our common stock issued as partial
consideration in the transaction. At the time of the acquisition, the purchase
price exceeded the fair value of the assets acquired by $390,600 which we
treated as goodwill for accounting purposes. From the date of acquisition
through September 30, 2007 revenues from PatriotNet were approximately $316,000
and represented approximately 6% of our consolidated revenues. On December 1,
2006 we sold PatriotNet to Leros Online, Inc., a third party, for $150,000 in
cash and the assumption of $60,000 in liabilities. At September 30, 2007 we
recorded goodwill impairment of $180,000 related to this
transaction.





On
December 1, 2006 we sold 100% of the capital stock of our wholly-owned
subsidiary, Integrated Power Solutions, Inc. to Mr. John Younts, our Vice
President of Integrated Power Solutions and a key employee, for the assumption
of approximately $180,000 in liabilities and the payment of $12,000 we owed him.
For the fiscal year ended September 30, 2006, revenues for Integrated Power
Solutions were approximately $457,000, or approximately, 9.5%, of our total
sales.





On
November 15, 2006, we acquired certain of the assets of True North Solutions
related to its governmental customer business for $350,000 of which $250,000 was
paid in cash and the balance was paid through the delivery of a $100,000
principal amount promissory note secured by collateral pledge of the assets,
payable immediately upon accomplishment of the novation of the GSA Schedule.
Under the terms of the agreement, we acquired the customers, forecast, contract
renewals, and GSA schedule of True North Solutions. We permitted True North
Solutions to use the purchased assets until December 31, 2006 pursuant to which
we acted as the seller’s subcontractor until the novation of the GSA Schedule
was complete. The novation of the GSA schedule was completed in March,
2008.





On
February 16, 2007 we sold 100% of the outstanding stock of our subsidiary, The
Seven Corporation of Virginia, Inc., to PC NET in exchange for the waiver of
approximately $11,000 we owed PC NET. Under the terms of the agreement we may
not engage in any staffing services businesses as The Seven Corporation had
conducted for a period of at least two years. For the fiscal year ended
September 30, 2006 revenues from The Seven Corporation were $360,000 or
approximately 7.5%, of our total sales.


7


On
December 22, 2007, we acquired 100% of the outstanding stock of Inline for
$1,925,128 in cash, plus 503,356 shares of IceWEB common stock valued at
$276,846, the fair market value on the date of acquisition. The acquisition was
accounted for using the purchase method of accounting. The results of operations
are included in the financial statements of operations from the date of
acquisition. Inline is a leading provider of intelligent enterprise data storage
solutions and services for the geospatial intelligence
marketplace.  Inline’s proprietary products include reliable, high
performance Storage Area Network Solutions, Network Attached Storage, and Direct
Attached Storage and the rapidly expanding OEM Storage Centric Appliances.
Today, Inline has developed its fifth generation of advanced data storage
solutions, marketed under the brands TruEnterpriseand FileStorm. All Inline systems
function in a heterogeneous operating system environment, including Windows,
UNIX and Linux. The purchase of Inline Corporation included the acquisition of
assets of $2,688,795, and liabilities of $614,668.








RISK
FACTORS





WE HAVE
AN ACCUMULATED DEFICIT AND WE ANTICIPATE CONTINUING LOSSES THAT WILL RESULT IN
SIGNIFICANT LIQUIDITY AND CASH FLOW PROBLEMS ABSENT A MATERIAL INCREASE IN OUR
REVENUES.





We have
an accumulated deficit of $20,131,957 at September 30, 2008.  For the
years ended September 30, 2008 and 2007, we had a net loss attributable to
common stockholders of approximately $6,410,793 and approximately $2,850,123,
respectively, and cash provided by/(used) in operations was approximately
$862,691 and ($1,245,512), respectively. The report of our independent
registered public accounting firm on our consolidated financial statements for
the fiscal year ended September 30, 2008 contains a qualification expressing
substantial doubt as to our ability to continue as a going concern as a result
of our net losses and cash used in operations. We reported a decrease in our
revenues for fiscal 2008 as compared to fiscal 2007 of approximately 13% which
is primarily related to a drop in our IceWEB Solutions Group.  We
cannot assure you that our revenues will increase in future periods, nor can we
assure you that they will not decrease. As long as our cash flow from operations
remains insufficient to fund our operations, we will continue depleting our cash
and other financial resources. Our failure to achieve profitable operations in
future periods will adversely affect our ability to continue as a going concern.
In this event, you could lose all of your investment in our
company.





WE WILL
NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON ACCEPTABLE
TERMS. IF WE CANNOT RAISE ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY TO EXECUTE
OUR GROWTH STRATEGY AND FUND OUR ONGOING OPERATIONS WILL BE IN
JEOPARDY.





Historically,
our operations have been financed primarily through the issuance of equity and
short-term loans. Capital is typically needed not only to fund our ongoing
operations and to pay our existing obligations, but capital is also necessary if
we wish to acquire additional assets or companies and for the effective
integration, operation and expansion of these businesses. Our future capital
requirements, however, depend on a number of factors, including our ability to
internally grow our revenues, manage our business and control our expenses. At
September 30, 2008, we had a working capital deficit of $5,572,671 as compared
to a working capital deficit of $1,981,325 at September 30,
2007.  This change is primarily attributable to the acquisition of
Inline Corporation and our financing arrangement with Sand Hill Finance to
factor accounts receivable. We will need to raise additional capital to fund our
ongoing operations, pay our existing obligations and for future growth of our
company. We cannot assure you that additional working capital is available to us
in the future upon terms acceptable to us. If we do not raise funds as needed,
our ability to provide for current working capital needs, make additional
acquisitions, grow our company, and continue our existing business and
operations is in jeopardy. In this event, you could lose all of your investment
in our company.





FROM TIME
TO TIME WE ENTER INTO RELATED PARTY TRANSACTIONS, THE TERMS OF WHICH MAY NOT BE
AS ADVANTAGEOUS AS WE COULD OBTAIN FROM UNRELATED THIRD PARTIES.





From time
to time we have borrowed operating funds from related parties, including from
Bluepoint Financial, LLC, a company of which Mr. John Signorello, our Chief
Executive Officer, is a 50% owner.  In lieu of interest we agreed to
issue 1.54 shares of common stock for each dollar lent under the loan. During
fiscal 2006 we borrowed approximately $335,000 under this loan agreement, repaid
approximately $157,000 and issued shares valued at $296,608 as
interest.  During fiscal 2007, we borrowed approximately $30,000 under
this loan agreement, repaid approximately $308,080 and issued shares valued at
$169,803 as interest. The value of the securities we have issued as interest far
exceeds generally available commercial interest rates. While the transaction was
approved by our Board of Directors, of which Mr. Signorello is a member,
there are no assurances that we could not have obtained more favorable terms
from third party lenders.


8


WHILE THE
SHARES OF OUR SERIES B CONVERTIBLE PREFERRED STOCK IS OUTSTANDING WE ARE
PROHIBITED FROM ENTERING INTO CERTAIN TYPES OF EQUITY AND DEBT TRANSACTIONS
WHICH MAY ADVERSELY AFFECT OUR ABILITY TO RAISE WORKING CAPITAL AS
NEEDED.





Under the
terms of our sale of Series B Convertible Preferred Stock in December 2005, we
agreed to a number of limitations on our future capital raising activities,
including:




•
            for a period of three years we
      will not issue any convertible debt or preferred stock, for a period of
      two years we will not enter into any new borrowings of more than twice as
      much as the sum of EBITDA (earnings before income taxes, depreciation and
      amortization) from recurring operations over the past four
      quarters,




•
            for so long as the shares are
      outstanding we will not issue any debt or equity securities with a
      floating conversion price or reset feature,
  and




•
            for so long as the shares are
      outstanding we cannot issue any common stock or securities which are
      convertible into common stock at an effective price per share less than
      the conversion value of the Series B Convertible Preferred Stock which is
      initially $0.2727 per share.





These
restrictions are likely to adversely affect our ability to raise working capital
as needed in future periods as the types of financing transactions generally
available to us and other comparably-sized public companies often involve the
sale of a convertible security with a reset feature, or the sale of common stock
at a discount to market.





OUR
FACTORING AGREEMENT WITH SAND HILL FINANCE, LLC CONTAINS CERTAIN TERMS WHICH MAY
ADVERSELY AFFECT OUR ABILITY TO RAISE CAPITAL IN FUTURE PERIODS.





In
December 2005 and as amended during fiscal 2006 and fiscal 2008, we entered into
a Finance Agreement with Sand Hill Finance, LLC for a $2.75 million accounts
receivable factoring line. Under the terms of this agreement we agreed not to
take certain actions including undertaking a transaction which would result in a
change of control of our company or the transfer of more than 20% of our
securities and incurring any indebtedness other than trade credit in the
ordinary course of business. These restrictions may limit our ability to raise
working capital as needed.





OUR
PRIMARY ASSETS SERVE AS COLLATERAL UNDER OUR ACCOUNTS RECEIVABLE FACTORING LINE.
IF WE WERE TO DEFAULT ON THIS AGREEMENT, THE LENDER COULD FORECLOSE ON OUR
ASSETS.





The
revolving line with Sand Hill Finance, LLC is collateralized by a blanket
security interest in our assets. If we should default under the terms of this
agreement, the lender could seek to foreclose on our primary assets. If the
lender was successful, we would be unable to conduct our business as it is
presently conducted and our ability to generate revenues and fund our ongoing
operations would be materially adversely affected.





WE ARE A
PARTY TO A SALES/LEASBACK AGREEMENT. IF THE LESSOR SHOULD DECLARE US IN DEFAULT
UNDER THE AGREEMENT, WE COULD BE FORCED TO PAY ALL AMOUNTS OWED THEREUNDER OR
LOSE THE BENEFIT OF THE EQUIPMENT.





In July
2006, we entered into what is in essence a sale and leaseback agreement with
respect to certain computer and office equipment. We received gross proceeds of
$300,000 from the sale of the equipment to a third party. As part of the same
transaction, we entered into a 36 month agreement to lease the equipment back
from the third party for monthly rent payments of $10,398. Imputed interest on
this financing is 20% per annum. At September 30, 2008, the amount due under
this equipment financing arrangement amounted to $91,807. The equipment which is
subject to this arrangement is material in the operation of our business. From
time to time we have failed to make the monthly payments due under this
agreement on a timely basis. Should the lessor declare us in default, it would
be entitled to accelerate all amounts due under the agreement which is
approximately $100,000 at September 30, 2008. If we were unable to satisfy such
amount, the lessor could retake the equipment thereby depriving us of its use
which could materially affect our business and operations.





WE DO NOT
HAVE A DISASTER RECOVERY PLAN AND WE DO NOT CARRY BUSINESS INTERRUPTION
INSURANCE.


9


Our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins and similar events. Our
headquarters are physically located in Fairfax County, Virginia, a Washington,
DC suburb, in close proximity to the US Capitol, White House, Pentagon, CIA, and
numerous other agencies within the intelligence community. All these government
installations are considered potential targets of any future terrorist attacks.
We do not currently have a disaster recovery plan, nor do we carry business
interruption insurance to compensate our company for losses that may occur. We
are also vulnerable to computer viruses and/or physical disruptions, which could
lead to interruptions, delays, loss of data or the inability to accept orders.
The occurrence of any of the foregoing events could have a material adverse
effect on our business, prospects, financial condition and results of
operations.





OUR
MANAGEMENT MAY BE UNABLE TO EFFECTIVELY INTEGRATE OUR ACQUISITIONS AND TO MANAGE
OUR GROWTH AND WE MAY BE UNABLE TO FULLY REALIZE ANY ANTICIPATED BENEFITS OF
THESE ACQUISITIONS.





Our
business strategy includes growth through acquisition and internal development.
We are subject to various risks associated with our growth strategy, including
the risk that we will be unable to identify and recruit suitable acquisition
candidates in the future or to integrate and manage the acquired companies.
Acquired companies’ histories, geographical locations, business models and
business cultures can be different from ours in many respects. Our directors and
senior management face a significant challenge in their efforts to integrate our
businesses and the business of the acquired companies or assets, and to
effectively manage our continued growth. There can be no assurance that our
efforts to integrate the operations of any acquired assets or companies acquired
in the future will be successful, that we can manage our growth or that the
anticipated benefits of these proposed acquisitions will be fully realized. The
dedication of management resources to these efforts may detract attention from
our day-to-day business. There can be no assurance that there will not be
substantial costs associated with these activities or of the success of our
integration efforts, either of which could have a material adverse effect on our
operating results.





WE HAVE
NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN THE
ABSENCE OF WHICH, STOCKHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST
INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR
MATTERS.





Recent
Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in
the adoption of various corporate governance measures designed to promote the
integrity of the corporate management and the securities markets. Some of these
measures have been adopted in response to legal requirements. Others have been
adopted by companies in response to the requirements of national securities
exchanges, such as the NYSE or The Nasdaq Stock Market, on which their
securities are listed. Among the corporate governance measures that are required
under the rules of national securities exchanges are those that address board of
directors’ independence, audit committee oversight, and the adoption of a code
of ethics. Because our stock is not listed on an exchange we are not required to
adopt these corporate governance standards. While our board of directors has
adopted a Code of Ethics and Business Conduct and our Board has established
Audit and Compensation Committees, we have not adopted all of the corporate
governance measures which we might otherwise have been required to adopt if our
securities were listed on a national securities exchange. It is possible that if
we were to adopt all of these corporate governance measures, stockholders would
benefit from somewhat greater assurances that internal corporate decisions were
being made by disinterested directors and that policies had been implemented to
define responsible conduct. Prospective investors should bear in mind our
current lack of corporate governance measures in formulating their investment
decisions.





THE
EXERCISE OF WARRANTS AND OPTIONS AND THE CONVERSION OF SHARES OF OUR SERIES B
CONVERTIBLE PREFERRED STOCK WILL BE DILUTIVE TO OUR EXISTING
STOCKHOLDERS.





At
September 30, 2008 we had outstanding:




•
            24,688,088 shares of our common
      stock,




•
            1,253,334 shares of Series B
      Convertible Preferred Stock which is convertible into 1,253,334 shares of
      our common stock,




•
            common stock purchase warrants to
      purchase a total of 300,000 shares of our common stock with exercise
      prices ranging from $0.65 to $8.00 per share,
  and




•
            options granted under our 2000
      Management and Director Equity Incentive and Compensation Plan which are
      exercisable into 6,583,827 shares of our common stock with a weighted
      average exercise price of $0.44 per
  share.


10


The
conversion of the Series B Convertible Preferred Stock and/or the exercise of
outstanding options and warrants may materially adversely affect the market
price of our common stock and will have a dilutive effect on our existing
stockholders.





CERTAIN
OF OUR OUTSTANDING WARRANTS CONTAIN CASHLESS EXERCISE PROVISIONS WHICH MEANS WE
WILL NOT RECEIVE ANY CASH PROCEEDS UPON THEIR EXERCISE.





In March
2005 and December 2005, we issued common stock purchase warrants to purchase an
aggregate of 6,925,000 shares of our common stock with exercise prices ranging
from $2.00 to $9.60 per share in connection with the sales of shares of our
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock.
The exercise price of each these warrants was subsequently amended to be $1.00
per share. In April, 2008, 5,150,000 of these warrants were converted into
2,525,000 shares of common stock on a cashless basis.  At September
30, 2008, none of these warrants remain outstanding. In December 2005, we also
issued a seven year common stock purchase warrant to purchase 25,000 shares of
our common stock with an exercise price of $1.00 per share in connection with
our accounts receivable financing agreement with Sand Hill Finance,
LLC.





All of
these five-year warrants were exercisable on a cashless basis which means that
the holders, rather than paying the exercise price in cash, may surrender a
number of warrants equal to the exercise price of the warrants being exercised.
The utilization of this cashless exercise feature deprived us of additional
capital which might otherwise be obtained if the warrants did not contain a
cashless feature.





PROVISIONS
OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A TAKE-OVER
WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.





Provisions
of our certificate of incorporation and bylaws may be deemed to have
anti-takeover effects, which include when and by whom special meetings of our
stockholders may be called, and may delay, defer or prevent a takeover attempt.
In addition, certain provisions of the Delaware General Corporations Law also
may be deemed to have certain anti-takeover effects which include that control
of shares acquired in excess of certain specified thresholds will not possess
any voting rights unless these voting rights are approved by a majority of a
corporation’s disinterested stockholders.





In
addition, our certificate of incorporation authorizes the issuance of up to
10,000,000 shares of preferred stock with such rights and preferences as may be
determined from time to time by our Board of Directors. We presently have
outstanding 1,253,334 shares of Series B Convertible Preferred
Stock.  Our Board of Directors may, without stockholder approval,
issue additional series of preferred stock with dividends, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of our common stock.





OUR
COMMON STOCK COULD BE REMOVED FROM QUOTATION ON THE OTCBB IF WE FAIL TO TIMELY
FILE OUR ANNUAL OR QUARTERLY REPORTS. IF OUR COMMON STOCK WAS NO LONGER ELIGIBLE
FOR QUOTATION ON THE OTCBB, THE LIQUIDITY OF OUR STOCK MAY BE FURTHER ADVERSELY
IMPACTED.





Under the
rules of the Securities and Exchange Commission we are required to file our
quarterly reports within 45 days from the end of the fiscal quarter and our
annual report within 90 days from the end of our fiscal year. Under rules
adopted by the Financial Industry Regulatory Authority (FINRA) in 2005 which is
informally known as the “Three Strikes Rule”, a FINRA member is prohibited from
quoting securities of an OTCBB issuer such as our company if the issuer either
fails to timely file these reports or is otherwise delinquent in the filing
requirements three times in the prior two year period or if the issuer’s common
stock has been removed from quotation on the OTCBB twice in that two year
period. We failed to file this annual report on a timely basis. If we were to
fail to file two additional reports on a timely basis our stock would be removed
from quotation on the OTCBB and would in all likelihood then be quoted on the
Pink Sheets Electronic Quotation Service. Pink Sheets offers a quotation service
to companies that are unable to list their securities on the OTCBB or an
exchange. The requirements for listing on the Pink Sheets are considerably lower
and less regulated than those of the OTCBB an exchange. If our common stock were
to be quoted on the Pink Sheets, it is possible that even fewer brokers or
dealers would be interested in making a market in our common stock which would
further adversely impact its liquidity.





11


ITEM
2. DESCRIPTION OF PROPERTY





In
December 2007, we entered into a seven year lease for approximately 9,000 square
feet of office space located in the same building in which our principal
executive offices are located. This new lease provides for annual base rental of
approximately $148,000.  We are also responsible for our pro rata
share of certain pass through costs. We have the option to renew this lease for
one additional five year term and we have a right of first refusal to lease as
additional approximately 7,200 square feet of adjoining office space should it
become available.





ITEM
3. LEGAL PROCEEDINGS





The Company
is a party to litigation which arises primarily in the ordinary course of
business. In the opinion of management, the ultimate disposition of such
litigation should not have a material adverse effect on the financial position
or results of operations of the Company.





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





None.





PART
II





ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES





Our
common stock is quoted on the OTCBB under the symbol IWEB. The reported high and
low bid prices for the common stock as reported on the OTCBB are shown below for
the periods indicated. The quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not represent actual
transactions.




High
                  
                  LowFiscal 2007First
      quarter ended December 31, 2006
                  $
                  0.75
                  
                  $
                  0.35Second
      quarter ended March 31, 2007
                  $
                  0.85
                  
                  $
                  0.51Third
      quarter ended June 30, 2007
                  $
                  0.90
                  
                  $
                  0.50Fourth
      quarter ended September 30, 2007
                  $
                  0.85
                  
                  $
                  0.53Fiscal 2008First
      quarter ended December 31, 2007
                  $
                  0.65
                  
                  $
                  0.45Second
      quarter ended March 31, 2008
                  $
                  0.59
                  
                  $
                  0.28Third
      quarter ended June 30, 2008
                  $
                  0.62
                  
                  $
                  0.29Fourth
      quarter ended September 30, 2008
                  $
                  0.35
                  
                  $
                  0.11





As of
December 26, 2008 the last sale price of our common shares as reported on the
OTC Bulletin Board was $0.09 per share. As of December 28, 2008, there were
approximately 561 record owners of our common stock.


12


Dividend
Policy





We have
never paid cash dividends on our common stock. Under Delaware law, we may
declare and pay dividends on our capital stock either out of our surplus, as
defined in the relevant Delaware statutes, or if there is no such surplus, out
of our net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year. If, however, the capital of our company, computed in
accordance with the relevant Delaware statutes, has been diminished by
depreciation in the value of our property, or by losses, or otherwise, to an
amount less than the aggregate amount of the capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets, we are prohibited from declaring and paying out of such net profits
any dividends upon any shares of our capital stock until the deficiency in the
amount of capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets shall have been
repaired.





We do not
anticipate that any cash dividends will be declared or paid on our common stock
in the foreseeable future.





RECENT
SALES OF UNREGISTERED SECURITIES





On June
6, 2008 we sold 400,000 shares of common stock at a per share price of $0.20,
valued at $80,000 to an accredited investor and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





Small
Business Issuer Purchases of Equity Securities





None.





ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





OVERVIEW





IceWEB,
through our Inline Corporation subsidiary is a leading provider of
high-performance storage products that simplify the way enterprises retain,
access, manage and protect their data.  Our products are designed
specifically for mid-sized enterprises that have complex storage needs but
cannot justify the high procurement and ongoing management costs of other
storage area network, or SAN, alternatives.  Our products are offered
in an integrated, all-inclusive package that combines resilient disk storage
with a comprehensive suite of intelligent storage management
software.





In
addition, IceWEB’s Solutions Group specializes in network infrastructure
security solutions. Through our team of engineers and our partners, including
RSA Security, ISS, F5 Networks, Blue Coat, and Cisco, we provide firewall,
authentication, PKI, encryption, and traffic filtering products and services to
protect network infrastructure. Our customers are primarily Federal, State, and
Local government entities. We believe that the combination of our vendor
partners/manufacturers, customers, and government contracting vehicles enables
our company to be successful in providing the industry’s best network security
solutions to government clients and those commercial integrators who service the
government. We further believe that we can, through IceWEB Solutions group,
position, market, and sell our high margin hosted online subscription services
to that constituency enabling us to attain a larger subscriber base for those
services.





Also, we
offer small and medium sized businesses (“SMBs”) hosted access to
enterprise-class applications delivered via the Internet for a reasonable
monthly fee. These rapidly growing SaaS offerings include such hosted
applications as Microsoft Exchange Server, Sharepoint, BlackBerry Enterprise
Server, Good Messaging Server, SPAM and Virus protection, and advanced Email
Encryption services. Our current customer base consists of nearly 900
organizations worldwide in both the public and private sectors.





Our
storage product architecture employs innovative, proprietary virtualization
software that severs the traditional tie between stored data and disk drive
hardware. This virtualization software masks the complexity of the underlying
storage configuration and enables our storage arrays to cooperate with one
another to automatically share resources and balance workloads. Our products are
based on the iSCSI network protocol, which utilizes widely-deployed Internet
Protocol, or IP, networks. As a result, our customers can cost-effectively
install, expand and modify their data storage resources.





Beginning
in 2001, we began a series of strategic acquisitions and divestitures which have
resulted in our current business and operations and impacted our financial
statements for fiscal 2008 and 2007, including:


13





•
            in June 2001, we acquired the
      assets of Learning Stream, Inc., a provider of digital content streaming
      services, which coincided with the transition of our business model to a
      focus on e-learning. Learning Stream had developed custom streaming
      solutions which we believed were more efficient and effective than the
      solutions we had implemented at that time. We considered the software we
      acquired to be competitive because it helped remove the complexity and
      unnecessary cost from the implementation of the streaming
      technology,





•
            in June 2003, we acquired all of
      the outstanding stock of Interlan Corporation, a provider of data
      communications and networking solutions for business, government, and
      education. Interlan provided technical services including presales design
      and consulting, installation, troubleshooting, and long term maintenance
      and support contracts,




•
            in June 2003, we also acquired
      all of the outstanding stock of The Seven Corporation, a provider of
      network engineering services to commercial and government customers
      throughout the United
States,




•
            in October 2003, we acquired the
      software ownership rights and customers of Iplicity, Inc. of Virginia.
      Iplicity had developed a complete content management software platform
      based on open source architecture to run in any operating environment. In
      this transaction we acquired software licenses, source code, potential
      patents and trademarks,




•
            in May 2004 we acquired
      substantially all of the assets of DevElements, Inc. of Virginia, a
      professional IT consultancy firm that designs, develops and implements
      web-based productivity solutions for its customers. In this transaction we
      acquired software licenses, source code, potential patents and trademarks,
      as well as some cash and tangible assets,
  and





•
            in March 2006, the Company,
      through its wholly-owned subsidiary, IceWEB Online, Inc., completed the
      acquisition of substantially all of the assets and some liabilities of
      PatriotNet, Inc.





In August
2006, after multiple quarters of collapsing revenue and higher than anticipated
losses in fiscal 2006, our Board of Directors and senior management implemented
a strategy of re-focusing the Company on hosted software services and network
security sales. The Company determined, through a detailed analysis of
operations, that the PatriotNet and Integrated Power Solutions activities were
not profitable or in line with the company’s core focus and competencies. In
addition, the Company believes we can focus our limited sales and marketing
budgets on the remaining core business activities to achieve more
success.




•
            On November 15, 2006, the Company
      acquired the assets of True North Federal Solutions Group for $350,000 of
      which $250,000 was paid in cash and $100,000 due upon future terms of the
      agreement. Under the terms of the agreement, IceWEB acquired the customer
      database, forecast, contract renewals, and GSA schedule of True North
      Federal. The revenue generated to IceWEB from this division since the
      acquisition, exceeded the revenue from the discontinued PatriotNet
      and IPS operations.





•
            On December 1, 2006, we sold the
      assets of PatriotNet to Leros Technologies, a third party, for $150,000 in
      cash and the assumption of $60,000 in liabilities. On September 30, 2007
      we recorded goodwill impairment of $180,000 related to this transaction.
      The PatriotNet services constituted 9.5% of revenue in fiscal
      2006.





•
            On
      December 1, 2006, we sold 100% of the capital stock of our wholly-owned
      subsidiary, Integrated Power Solutions, Inc. to John Younts, a related
      party, for the assumption of approximately $200,000 in liabilities. In
      fiscal 2006, revenues for Integrated Power Solutions accounted for
      approximately $400,000 or 7% of our total IceWEB
  revenues.





•
            On December 22, 2007, we acquired
      100% of the outstanding stock of Inline Corporation for $1,925,128 in
      cash, plus 503,356 shares of IceWEB common stock valued at $276,846, the
      fair market value on the date of acquisition. The acquisition was
      accounted for using the purchase method of accounting. The results of
      operations are included in the financial statements of operations from the
      date of acquisition. Inline is a leading provider of intelligent
      enterprise data storage solutions and services for the geospatial
      intelligence marketplace.  Inline’s proprietary products include
      reliable, high performance Storage Area Network Solutions, Network
      Attached Storage, and Direct Attached Storage and the rapidly expanding
      OEM Storage Centric Appliances. Today, Inline has developed its fifth
      generation of advanced data storage solutions, marketed under the brandsTruEnterpriseandFileStorm. All Inline systems function in
      a heterogeneous operating system environment, including Windows, UNIX and
      Linux. The purchase of Inline Corporation included the acquisition of
      assets of $2,688,795, and liabilities of
  $614,668.


14


We
generate revenues from the manufacture and sale of data storage appliances and
servers, the sale of software services, application development, network
integrated technology, and third party hardware sales. We believe that the key
factors to our continued growth and profitability include the
following:




•
            Continued focus on the GIS market
      and expanding our channels of distribution with OEM
      partners


•
            Continued investment in product
      development and research
efforts


•
            Raising approximately $3 million
      of additional working capital to expand our marketing, research and
      development, and restructure our
debt.


•
            Hiring additional qualified,
      technical employees, and


•
            Improving our internal financial
      reporting systems and
processes.





GOING
CONCERN





We have a
history of losses and have incurred net losses of approximately $20.1 million
since inception through September 30, 2008. Our current operations are not an
adequate source of cash to fund future operations. The report of our independent
registered public accounting firm on our consolidated financial statements for
the year ended September 30, 2008 contains an explanatory paragraph regarding
our ability to continue as a going concern based upon our net losses. Our
ability to continue as a going concern is dependent upon our ability to obtain
the necessary financing to meet our obligations and repay our liabilities when
they become due and to generate profitable operations in the future. We plan to
continue to provide for our capital requirements through the sale of equity
securities and debt, however, we have no firm commitments from any third party
to provide this financing and we cannot assure you we will be successful in
raising working capital as needed. There are no assurances that we will have
sufficient funds to execute our business plan, pay our operating expenses and
obligations as they become due or generate positive operating
results.





RESULTS
OF OPERATIONS





FISCAL
YEAR ENDED SEPTEMBER 30, 2008 (“fiscal 2008”) AS COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 2007 (“fiscal 2007”)





The
following table provides an overview of certain key factors of our results of
operations for fiscal year 2008 as compared to fiscal year 2007:




Fiscal
      Year Ended
                  September
      30,
                
                $
                
                %2008
                
                2007
                
                Change
                
                ChangeSales
                
                $
                16,294,423
                
                $
                18,732,069
                
                $
                (2,437,646
                )
                (13
                %)Cost
      of sales
                
                
                14,067,630
                
                
                16,811,274
                
                
                (2,743,644
                )
                (16
                %)Operating
      Expenses:Marketing
      and selling
                
                
                192,595
                
                
                192,816
                
                
                (222
                )
                (0
                %)Depreciation
      and amortization
                
                
                575,499
                
                
                351,400
                
                
                224,099
                
                (64
                %)Research
      and development
                
                
                303,526
                
                
                -
                
                
                303,526
                
                100
                %General
      and administrative
                
                
                6,910,659
                
                
                3,834,829
                
                
                3,075,210
                
                80
                %Total
      operating expenses
                
                
                7,981,659
                
                
                4,379,045
                
                
                3,602,614
                
                82
                %Loss
      from operations
                
                
                (5,754,865
                )
                
                (2,458,250
                )
                
                (3,296,615
                )
                (134
                %)Total
      other income (expense)
                
                
                (655,928
                )
                
                (391,873
                )
                
                (264,055
                )
                (67
                %)Net
      loss
                
                $
                (6,410,793
                )
                $
                (2,850,123
                )
                $
                (3,560,670
                )
                (125
                %)





Other
Key Indicators:


Fiscal
              2008
            
            Fiscal
              2007
            
            %
              ChangeCost
      of sales as a percentage of revenues
            
            86.3%
            
            89.75%
            
            (3.4%
            )Gross
      profit margin
            
            13.7%
            
            10.25%
            
            3.4%General
      and administrative expenses as a percentage of revenues
            
            39.8%
            
            20.47%
            
            (19.4%
            )Total
      operating expenses as a percentage of revenues
            
            46.2%
            
            23.37%
            
            (22.8%
            )





Sales


For
fiscal 2008, we reported sales of $16,294,423 as compared to net revenues of
$18,732,069 for fiscal 2007, a decrease of $2,437,646 or approximately 13%. Of
our total net revenues for fiscal 2008, approximately $14,886,699 is
attributable to third party product sales by our IceWEB Solutions Group,
approximately $982,049 is attributable to our sale of storage products, and
approximately $425,676 is attributable to revenues from our online products and
services. For fiscal 2007, approximately $16,921,721 is attributable to third
party product sales by our IceWEB Solutions Group and approximately $186,625 is
attributable to revenues from our online products and services.


15


The
decrease in fiscal 2008 net revenues from fiscal 2007 is primarily due to a
decrease in our third party product sales through our IceWEB Solutions
Group.





Cost of Sales and
Gross Profit





Our cost
of sales consists primarily of products purchased for resale by our IceWEB
Solutions Group, and the cost of goods to manufacture our storage
products.  For fiscal 2008, cost of sales was $14,067,630, or
approximately 86.3% of revenues, as compared to $16,811,274, or approximately
89.75% of revenues, for fiscal 2007. The decrease in costs of sales as a
percentage of revenue and the corresponding increase in our gross profit margin
for fiscal 2008 as compared to fiscal 2007 was the result of an increase in
higher margin storage sales in fiscal 2008, and improved margins attributable to
our Solutions Group revenues.





Total
Operating Expenses





Our total
operating expenses increased approximately 82% to $7,981,659 for fiscal 2008 as
compared to $4,379,045 for fiscal 2007.  The increase is primarily due
to our acquisition of Inline Corporation in December, 2007.  This
increase includes:





Marketing
and Selling. For the year ended September 30, 2008, marketing and selling costs
were $192,595 as compared to $192,816  for the year ended September
30, 2007, a decrease of $222 or approximately 0.1%.  This decrease was
primarily due to a decrease in online web marketing, advertising and print
advertising during fiscal 2008, offset by increased marketing costs related to
our storage products and the acquisition of Inline Corporation. We anticipate
that our marketing and selling expenses will increase in fiscal 2009 as we
execute on our plan to increase our storage sales.





Depreciation
and amortization expense. For fiscal 2008, depreciation and amortization expense
amounted to $575,499 as compared to $351,400 for fiscal 2007, an increase of
224,099 or 63.8%.  Depreciation expense is provided by use of the
straight-line method over the estimated useful lives of the assets. For fiscal
2008, depreciation expense was $281,355 as compared to $247,226 for fiscal 2007.
The increase in depreciation was attributable to the acquisition in December
2007 of Inline Corporation.





Amortization
expense is related to the customer relationships and software library which are
intangible assets that we generated through our acquisitions Inline Corporation,
DevElements, Inc. and Iplicity, Inc. It also includes the amortization of the
value of the manufacturing GSA schedule which was acquired as part of the Inline
Corporation acquisition and the GSA schedule which was acquired as part of the
True North Solutions Group acquisition. These GSA schedules are being amortized
on a straight-line basis over three years. For fiscal 2008, amortization expense
was $294,144 as compared to $104,174 for fiscal 2007. The increase in
amortization expense of $189,970 is due to the amortization of the intangible
assets acquired as part of the Inline Corporation acquisition.





Research
and development expense. For fiscal 2008, research and development expenses were
$303,526 as compared to $0 for fiscal 2007.  The increase in research
and development expense is related to the acquisition of Inline
Corporation.  We anticipate the spending on research and development
in fiscal 2009 will be approximately $100,000 per quarter.





General
and administrative expense. For fiscal 2008, general and administrative expenses
were $6,745,039 as compared to $3,834,829 for fiscal 2007, an increase of
$2,910,210 or approximately 76%. This increase is primarily attributable to the
acquisition of Inline Corporation in December 2007, which contributed general
and administrative expense of $1,096,655.  For each of fiscal 2008 and
2007, general and administrative expenses consisted of the
following:




2008
                  
                  2007Salaries/benefits
                  
                  $
                  4,544,682
                  
                  $
                  2,561,932Occupancy
                  
                  
                  301,313
                  
                  
                  219,015Professional
      fees
                  
                  
                  93,365
                  
                  
                  195,491Other
                  
                  
                  524,935
                  
                  
                  256,098Consulting
                  
                  
                  197,082
                  
                  
                  172,041Investor
      Relations
                  
                  
                  904,537
                  
                  
                  161,505Travel/Entertainment
                  
                  
                  125,729
                  
                  
                  105,097Internet/Phone
                  
                  
                  93,638
                  
                  
                  75,150Leased
      Equipment
                  
                  
                  66,424
                  
                  
                  48,547Insurance
                  
                  
                  48,768
                  
                  
                  23,607Licenses
                  
                  
                  9,566
                  
                  
                  16,346$
                  6,910,039
                  
                  $
                  3,834,829





16


The
principal changes in fiscal 2008 as compared to fiscal 2007
include:




•
            For fiscal 2008, salaries and
      related taxes and benefits increased $1,982,750 or 77.4% from fiscal 2007.
      The increase was primarily attributable to the acquisition of Inline
      Corporation, which contributed $440,437 in salary and related
      expense.  In addition, the increase was due to an increase in
      the granting of stock options in fiscal 2008 to members of the board of
      directors, executive officers, and employees which was valued using FASB
      123R and resulted in stock-based compensation of $1,988,358 versus the
      same expense in the prior year of $650,555, an increase of
      $1,337,803.  Excluding the impact of FASB 123R expense and the
      acquisition of Inline Corporation, salaries and related taxes and benefits
      increased $204,511.





•
            For fiscal 2008, occupancy
      expense increased $82,298 or 37.6% from fiscal 2007.  The
      increase was due to the acquisition of Inline Corporation, and the rent
      expense associated with their office location.  We expect
      occupancy expense in fiscal 2009 to be substantially reduced as a result
      of consolidating our office locations in August,
    2008.





•
            For fiscal 2008, professional
      fees decreased $102,126 or approximately 52.2% from fiscal 2007. The
      decrease was primarily attributable to a decrease in legal fees incurred
      to settle lawsuits against the Company, which occurred in fiscal
      2007.





•
            For fiscal 2008, other expense
      increased $268,837 or approximately 105% from fiscal 2007. The increase is
      primarily due to the accrued costs to settle potential litigation of
      $165,000, an increase in hosting fees of $29,270, an increase in web
      development expense of $52,125, and property taxes related to the Inline
      office space of $18,169.





•
            For fiscal 2008, consulting
      expense increased by $25,041 or approximately 14.6% from fiscal 2007. The
      increase was primarily due to higher consulting fees related to the
      acquisition of Inline Corporation in December,
  2007.





•
            For fiscal 2008, investor
      relations expense increased $743,032 or approximately 460.1% from fiscal
      2007. The increase was attributable to an increase in general investor
      relations activity as we seek to build awareness of our company with
      financial professionals and individual investors.  $493,850 of
      this expense of the investor relations expense in fiscal 2008 was
      non-cash.  We expect that in fiscal 2009 our investor relations
      activity and related expense will be substantially
      reduced.





•
            For fiscal 2008, travel and
      entertainment expense increased $20,632 or approximately 19.6%. The
      increase was attributable to an increase in general business, sales, and
      travel-related investor relations
  activity.





•
            For fiscal 2008, insurance
      expense increased $25,161 or approximately 106.6%.from fiscal 2007. The
      increase was attributable to higher premiums paid for general business and
      D&O insurance, related primarily to the acquisition of Inline
      Corporation.





LOSS FROM
OPERATIONS





We
reported a loss from operations of $5,754,865 for fiscal 2008 as compared to a
loss from operations of $2,458,250 for fiscal 2007, an increase of $3,296,615 or
approximately 134%. This increase is primarily the result of decreased net
revenues in the fiscal 2008 period, losses incurred related to the acquisition
of Inline Corporation, and non-cash expenses related to FAS123R compensation
expense.





TOTAL
OTHER INCOME (EXPENSES)





Gain
(loss) from sale of assets. During fiscal 2007 we recorded a gain of $153,319 on
the sale of our Integrated Power Solutions and The Seven Corporation
subsidiaries. We did not have comparable transactions in fiscal
2008.





Interest
Expense. For fiscal 2008, interest expense increased $110,778 or approximately
20%. The increase in interest expense is primarily attributable to higher
average outstanding note balances during fiscal 2008, offset by lower deferred
loan fee amortization in fiscal 2008 of $16,251, as compared to deferred loan
fee amortization of $160,000 in fiscal 2007.





NET
LOSS





Our net
loss was $6,410,793 for fiscal 2008 compared to $2,850,123 for fiscal 2007, a
decrease of $3,560,670 or approximately 125%.





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
The following table provides certain selected balance sheet comparisons between
September 30, 2008 and September 30, 2007:


17





September
    30,
                
                September
    30,
                
                $
                
                %2008
                2007
                Change
                ChangeWorking
    Capital
                (5,572,671)
                
                (1,981,325)
                
                (3,591,346)
                
                181.3%Cash
                
                4,780
                
                1,092,470
                
                (1,087,690)
                
                (99.6%)Accounts receivable,
      net
                3,094,110
                
                5,115,428
                
                (2,021,318)
                
                (39.5%)Inventory
                400,312
                
                8,097
                
                392,216
                
                4,844.2%Total current
      assets
                3,575,930
                
                6,243,714
                
                (2,667,784)
                
                (42.7%)Property and equipment,
      net
                1,169,369
                
                344,728
                
                824,641
                
                239.2%Intangibles,
      net
                1,132,612
                
                211,305
                
                921,307
                
                436.0%Total
assets
                5,939,327
                
                6,853,703
                
                (914,376)
                
                (13.3%)Accounts payable and accrued
      liabilities
                7,762,872
                
                5,805,256
                
                1,957,616
                
                33.7%Notes
      payable-current
                1,372,565
                
                2,293,560
                
                (920,995)
                
                (40.2%)Deferred
      revenue
                13,164
                
                10,456
                
                2,709
                
                25.9%Total current
      liabilities
                9,148,601
                
                8,225,039
                
                923,562
                
                11.2%Notes payable-long
      term
                956,519
                
                98,716
                
                857,803
                
                869.0%Total
      liabilities
                10,105,120
                
                8,323,755
                
                1,781,365
                
                21.4%Accumulated
      deficit
                (20,131,957)
                
                (13,721,164)
                
                (6,410,793)
                
                46.7%Stockholders’
      deficit
                (4,165,793)
                
                (1,470,053)
                
                (2,695,740)
                
                183.4%





At
September 30, 2008, we had a working capital deficit of $(5,572,671) compared to
a working capital deficit of $(1,981,325) at September 30, 2007, an increase of
$3,591,346. The increase is primarily attributable to activity related to our
acquisition of Inline Corporation.  These changes are primarily
attributable to the decreases in accounts receivable of $2,021,318 and cash of
$1,100,220, along with the increase in accounts payable and accrued expenses of
$1,945,086, offset by the decrease in current notes payable of $920,995, the
decrease in notes payable- related party of $115,767, and the increase in
inventory of $392,216.





