UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 
 Form
        10-KSB
 
 (Mark
        One)
 
 x
        ANNUAL REPORT PURSUANT
        TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For
        the fiscal year ended September 30, 2006
 
 o
        TRANSITION 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.)
  205
                  Van Buren Street, Suite 150
                Herndon,
                  VA
              
              20170(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. Yes x  Noo
 
 Check
        if there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B is not 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-KSB
        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) Yes o No
x
 
 State
        issuer's revenues for its most recent fiscal year. $4,768,993 for the 12
        months
        ended September 30, 2006.
 
 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 February 5, 2007 the aggregate
        market value of the common stock held by non-affiliates at the closing price
        of
        the registrant's common stock is approximately $2,695,711.
 
 State
        the number of shares outstanding of each of the issuer's class of common
        equity.
        As February 5, 2007, 9,677,909 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-KSB (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").
 
 Not
        applicable
 
 Transitional
        Small Business Disclosure Form (check one): Yes o No x
 
 When
        used in this annual report, the terms "IceWEB," " 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.
 
 All
        per
        share information contained in this annual report gives effect to the ten
        for
        one (10:1) forward stock split of our common stock effective October 13,
        2004
        and a one for eighty (1:80) reverse stock split effective April 27,
        2005.
 
 
  2
  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.
 
 
  3
  
 PART
        I
 
 ITEM
        1. Description of Business
 
 OVERVIEW
 
 We
        are an Internet technology company headquartered in Herndon, Virginia, which
        was
        founded in 2000 and became public in 2002 through a reverse merger. Our focus
        has consistently remained on providing small businesses enterprise-class
        applications via the Internet in a hosted service model (Software as a Service
        or “SaaS”). Our products and services are used by organizations in both the
        public and private sectors. Through internal software development and a series
        of acquisitions, we have developed a suite of robust, hosted software
        application services that are accessed by our customers via the Internet.
        Our
        current “online” products include IceMAIL (messaging), IceVISTA (web hosting),
        and IcePORTAL (Intranet portal). Our goal is to bring this enterprise-class
        technology, normally affordable by only large corporations, to small business
        customers via a recurring monthly subscription model. This recurring revenue
        along with little or no startup costs make IceWEB more costs effective and
        faster for small businesses to begin using our technology service.
 
 Complementing
        the online service offerings is our 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 to the Federal Government. IceWEB’s key partners are
        Secure Computing, Internet Security Systems, RSA Security, Blue Coat and
        F5
        Networks.  The combination of our 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.
 
 48%
        of revenues were generated by the IceWEB Solutions Group’s reselling of
        third-party hardware and software 52% of revenues were generated by services
        and
        online web subscriptions.
 
 OUR
        PRODUCTS AND SERVICES
 
 IceWEB
        has two lines of business that have many common technologies and leverage
        our
        personnel and vendor/manufacturer relationships: IceWEB Online services and
        IceWEB Solutions Group.
 
 ONLINE
        PRODUCTS AND SERVICES
 
 Our
        focus is providing enterprise-class applications via the Internet in a hosted
        service model (Software as a Service or “SaaS”). Our goal is to have all of the
        IceWEB “online” service offerings automatically provision new accounts and offer
        our customers web-based control panels for “self service” account
        management.  Customers can purchase products/services via the IceWEB web
        site and have their new account/service automatically created without human
        intervention or manual steps taken by IceWEB Customer Service.  The
        web-based control panel enables IceWEB Customer Service to manage all
        services/products via a single interface, adjust customer billing information,
        view reports, and control resellers.  Customers use a version of this same
        control panel system to view all of their IceWEB Online services, adjust
        their
        billing information, view past bills, and activate new services.  This
“self service” is coupled with IceWEB Customer Service via telephone, email, and
        live chat to complete our IceWEB Online service offerings.
 
 Starting
        with enterprise messaging (IceMAIL), collaboration (IcePORTAL), and web hosting
        (IceVISTA) services, IceWEB will continue to add additional software systems
        to
        our server farms.  Each application and service has the goal of bringing
        enterprise-level applications, normally cost effective for only large
        corporations, to small business customers through a monthly/annual subscription
        plan.  This recurring revenue business model brings more consistent profits
        to the company with a much higher customer retention rate than any other
        service
        IceWEB has ever offered (currently over 90% retention rate).
 
 IceMAIL
 
 In
        December 2005, we launched IceMAIL, a packaged service that provides a
        network-hosted groupware, email, calendaring, and collaboration solution
        utilizing Microsoft Exchange, the most widely used enterprise system available.
        Customers are able to leverage the full capabilities of Microsoft Exchange
        and
        Microsoft Outlook without the initial implementation and maintenance costs
        associated with such an advanced system. In addition to providing hosted
        Exchange services, IceMAIL focuses on providing wireless PDA/Smart Phone
        synchronization services that enable our customers to have everything in
        Outlook/Exchange available while traveling away from their office. IceWEB
        can
        function as a single-source provider of wireless PDA/Smart Phones, GoodLink
        or
        Blackberry software, and the cellular carrier services through agent/reseller
        arrangements with those companies. IceMAIL also forms marketing initiatives
        with
        PDA/Smart Phone manufacturers to create demand for our subscription based
        services while driving sales of those manufacturers’ devices.
 