Net cash
provided by operating activities was $862,691 for fiscal 2008 as compared to net
cash used in operating activities of $1,245,512 for fiscal 2007, an increase of
$2,108,203.  For fiscal 2008, our cash provided by operations of
$862,691 consisted of a net loss of $6,245,793, offset by non-cash items
totaling $7,058,551 including items such as depreciation and amortization of
$575,499, stock based compensation of $1,573,363, the amortization of deferred
compensation of $910,930, and other non-cash items of $16,196. Additionally,
during fiscal 2008 we had an increase in operating liabilities and a decrease in
operating assets which offset our net loss. This change in operating assets and
liabilities primarily consisted of a decrease in accounts receivable of
$2,887,773 attributable to a decrease in fourth quarter sales, an increase in
accounts payable and accrued liabilities of $1,342,947, offset by an increase in
inventory of $2,647.





For fiscal
2007, our cash used in operations of $1,245,512 consisted of a net loss of
$2,850,123, offset by non-cash items totaling $1,149,544 including items such as
depreciation and amortization of $351,400, stock based compensation of
$697,000,  the amortization of deferred compensation of $150,666, and
other non-cash items of $79,000. Additionally, during fiscal 2007 we had an
increase in operating liabilities and an increase in operating assets which
offset our net loss. This change in operating assets and liabilities primarily
consisted of an increase in accounts receivable of $3,946,058 attributable to an
increase in fourth quarter sales, offset by an increase in accounts payable and
accrued expenses of $4,559,078 attributable to the increase in fourth quarter
2007 sales.




Net cash used
in investing activities for fiscal 2008 was $2,111,749 as compared to net cash
used in investing activities of $130,873 for fiscal 2007. During fiscal 2008, we
acquired Inline Corporation and in connection therewith used net cash of
$1,925,128.  Additionally, we used cash of $186,621 for property and
equipment purchases. During fiscal 2007, we
acquired certain assets and in connection therewith used cash of $247,000.
Additionally, we used cash of $21,873 for property and equipment
purchases.
 
 Net cash
provided by financing activities for fiscal 2008 was $161,367 as compared to
$2,035,975 for fiscal 2007, a decrease of $1,874,603.  The primary
reason for the decrease was a decrease of $858,158 in net proceeds from the sale
of equity securities and exercise of warrants and options during fiscal 2008 as
compared to fiscal 2007, as well as the net proceeds from notes payable of
$1,275,218.
 
 At
September 30, 2008 we had an accumulated deficit of $20,131,957 and the report
from our independent registered public accounting firm on our audited financial
statements at September 30, 2008 contained an explanatory paragraph regarding
doubt as to our ability to continue as a going concern as a result of our net
losses in operations. In spite of our revenues, there is no assurance that we
will be able to maintain or increase our revenues in fiscal 2009 or that we will
report net income in any future periods.


18




We do not
have any working capital commitments nor do we not presently have any external
sources of working capital. Historically, our revenues have not been sufficient
to fund our operations and we have relied on capital provided through the sale
of equity securities, and various financing arrangements and loans from related
parties. At September 30, 2008 we had cash on hand of $4,780.  In
addition to the cash necessary to fund our operating losses, research and
development, marketing and general growth, we will need cash to satisfy certain
obligations.  In fiscal 2006, we entered into a receivable factoring
agreement with Sand Hill Finance, LLC under which we can sell certain accounts
receivable to the lender on a full recourse basis at 80% of the face amount of
the receivable up to an aggregate of $1.8 million. We agreed to pay Sand Hill
Finance, LLC an annual commitment fee of $10,000 and a monthly finance fee of 2%
of the average daily balance under the line. We granted Sand Hill Finance, LLC a
blanket security interest in our assets and agreed to refrain from certain
actions while the line is outstanding.  This financing agreement was
amended in fiscal 2008 to increase the line amount to $2,750,000, and to add an
eighteen month term loan of $1,000,000 with an interest rate of 24% per
annum.  As of September 30, 2008, we had $1,581,148 available under
the line of credit facility.  Also, in July 2006, we entered into what
is in essence a sale and leaseback agreement with respect to certain computer
and office equipment. At September 30, 2008, amount due under this equipment
financing arrangement amounted to $91,807.





Our
working capital needs in future periods depend primarily on the rate at which we
can increase our revenues while controlling our expenses and decreasing the use
of cash to fund operations. Additional capital may be needed to fund
acquisitions of additional companies or assets, although we are not a party to
any pending agreements at this time and, accordingly, cannot estimate the amount
of capital which may be necessary, if any, for acquisitions.





As long
as our cash flow from operations remains insufficient to completely fund
operations, we will continue depleting our financial resources and seeking
additional capital through equity and/or debt financing. In March 2005 we sold
shares of our Series A Convertible Preferred Stock and in December 2005 we sold
shares of our Series B Convertible Preferred Stock to the same purchaser. The
series A Convertible Preferred Stock has been converted into Common Stock, and
there are no remaining outstanding shares of Series A Preferred
Stock.  The designation of the Series B Preferred Stock included a
restriction that so long as the shares are outstanding, we cannot sell or issue
any common stock, rights to subscribe for shares of common stock or securities
which are convertible or exercisable into shares of common stock at an effective
purchase price of less than the then conversion value which is presently $0.2727
for the Series B Convertible Preferred Stock. Under the terms of the Series B
Convertible Preferred Stock transaction, we also agreed not to issue any
convertible debt or preferred stock. The terms of our sales of our Series B
Convertible Preferred Stock to Barron Partners contain restrictions on the types
of financing transactions we can enter into while those securities are
outstanding which may adversely affect our ability to raise capital in equity or
debt transactions.  In addition, under the terms of the financing
agreement with Sand Hill Finance, LLC we agreed not to incur any additional
indebtedness other than trade credit in the ordinary course of business. These
covenants may also limit our ability to raise capital in future periods. There
can be no assurance that acceptable financing can be obtained on suitable terms,
if at all.  Our ability to continue our existing operations and to
fund our working capital needs will suffer if we are unable to raise the
additional funds on acceptable terms which will have the effect of adversely
affecting our ongoing operations and limiting our ability to increase our
revenues and maintain profitable operations in the future. If we are unable to
secure the necessary additional working capital as needed, we may be forced to
curtail some or all of our operations.


CRITICAL
ACCOUNTING POLICIES





Financial
Reporting Release No. 60, which was released by the U.S. Securities and Exchange
Commission, encourages all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
Our consolidated financial statements include a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. Management believes the following critical accounting
policies affect the significant judgments and estimates used in the preparation
of the financial statements.





Use of
Estimates - Management’s Discussion and Analysis or Plan of Operations is based
upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to allowances for doubtful accounts
receivable, the carrying value of property and equipment, intangible assets, and
long-lived assets, and the value of stock-option based compensation. Management
bases these estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis of making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.





Revenue
Recognition - We follow the guidance of the Securities and Exchange Commission’s
Staff Accounting Bulletin 104 for revenue recognition. In general, we record
revenue when persuasive evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the sales price to the customer is
fixed or determinable, and collectability is reasonably assured. The following
policies reflect specific criteria for the various revenues streams of the
Company:





Revenues
from sales of products are generally recognized when products are shipped unless
we have obligations remaining under sales or licensing agreements, in which case
revenue is either deferred until all obligations are satisfied or recognized
ratably over the term of the contract.





Revenue
from services is recorded as it is earned. Commissions earned on third party
sales are recorded in the month in which contracts are awarded. Customers are
generally billed every two weeks based on the units of production for the
project. Each project has an estimated total which is based on the estimated
units of production and agreed upon billing rates. Amounts billed in advance of
services being provided are recorded as deferred revenues and recognized in the
consolidated statement of operations as services are provided.





Accounting
for Stock Based Compensation - Effective October 1, 2005, we adopted Statement
of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment
(“SFAS No. 123R”). SFAS No. 123R establishes the financial accounting and
reporting standards for stock-based compensation plans. As required by SFAS No.
123R, we recognize the cost resulting from all stock-based payment transactions
including shares issued under our stock option plans in the financial
statements.


19


RECENT
ACCOUNTING PRONOUNCEMENTS





The
Financial Accounting Standards Board has recently issued several new accounting
pronouncements:





In
July 2006, the FASB issued FASB Interpretation No. 48 – Accounting for Uncertainty in Income
Taxes– an interpretation of FASB Statement No. 109. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on accounting for de-recognition,
interest, penalties, accounting in interim periods, disclosure and
classification of matters related to uncertainty in income taxes, and
transitional requirements upon adoption of FIN 48. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is in the
process of evaluating the impact of FIN 48 on its Condensed Consolidated
Financial Statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115.SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value, with unrealized gains and losses related
to these financial instruments reported in earnings at each subsequent reporting
date. This Statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. The Company is in the process
of evaluating the impact of SFAS No. 159 on its Condensed Consolidated Financial
Statements.





In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 108, Financial Statements — Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 provides interpretive guidance on how the effects
of prior-year uncorrected misstatements should be considered when quantifying
misstatements in the current year financial statements. SAB No. 108 requires
registrants to quantify misstatements using both the income statement and
balance sheet approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB No. 108 is effective for years ending after
November 15, 2006, and the impact of adoption had no effect on the Company’s
consolidated financial statements.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.




20




ITEM 7. FINANCIAL
STATEMENTS


IceWEB,
Inc. and Subsidiaries


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





CONTENTS




Report
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Financial Statements:Consolidated
      Balance Sheet
            F-3Consolidated
      Statements of Operations
            F-4Consolidated
      Statement of Changes in Stockholders’ Deficit
            F-5Consolidated
      Statements of Cash Flows
            F-6Notes
      to Consolidated Financial Statements
            F-7
      to F-28





F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
the Board of Directors


IceWEB,
Inc.





We have
audited the accompanying consolidated balance sheet of IceWEB, Inc. and
Subsidiaries as of September 30, 2008 and the related consolidated statements of
operations, changes in stockholders’ deficit and cash flows for the years ended
September 30, 2008 and 2007. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IceWEB, Inc.
and Subsidiaries, as of September 30, 2008 and the consolidated results of their
operations and their cash flows for the years ended September 30, 2008 and 2007,
in conformity with accounting principles generally accepted in the United States
of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company had net losses of $6,245,793 and
$2,850,123 respectively, for the years ended September 30, 2008 and 2007. These
matters raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regards to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





/s/ Sherb
& Co., LLP


Certified
Public Accountants




Boca
Raton, Florida


December
26, 2008


F-2


IceWEB,
Inc. and Subsidiaries


CONSOLIDATED
BALANCE SHEET


September
30, 2008




CURRENT
      ASSETS:Cash
                      
                      $
                      4,780Accounts
      receivable, net of allowance for doubtful accounts of
    $9,000
                      
                      
                      3,094,110Inventory,
      net
                      
                      
                      400,312Other
      current assets
                      
                      
                      21,572Prepaid
      expenses
                      
                      
                      55,1553,575,929OTHER
      ASSETS:Property
      and equipment, net
                      
                      
                      1,169,369Deposits
                      
                      
                      61,418Intangible
      assets, net of accumulated amortization of  $458,318
                      
                      
                      1,132,612Total
      Assets
                      
                      $
                      5,939,328CURRENT
      LIABILITIES:Accounts
      payable and accrued liabilities
                      
                      $
                      7,762,872Notes
      payable
                      
                      
                      1,372,565Deferred
      revenue
                      
                      
                      13,1649,148,601Long-Term
      LiabilitiesNotes
      Payable
                      
                      
                      956,520Total
      Liabilities
                      
                      
                      10,105,121Stockholders’
      DeficitPreferred
      stock ($.001 par value; 10,000,000 shares authorized) Series A convertible
      preferred stock ($.001 par value; 0 shares issued and
      outstanding)
                      
                      
                      -Series
      B convertible preferred stock ($.001 par value; 1,253,334 shares issued
      and outstanding)
                      
                      
                      1,253Common
      stock ($.001 par value; 1,000,000,000 shares authorized; 24,688,088 shares
      issued and 24,425,588 shares outstanding)
                      
                      
                      24,690Additional
      paid in capital
                      
                      
                      15,953,221Accumulated
      deficit
                      
                      
                      (20,131,957
                      )Treasury
      stock, at cost, (162,500 shares)
                      
                      
                      (13,000
                      )Total
      stockholders’ deficit
                      
                      
                      (4,165,793
                      )Total
      Liabilities and stockholders’ deficit
                      
                      $
                      5,939,328





See
accompanying notes to consolidated financial statements


F-3


IceWEB,
Inc. and Subsidiaries


CONSOLIDATED
STATEMENTS OF OPERATIONS




For
      the Year Ended
                  September
      30,2008
                
                
                2007Sales
                
                $
                16,294,423
                
                
                $
                18,732,069Cost
      of sales
                
                
                14,067,629
                
                
                
                16,811,274Gross
      profit
                
                
                2,226,794
                
                
                
                1,920,795Operating
      expenses:Marketing
      and selling
                
                
                192,595
                
                
                
                192,816Depreciation
      and amortization expense
                
                
                575,499
                
                
                
                351,400Research
      and development
                
                
                303,526
                
                
                
                -General
      and administrative
                
                
                6,910,039
                
                
                
                3,834,829Total
      operating expenses
                
                
                7,981,659
                
                
                
                4,379,045Loss
      from operations
                
                
                (5,754,865
                )
                
                
                (2,458,250
                )Other
      income (expenses):Gain/(loss)
      from sale of assets
                
                
                -
                
                
                
                153,319Interest
      income
                
                
                3,444
                
                
                
                3,402Interest
      expense
                
                
                (659,372
                )
                
                
                (548,594
                )Total
      other income (expenses)
                
                
                (655,928
                )
                
                
                (391,873
                )Net
      loss
                
                $
                (6,410,793
                )
                
                $
                (2,850,123
                )Basic
      and diluted loss per common share
                
                $
                (0.35
                )
                
                $
                (0.27
                )Weighted
      average common shares outstanding basic and diluted
                
                
                18,321,369
                
                
                
                10,393,830





See
accompanying notes to consolidated financial statements





F-4








IceWEB,
Inc. and Subsidiaries


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT


For
the years ended September 30, 2008 and 2007




AdditionalSeries
      A Preferred Stock
                                                                                                                                              
                                                                                                                                              Series B
      Preferred Stock
                                                                                                                                              
                                                                                                                                              Common
      Stock
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              Paid-In
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              Accumulated
                                                                                                                                              
                                                                                                                                              Treasury
      StockShares
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              Amount
                                                                                                                                              
                                                                                                                                              Shares
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              Amount
                                                                                                                                              
                                                                                                                                              Shares
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              Amount
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              Capital
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              Deficit
                                                                                                                                              
                                                                                                                                              Share
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              Amount
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              TotalBalance
      at September 30, 2006
                                                                                                                                              
                                                                                                                                              1,256,667
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,257
                                                                                                                                              
                                                                                                                                              1,833,334
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,833
                                                                                                                                              
                                                                                                                                              8,857,909
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              8,859
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              9,801,411
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (10,871,041
                                                                                                                                              )
                                                                                                                                              (162,500
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (13,000
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (1,070,681
                                                                                                                                              )Amortization
      of deferred compensation
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              347,585
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              347,585Cancellation
      of marketing agreement
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              (350,000
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (350
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (349,650
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (350,000
                                                                                                                                              )Issuance
      of common stock for cash
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              350,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              350
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              174,650
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              175,000Common
      stock issued for exercise of options
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              967,800
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              968
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              490,390
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              491,358Common
      stock issued for exercise of warrants
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              1,350,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,350
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              489,650
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              491,000Common
      stock issued in connection with notes payable
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              339,606
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              340
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              169,463
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              169,803Conversion
      of series A preferred to common stock
                                                                                                                                              
                                                                                                                                              (800,000
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (800
                                                                                                                                              )
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              800,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              800
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —Common
      stock issued for services
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              25,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              25
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              15,475
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              15,500Grant
      of stock options to employees
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              650,555
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              650,555Issuance
      of common stock in exchange for extinguishment of debt
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              700,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              700
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              428,300
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              429,000Issuance
      of warrants
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              30,950
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              30,950Net
      loss for the year
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (2,850,123
                                                                                                                                              )
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (2,850,123
                                                                                                                                              )Balance
      at September 30, 2007
                                                                                                                                              
                                                                                                                                              456,667
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              457
                                                                                                                                              
                                                                                                                                              1,833,334
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              1,833
                                                                                                                                              
                                                                                                                                              13,040,315
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              13,042
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              12,248,779
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              (13,721,164
                                                                                                                                              )
                                                                                                                                              (162,500
                                                                                                                                              )
                                                                                                                                              $
                                                                                                                                              (13,000
                                                                                                                                              )
                                                                                                                                              $
                                                                                                                                              (1,470,053
                                                                                                                                              )Amortization
      of deferred compensation
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              910,930
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              910,930Issuance
      of common stock for cash
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              400,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              400
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              79,600
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              80,000Common
      stock issued for exercise of options
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              1,780,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,780
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              217,420
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              219,200Common
      stock issued for exercise of warrants
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              2,625,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              2,625
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (2,625)
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —Common
      stock issued in connection with notes payable
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              266,500
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              267
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              40,860
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              41,127Conversion
      of series A preferred to common stock
                                                                                                                                              
                                                                                                                                              (456,667
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (457
                                                                                                                                              )
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              456,667
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              457
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —Conversion
      of series B preferred to common stock
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (580,000
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (580
                                                                                                                                              )
                                                                                                                                              580,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              580
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —Common
      stock issued for services
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              1,086,250
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,086
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              495,577
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              496,663Common
      stock issued to employees
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              2,950,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              2,950
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,073,750
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,076,700Common
      stock issued in connection with acquisition
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              1,503,356
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,503
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              875,343
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              876,846Issuance
      of warrants
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              13,587
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              13,587Net
      loss for the year
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (6,410,793
                                                                                                                                              )
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (6,410,793
                                                                                                                                              )Balance
      at September 30, 2008
                                                                                                                                              
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              —
                                                                                                                                              
                                                                                                                                              1,253,334
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              1,253
                                                                                                                                              
                                                                                                                                              24,688,088
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              24,690
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              15,953,221
                                                                                                                                              
                                                                                                                                              $
                                                                                                                                              (20,131,957
                                                                                                                                              )
                                                                                                                                              (162,500
                                                                                                                                              )
                                                                                                                                              $
                                                                                                                                              (13,000
                                                                                                                                              )
                                                                                                                                              $
                                                                                                                                              (4,165,793
                                                                                                                                              )





See
accompanying notes to consolidated financial statements


F-5








IceWEB,
Inc. and Subsidiaries


CONSOLIDATED
STATEMENTS OF CASH FLOWS







For
      the Year Ended
                  September
      30,2008
                
                
                2007Net
      loss
                
                $
                (6,410,793
                )
                
                $
                (2,850,123
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                
                
                575,498
                
                
                
                351,400Share-based
      compensation
                
                
                1,573,363
                
                
                
                697,005Gain
      on conversion of note payable to equity
                
                
                —
                
                
                
                (17,875
                )Amortization
      of deferred compensation
                
                
                910,930
                
                
                
                150,666Interest
      expense from stock issued for note payable
                
                
                —
                
                
                
                96,875Gain
      on sales of net assets
                
                
                —
                
                
                
                (153,319
                )Cancellation
      of marketing agreement
                
                
                —
                
                
                
                (153,082
                )Amortization
      of deferred finance costs
                
                
                16,196
                
                
                
                159,999Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                
                
                2,887,773
                
                
                
                (3,946,058
                )Prepaid
      expense
                
                
                (27,436
                )
                
                
                (18,048
                )Inventory
                
                
                2,647
                
                
                
                (8,096
                )Deposits
                
                
                (11,143
                )
                
                
                (860
                )Increase
      (decrease) in:Accounts
      payable and accrued liabilities
                
                
                1,342,947
                
                
                
                4,559,079Accrued
      interest payable
                
                
                —
                
                
                
                (84,375
                )Deferred
      revenue
                
                
                2,709
                
                
                
                (28,700
                )NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
                
                
                862,691
                
                
                
                (1,245,512
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
                
                
                (186,621
                )
                
                
                (21,873
                )Net
      cash received from sale of net assets
                
                
                —
                
                
                
                138,000Cash
      used in acquisitions, net
                
                
                (1,925,128
                )
                
                
                (247,000
                )NET
      CASH USED IN INVESTING ACTIVITIES
                
                
                (2,111,749
                )
                
                
                (130,873
                )


(continued)


F-6





IceWEB,
Inc. and Subsidiaries


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(continued)




For
      the Year Ended
                  September
      30,2008
                
                
                2007CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayment
      of equipment financing
                
                
                (98,887
                )
                
                
                (77,251
                )Proceeds
      from notes payable - related party
                
                
                157,425
                
                
                
                (23,039
                )Repayment
      of notes payable - related party
                
                
                (124,109
                )
                
                
                (235,791
                )Net
      proceeds from related party advances
                
                
                —
                
                
                
                11,737Proceeds
      from notes payable
                
                
                6,519,365
                
                
                
                2,247,477Payments
      on notes payable
                
                
                (6,591,626
                )
                
                
                (1,044,521
                )Proceeds
      from common stock issued for cash
                
                
                80,000
                
                
                
                175,000Proceeds
      from exercise of common stock options
                
                
                219,200
                
                
                
                491,358Proceeds
      from exercise of common stock warrants
                
                
                —
                
                
                
                491,000NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                161,368
                
                
                
                2,035,970NET
      INCREASE/(DECREASE) IN CASH
                
                
                (1,087,690
                )
                
                
                659,585CASH
      - beginning of period
                
                
                1,092,470
                
                
                
                432,885CASH
      - end of period
                
                $
                4,780
                
                
                $
                1,092,470Supplemental
      disclosure of cash flow information:Cash
      paid for :Interest
                
                $
                659,372
                
                
                $
                376,095Income
      taxes
                
                $
                —
                
                
                $
                —NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Common
      stock issued for debt and interest
                
                $
                41,127
                
                
                $
                616,678Warrant
      granted for debt discount and debt issuance costs
                
                $
                13,587
                
                
                $
                —Preferred
      stock issued for liability
                
                $
                —
                
                
                $
                —Common
      stock issued in connection with acquisition
                
                $
                876,846
                
                
                $
                —Acquisition
      details:Fair
      value of assets acquired
                
                $
                2,688,795
                
                
                $
                154,521Intangible
      assets
                
                $
                1,215,450
                
                
                $
                275,479Liabilities
      assumed
                
                $
                (614,668
                )
                
                $
                —Common
      stock issued in connection with acquisition
                
                $
                876,846
                
                
                $
                —





See
accompanying notes to consolidated financial statements


F-6B


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





NOTE 1 -
ORGANIZATION





IceWEB,
Inc. (the “Company”) began trading publicly in April 2002. Utilizing resources
gained through acquisitions, the Company has developed two applications that are
now available to the general public, IceWEB Vista which is a website portal
development and management application, and IceMAIL which is a hosted Microsoft
Exchange application service. In addition to the new application services, the
Company also continues to provide customers with systems integration, network
consulting, and customized software application services.





Complementing
the online service offerings is the Company’s IceWEB Solutions Group. The IceWEB
Solutions Group focuses on providing computer network security products such as
access control, content filtering, email security, intrusion detection, and the
latest layer 7 firewall technology. IceWEB has certified technical and sales
personnel who continuously build and maintain excellent relationships with key
manufacturers of network security solutions. The combination of its vendor
partners/manufacturers, customers, and Government contracting vehicles enables
IceWEB to be successful in providing the industry’s best network security
solutions to the Federal Government and commercial integrators who service the
Government.





NOTE 2 -
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Principles
of Consolidation





The
accompanying consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles and include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.





Reclassifications





Certain
reclassifications have been made to previously reported amounts to conform to
2007 amounts. The reclassifications had no impact on previously reported results
of operations or shareholders’ deficit.





Going
Concern





The
Company’s auditors stated in their report on the consolidated financial
statements of the Company for the years ended September 30, 2008 and 2007 that
the Company is dependent on outside financing and has had losses since inception
that raise doubt about its ability to continue as a going concern. In addition
and as discussed further in Note 6, the Company is not in compliance with debt
covenants under its Financing Agreements with Sand Hills Finance LLC. For the
year ended September 30, 2008, the Company incurred a net loss of
$6,410,793.  The consolidated financial statements do not include any
adjustments related to the recovery and classification of recorded assets, or
the amounts and classification of liabilities that might be necessary in the
event the Company cannot continue in existence.





Management
has established plans intended to increase the sales of the Company’s products
and services. Management intends to seek new capital from new equity securities
offerings to provide funds needed to increase liquidity, fund growth, and
implement its business plan. However, no assurances can be given that the
Company will be able to raise any additional funds.





Fair
value of financial instruments


The
carrying amounts of financial instruments, including cash, accounts receivable,
accounts payable and accrued liabilities approximated fair value as of September
30, 2008, because of the relatively short-term maturity of these instruments and
their market interest rates.


F-7


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





Use
of Estimates





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 balance sheets and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Significant
estimates in 2008 and 2007 include the allowance for doubtful accounts, the
valuation of stock-based compensation, and the useful life of property and
equipment and intangible assets.





Cash
and Cash Equivalents





The
Company considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.





Accounts
Receivable





Accounts
receivable consists of normal trade receivables. The Company recorded a bad debt
allowance of $9,000 as of September 30, 2008. Management performs ongoing
evaluations of its accounts receivable. Management believes that all remaining
receivables are fully collectable. Bad debt expense amounted to $0 and $0 for
the years ended September 30, 2008 and 2007, respectively.





Inventory





Inventory
is valued at the lower of cost or market, on a first-in, first-out (FIFO) basis
and includes primarily finished goods.





Property
and Equipment





Property
and equipment is stated at cost, net of accumulated depreciation. Depreciation
is provided by using the straight-line method over the estimated useful lives of
the related assets.





Property
and equipment also includes costs incurred in connection with development on the
Company’s software developed for internal use and website costs. The Company
capitalized certain costs valued in connection with developing or obtaining
internal use software in accordance with American Institute of Certified Public
Accountants Statement of Position 98-1, “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use”. These costs, which consist of
direct technology labor costs, are capitalized and amortized using the
straight-line method over expected useful lives of three years.


F-8


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





Intangible
Assets





Intangible
assets, net consists of the cost of acquired customer relationships. The Company
capitalizes and amortizes the cost of acquired intangible assets over their
estimated useful lives on a straight-line basis. The estimated useful lives of
the Company’s acquired customer relationships is five years.





Long-lived
Assets





In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
reviews the carrying value of intangibles and other long-lived assets for
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets is measured by comparison of its carrying
amount to the undiscounted cash flows that the asset or asset group is expected
to generate. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
property, if any, exceeds its fair market value.





Revenue
Recognition





The
Company follows the guidance of the Securities and Exchange Commission’s Staff
Accounting Bulletin 104 for revenue recognition. In general, the Company records
revenue when persuasive evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the sales price to the customer is
fixed or determinable, and collectability is reasonably assured. The following
policies reflect specific criteria for the various revenues streams of the
Company:





Revenues
from sales of products are generally recognized when products are shipped unless
the Company has obligations remaining under sales or licensing agreements, in
which case revenue is either deferred until all obligations are satisfied or
recognized ratably over the term of the contract.





Revenue
from services is recorded as it is earned. Commissions earned on third party
sales are recorded in the month in which contracts are awarded. Customers are
generally billed every two weeks based on the units of production for the
project. Each project has an estimated total which is based on the estimated
units of production and agreed upon billing rates. Amounts billed in advance of
services being provided are recorded as deferred revenues and recognized in the
consolidated statement of operations as services are provided.





Earnings
per Share





The
Company computes earnings per share in accordance with Statement of Accounting
Standards No. 128, “Earnings per Share (“SFAS No. 128”). Under the provisions of
SFAS No. 128, basic earnings per share is computed by dividing the net income
(loss) for the period by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares consist of the common shares issuable upon
the exercise of stock options and warrants (using the treasury stock method) and
upon the conversion of convertible preferred stock (using the if-converted
method). Potentially dilutive common shares are excluded from the calculation if
their effect is antidilutive.  At September 30, 2008, there were
options and warrants to purchase 6,883,827 shares of common stock and 1,253,334
shares issuable upon conversion of Series B preferred stock which could
potentially dilute future earnings per share.


F-9


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





Stock-Based
Compensation





As more
fully described in Note 12, the Company has a stock option plan that provides
for non-qualified and incentive stock options to be issued to directors,
officers, employees and consultants (the 2000 Management and Director Equity
Incentive and Compensation Plan (the “Plan”).





Prior to
October 1, 2005, the Company accounted for stock options issued under the Plan
under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, as permitted by FASB Statement
No. 123, Accounting for
Stock-Based Compensation. No stock-based
compensation cost related to employee stock options was recognized in the
Consolidated Statement of Operations for the year ended September 30, 2005 as
all options granted under the Plan had an exercise price equal to the market
value of the underlying common stock on the date of grant.





Effective
October 1, 2005, the Company adopted the fair value recognition provisions of
FASB Statement No. 123(R), Share-Based Payment, using
the modified-prospective-transition method. Under that transition method,
compensation cost recognized in the year ended September 30, 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of September 30, 2005, based on the grant date fair value estimated in
accordance with the original provisions of Statement 123, and (b) compensation
cost for all share-based payments granted subsequent to October 1, 2005, based
on the grant-date fair value estimated in accordance with the provisions of
Statement 123(R). Financial results for the year ended September 30, 2005 have
not been restated.





Recent
Accounting Pronouncements





The
Financial Accounting Standards Board has recently issued several new accounting
pronouncements:





In
July 2006, the FASB issued FASB Interpretation No. 48 – Accounting for Uncertainty in Income
Taxes– an interpretation of FASB Statement No. 109. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on accounting for de-recognition,
interest, penalties, accounting in interim periods, disclosure and
classification of matters related to uncertainty in income taxes, and
transitional requirements upon adoption of FIN 48. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is in the
process of evaluating the impact of FIN 48 on its Consolidated Financial
Statements.





In
September 2006, the FASB issued SFAS No. 157, (“SFAS No. 157”),
“Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practice. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. However, the FASB did provide a one year deferral for
the implementation of SFAS No. 157 for other nonfinancial assets and
liabilities. The Company is currently evaluating the impact of this Statement on
its consolidated financial statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115.SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value, with unrealized gains and losses related
to these financial instruments reported in earnings at each subsequent reporting
date. This Statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. The Company is in the process
of evaluating the impact of SFAS No. 159 on its Condensed Consolidated Financial
Statements.


F-10


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 108, Financial Statements — Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 provides interpretive guidance on how the effects
of prior-year uncorrected misstatements should be considered when quantifying
misstatements in the current year financial statements. SAB No. 108 requires
registrants to quantify misstatements using both the income statement and
balance sheet approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB No. 108 is effective for years ending after
November 15, 2006, and the impact of adoption had no effect on the Company’s
consolidated financial statements.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.





NOTE 3 -
PROPERTY AND EQUIPMENT





At
September 30, 2008, property and equipment consisted of the
following:




Estimated
                    LifeOffice
      equipment
                  
                  5
      years
                  
                  $
                  628,080Computer
      software
                  
                  3
      years
                  
                  
                  713,876Vehicles
                  
                  3
      years
                  
                  
                  17,330Furniture
      and fixtures
                  
                  5
      years
                  
                  
                  261,385Leasehold
      improvements
                  
                  5
      years
                  
                  
                  999,0502,619,721Less:
      accumulated depreciation
                  
                  
                  
                  
                  (1,450,352
                  )$
                  1,169,369





Depreciation
expense for the years ended September 30, 2008 and 2007 was $281,355 and
$247,226 respectively.





NOTE 4 -
INTANGIBLE ASSETS





At
September 30, 2008, intangible assets consist of the following:




Acquired
      software library
                                
                                $
                                100,000GSA
      Schedule
                                
                                
                                275,479Manufacturing
      GSA Schedule
                                
                                
                                750,000Customer
      relationships  intangible
                                
                                
                                465,4511,590,930Less:
      accumulated amortization
                                
                                
                                (458,318
                                )$
                                1,132,612




Amortization
expense amounted to $294,144 and $104,174 for the years ended September 30, 2008
and 2007, respectively.


F-11


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





Amortization
expense subsequent to the year ended September 30, 2008 is as
follows:




Years
      ending September 30:2009
                  
                  $
                  334,9172010
                  
                  
                  250,7422011
                  
                  
                  243,0902012
                  
                  
                  243,0902013
                  
                  
                  60,773$
                  1,132,612





NOTE 5 -
RELATED PARTY TRANSACTIONS





Advances
from Related Party





The
Company’s Chief Executive Officer provides advances to the Company from
time-to-time for operating expenses. These advances are short-term in nature and
are non-interest bearing. At September 30, 2008, amounts due to this related
party amounted to $0.





NOTE 6 -
NOTES PAYABLE





Sand Hill Finance,
LLC





On
December 19, 2005, the Company entered into a Financing Agreement with Sand Hill
Finance, LLC pursuant to which, together with related amendments, the Company
may borrow up to 80% on the Company’s accounts receivable balances up to a
maximum of $1,800,000.  In conjunction with the acquisition of Inline
Corporation in December, 2007, the lending limit on the credit facility was
increased to $2,750,000.  In addition, the Company and Sand Hill
Finance, LLC entered into a 36 month term note agreement in the amount of
$1,000,000. Amounts borrowed under the Financing Agreement are secured by a
first security interest in substantially all of the Company’s
assets.  At September 30, 2008, the principal amount due under the
Financing Agreement amounted to $1,168,852.  The principal amount due
under the term note amounted to $919,340.  These amounts are included
in the notes payable balance of $2,293,560 on the balance sheet at September 30,
2008.




Interest
is payable at a rate of 2% per month on the average loan balance outstanding
during the year, equal to an annual interest of approximately 24% per year. The
Company also agreed to pay an upfront commitment fee of 1% of the credit line
upon signing the Financing Agreement, half of which was due and paid upon
signing (amounting to $9,000) and half of which is due on the first anniversary
of the Financing Agreement. In addition, the Company is obligated to pay a
commitment fee of 1% of the credit limit annually, such amounts are payable on
the anniversary of the agreement.





In
connection with the Financing Agreement, the Company issued Sand Hill Finance,
LLC, a seven-year common stock purchase warrant to purchase 25,000 shares of our
common stock at an exercise price of $1.00 per share. The warrant contains a
cashless exercise provision which means that at the option of the holder, the
warrant is convertible into a number of shares of our common stock as determined
by dividing the aggregate fair market value of the Company’s common stock minus
the aggregate exercise price of the warrant by the fair market value of one
share of common stock. The number of shares issuable upon the exercise of the
warrant and the exercise price are subject to adjustment in the event of stock
dividends, stock splits and reclassifications. The fair value of the warrant of
$16,250 has been recorded as an addition to paid-in capital and interest expense
during the year ended September 30, 2007.





In
connection with the term loan, the Company issued Sand Hill Finance, LLC a
seven-year common stock purchase warrant to purchase 120,000 shares of our
common stock at an exercise prices $1.00 per share.  The warrant
contains a cashless exercise provision which means that at the option of the
holder, the warrant is convertible into a number of shares of our common stock
as determined by dividing the aggregate fair market value of the Company’s
common stock minus the aggregate exercise price of the warrant by the fair
market value of one share of common stock. The number of shares issuable upon
the exercise of the warrant and the exercise price are subject to adjustment in
the event of stock dividends, stock splits and reclassifications. The fair value
of the warrant of $13,589 has been recorded as an addition to paid-in capital
and deferred finance costs during the year ended September 30,
2008.





The
Financing Agreement has a term of one year, subject to mutual extension by both
parties. As a result, the balance due to Sand Hill Finance, LLC is classified as
a current liability on the accompanying consolidated balance sheet.





The terms
of the Financing Agreement also restrict the Company from undertaking certain
transactions without the written consent of the creditor including (i) permit or
suffer a change in control involving 20% of its securities, (ii) acquire assets,
except in the ordinary course of business, involving payment of $100,000 or
more, (iii) sell, lease, or transfer any of its property except for sales of
inventory and equipment in the ordinary course of business, (iv) transfer, sell
or license any intellectual property, (v) declare or pay a dividend on stock,
except payable in the form of stock dividends (vi) incur any indebtedness other
than trade credit in the ordinary course of business and (vii) permit any lien
or security interest to attach to any collateral.





Third
party guarantee - In November 2006, the Company sold its interest in one of its
subsidiaries (Integrated Power Solutions, Inc. or IPS) to a shareholder of the
Company and related party. IPS is a party to the Financing Agreement and can
borrow against receivables transferred to Sand Hill Finance, LLC under the terms
of the Financing Agreement. The Company remains liable for any such amounts
borrowed under the Financing Agreement by IPS which is no longer under the
Company’s control. To date, IPS has not borrowed any funds under the Financing
Agreement.





In
August, 2008, the Company borrowed $187,500 from an accredited
investor.  The note bears interest at 16% and had a term of four
months, and can be repaid in either cash or IceWEB common stock.  As
of September 30, 2008 the Company had repaid $41,126 on the note through the
sale of 266,500 shares of Iceweb common stock.  At September 30, 2008
the outstanding balance on this note was $149,085.


F-12


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





NOTE 7 -
EQUIPMENT FINANCING PAYABLE





On July
6, 2006, the Company entered into what is in essence a sale and leaseback
agreement with respect to certain computer and office equipment. The Company
received gross proceeds of $300,000 from the sale of the equipment to a third
party. As part of the same transaction, the Company entered into an agreement to
lease the equipment back from the third party for 36 monthly rent payments of
$10,398 until August 2009. The Company is accounting for this equipment
financing arrangement as a capital lease. In connection with the agreement, the
Company made an initial security deposit of $30,000 and is included in deposits
in the balance sheet at September 30, 2008. The equipment had a net book value
of $37,846 on the date of the transaction. In connection with the financing, the
Company did not record any gain or loss. Imputed interest on this financing is
20% per annum. At September 30, 2008, the amount due under this equipment
financing arrangement amounted to $91,807, which is reflected as a current
liability on the accompanying balance sheet.





NOTE 8 -
COMMITMENTS





The
Company leases office space in Dulles, Virginia under a seven-year operating
lease that expires on December 31, 2014.  The office lease agreement
has certain escalation clauses and renewal options. Additionally, the Company
has lease agreements for computer equipment an office copy and fax machine.
Future minimum rental payments required under these operating leases are as
follows:




Years
      ending September 30:2009
                  
                  $
                  147,3722010
                  
                  
                  147,3722011
                  
                  
                  147,3722012
                  
                  
                  147,3722013
      and thereafter
                  
                  
                  294,744$
                  884,232





Rent
expense was $326,932 and $199,054 for the years ended September 30, 2008 and
2007.








NOTE 9 -
INCOME TAXES





The
Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” “SFAS 109”. SFAS 109 requires
the recognition of deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.





As of
September 30, 2008 the Company had unused net operating loss carry forwards of
approximately $12,900,000 available to reduce its future federal taxable income.
Net operating loss carryforwards expire between fiscal years ending 2021 and
2028. Internal Revenue Code Section 382 places a limitation on the amount of
taxable income that can be offset by carryforwards after a change in control
(generally a greater than 50% change in ownership).




Deferred
      Tax Assets:Tax
      benefit of net operating loss carry forward
                        
                        $
                        4,865,000Grant
      of stock options/restricted stock to employees
                        
                        
                        838,000Unpaid
      accrued salaries
                        
                        
                        20,000Amortization
      of leasehold improvements
                        
                        
                        49,000Amortization
      of intangibles
                        
                        
                        97,0005,869,000Less:
      valuation allowance
                        
                        
                        (5,869,000
                        )Net
      deferred tax assets
                        
                        $
                        —





F-13


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





The table
below summarizes the differences between the Company’s effective tax rate and
the statutory federal rate as follows for fiscal 2008 and 2007. The effective
tax rate is 34% Federal and 3.6% State after Federal tax benefit:




2008
              
              2007Computed
      “expected” tax benefit
              
              
              (34.0
              )%
              
              (34.0
              )%State
      income taxes
              
              
              (3.6
              )%
              
              (3.6
              )%Other
      permanent differences
              
              
              —
              
              
              11.6
              %Change
      in valuation allowance
              
              
              37.6
              %
              
              26.0
              %Effective
      tax rate
              
              
              0.0
              %
              
              0.0
              %





The
valuation allowance at September 30, 2008 was $5,869,000. The increase during
fiscal 2008 was approximately $2,235,000.





NOTE 10 -
CONCENTRATION OF CREDIT RISK





Bank
Balances





The
Company maintains its cash bank deposits at various financial institutions
which, at times, may exceed federally insured limits. Accounts are guaranteed by
the Federal Deposit Insurance Corporation (FDIC) up to
$100,000.  During October 2008, the FDIC increased the insured amounts
at participating financial institutions to $250,000 and provided unlimited
coverage for non-interest bearing transaction accounts.  At September
30, 2008 the Company had no amounts in excess of FDIC insured limits. The
Company has not experienced any losses in such accounts.





Major
Customers





Sales to
ten customers represented approximately 63% of total sales for the year ended
September 30, 2008. As of September 30, 2008 approximately 94% of the Company’s
accounts receivable was due from one customer. Sales to twelve customers
represented approximately 50% in 2007.





NOTE 11 -
STOCKHOLDERS’ DEFICIT





Preferred
Stock





The
Company’s authorized capital includes 10,000,000 shares of blank check preferred
stock, par value $0.001 per share, of which 1,666,667 shares have previously
been designated as Series A Convertible Preferred Stock. The Company’s Board of
Directors, without further stockholder approval, may issue our preferred stock
in one or more series from time to time and fix or alter the designations,
relative rights, priorities, preferences, qualifications, limitations and
restrictions of the shares of each series. In September 2005, the Company’s
Board of Directors authorized a series of 833,334 shares of blank check
preferred stock be designated as Series B Convertible Preferred Stock and on
September 28, 2005, the Company filed a Certificate of Designations of
Preferences, Rights and Limitations of Series B Preferred with the Secretary of
State of Delaware. On December 29, 2005, the Company filed an Amended and
Restated Certificate of Designations of Preferences, Rights and Limitations of
Series B Convertible Preferred Stock increasing the number of shares authorized
under this series to 1,833,334 shares.


F-14


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





A) Series A Convertible
Preferred Stock





The
designations, rights and preferences of the Series A Convertible Preferred Stock
provide:




•
            no dividends are payable on the
      Series A Convertible Preferred Stock. So long as these shares are
      outstanding, the Company cannot pay dividends on its common stock nor can
      it redeem any shares of its common
stock,





•
            the shares of Series A
      Convertible Preferred Stock do not have any voting rights, except as may
      be provided under Delaware
law,





•
            so long as the shares are
      outstanding, the Company cannot change the designations of the Series A
      Convertible Preferred Stock, create a class of securities that in the
      instance of payment of dividends or distribution of assets upon the
      Company’s liquidation ranks senior to or equal with the Series A
      Convertible Preferred Stock or increase the number of authorized shares of
      Series A Convertible Preferred
Stock,





•
            the shares carry a liquidation
      preference of $0.60 per
share,





•
            each share of Series A
      Convertible Preferred Stock is convertible at the option of the holder
      into shares of our common stock, subject to adjustment in the event of
      stock splits and stock dividends, based upon a conversion value of $0.60
      per share, and





•
            so long as the shares of Series A
      Convertible Preferred Stock are outstanding, the Company cannot sell or
      issue any common stock, rights to subscribe for shares of common stock or
      securities which are convertible or exercisable into shares of common
      stock at an effective purchase price of less than the then conversion
      value.





No
conversion of the Series A Convertible Preferred Stock may occur if a conversion
would result in the holder, Barron Partners LP, and any of its affiliates
beneficially owning more than 4.99% of our outstanding common shares following
such conversion.





On March
30, 2005, the Company entered into a Preferred Stock Purchase Agreement and
related agreements with Barron Partners LP. Under the terms of this agreement,
the Company sold Barron Partners LP, an accredited investor, 1,666,667 shares of
our Series A Convertible Preferred Stock and issued the purchaser the Common
Stock Purchase Warrants “A”, “B” and “C” to purchase an aggregate of 4,500,000
shares of our common stock at exercise prices ranging from $2.00 to $9.60 per
share for an aggregate purchase price of $1,000,000. The Company received net
proceeds of $900,000 after payment of expenses of $35,000 and a finder’s fee to
Liberty Company LLC of $65,000. The Company also issued Liberty Company LLC, a
broker-dealer, a Common Stock Purchase Warrant “A” exercisable into 175,000
shares of our common stock with an exercise price of $0.70 per share as
additional compensation for its services. The Company used these proceeds for
general working capital and acquisitions. The transaction was exempt from
registration under the Securities Act in reliance on an exemption provided by
Section 4(2) of that act.





During
fiscal 2008, Series A Preferred stockholders’ converted 456,667 share of Series
A Preferred Stock into 456,667 shares of common stock.





During
fiscal 2007, Series A Preferred stockholders’ converted 800,000 share of Series
A Preferred Stock into 800,000 shares of common stock.


F-15


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





The
Preferred Stock Purchase Agreement provides:




•
            The Company was required to
      appoint or elect four additional directors, of whom three directors are
      required to be independent. In addition, the audit and compensation
      committees of its Board of Directors are to be comprised solely of
      independent directors. If at any time after the closing its Board of
      Directors is not comprised of a majority of qualified independent
      directors, these independent directors do not make up a majority of the
      members of the audit and compensation committees of the Board of Directors
      the Company is required to pay Barron Partners LP liquidated damages of
      24% of the purchase price per annum, payable
    monthly,





•
            Messrs. John R. Signorello
      and James Bond, executive officers of the Company at the time, agreed to
      exchange indebtedness in the principal amount of $325,000, of which
      approximately $170,000 principal amount was then outstanding, into an
      aggregate of 541,667 shares of the Company’s common
      stock,





•
            For a period of three years the
      Company agreed not to issue any preferred stock, convertible debt or other
      equity instruments containing reset features. In addition, while the
      securities issued in the transaction are outstanding, the Company is
      prohibited from entering into any financing involving a variable rate
      feature,





•
            Barron Partners LP was given the
      right of first refusal to participate in any funding transaction by the
      Company on a pro rata basis at 94% of the offering price or funding amount
      received in the transaction,





•
            If the Company sells notes,
      shares of its common stock or shares of any class of preferred stock
      within 24 months from the closing of the offering at an effective price
      per share of common stock less than the conversion price of the Series A
      Convertible Preferred Stock then in effect the Company is required to
      reduce the conversion price of the Series A Convertible Preferred Stock to
      this lower price,





•
            Mr. Signorello agreed not to
      sell any shares of the Company’s common stock in excess of 1% of its
      outstanding shares per quarter or at a price less than $1.50 per share
      during the two-year period following the closing date. In addition, the
      remaining officers and directors of our company cannot sell any shares of
      common stock owned by them for the two year period following the closing
      date,





•
            that for a period of three years
      all employment and consulting agreements must have the unanimous consent
      of the compensation committee of its Board, and any awards other than
      salary are usual and appropriate for other officers, directors, employees
      or consultants holding similar positions in similar publicly
      held-companies,





•
            For a period of three years from
      the closing date the Company agreed not to enter into any new borrowings
      of more than twice the sum of its EBITDA (earnings before income taxes,
      depreciation and amortization) from recurring operations over the past
      four quarters, other than short-term borrowings to purchase products to be
      resold by us.


F-16


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





Warrants
Issued In the Series A Convertible Preferred Stock Transaction





In
connection with the sale of shares of our Series A Convertible Preferred Stock
in March 2005, we issued the purchaser the following five-year common stock
purchase warrants:




•
            Common Stock Purchase Warrants
      “A” to purchase an aggregate of 2,000,000 shares of our common stock at an
      exercise price of $2.00 per
share,





•
            Common Stock Purchase Warrants
      “B” to purchase an aggregate of 1,250,000 shares of our common stock at an
      exercise price of $4.80 per share,
and





•
            Common Stock Purchase Warrants
      “C” to purchase an aggregate of 1,250,000 shares of our common stock at an
      exercise price of $9.60 per
share.





We also
issued Liberty Company LLC, a broker dealer which served as finder for us in the
transaction, a Common Stock Purchase Warrant “A” to purchase 175,000 shares of
our common stock at an exercise price of $0.70 per share. Other than the
exercise price, all other terms of the warrant issued to Liberty Company LLC are
identical to the Common Stock Purchase Warrant “A” issued to the
purchaser.





The
warrants contain a cashless exercise provision which permits the holder, rather
than paying the exercise price in cash, to surrender a number of warrants equal
to the exercise price of the warrants being exercised. The exercise price of the
warrants and the number of shares issuable upon the exercise of the warrants is
subject to adjustment in the event of stock splits, stock dividends and
reorganizations.





Series
A Convertible Preferred Stock and Related Warrants Registration
Rights





The
Company agreed to file a registration statement within 30 days of the closing
for the common shares underlying the securities sold in this offering and to use
its best efforts to cause the registration statement to be declared effective by
the SEC within 120 days of the closing date of the transaction. The Company
agreed to pay Barron Partners liquidated damages of 36% per annum for each day
it did not file this registration statement after the initial 30 day period. As
the Company did not file the registration statement within 30 days from the
closing date of the offering, at June 30, 2005, the Company owed Barron Partners
$36,000 representing the failure to file penalty. In addition, the Company
agreed to pay Barron Partners liquidated damages of 36% per annum for each day
the registration statement was not effective beginning on July 30, 2005 through
the earlier of the effective date of the registration statement or March 30,
2007. The Company received a waiver from Barron, whereby Barron waived any
penalties due pursuant to the Registration Rights Agreement.





B) Series B Convertible
Preferred Stock





The
designations, rights and preferences of the Series B Convertible Preferred Stock
provide:




•
            no dividends are payable on the
      Series B Convertible Preferred Stock. So long as these shares are
      outstanding, the Company cannot pay dividends on our common stock nor can
      it redeem any shares of its common stock, the shares of Series B
      Convertible Preferred Stock do not have any voting rights, except as may
      be provided under Delaware
law,





•
            so long as the shares are
      outstanding, the Company cannot change the designations of the Series B
      Convertible Preferred Stock, create a class of securities that in the
      instance of payment of dividends or distribution of assets upon our
      liquidation ranks senior to or pari passu with the Series B Convertible
      Preferred Stock or increase the number of authorized shares of Series B
      Convertible Preferred Stock, the shares carry a liquidation preference of
      $0.2727 per share,


F-17


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007




•
            each share of Series B
      Convertible Preferred Stock is convertible at the option of the holder
      into one share of the Company’s common stock based upon an initial
      conversion value of $0.2727 per share. The conversation ratio is subject
      to adjustment in the event of stock dividends, stock splits or
      reclassification of the Company’s common stock. The conversion ratio is
      also subject to adjustment in the event the Company should sell any shares
      of its common stock or securities convertible into common stock at an
      effective price less than the conversion ratio then in effect, in which
      case the conversion ratio would be reduced to the lesser price. No
      conversion of the Series B Convertible Preferred Stock may occur if a
      conversion would result in the holder, Barron Partners LP, and any of its
      affiliates beneficially owning more than 4.9% of our outstanding common
      shares following such
conversion,





•
            so long as the Series B
      Convertible Preferred Stock is outstanding, the Company has agreed not to
      issue any rights, options or warrants to holders of its common stock
      entitling the holders to purchase shares of its common stock at less than
      the conversion ratio without the consent of the holders of a majority of
      the outstanding shares of Series B Convertible Preferred Stock. If the
      Company should elect to undertake such an issuance and the Series B
      holders consent, the conversion ratio would be reduced. Further, if the
      Company should make a distribution of any evidence of indebtedness or
      assets or rights or warrants to subscribe for any security to our common
      stockholders, the conversion value would be
    readjusted,





•
            the shares of Series B
      Convertible Preferred Stock automatically convert into shares of the
      Company’s common stock in the event of change of control of the Company,
      and





•
            so long as the shares of Series B
      Convertible Preferred Stock are outstanding, the Company cannot sell or
      issue any common stock, rights to subscribe for shares of common stock or
      securities which are convertible or exercisable into shares of common
      stock at an effective purchase price of less than the then conversion
      value of the Series B Convertible Preferred
  Stock.





During
fiscal 2008, Series B Preferred stockholders’ converted 580,000 share of Series
B Preferred Stock into 580,000 shares of common stock.





On
December 28, 2005, the Company consummated a Preferred Stock Purchase Agreement
and related agreements with Barron Partners LP. Under the terms of these
agreements, the Company issued Barron Partners LP, an accredited investor,
1,833,334 shares of its Series B Convertible Preferred Stock and Common Stock
Purchase Warrants “D”, “E” and “F” to purchase an aggregate of 2,250,000 shares
of its common stock at exercise prices ranging from $2.00 to $9.60 per share,
for an aggregate purchase price of $500,000. The Company received net proceeds
of $475,000 after payment of commissions of $25,000 (before placement expenses).
The Company used these proceeds for general working capital. The transaction was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.





On the
date of issuance of the Series B Preferred Stock, the effective conversion price
was at a discount to the price of the common stock into which it was
convertible. In fiscal 2006, the Company recorded a $500,000 preferred stock
dividend related to the beneficial conversion feature and the fair value of the
warrants granted in connection with the preferred stock.





Under the
terms of the Preferred Stock Purchase Agreement, the Company
agreed:




•
            that all convertible debt in the
      Company would be cancelled and that for a period of three years from the
      closing date the Company will not issue any convertible debt or preferred
      stock. In addition, the Company agreed to cause all reset features related
      to any shares of its outstanding common stock to be cancelled and for a
      period of three years from the closing date to refrain from entering into
      any transactions that have reset
  features,


F-18


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007




•
            to maintain a majority of
      independent directors on its Board of Directors, and that these
      independent directors will make up a majority of the audit and
      compensation committees of its Board. If at any time the Company should
      fail to maintain these independent majority requirements, the Company is
      required to pay Barron Partners LP liquidated damages of 24% of the
      purchase price of the securities ($120,000) per annum, payable monthly in
      kind,





•
            that if within 24 months from the
      closing date the Company consummates the sale of debt or equity securities
      with a conversion price less than the then effective conversion price of
      the Series B Convertible Preferred Stock, the Company will make a
      post-closing adjustment in the conversion price of the Series B
      Convertible Preferred Stock to such lower conversion
      price,





•
            that for a period of three years
      all employment and consulting agreements must have the unanimous consent
      of the compensation committee of its Board, and any awards other than
      salary are usual and appropriate for other officers, directors, employees
      or consultants holding similar positions in similar publicly
      held-companies,





•
            that for a period of two years
      from the closing the Company will not enter into any new borrowings of
      more than twice as much as the sum of EBITDA from recurring operations
      over the past four quarters, subject to certain
      exceptions,





•
            that for long as Barron Partners
      LP holds any of the securities, the Company will not enter into any
      subsequent financing in which we issue or sell any debt or equity
      securities with a floating conversion price or containing a reset feature,
      and





•
            that
      the Company will submit a proposal at its next annual meeting of
      stockholders to amend our Certificate of Incorporation to require the
      consent of the holders of a designated percentage of a designated class of
      its securities to waive or amend the terms of any rights, options and
      warrants approved by its Board.





Mr. John
R. Signorello, the Company’s CEO, agreed not to sell any shares of the Company’s
common stock that he may own in excess of 1% per quarter or at a price of less
than $1.50 per share for a period ending August 30, 2007, and that the earliest
any other insiders could sell their shares would be beginning two years from the
closing date.





The
Company granted Barron Partners LP a right of first refusal to participate in
any subsequent funding the Company may undertake on a pro rata basis at 94% of
the offering price.





Warrants
Issued In the Series B Convertible Preferred Stock Transaction





In
connection with the sale of shares of the Company’s Series B Convertible
Preferred Stock, the Company issued the purchaser the following common stock
purchase warrants:




•
            Common Stock Purchase Warrants
      “D” to purchase an aggregate of 1,000,000 shares of our common stock at an
      exercise price of $2.00 per
share,





•
            Common Stock Purchase Warrants
      “E” to purchase an aggregate of 625,000 shares of our common stock at an
      exercise price of $4.80 per share,
and





•
            Common Stock Purchase Warrants
      “F” to purchase an aggregate of 625,000 shares of our common stock at an
      exercise price of $9.60 per
share.


F-19


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





The
Company also issued Liberty Company LLC, a broker dealer which served as finder
for the Company in the transaction, a Common Stock Purchase Warrant “G” to
purchase 25,000 shares of its common stock at an exercise price of $1.00 per
share. Other than the exercise price, all other terms of the warrant issued to
Liberty Company LLC are identical to the Common Stock Purchase Warrants “E” and
“F” issued to the purchaser.





The
expiration date of the warrants is five years, or 18 months after effectiveness
of a registration statement subsequent to the issuance hereof with such 18
months to be extended by one month for each month or portion of a month during
which such registration statement’s effectiveness has lapsed or been suspended,
whichever is longer. The warrants contain a cashless exercise provision which
permits the holder, rather than paying the exercise price in cash, to surrender
a number of warrants equal to the exercise price of the warrants being
exercised. The holder cannot utilize the cashless exercise feature during the
first six months of the term or so long as there is an effective registration
statement covering the shares of common stock underlying the warrants. The
exercise price of the warrants and the number of shares issuable upon the
exercise of the warrants is subject to adjustment in the event of stock splits,
stock dividends and reorganizations, as well as if we issue common stock or
securities convertible into common stock at an effective price less than the
then current exercise price of the warrant.





As with
the shares of Series B Convertible Preferred Stock, no exercise of these
warrants may occur if a conversion would result in the holder, Barron Partners
LP, and any of its affiliates beneficially owning more than 4.9% of the
Company’s outstanding common shares following such exercise. This limitation,
however, immediately terminates as to the warrants in the event of the sale of
all or substantially all of the Company’s assets or a merger or consolidation in
which the Company is not the surviving entity.





If the
Company’s common stock trades at or above $2.85 per share for 20 consecutive
trading days, upon notice from the Company the holder must exercise the Common
Stock Purchase Warrant “D” within 45 days, or transfer the warrant to a third
party. If the holder elects to so transfer the warrant, the new holder then has
an additional 45 days to exercise the Common Stock Purchase Warrant “D”. If the
Company called the warrants and all or any portion of the warrants are not
exercised within these respective periods, the unexercised Common Stock Purchase
Warrants “D” will terminate.





Series
B Convertible Preferred Stock and Related Warrants Registration
Rights





The
Company agreed to file a registration statement with the Securities and Exchange
Commission within 30 days to register for resale the shares of common stock
issuable upon the possible conversion of the Series B Convertible Preferred
Stock and the exercise of the warrants, and to use our best efforts to cause
such registration statement to be declared effective within 120 days from the
closing date. The Company has also granted Barron Partners LP demand
registration rights covering these securities, as well as piggy-back
registration rights for a period of two years from the closing date. The Company
paid all costs associated with these registration statements and have
indemnified Barron Partners LP with respect thereto for any losses or claims
related to material misstatements or material omissions by the Company in the
registration statement(s). The Company received a waiver from Barron, whereby
Barron waived any penalties due pursuant to the Registration Rights
Agreement.





Common
Stock





Fiscal
2007 Transactions





During
fiscal 2007, Series A preferred stockholders’ converted 800,000 shares of Series
A Preferred Stock into 800,000 shares of common stock.





On March
9, 2007, we issued 339,606 shares of our common stock in satisfaction of accrued
interest in the amount of $169,803, the fair market value on that day related to
a promissory note. The recipient was an accredited investor and the issuance was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 3(a)(9) of that act.


F-20





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





On June
5, 2007 we issued 25,000 shares of common stock valued at $15,500, the fair
market value on that day to Harold Compton, a member of our Board of Directors,
as additional compensation for his having the role as lead director. The
recipient was an accredited investor and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





On June
29, 2007, we issued 200,000 shares of our common stock in satisfaction of a
promissory note in the amount of $150,000, plus accrued interest of $96,875. The
recipient was an accredited investor and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 3(a)(9) of that act. The fair market value of the shares on
the date of the transaction was $114,000, and this transaction resulted in a
gain on the extinguishment of debt of $132,875, which is included in general and
administrative expense in the statement of operations.





On July
5, 2007, we issued 500,000 shares of our common stock in satisfaction a debt in
the amount of $200,000. The recipient was an accredited investor and the
issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 3(a)(9) of that act. The fair
market value of the shares on the date of the transaction was $335,000, and this
transaction resulted in a loss on the extinguishment of debt of $115,000, which
is included in general and administrative expense in the statement of
operations.





On August
28, 2007 we sold 350,000 shares of common stock at a per share price of $0.50,
valued at $175,000 to Harold Compton, a member of our Board of Directors. The
acquirer was an accredited investor and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





In fiscal
2007, in connection with the exercise of 1,167,800 stock options, the Company
issued 1,167,800 shares of common stock for cash proceeds of
$491,358.





During
fiscal 2007, in connection with the exercise of 1,200,000 stock warrants, the
Company issued 1,200,000 shares of common stock for cash proceeds of
$491,000.





Fiscal
2008 Transactions





During
fiscal 2008, Series A preferred stockholders’ converted 456,667 shares of Series
A Preferred Stock into 456,667 shares of common stock.





During
fiscal 2008, Series B preferred stockholders’ converted 580,000 shares of Series
B Preferred Stock into 580,000 shares of common stock.





On August
28, 2007 we sold 400,000 shares of common stock at a per share price of $0.20,
valued at $80,000 to an accredited investor, and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





In fiscal
2008, in connection with the exercise of 1,780,000 stock options, the Company
issued 1,780,000 shares of common stock for cash proceeds of
$219,200.





During
fiscal 2008, in connection with the cashless exercise of 5,250,000 stock
warrants, the Company issued 2,525,000 shares of common stock.





During
fiscal 2008, in connection with the payment on a note payable discussed in Note
6, the Company issued 266,500 shares of common stock.  The shares were
valued at $41,126, the fair market value in the date of issuance.





During
fiscal 2008, in connection with the payment for consulting services rendered,
the Company issued 2,086,250 shares of common stock.  The services
were valued at $1,096,663, the fair market value on the date of
issuance.





During
fiscal 2008, in connection with the acquisition of Inline Corporation, the
Company issued 503,356 shares of common stock.  The shares were valued
at $276,846, the fair market value on the date of issuance.


F-21


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





During fiscal 2008 the
Company issued 2,950,000 shares of common stock to employees, valued at
$1,076,700, the fair market value at the time of issuance, as additional
compensation.





Common Stock
Warrants





In
February 2006, the Company reduced the exercise price of common stock purchase
warrants to purchase 4,500,000 shares of common stock, all of which are held by
Barron Partners LP, to $1.00 per share through December 31, 2006. On March 17,
2006, the Company further reduced the exercise price of 500,000 warrants to
purchase 500,000 shares of common stock to $.80 during the period from March 17,
2006 through March 31, 2006. On October 20, 2006, the Company further reduced
the exercise price of warrants to purchase 1,000,000 shares of common stock to
$.35 during the period from October 17, 2006 through November 10, 2006. To the
extent that those warrants were not exercised by 5:30 PM Eastern time, on
November 10, 2006, the exercise price of those warrants reverted to $1.00 per
share through December 31, 2006 and at that time the warrants reverted back to
the original exercise price.





On
February 24, 2007 the Company agreed to amend the common stock purchase warrant
agreements to purchase 4,500,000 shares of common stock, all of which were held
by Barron Partners LP, to $1.00 per share. These common stock purchase warrants
were previously priced from $2.00 to $9.60. On April 25, 2007, the Company
further reduced the exercise price of 1,000,000 warrants to purchase 1,000,000
shares of common stock to $.60 during the period from April 25 through April 30,
2007. To the extent that those warrants were not exercised by 5:30 PM Eastern
time, on April 30, 2007, the exercise price of those warrants reverted to $1.00
per share. On July 12, 2007, the Company reduced the exercise price of warrants
to purchase 100,000 shares of common stock to $.50 during the period from July
13, 2007 through July 15, 2007. To the extent that those warrants were not
exercised by 5:30 PM Eastern time, on July 15, 2007, the exercise price of those
warrants reverted to $1.00 per share. On July 23, 2007, the Company reduced the
exercise price of warrants to purchase 100,000 shares of common stock to $.50
during the period from July 23, 2007 through July 23, 2007. To the extent that
those warrants were not exercised by 5:30 PM Eastern time, on July 23, 2007, the
exercise price of those warrants reverted to $1.00 per share. On August 13,
2007, the Company reduced the exercise price of warrants to purchase 80,000
shares of common stock to $.55 during the period from August 13, 2007 through
August 14, 2007. To the extent that those warrants were not exercised by 5:30 PM
Eastern time, on August 14, 2007, the exercise price of those warrants reverted
to $1.00 per share.





In April,
2008 5,250,000 common stock purchase warrants were converted on a cashless basis
into 2,525,000 shares of common stock.


F-22


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





A summary
of the status of the Company’s outstanding common stock warrants as of September
30, 2008 and changes during the period ending on that date is as
follows:




Year
      Ended September 30,
                    2008
                  
                  
                  Year
      Ended September 30,
                    2007Number
      of
                    Warrants
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Number
      of
                    Warrants
                  
                  Weighted
                    Average
                    Exercise
                    PriceCommon Stock WarrantsBalance
      at beginning of year
                  
                  5,955,000
                  
                  $
                  1.25
                  
                  
                  7,055,000
                  
                  $
                  4.88Granted
                  
                  120,000
                  
                  
                  1.00
                  
                  
                  250,000
                  
                  
                  0.59Exercised
                  
                  (5,150,000
                  )
                  
                  0.28
                  
                  
                  (1,350,000
                  )
                  
                  0.80Forfeited
                  
                  (625,000
                  )
                  
                  2.79
                  
                  
                  —
                  
                  
                  0.00Balance
      at end of year
                  
                  300,000
                  
                  $
                  1.25
                  
                  
                  5,955,000
                  
                  $
                  1.25Warrants
      exercisable at end of year
                  
                  300,000
                  
                  $
                  2.18Weighted
      average fair value of warrants granted or re-priced during the
      year
                  
                  
                  
                  $
                  1.00





The
following table summarizes information about common stock warrants outstanding
at September 30, 2008:




Warrants
      Outstanding
                      
                      
                      Warrants
      ExercisableRange
      of
                        Exercise
                        Price
                      
                      Number
                        Outstanding
      at
                        September
      30,
                        2008
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Number
                        Exercisable
      at
                        September
      30,
                        2008
                      
                      Weighted
                        Average
                        Exercise
                        Price0.65
                      
                      75,000
                      
                      0.92
      Years
                      
                      0.65
                      
                      
                      75,000
                      
                      0.651.00
                      
                      145,000
                      
                      5.34
      Years
                      
                      1.00
                      
                      
                      145,000
                      
                      1.002.00
                      
                      5,000
                      
                      2.81
      Years
                      
                      2.00
                      
                      
                      5,000
                      
                      2.004.00
                      
                      37,500
                      
                      1.25
      Years
                      
                      4.00
                      
                      
                      37,500
                      
                      4.008.00
                      
                      37,500
                      
                      1.25
      Years
                      
                      8.00
                      
                      
                      37,500
                      
                      8.00300,000
                      
                      
                      
                      $
      2.18
                      
                      
                      300,000
                      
                      $
      2.18





NOTE 12 -
STOCK OPTION PLAN





In August
2000, the Board of Directors adopted the 2000 Management and Director Equity
Incentive and Compensation Plan the “Plan”) for directors, officers and
employees that provides for non-qualified and incentive stock options to be
issued enabling holders thereof to purchase common shares of the Company at
exercise prices determined by the Company’s Board of Directors. The Plan was
approved by the Company’s stockholders in August 2001.





The
purpose of the Plan is to advance the Company’s interests and those of its
stockholders by providing a means of attracting and retaining key employees,
directors and consultants. In order to serve this purpose, the Company believes
the Plan encourages and enables key employees, directors and consultants to
participate in its future prosperity and growth by providing them with
incentives and compensation based on its performance, development and financial
success. Participants in the Plan may include the Company’s officers, directors,
other key employees and consultants who have responsibilities affecting our
management, development or financial success.


F-23


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





Awards
may be made under the Plan in the form of Plan options, shares of the Company’s
common stock subject to a vesting schedule based upon certain performance
objectives (“Performance Shares”) and shares subject to a vesting schedule based
on the recipient’s continued employment (“restricted shares”). Plan options may
either be options qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended or options that do not so qualify. Any
incentive stock option granted under the Plan must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of such grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our common stock must be at least 110%
of such fair market value as determined on the date of the grant. Only persons
who are officers or other key employees are eligible to receive incentive stock
options and performance share grants. Any non-qualified stock option granted
under the Plan must provide for an exercise price of not less than 50% of the
fair market value of the underlying shares on the date of such
grant.





As
amended in fiscal 2007, the Plan permits the grant of options and shares for up
to 10,000,000 shares of the Company’s common stock. The Plan terminates 10 years
from the date of the Plan’s adoption by the Company’s stockholders.





The term
of each Plan option and the manner in which it may be exercised is determined by
the Board of Directors, provided that no Plan option may be exercisable more
than three years after the date of its grant and, in the case of an incentive
option granted to an eligible employee owning more than 10% of the Company’s
common stock, no more than five years after the date of the grant. The exercise
price of the stock options may be paid in either cash, or delivery of
unrestricted shares of common stock having a fair market value on the date of
delivery equal to the exercise price, or surrender of shares of common stock
subject to the stock option which has a fair market value equal to the total
exercise price at the time of exercise, or a combination of the foregoing
methods.





The fair
value of stock options granted was estimated at the date of grant using the
Black-Scholes options pricing model. The Company used the following assumptions
for determining the fair value of options granted under the Black-Scholes option
pricing model:




Year
      Ended September 30,2008
              
              2007Expected
      volatility
              
              51%
      - 62%
              
              76%
      - 107%Expected
      term
              
              1 -
      5 Years
              
              3 -
      5 YearsRisk-free
      interest rate
              
              2.34%
      - 4.38%
              
              4.39%
      - 4.96%Forfeiture
      Rate
              
              0%
      - 45%
              
              0%
      - 35%Expected
      dividend yield
              
              0%
              
              0%





The
expected volatility was determined with reference to the historical volatility
of the Company’s stock. The Company uses historical data to estimate option
exercise, employee termination, and forfeiture rate within the valuation model.
The expected term of options granted represents the period of time that options
granted are expected to be outstanding. The risk-free interest rate for periods
within the contractual life of the option is based on the U.S. Treasury rate in
effect at the time of grant.





For the
year ended September 30, 2008, total stock-based compensation charged to
operations for option-based arrangements amounted to $910,930. At September 30,
2008, there was approximately $820,470 of total unrecognized compensation
expense related to non-vested option-based compensation arrangements under the
Plan.


F-24


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





A summary
of the status of the Company’s outstanding stock options as of September 30,
2008 and changes during the period ending on that date is as
follows:




Year
      Ended September 30,
                              2008
                            
                            Year
      Ended September 30,
                              2007Number
      of
                              Options
                            
                            Weighted
                              Average
                              Exercise
                              Price
                            
                            
                            Aggregate
                              Intrinsic
                              Value
                            
                            Number
      of
                              Options
                            
                            Weighted
                              Average
                              Exercise
                              Price
                            
                            Aggregate
                              Intrinsic
                              ValueStock optionsBalance
      at beginning of year
                            
                            5,212,219
                            
                            $
                            0.61
                            
                            $
                            
                            
                            1,493,806
                            
                            $
                            1.00
                            
                            $Granted
                            
                            7,310,000
                            
                            
                            0.27
                            
                            
                            
                            
                            6,225,000
                            
                            
                            0.55Exercised
                            
                            (1,765,000
                            )
                            
                            0.12
                            
                            
                            
                            
                            (967,800
                            )
                            
                            0.51Forfeited
                            
                            (4,173,392
                            )
                            
                            0.49
                            
                            
                            
                            
                            (1,538,787
                            )
                            
                            0.76Balance
      at end of year
                            
                            6,583,827
                            
                            $
                            0.45
                            
                            $
                            92,650
                            
                            5,212,219
                            
                            $
                            0.61
                            
                            $
                            285,570Options
      exercisable at end of year
                            
                            4,123,134
                            
                            $
                            0.48
                            
                            $
                            10,560
                            
                            2,295,527
                            
                            $
                            0.63
                            
                            $
                            236,766Weighted
      average fair value of options granted during the year
                            
                            
                            
                            $
                            0.27
                            
                            
                            
                            
                            
                            
                            $
                            0.55





The
following table summarizes information about employee stock options outstanding
at September 30, 2007:




Options Outstanding
                    
                    Options ExercisableRange
      of
                      Exercise
                      Price
                    
                    Number
                      Outstanding
      at
                      September
      30,
                      2008
                    
                    Weighted
                      Average
                      Remaining
                      Contractual
                      Life
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    Number
                      Exercisable
      at
                      September
      30,
                      2008
                    
                    Weighted
                      Average
                      Exercise
                      Price$ 0.001-0.25
                    
                    1,850,000
                    
                    3.44
      Years
                    
                    $
      0.11
                    
                    1,096,000
                    
                    $
      0.180.30-0.48
                    
                    1,045,000
                    
                    3.20
      Years
                    
                    0.41
                    
                    784,050
                    
                    0.400.54-0.60
                    
                    2,531,608
                    
                    3.81
      Years
                    
                    0.58
                    
                    1,236,873
                    
                    0.580.61-0.80
                    
                    1,137,500
                    
                    3.11
      Years
                    
                    0.70
                    
                    986,492
                    
                    0.711.44-3.80
                    
                    19,719
                    
                    0.28
      Years
                    
                    1.48
                    
                    19,719
                    
                    1.486,583,827
                    
                    
                    
                    $
      0.44
                    
                    4,123,134
                    
                    $
      0.48








NOTE 13 -
ACQUISITIONS AND DISPOSITIONS





On
October 31, 2006, the Company entered into an Asset Purchase Agreement (the
“Agreement”) with True North Solutions, Inc., a Delaware corporation (“True
North”) whereby the Company acquired all or substantially all of True North’s
assets used in its Government Business. Upon the terms and subject to the
conditions of the Agreement, the Company agreed to purchase, accept, and acquire
from True North all right, title, and interest of True North in and to the
Government Business, which is hereby defined and limited to (i) certain vendor
agreements and (ii) all of those rights and assets, tangible or intangible,
exclusively used in the performance of day to day business operations, as owned
or held True North such as certain tangible assets, websites, databases, GSA
schedules and other government contracts, Federal client lists, and contracts in
progress. The aggregate purchase price for these assets was $430,000 which
consisted of the following:





Cash payment to
      seller
                      
                      $
                      350,000Direct transaction fees and
      expenses
                      
                      
                      80,000$
                      430,000





F-25


The
following table summarizes the estimated fair values of certain assets of True
North acquired at the date of the acquisition:





Property and equipment,
      net
                        
                        $
                        154,521Intangible
      assets
                        
                        
                        275,479$
                        430,000





On
December 22, 2007, we acquired 100% of the outstanding stock of Inline for
$2,412,731 in cash, plus 503,356 shares of IceWEB common stock valued at
$276,846, the fair market value on the date of acquisition. The acquisition was
accounted for using the purchase method of accounting. The results of operations
are included in the financial statements of operations from the date of
acquisition. Inline is a leading provider of intelligent enterprise data storage
solutions and services for the geospatial intelligence
marketplace.  Inline’s proprietary products include reliable, high
performance Storage Area Network Solutions, Network Attached Storage, and Direct
Attached Storage and the rapidly expanding OEM Storage Centric Appliances.
Today, Inline has developed its fifth generation of advanced data storage
solutions, marketed under the brands TruEnterpriseand FileStorm. All Inline systems
function in a heterogeneous operating system environment, including Windows,
UNIX and Linux. The purchase of Inline Corporation included the acquisition of
assets of $3,904,245, and liabilities of $614,668.  The aggregate
purchase price consisted of the following:





Cash payment to
      seller
                    
                    $
                    2,412,731Fair value of common stock issued
      to seller
                    
                    
                    276,846Estimated direct transaction fees
      and expenses
                    
                    
                    600,000$
                    3,289,577





The
following table summarizes the estimated fair values of Inline’s assets acquired
and liabilities assumed at the date of the acquisition:





Cash
                      
                      $
                      487,603Accounts
      Receivable
                      
                      
                      866,455Lease
    Deposits
                      
                      
                      20,500Inventory,
    net
                      
                      
                      394,863Property and equipment,
      net
                      
                      
                      919,374Intangible
      assets
                      
                      
                      1,215,450Accounts payable and accrued
      expenses
                      
                      
                      (614,668
                      )$
                      3,289,577





Intangible
assets acquired from Inline were assigned the following values:  value
of manufacturing GSA schedule with an assigned valued of $750,000 amortized
straight line over five years; value of customer relationships with an assigned
value of $465,450 amortized straight line over five years.  Intangible
assets acquired from Inline had the following unamortized values at September
30, 2008: value of manufacturing GSA schedule of $637,500; value of customer
relationships of $395,633.


F-26


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2008 and 2007





The
following table summarizes the required disclosures of the pro forma combined
entity, as if the acquisition of Inline Corporation occurred at October 1,
2006.




For
      the Year Ended September 30,2008
              
              2007Revenues,
      net
              
              $
              17,936,651
              
              $
              21,166,970Net
      loss
              
              
              (6,105,840
              )
              
              (3,550,068
              )Net
      loss per common share – basic and diluted
              
              
              $  (0.33
              )
              
              $  (0.34
              )





The above
unaudited pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of results of operations that actually would
have resulted had the acquisition occurred at October 1, 2006, nor is it
necessarily indicative of future operating results.





In
November 2006, the Company sold PatriotNet to a third party for $150,000 in cash
and the assumption of approximately $60,000 in liabilities by the purchaser. At
September 30, 2006, the Company recorded an impairment to goodwill of $180,000
to reflect the net realizable value of goodwill based on the subsequent sale of
PatriotNet.





On
December 1, 2006 we sold 100% of the capital stock of our wholly-owned
subsidiary, Integrated Power Solutions, Inc. to Mr. John Younts, our Vice
President of Integrated Power Solutions and a key employee, for the assumption
of approximately $180,000 in liabilities and the payment of $12,000 we owed him.
For the fiscal year ended September 30, 2006, revenues for Integrated Power
Solutions were approximately $457,000, or approximately, 9.5%, of our total
sales.





On
February 16, 2007 we sold 100% of the outstanding stock of our subsidiary, The
Seven Corporation of Virginia, Inc., to PC NET in exchange for the waiver of
approximately $11,000 we owed PC NET. Under the terms of the agreement we may
not engage in any staffing services businesses as The Seven Corporation had
conducted for a period of at least two years. For the fiscal year ended
September 30, 2006 revenues from The Seven Corporation were $360,000 or
approximately 7.5%, of our total sales.





NOTE 14 -
SEGMENT REPORTING





SFAS No.
131, Disclosure about Segments of an Enterprise and Related Information,
establishes standards for the reporting by business enterprises of information
about operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way that management organizes the operating segments with IceWEB for making
operational decisions and assessments of financial performance.





IceWEB’s
chief operating decision-maker is considered to be the chief executive officer
(CEO). The CEO reviews financial information presented on a consolidated basis
for purposes of making operating decisions and assessing financial performance.
The financial information reviewed by the CEO is identical to the information
presented in the accompanying consolidated statements of operations. Therefore,
IceWEB has determined that it operates in a single operating segment,
specifically, web communications services. For the periods ended September 30,
2008 and 2007 all material assets and revenues of IceWEB were in the United
States.





NOTE 15 –
SUBSEQUENT EVENTS





On November 26, 2008IceWEB executed a convertible debenture
agreement with Sand Hill Finance, LLC in the amount of $1,170,767. The debenture
bears interest at 18% and will allow SHF to convert the outstanding obligation
into shares of IceWEB common stock at a fixed floor conversion price of $0.30
per share. In conjunction with this agreement, IceWEB entered into a Warrant
Amendment Agreement pursuant to which the Company agreed to amend the exercise
price on outstanding warrants issued to SHF to purchase 145,000 shares of IceWEB
common stock by lowering the exercise price on these warrants to $0.50 per share
from $1.00 per share.




NOTE 16 –
COMMITMENTS AND CONTINGENCIES
  The
Company is a party to litigation which arises primarily in the ordinary course
of business. In the opinion of management, the ultimate disposition of such
litigation should not have a material adverse effect on the financial position
or results of operations of the Company.


F-27








ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





Not
applicable.





ITEM
8A(T). CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and
Procedures











Management’s Report on Internal Control
over Financial Reporting





Management of IceWEB, Inc. together with
its consolidated subsidiaries (the Company), is responsible for establishing and
maintaining adequate internal control over financial reporting. The Company’s
internal control over financial reporting is a process designed under the
supervision of the Company’s principal executive and principal financial officer
to provide reasonable assurance regarding the reliability of financial reporting
and the preparationof the
Company’s financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of
America.








As of the end of the Company’s 2008
fiscal year, management conducted an assessment of the effectiveness of the
Company’s internal control over financial reporting based on the framework
established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, management has determined that the Company’s internal
control over financial reporting as of September 30, 2008 is
effective.











Inherent Limitations on Effectiveness of
Controls


The Company’s management, including the
Chief Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal control over financial
reporting will prevent or detect all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. The design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are subject to risks.
Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or
procedures.





As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
September 30, 2008, the end of the period covered by this report, our management
concluded its evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures. Disclosure controls and procedures are
controls and procedures designed to reasonably assure that information required
to be disclosed in our reports filed under the Securities Exchange Act of 1934,
such as this report, is recorded, processed, summarized and reported within the
time periods prescribed by SEC rules and regulations, and to reasonably assure
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.





Our
management does not expect that our disclosure controls and procedures will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.





As of the
evaluation date, our Chief Executive Officer and Chief Financial Officer
concluded that we maintain disclosure controls and procedures that are effective
in providing reasonable assurance that information required to be disclosed in
our reports under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods prescribed by SEC rules and
regulations, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.





There
have been no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





ITEM
8B. OTHER INFORMATION





None


23


PART
III





ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT




Name
              Age
              PositionsJohn
      R. Signorello
              42
              Chairman
      and Chief Executive OfficerMark
      B. Lucky
              49
              Chief
      Financial OfficerHarold
      F. Compton (1)(2)
              58
              DirectorRaymond
      H. Pirtle (2)
              65
              DirectorJoseph
      L. Druzak (1)
              54
              DirectorJack
      Bush(1)
              71
              DirectorHarry
      E. Soyster
              71
              Director





(1)
Member of the Compensation Committee


(2)
Member of the Audit Committee





John R. Signorello.
Mr. Signorello has served as Chairman of the Board and CEO since March
2000. From 1991 until September 1997, Mr. Signorello served as the Chief
Executive Officer of STMS -”Solutions That Make Sense” - a private technology
company he founded that specialized in computer networks, systems integration
and information technology. In 1996, STMS was ranked the 17th fastest
growing technology company in America by The National Technology Council’s “The
Fast Five Hundred”. In September 1997, the company was acquired by Steelcloud
(Nasdaq: SCLD), and Mr. Signorello remained as Vice President of Sales and
Marketing until November 1998.Mr. Signorello is also a manager and the
owner of 50% of the membership interests of Bluepoint Financial, LLC. See Item
12. Certain Relationships and Related Party Transactions. Mr. Signorello is
an accomplished musician, and serves as a principal in New York City Lights
Entertainment. Mr. Signorello received a B.B.A. in Marketing from Radford
University in 1989.





Mark B. Lucky. Mark
B. Lucky has served as our Chief Financial Officer since March 2007. He has over
20 years professional experience in high growth/start-up ventures and
established companies with multi-industry experience including financial
services, technology, software, real estate, biotech and entertainment and
media. Prior to joining IceWEB, he consulted at Bearing Point on their financial
restatement project. From 2004 to 2005 he was Vice President of Finance and
Administration at Galt Associates, Inc., a Sterling, Virginia informatics/
technology and medical research services company and from 2001 to 2004 he was
Vice President of Finance and Administration of MindShare Design, Inc., a San
Francisco, California based internet technology company. While at both Galt
Associates, Inc. and MindShare Design, Inc. Mr. Lucky was the senior
financial officer for the company, providing strategic and tactical analysis and
managing day to day finance, accounting, cash management, reporting and human
resource responsibilities. During his career Mr. Lucky has also been
employed by Axys Pharmaceuticals, Inc., a NASDAQ-listed San Francisco,
California-based early stage drug discovery biotech company (acting CFO and
Senior Director of Finance), PriceWaterhouseCoopers, LLC, COMPASS Management and
Leasing, Inc. (Vice President - Finance 1997 to 1998), Mindscape, Inc. (Director
of Financial Planning and Analysis 1995 to 1996), The Walt Disney Company
(Manager, Operations Planning & Analysis, Manager of Corporate Planning 1991
to 1995), and KPMG. Mr. Lucky is a CPA and received his B.A., Economics,
from the University of California.





Harold F. Compton.
Mr. Compton has been a member of our Board of Directors since May 2005.
Mr. Compton has been a retailer for more than 30 years. Mr. Compton
joined CompUSA Inc. in 1994 as Executive Vice President-Operations, becoming
Executive Vice President and Chief Operating Officer in 1995, President of
CompUSA Stores in 1996 and Chief Executive Officer of CompUSA Inc. in 2000, a
position he held until his retirement in 2004. Prior to joining CompUSA, Inc.,
from 1993 until 1994 he served as President and COO of Central Electric Inc.,
Executive Vice President Operations and Human Resources, and Director of Stores
for HomeBase (1989 to 1993), Senior Vice President Operations and Director of
Stores for Roses Discount Department Stores (1986 to 1989), and held various
management positions including Store Manager, District Manager, Regional Vice
President and Zone Vice President for Zayre Corporation from 1965 to 1986. Since
1998 Mr. Compton was a member of the Board of Directors of Linens `N
Things, Inc., currently is a member of the Board of Directors of Maidenform
Brands, Inc. and is a member of its Compensation Committee and Corporate
Governance and Nominating Committee of the Board of Directors of that
company.


24


Raymond Pirtle. Jr.
Mr. Pirtle has been a member of our Board of Directors since June 2005.
Mr. Pirtle is a veteran of the financial services industry, having spent
the past three decades in a variety of senior roles in corporate finance,
institutional sales, investment banking, and equity research. From 1966 until
1989 he was employed by J.C. Bradford & Co., a large regional investment
banking and brokerage, departing as a general partner. From 1989 until 2001 he
was a Director and co-head of institutional sales of Equitable Securities Corp.,
a banking and institutional brokerage firm later known as SunTrust Equitable. In
2001 he was one of the founding partners of Avondale Partners, LLC, an
institutional equity research and investment banking firm focusing on small
companies generally with a market cap in the range of $200 million to $2
billion. In March 2005 Mr. Pirtle founded Clairidge Company, LLC., a
consulting firm that represents micro-cap to small-cap companies with a public
equity valuation under $200 million or larger companies that are seeking to
attract broad attention from institutional portfolio managers, research analysts
or investment bankers. Since 1985 Mr. Pirtle has been serving on the board
of both public and private companies. He currently serves on the board of
Premier Global Services, Inc. (NYSE: PGI), a provider of business communications
services and business process solutions that enable enterprise customers to
automate and simplify components of their critical business processes and to
communicate more effectively with their constituents.





Joseph L. Druzak.
Mr. Druzak has been a member of our Board of Directors since June 2005.
After first joining the company more than 20 years ago, since 1985
Mr. Druzak has served President and CEO of Kreher Steel Company, LLC., a
large, privately-held specialty steel distribution company serving such diverse
markets as automotive, rail, construction, oil and gas, aerospace and
defense.





Jack Bush.
Mr. Bush has been a member of our Board of Directors since August 2005.
Mr. Bush has served as the President of Raintree Partners, Inc., a
management consulting company, since September 1995. He is also currently
Chairman and Director of IdeaForest.com (Joann.com), and Vice Chairman and
Director of FPE Corporation (Framed Picture Enterprises). From 1995 to 1999 he
served as Chairman of Aaron Brothers Holding Company and of Carolina Art &
Frame Co. He was a founder, Chief Concept Officer and Director of Artistree Art,
Frame & Design Company. During this time he was also a Director of
Cyberplay, New York Coffee & Bagels, Bradlees Stores, Stage Stores, Telequip
and Jumbo Sports Company. He served on the board of Bradlees during a successful
reorganization and served as special assistant to the board of Stage Stores
during a successful reorganization. From 1997 to 1999 he served as Chairman, CEO
and President of Jumbo Sports Co. From 1991 to August 1995, he was President and
Director of Michaels Stores, Inc. and was Chairman of Michaels of Canada. The
company grew from 136 to 530 stores and became the largest arts and crafts
retailer in the world. Upon leaving the NASDAQ-listed company, sales reached
$1.5 billion and had 22,000 associates. From 1990 to 1991 he served as Executive
Vice President, Director of Operations and Stores for Ames Department Stores.
From 1985 to 1990 Mr. Bush was President and Director of Roses stores, a
NASDAQ-listed company. During his tenure the company grew to 226 stores with
$1.6 billion in sales and 25,000 associates. From 1980 to 1985 He served as Vice
President of Zayre Corporation, an NYSE-listed company responsible for 105
stores and $750 million in sales. From 1958 to 1980 he served in a variety of
positions with J.C. Penney Company, an NYSE-listed company. Mr. Bush was a
U.S. Air Force Reserve officer and holds a Bachelor of Science from the
University of Missouri.





Harry E.
Soyster.  General Soyster has been a member of our Board of
Directors since March 2008.  General Soyster served as Director,
Defense Intelligence Agency during Desert Shield/Storm.  He also
served as Deputy Assistant Chief of Staff for Intelligence, Department of the
Army; Commanding General, U.S. Army Intelligence and Security Command; and in
the Joint Reconnaissance Center, Joint Chiefs of Staff.  In Vietnam,
he was a field artillery battalion operations officer, and was twice decorated
for valor and wounded in action.  Upon retirement, General Soyster was
Vice President for International Operations with Military Professional Resources
Incorporated where he helped pioneer the concept of providing retired military
expertise to support emerging democracies in Eastern Europe and
Africa.  In 2006, he served as Special Assistant to the SEC Army for
World War II 60th
Anniversary Commemorations.  Currently, he serves as consultant to
numerous corporations and participates in studies by the Center for Strategic
and International Studies and the National Institute for Public
Policy.  In 1957, General Soyster graduated from the United States
Military Academy with a Bachelor of Science degree in Engineering. He also holds
a Masters of Science degree in Chemistry from Pennsylvania State University in
Chemistry and a Masters of Science degree in Management from the University of
Southern California. His military education includes completion of the Field
Artillery School, Basic and Advanced Courses; the U.S. Army Command and General
Staff College; and the National War College.  General Soyster has an
active TS/SCI (Top Secret/Sensitive Compartmented Information)
clearance.





There are
no family relationship between any of the executive officers and directors.
Directors are elected at our annual meeting of stockholders and hold office
until the next annual meeting of stockholders or until his or her resignation,
removal, or death.


25


Committees
of the Board of Directors





Our Board
of Directors has created both an Audit Committee and a Compensation Committee.
We do not have a Nominating Committee or any committee performing a similar
function. The functions that such a committee would undertake are being
undertaken by the entire board as a whole. We do not have a policy regarding the
consideration of any director candidates which may be recommended by our
stockholders, including the minimum qualifications for director candidates, nor
has our Board of Directors established a process for identifying and evaluating
director nominees. We have not adopted a policy regarding the handling of any
potential recommendation of director candidates by our stockholders, including
the procedures to be followed. Our Board has not considered or adopted any of
these policies as we have never received a recommendation from any stockholder
for any candidate to serve on our Board of Directors or any inquiry as to what
the procedures may be if a stockholder wished to make such a recommendation.
During fiscal 2008 our Board intends to develop a policy which will guide the
handling of potential recommendations of board candidates. While there have been
no nominations of additional directors proposed, in the event such a proposal is
made, all members of our Board will participate in the consideration of director
nominees.





Audit
Committee. The Audit Committee of our Board of Directors was formed to assist
the Board of Directors in fulfilling its oversight responsibilities for the
integrity of our consolidated financial statements, compliance with legal and
regulatory requirements, the independent registered public accounting firm’s
qualifications and independence, and the performance of our internal audit
function and independent auditors. The Audit Committee will also prepare the
report that SEC rules require be included in our annual proxy statement. The
Audit Committee has adopted a charter which sets forth the parameters of its
authority The Audit Committee Charter provides that the Audit Committee is
empowered to:




•
            Appoint, compensate, and oversee
      the work of the independent registered public accounting firm employed by
      our company to conduct the annual audit. This firm will report directly to
      the audit committee;


•
            Resolve any disagreements between
      management and the auditor regarding financial
      reporting;


•
            Pre-approve all auditing and
      permitted non-audit services performed by our external audit
      firm;


•
            Retain independent counsel,
      accountants, or others to advise the committee or assist in the conduct of
      an investigation;


•
            Seek any information it requires
      from employees - all of whom are directed to cooperate with the
      committee’s requests - or external
  parties;


•
            Meet with our officers, external
      auditors, or outside counsel, as necessary;
  and


•
            The committee may delegate
      authority to subcommittees, including the authority to pre-approve all
      auditing and permitted non-audit services, provided that such decisions
      are presented to the full committee at its next scheduled
      meeting.





Each
Audit Committee member is required to:




•
            satisfy the independence
      requirements of Section 10A(m)(3) of the Securities Exchange Act of 1934,
      and all rules and regulations promulgated by the SEC as well as the rules
      imposed by the stock exchange or other marketplace on which our securities
      may be listed from time to time,
and


•
            meet the definitions of
      “non-employee director” for purposes of SEC Rule 16b-3 and “outside
      director” for purposes of Section 162(m) of the Internal Revenue
      Code.


26


Each
committee member is required to be financially literate and at least one member
is to be designated as the “financial expert,” as defined by applicable
legislation and regulation. No committee member is permitted to simultaneously
serve on the audit committees of more than two other public companies.
Mr. Pirtle is presently the sole member of our Audit Committee, and is
considered an “audit committee financial expert” under the definition under Item
407 of Regulation S-B. As we expand our Board of Directors with additional
independent directors the number of directors serving on the Audit Committee
will also increase.





A copy of
the Audit Committee Charter is available on our website at www.iceweb.com under
the “Investor Relations” tab.





Compensation
Committee. The Compensation Committee was appointed by the Board to discharge
the Board’s responsibilities relating to:




•
            compensation of our
      executives,


•
            equity-based compensation plans,
      including, without limitation, stock option and restricted stock plans, in
      which officers or employees may participate,
  and


•
            arrangements with executive
      officers relating to their employment relationships with our company,
      including employment agreements, severance agreements, supplemental
      pension or savings arrangements, change in control agreements and
      restrictive covenants.





The
Compensation Committee has adopted a charter. The Compensation Committee charter
provides that the Compensation Committee has overall responsibility for
approving and evaluating executive officer compensation plans, policies and
programs of our company, as well as all equity-based compensation plans and
policies. In addition, the Compensation Committee oversees, reviews and approves
all of our ERISA and other employee benefit plans which we may establish from
time to time. The Compensation Committee is also responsible for producing an
annual report on executive compensation for inclusion in our proxy statement and
assisting in the preparation of certain information to be included in other
periodic reports filed with the SEC.





Each
Compensation Committee member is required to:




•
            satisfy the independence
      requirements of Section 10A(m)(3) of the Securities Exchange Act of 1934,
      and all rules and regulations promulgated by the SEC as well as the rules
      imposed by the stock exchange or other marketplace on which our securities
      may be listed from time to time,
and


•
            meet the definitions of
      “non-employee director” for purposes of SEC Rule 16b-3 and “outside
      director” for purposes of Section 162(m) of the Internal Revenue
      Code.





Pursuant
to our Compensation Committee Charter, the Compensation Committee is charged
with evaluating and recommending for approval by the Board of Directors the
compensation of our executive officers. In addition, the Compensation Committee
also evaluates and makes recommendations to the entire Board of Directors
regarding grants of options which may be made as director compensation. The
Compensation Committee does not delegate these authorities to any other persons
nor does it use the services of any compensation consultants.





Messrs. Compton,
Druzak and Bush are the members of our Compensation Committee. As we expand our
Board of Directors with additional independent directors the number of directors
serving on the Compensation Committee will also increase. A copy of the
Compensation Committee Charter is available on our website at www.iceweb.com
under the “Investor Relations” tab.


27


Code of
Ethics





In May
2005, we adopted a Code of Business Conduct and Ethics applicable to our Chief
Executive Officer, principal financial and accounting officers and persons
performing similar functions. A Code of Business Conduct and Ethics is a written
standard designed to deter wrongdoing and to promote:




•
            honest and ethical
      conduct,





•
            full, fair, accurate, timely and
      understandable disclosure in regulatory filings and public
      statements,





•
            compliance with applicable laws,
      rules and regulations,





•
            the prompt reporting violation of
      the code, and





•
            accountability for adherence to
      the Code.





A copy of
our Code of Business Conduct and Ethics is filed as an exhibit to this annual
report. We will provide a copy, without charge, to any person desiring a copy of
the Code of Business Conduct and Ethics, by written request to us at our
principal offices to the attention of Corporate Secretary.





Director
Compensation





We have
not established standard compensation arrangements for our directors and the
compensation payable to each individual for their service on our Board is
determined from time to time by our Board of Directors based upon the amount of
time expended by each of the directors on our behalf. The following table
provides information concerning the compensation of our directors for their
services as members of our Board of Directors for the fiscal year ended
September 30, 2008.




Name
            
            Fees
              Earned
              or
      Paid
              in
      Cash
              ($)
            
            Stock
              Awards
              ($)
            
            Option
              Awards
              ($)
            
            Non-Equity
              Incentive
              Plan
              Compensation
              ($)
            
            Non-Qualified
              Deferred
              Compensation
              Earnings
              ($)
            
            All
      Other
              Compensation
              ($)
            
            Total
              ($)Harold
      Compton
            
            —
            
            —
            
            48,005
            
            —
            
            —
            
            —
            
            48,005Jack
      Bush
            
            —
            
            —
            
            28,803
            
            —
            
            —
            
            —
            
            28,803John
      R. Signorello
            
            —
            
            —
            
            —
            
            —
            
            —
            
            —
            
            —Raymond
      Pirtle
            
            —
            
            —
            
            28,803
            
            —
            
            —
            
            —
            
            28,803Harry
      E. Soyster
            
            —
            
            —
            
            21,268
            
            —
            
            —
            
            —
            
            21.268Joseph
      Druzak
            
            —
            
            —
            
            28,803
            
            —
            
            —
            
            —
            
            28,803





COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT





Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
under Rule 16a-3(d) of the Securities Exchange Act during the fiscal year ended
September 30, 2008 and Forms 5 and amendments thereto furnished to us with
respect to the fiscal year ended September 30, 2008, as well as any written
representation from a reporting person that no Form 5 is required, we are aware
that the following Board members and officers failed to file on a timely basis,
as disclosed in the aforementioned Forms, reports required by Section 16(a) of
the Securities Exchange Act during the fiscal year ended September 30, 2008,
except as set forth below:


28





•
            Mr. Signorello failed to
      file 2 reports covering 3
transactions,


•
            Mr. Compton failed to file 1
      reports covering 2
transactions,


•
            Mr. Pirtle failed to file 1
      report covering 2
transaction,


•
            Mr. Druzak failed to file 1
      reports covering 2
transactions


•
            Mr. Bush failed to file 1
      reports covering 2 transactions,
and


•
            Mr. Lucky failed to file 2
      reports covering 3
transactions





All such
Form 4s have subsequently been filed by the reporting person.





ITEM
10. Executive Compensation





Summary
Compensation Table





The
following table summarizes all compensation recorded by us in each of the last
two completed fiscal years for our principal executive officer, each other
executive officer serving as such whose annual compensation exceeded $100,000
and up to two additional individuals for whom disclosure would have been made in
this table but for the fact that the individual was not serving as an executive
officer of our company at September 30, 2008. The value attributable to any
option awards is computed in accordance with FAS 123R.





SUMMARY COMPENSATION
TABLE




Name
      and
              principal
      position
              (a)
            
            Year
              (b)
            
            Salary
              ($)
              (c)
            
            Bonus
              ($)
              (d)
            
            Stock
              Awards
              ($)
              (e)
            
            Option
              Awards
              ($)
              (f)
            
            Non-Equity
              Incentive
      Plan
              Compensation
              ($)
              (g)
            
            Nonqualified
              Deferred
              Compensation
              Earnings
              ($)
              (h)
            
            All
              Other
              Compensation
              ($)
              (i)
            
            Total
              ($)
              (j)John  Signorello
      (1)
            
            2008
            
            235,500
            
            
            
            559,500
            
            0
            
            
            
            
            
            5,736
            
            800,7362007
            
            192,000
            
            
            
            0
            
            245,035
            
            
            
            
            
            5,049
            
            442,084Mark
      B. Lucky (2)
            
            2008
            
            211,250
            
            
            
            158,900
            
            9,601
            
            
            
            
            
            5,736
            
            385,4872007
            
            80,000
            
            
            
            
            
            105,714
            
            0
            
            0
            
            2,945
            
            188,659





(1)        Mr. Signorello
is our Chief Executive Officer. All other compensation in fiscal 2008 includes
$5,736 which represents the value of health insurance premiums we pay for
Mr. Signorello. In fiscal 2008 we granted him 1,500,000 shares of our
restricted common stock, valued at $559,500.  The compensation for Mr.
Signorello in fiscal 2008 included $25,500  in salary that had been
accrued and not yet paid.  All other compensation in fiscal 2007
includes $5,049 which represents the value of health insurance premiums we pay
for Mr. Signorello. In fiscal 2007 we granted
him options to purchase 100,000 shares of our common stock with an exercise
price of $0.70 per share, 500,000 of our common stock with an exercise price of
$0.58 per share, and 250,000 shares of our common stock with an exercise price
of $0.60 per share. All other compensation expense for fiscal 2007
excludes the value of securities issued to Blue Point Financial, LLC as
interest, or interest otherwise due BluePoint Financial, LLC as such effective
interest rate equated to 18% per annum.





(2)        Mr. Lucky
is our Chief Financial Officer. All other compensation in fiscal 2007 and 2008
represents the value of health insurance premiums we pay for Mr. Lucky. In
fiscal 2008 we granted him options to purchase 50,000 shares of our common stock
with an exercise price of $0.001.  The compensation for Mr. Lucky in
fiscal 2008 included $12,750  in salary that had been accrued and not
yet paid.  In fiscal 2007 we granted him options to purchase 100,000
shares of our common stock with an exercise price of $0.58, options to purchase
100,000 shares of our common stock with an exercise price of $0.55, options to
purchase 50,000 with an exercise price of $0.50 and options to purchase 150,000
shares of our common stock with an exercise price of $0.60.


29


How
Mr. Signorello’s compensation is determined





Mr. Signorello,
who has served as our CEO since March 2000, is not a party to an employment
agreement with our company. His compensation is determined by the Compensation
Committee of our Board of Directors. The Compensation Committee considered a
number of factors in determining Mr. Signorello compensation including the
scope of his duties and responsibilities to our company and the time he devotes
to our business. The Compensation Committee did not consult with any experts or
other third parties in fixing the amount of Mr. Signorello compensation.
During fiscal 2008 Mr. Signorello’s compensation package included a base
salary of $250,000 and company provided health care benefits. The amount of
compensation payable to Mr. Signorello can be increased at any time upon
the determination of the Compensation Committee of our Board of
Directors.





Outstanding
Equity Awards at Fiscal Year-End





The
following table provides information concerning unexercised options, stock that
has not vested and equity incentive plan awards for each named executive officer
outstanding as of September 30, 2008:





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END




OPTION
      AWARDS
                
                STOCK
      AWARDSName
                  (a)
                
                Number
      of
                  Securities
                  Underlying
                  Unexercised
                  Options
                  (#)
                  Exercisable
                  (b)
                
                Number
      of
                  Securities
                  Underlying
                  Unexercised
                  Options
                  (#)
                  Unexercisable
                  (c)
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Number
      of
                  Securities
                  Underlying
                  Unexercised
                  Unearned
                  Options
                  (#)
                  (d)
                
                Option
                  Exercise
                  Price
                  ($)
                  (e)
                
                Option
                  Expiration
                  Date
                  (f)
                
                Number
                  of
                  Shares
                  or
                  Units
                  of
                  Stock
                  That
                  Have
                  Not
                  Vested
                  (#)
                  (g)
                
                Market
                  Value
                  of
                  Shares
                  or
                  Units
                  of
                  Stock
                  That
                  Have
                  Not
                  Vested
                  ($)
                  (h)
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Number
                  of
                  Unearned
                  Shares,
                  Units
      or
                  Other
                  Rights
                  That
                  Have
      Not
                  Vested
                  (#)
                  (i)
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Market
                  or
      Payout
                  Value
      of
                  Unearned
                  Shares,
                  Units
      or
                  Other
                  Rights
                  That
                  Have
      Not
                  Vested
                  (#)
                  (j)John
      R. Signorello
                
                100,000
                
                
                
                
                
                $
                0.70
                
                04/28/201275,000
                
                425,000
                
                
                
                $
                0.58
                
                05/05/20157,500
                
                242,500
                
                
                
                $
                0.60
                
                09/06/2012Mark Lucky
                
                51,000
                
                49,000
                
                
                
                $
                0.58
                
                5/6/201272,000
                
                78,000
                
                
                
                $
                0.55
                
                6/14/201258,500
                
                91,500
                
                
                
                $
                0.60
                
                9/6/20125,000
                
                45,000
                
                
                
                $
                0.001
                
                3/18/2013





30


STOCK
OPTION PLAN





In August
2000, our Board of Directors adopted our 2000 Management and Director Equity
Incentive and Compensation Plan (the “Plan”). The Plan was approved by our
stockholders in August 2001. As amended in May 2006 and in June, 2007, we have
reserved an aggregate of 10,000,000 shares of common stock for issuance under
the Plan. At November 30, 2008 we have granted options to purchase 6,583,827
shares of our common stock under the Plan. Our Board of Directors (or at their
discretion a committee of our Board members) administers the Plan including,
without limitation, the selection of recipients of awards under the Plan, the
granting of stock options, restricted shares or performance shares, the
determination of the terms and conditions of any such awards, the interpretation
of the Plan and any other action they deem appropriate in connection with the
administration of the Plan.





The
purpose of the Plan is to advance our interests and those of our stockholders by
providing a means of attracting and retaining key employees, directors and
consultants. In order to serve this purpose, we believe the Plan encourages and
enables key employees, directors and consultants to participate in our future
prosperity and growth by providing them with incentives and compensation based
on our performance, development and financial success. Participants in the Plan
may include our officers, directors, other key employees and consultants who
have responsibilities affecting our management, development or financial
success.





Awards
may be made under the Plan in the form of Plan options, shares of our common
stock subject to a vesting schedule based upon certain performance objectives
(“performance shares”) and shares subject to a vesting schedule based on the
recipient’s continued employment (“restricted shares”). Plan options may either
be options qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended or options that do not so qualify. Any
incentive stock option granted under our Plan must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of such grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our common stock must be at least 110%
of such fair market value as determined on the date of the grant. Only persons
who are our officers or other key employees are eligible to receive incentive
stock options and performance share grants. Any non-qualified stock option
granted under our Plan must provide for an exercise price of not less than 50%
of the fair market value of the underlying shares on the date of such
grant.





The term
of each Plan option and the manner in which it may be exercised is determined by
the Board of Directors, provided that no Plan option may be exercisable more
than three years after the date of its grant and, in the case of an incentive
option granted to an eligible employee owning more than 10% of our common stock,
no more than five years after the date of the grant. The exercise price of the
stock options may be paid in either:




•
            cash,
  or


•
            delivery of unrestricted shares
      of our common stock having a fair market value on the date of delivery
      equal to the exercise price,
or


•
            surrender of shares of our common
      stock subject to the stock option which has a fair market value equal to
      the total exercise price at the time of exercise,
  or


•
            a combination of the foregoing
      methods.


31


All Plan
options are nonassignable and nontransferable, except by will or by the laws of
descent and distribution and, during the lifetime of the optionee, may be
exercised only by such optionee. At the discretion of the Board of Directors, it
may approve the irrevocable transfer, without payment, of non-qualified options
to the option holder’s spouse, children, grandchildren, nieces or nephews, or to
the trustee of a trust for the principal benefit of one or more such persons, or
to a partnership whose partners are one or more of such persons. If an
optionee’s employment is terminated for any reason, other than due to his or her
death, disability or termination for cause, or if an optionee is not our
employee but is a member of our Board of Directors and his or her service as a
director is terminated for any reason, other than due to his or her death or
disability, the Plan option granted may be exercised on the earlier of the
expiration date or 90 days following the date of termination. If the optionee
dies during the term of his or her employment, the Plan option granted to him or
her shall lapse to the extent unexercised on the earlier of the expiration date
of the Plan option or the date one year following the date of the optionee’s
death. If the optionee’s employment, membership on the Board of Directors or
engagement as a consultant terminates by reason of the optionee’s retirement,
then the Plan option granted may be exercised until the earlier of 90 days
following the date of termination or the expiration date. If the optionee is
permanently and totally disabled within the meaning of Section 22(c)(3) of the
Internal Revenue Code, the Plan option granted to him or her lapses to the
extent unexercised on the earlier of the expiration date of the option or one
year following the date of such disability.





At the
time of the restricted share grant, the Board of Directors may determine the
vesting schedule of such shares and that after vesting, such shares may be
further restricted as to transferability or be subject to repurchase by us or
forfeiture upon the occurrence of certain events. Awards of restricted shares
must be accepted by the participant within 30 days of the grant.





At the
time of the award of performance shares, the Board of Directors shall establish
a range of performance goals to be achieved during the performance period,
including, without limitation, earnings, return on capital, or any performance
goal approved by our stockholders in accordance with Section 162(m) of the
Internal Revenue Code. Attainment of the highest performance goal for the
performance period will earn 100% of the performance shares awarded for the
performance period; failure to attain the lowest performance goal will result in
the participant earning no performance shares. Attainment of the performance
goals will be calculated from our financial statements, excluding changes in
federal income tax rates and the effect of non-recurring and extraordinary
items. The performance goals may vary for different performance periods and need
not be the same for each participant receiving an award during a performance
period.





If the
participant’s employment by us, membership on our Board of Directors, or
engagement by us as a consultant is terminated before the end of any performance
period, or upon the participant’s death, retirement or disability, the Board of
Directors, taking into consideration the performance of such participant and our
performance over the performance period, may authorize the issuance to the
participant or his or her legal representative or designated beneficiary all or
a portion of the performance shares which would have been issued to him or her
had the participant’s employment, Board membership or consulting engagement
continued to the end of the performance period. If the participant’s employment,
Board membership or consulting engagement terminates before the end of the
performance period for any other reason, all performance shares are
forfeited.





Notwithstanding
the foregoing, but subject to any stockholder approval or other requirements of
Section 162(m) of the Internal Revenue Code, the Board of Directors in its
discretion and as determined at the time of award of the performance shares, may
provide the participant with the option of receiving cash in lieu of the
performance shares in an amount determined at the time of award including,
without limitation, by one or more of the following methods:




•
            the fair market value of the
      number of shares subject to the performance shares agreement on the date
      of award, or


•
            part or all of any increase in
      the fair market value since such date,
  or


•
            part or all of any dividends paid
      or payable on the number of shares subject to the performance share
      agreement, or


•
            any other amounts which in the
      Board’s sole discretion are reasonably related to the achievement of the
      applicable performance goals,
or


•
            any combination of the
      foregoing.





The
purchase price for restricted shares or performance shares granted under the
Plan shall be set by the Board of Directors but may not be less than par value.
Payment of the purchase price for the restricted shares or performance share may
be made in either,





•
            cash,
  or


32


•
            by delivery of unrestricted
      shares of our common stock having a
fair


•
            market value on the date of such
      delivery equal to the total


•
            purchase price,
      or


•
            a combination of either of these
      methods.





The
restricted stock awards, performance stock awards and stock options are subject
to accelerated vesting in the event of our change of control. We may, at our
option, terminate all unexercised stock options 30 days after a change in
control and pay to the participant holding these unexercised options cash in an
amount equal to the difference between fair market value and the exercise price
of the stock option. If the fair market value is less than the exercise price,
we may terminate the options without payment to the holder. The per share
purchase price of shares subject to Plan options granted under the Plan or
related to performance share awards or restricted share awards may be adjusted
in the event of certain changes in our capitalization, but any such adjustment
shall not change the total purchase price payable upon the exercise in full of
such option or award. No participant in our Plan has any rights as a stockholder
until the shares subject to the Plan options or stock awards have been duly
issued and delivered to him or her.





We have
an option to purchase any shares of our common stock which have been issued to
Plan participants pursuant to restricted stock awards, performance stock awards
or stock options if the participant ceases to be our employee, a member of our
Board of Directors or a consultant to us for any reason. We must exercise our
repurchase right at the time of termination. The purchase price for any shares
we repurchase will be equal to the fair market value of the our total
stockholders’ equity divided by the total outstanding shares of our common stock
on the last day of that calendar month, calculated on a fully-diluted basis. If
we exercise our repurchase right, we much close the transaction within 20 days
from the termination date. At closing, we are entitled to delivery of a one-year
promissory note as payment for the purchase price or, at our option, we may pay
same in cash at closing.





We also
have a right of first refusal to meet the offer if the holder of any shares of
our common stock awarded or issued pursuant to our Plan desires to sell such
shares to a third party.





The Board
of Directors may amend, suspend or terminate our Plan at any time, except that
no amendment shall be made which:




•
            increases the total number of
      shares subject to the Plan or changes the minimum purchase price therefore
      (except in either case in the event of adjustments due to changes in our
      capitalization), or


•
            affects outstanding Plan options
      or any exercise right thereunder,
or


•
            extends the term of any Plan
      option beyond 10 years, or


•
            extends the termination date of
      the Plan.





Unless
the Plan shall be earlier suspended or terminated, the Plan shall terminate 10
years from the date of the Plan’s adoption by our stockholders. Any such
termination of our Plan shall not affect the validity of any Plan options
previously granted there under.


33


ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





At
December 22, 2008, there were 30,379,369 shares of our common stock issued and
outstanding. Our common stock is the only outstanding class of our voting
securities. The following table sets forth, as of December 15, 2008, information
known to us relating to the beneficial ownership of these shares
by:




•
            each person who is the beneficial
      owner of more than 5% of the outstanding shares of common
      stock;





•
            each
    director;





•
            each executive officer;
      and





•
            all executive officers and
      directors as a group.





Unless
otherwise indicated, the address of each beneficial owner in the table set forth
below is care of 45925 Maries Road, Dulles, Virginia 20166.





We
believe that all persons named in the table have sole voting and investment
power with respect to all shares of beneficially owned by them. Under securities
laws, a person is considered to be the beneficial owner of securities he owns
and that can be acquired by him within 60 days from December 5, 2008 upon the
exercise of options, warrants, convertible securities or other understandings.
We determine a beneficial owner’s percentage ownership by assuming that options,
warrants or convertible securities that are held by him, but not those held by
any other person and which are exercisable within 60 days of December 5, 2007,
have been exercised or converted. Unless otherwise noted, the address of each of
these principal stockholders is our principal executive offices.




Name
      of Beneficial Owner
                
                Amount
      and
                  Nature
      of
                  Beneficial
                  Ownership
                
                Percentage
                  of
      ClassJohn
      R. Signorello (1)
                
                6,730,344
                
                21.7%Hal
      Compton (2)
                
                773,500
                
                2.5%Raymond
      H. Pirtle (3)
                
                280,500
                
                0.9%Joseph
      L. Druzak (4)
                
                583,626
                
                1.9%Mark
      B. Lucky (5)
                
                1,587,400
                
                5.2%Ed
      Soyster (6)
                
                28,500
                
                0.1%Jack
      Bush (7)
                
                380,500
                
                1.2%All
      executive officers and as a group (seven persons)
                
                9,344,370
                
                33.5%





(1) The
number of shares beneficially owned by Mr. Signorello includes options to
purchase 75,000 shares of our common stock at an exercise price of $3.20 per
share, options to purchase 50,000 shares of our common stock at an exercise
price of $0.47 per share, options to purchase 100,000 shares of our common stock
at an exercise price of $0.70 per share, options to purchase 135,000 shares of
our common stock at an exercise price of $0.58 per share and options to purchase
37,500 shares of our common stock at an exercise price of $0.60 per
share.





(2) The
number of shares beneficially owned by Mr. Compton includes options to
purchase 27,500 shares of our common stock at an exercise price of $0.80 per
share, options to purchase 50,000 shares of our common stock at an exercise
price of $0.47 per share, options to purchase 100,000 shares of our common stock
at an exercise price of $0.70, options to purchase 22,500 shares of our common
stock at an exercise price of $0.60 per share, and options
to purchase 250,000 shares of our common stock


at an
exercise price of $0.001 per share.





(3) The
number of shares beneficially owned by Mr. Pirtle includes options to
purchase 27,500 shares of our common stock at an exercise price of $0.80 per
share and options to purchase 50,000 shares of our common stock at an exercise
price of $0.47 per share, options to purchase 100,000 shares of our common stock
at an exercise price of $0.70 per share, and options to purchase 22,500 shares
of our common stock at an exercise price of $0.60 per share, and options
to purchase 150,000 shares of our common stock at an exercise price of $0.001
per share.


34


(4) The
number of shares beneficially owned by Mr. Druzak includes options to
purchase 27,500 shares of our common stock at an exercise price of $0.80 per
share, options to purchase 50,000 shares of our common stock at an exercise
price of $0.47 per share, options to purchase 100,000 shares of our common stock
at an exercise price of $0.70 per share, and options to purchase 22,500 shares
of our common stock at an exercise price of $0.60 per share, and options
to purchase 150,000 shares of our common stock at an exercise price of $0.001
per share.





(5) The
number of shares beneficially owned by Mr. Lucky includes options to
purchase 27,000 shares of our common stock at an exercise price of $0.58 per
share, options to purchase 36,000 shares of our common stock at an exercise
price of $0.55 per share, and options to purchase 22,500 shares of our common
stock at an exercise price of $0.60 per share, and options
to purchase 50,000 shares of our common stock at an exercise price of $0.001 per
share.








(7) The
number of shares beneficially owned by Mr. Bush includes options to
purchase 25,000 shares of our common stock at an exercise price of $0.80 per
share, options to purchase 50,000 shares of our common stock at an exercise
price of $0.47 per share, options to purchase 100,000 shares of our common stock
at an exercise price of $0.70 per share, and options to purchase 22,500 shares
of our common stock at an exercise price of $0.60 per share, and options
to purchase 150,000 shares of our common stock at an exercise price of $0.001
per share.





Securities
Authorized For Issuance Under Equity Compensation Plans





The
following table sets forth securities authorized for issuance under equity
compensation plans, including individual compensation arrangements, by us under
our 2000 Management and Director Equity Incentive and Compensation Plan and any
compensation plans not previously approved by our stockholders as of September
30, 2008.




Number
      of
              securities
      to be
              issued
      upon
              exercise
      of
              outstanding
              options,
              warrants
      and
              rights
      (a)
            
            Weighted
              average
              exercise
              price
      of
              outstanding
              options,
              warrants
      and
              rights
      (b
            
            Number
      of
              securities
              remaining
              available
      for
              future
      issuance
              under
      equity
              compensation
              plans
      (excluding
              securities
              reflected
              in
      column (a)) (c)Plan
      categoryPlans
      approved by our stockholders:2000
      Management and Director Equity Incentive and Compensation
    Plan
            6,883,827
            
            $0.44
            
            3,446,173Plans
      not approved by stockholders:None
            0
            
            n/a
            
            n/a





A
description of each of these plans is contained later in this report under Part
III Item 10. Executive Compensation – Stock Option Plan.


35


ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Director
Independence





Messrs. Compton,
Pirtle, Druzak, Soyster, and Bush, members of our Board of Directors, are
“independent” within the meaning of Marketplace Rule 4200 of the National
Association of Securities Dealers, Inc.


36


ITEM
13. EXHIBITS




2.1
              Agreement
      and Plan of Reorganization and Stock Purchase Agreement with Disease S.I.
      Inc.(4)2.2
              Agreement
      and Plan of Merger with IceWEB Communications, Inc. (8)2.3
              Agreement
      and Plan of Merger with Seven Corporation (9)3.1
              Certificate
      of Incorporation (1)3.2
              Certificate
      of Amendment to Certificate of Incorporation (1)3.3
              Certificate
      of Amendment to Certificate of Incorporation (1)3.4
              Certificate
      of Amendment to Certificate of Incorporation (1)3.5
              Certificate
      of Amendment to Certificate of Incorporation (2)3.6
              Certificate
      of Amendment to Certificate of Incorporation (3)3.7
              Certificate
      of Amendment to Certificate of Incorporation (11)3.8
              Certificate
      of Designations of Series A Convertible Preferred Stock
    (12)3.9
              Certificate
      of Amendment to Certificate of Incorporation (13)3.10
              Bylaws
      (1)3.11
              Certificate
      of Designations of Series B Convertible Preferred Stock
    (17)4.1
              Form
      of Common Stock Purchase Warrant “A” (12)4.2
              Form
      of Common Stock Purchase Warrant “B” (12)4.3
              Form
      of Common Stock Purchase Warrant “C” (12)4.4
              Form
      of Series H Common Stock Purchase Warrant (16)4.5
              Form
      of Series I Common Stock Purchase Warrant (16)4.6
              Form
      of $0.70 Common Stock Purchase Warrant “A” (16)4.7
              Form
      of Comerica Bank warrant (16)4.8
              Form
      of Common Stock Purchase Warrant “D” (17)4.9
              Form
      of Common Stock Purchase Warrant “E” (17)4.10
              Form
      of Common Stock Purchase Warrant “F” (17)4.11
              Form
      of Common Stock Purchase Warrant “G” (18)4.12
              Form
      of Common Stock Purchase Warrant for Sand Hill Finance LLC
      (18)4.13
              Secured
      Convertible Debenture for Sand Hill Finance LLC4.14
              Warrant
      Amendment Agreement with Sand Hill Finance LLC10.1
              Acquisition
      Agreement with North Orlando Sports Promotions, Inc.
(1)10.2
              Asset
      Purchase Agreement with Raymond J. Hotaling (5)10.3
              2000
      Management and Director Equity Incentive and Compensation Plan
      (6)10.4
              Stock
      Purchase Agreement with Health Span Sciences, Inc. (7)10.4
              Stock
      Purchase Agreement with Health Span Sciences, Inc. (7)10.5
              Stock
      Purchase and Exchange Agreement with Interlan Communications
      (9)10.6
              Preferred
      Stock Purchase Agreement dated March 30, 2005 (12)10.7
              Registration
      Rights Agreement with Barron Partners LP (12)10.8
              Asset
      and Stock Purchase Agreement for iPlicity, Inc.(16)10.9
              Asset
      and Stock Purchase Agreement for DevElements, Inc. of Virginia
      (15)10.10
              Form
      of Loan and Security Agreement with Comerica Bank (16)10.11
              Forbearance
      Agreement (16)10.12
              Sublease
      Agreement for principal executive offices (16)10.13
              Preferred
      Stock Purchase Agreement dated September 8, 2005 (18)10.14
              Registration
      Rights Agreement with Barron Partners LP (18)10.15
              Financing
      Agreement with Sand Hill Finance LLC (18)10.16
              Lease
      Agreement for principal executive offices (19)10.17
              Retailer
      Marketing Agreement with CompUSA (20)10.18
              Stock
      Purchase Agreement with Inline Corporation10.19
              First
      Amendment to Stock Purchase Agreement with Inline
    Corporation14.1
              Code
      of Business Conduct and Ethics *21.1
              Subsidiaries
      of the small business issuer (16)31.1
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer
    *31.2
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer
    *32.1
              Section
      906 Certification of Chief Executive Officer *32.2
              Section
      906 Certification of Chief Financial Officer
*


_________


* filed
herewith


37


ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





AUDIT
FEES





The
aggregate fees billed for professional services rendered by our principal
accountant for the audit of our annual financial statements, review of our
financial statements included in our quarterly reports and other fees that are
normally provided by our accountant in connection with our audits and reviews
for the fiscal years ended September 30, 2008 and 2007 is $61,500 and $55,000,
respectively.





AUDIT-RELATED
FEES





This
category consists of assurance and related services by the independent auditors
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported above under “Audit Fees.” The services
for the fees disclosed under this category include consultation regarding our
correspondence with the SEC and other accounting consulting. Our audit-related
and review fees for the fiscal Years ended September 30, 2008 and 2007 were
$27,500 and $0.





TAX
FEES





The
aggregate fees billed for professional services rendered by our principal
accountant for tax compliance, tax advices and tax planning for the fiscal Years
ended September 30, 2008 and 2007 is $0 and $0, respectively.





ALL OTHER
FEES





There
were no other fees billed by our principal accountant for the fiscal years ended
September 30, 2008 and 2007, except as provided above.





Our Board
of Directors has adopted a procedure for pre-approval of all fees charged by our
independent auditors. Under the procedure, the Board approves the engagement
letter with respect to audit, tax and review services. Other fees are subject to
pre-approval by the Board, or, in the period between meetings, by a designated
member of Board. Any such approval by the designated member is disclosed to the
entire Board at the next meeting. The audit and tax fees paid to the auditors
with respect to fiscal year 2007 were pre-approved bythe entire Board of
Directors.


38


SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




ICEWEB,
      INC.December
      26, 2008
                      By:  /s/ John R.
      SignorelloJohn
      R. Signorello, Director, and Principal
                        Executive
      OfficerBy:  /s/
      Mark B. LuckyMark B. Lucky, Chief Financial
      Officer and
                        principal financial and
      accounting
officer




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Signature
                              Title
                              Date/s/ John R. Signorello
                              CEO
      and director
                              December
      29, 2008John
      R. Signorello/s/ Mark B. Lucky
                              Chief
      Financial Officer
                              December
      29, 2008Mark
      B. Lucky/s/ Hal Compton
                              Director
                              December
      29, 2008Hal
      Compton/s/ Raymond H. Pirtle, Jr.
                              Director
                              December
      29, 2008Raymond
      H. Pirtle, Jr./s/ Joseph Druzak
                              Director
                              December
      29, 2008Joseph
      Druzak/s/ Jack Bush
                              Director
                              December
      29, 2008Jack Bush/s/ Harry E. Soyster
                              Director
                              December
      29, 2008Harry
      E. Soyster


39