 IceMAIL
        is based on the advanced Microsoft Exchange platform which provides
        industry-leading features such as calendars, group scheduling, contact
        management, task management, notes, and shareable public folders. Using the
        latest in network hosting, wireless, and Internet technologies, IceMAIL is
        accessible from anywhere on the Internet via Microsoft Outlook or a web-browser.
        For the true "road warrior", we will also offer wireless handheld PDA access
        using a Palm Treo, RIM Blackberry, Windows PocketPC, or SmartPhone devices.
  4
  
 
 Features
        of IceMAIL include:
 
 l
              Use
                  your own professional email domain namel
              Manage
                  your personal/business calendar. See when employees are available
                  for
                  meetingsl
              Share
                  your calendar with people you choose or delegate permissions to
                  your
                  assistantl
              Schedule
                  shared resources such as conference rooms, projectors, vehicles,
                  technicians, etc.l
              Spam
                  and virus protectionl
              Assign
                  tasks to employees and track progressl
              Track
                  all calls, emails, or documents relating to a person contained
                  within your
                  contacts listl
              Optional
                  inbound/outbound faxing from Outlook or your wireless
                  PDAl
              IceMAIL
                  handles all system maintenance, daily backups, security updates,
                  and
                  end-user supportl
              Real-time
                  synchronization of email, calendar, contacts, and tasks to your
                  cellular
                  PDA using ActiveSync, GoodLink, or Blackberryl
              View
                  or edit file attachments from your PDAl
              All
                  users receive the latest Microsoft Outlook software free (a $110
                  value
                  each)
 
 IcePORTAL
 
 IcePORTAL
        leverages the power of Microsoft SharePoint to provide customers with a complete
        Intranet portal for their company. Customers can share and manage announcements,
        tasks, events/calendars, document libraries, pictures, discussion threads,
        and
        more through a single web-based portal with no need to purchase their own
        network file server.
  Features
        of IcePORTAL include:
  l
              Provide
                  a central location for all of employees to log into via a web browser
                  for
                  all of a company’s company news, announcements, document libraries, and
                  phone directories.l
              Enables
                  access to a company’s Intranet securely from anywhere in the world via the
                  Internet.  And no VPN configuration is requiredl
              Eliminates
                  the need to purchase and maintain a network file server within
                  a company
                  which could cost $20,000 or more each year.l
              Stores
                  all of a company’s files and documents within multiple document libraries
                  and directories.  Assign read/write/delete permissions to some or all
                  employees for each document library, the customer has complete
                  control of
                  who can access each section of their Intranet portal.l
              Search
                  for information or documents/files right from within the Intranet
                  portal’s
                  main page.l
              Post
                  company news, announcements, calendars/events, or track tasks all
                  via the
                  Intranet portal.l
              Create
                  sub-portals or sections within a customer’s Intranet portal for
                  vendor/partners or customers with complete control of account and
                  passwords so the customer controls what they can see/view/edit
                  and what
                  portions of the Intranet portal they can access.l
              Customize
                  the portal layout, colors, theme, and specific modules/features
                  to a
                  customer’s liking—include company stock quotes and news that is
                  automatically updated from the
                  Internet.
 
 IceVISTA
 
 IceVISTA
        provides web hosting services. Customers leverage IceVISTA’s network security,
        servers, and redundant data center environment for their critical web hosting
        needs. Typically, customers have both a public facing web site which is the
        focus of IceVISTA and also an internal Intranet web site which is serviced
        by
        our IcePORTAL product. IceVISTA includes a combination of web technologies
        from
        Microsoft and open source software providers. Specific web hosting needs
        vary
        depending on what operating system platform and web programming language
        is used
        by the web developer. IceVISTA supports all of the most popular web platforms
        and technologies thus providing customers with flexibility and reliability
        for
        their web hosting needs. IceVISTA provides both shared and dedicated web
        services solutions and currently hosts numerous content management and
        database-driven solutions for our customers.
 
 LEARNINGSTREAM.COM
 
 LearningStream.com
        is an online business education portal that offers subscription-based online
        classes to consumers and corporate customers (managers, employees, associations,
        etc.). Business professionals can choose among many different subjects such
        as
        making presentations, managing people and learning software applications
        from
        training developers such as Fred Pryor Seminars, CareerTrack and Evelyn Woods.
        LearningStream currently hosts 13 online video training classes and will
        expand
        to more than 100 in Q2 2007.
  5
  
 IceWEB
        SOLUTIONS GROUP (www.icewebsg.com)
 
 IceWEB’s
        Solutions Group specializes in network infrastructure security solutions.
        Through our team of engineers and our partners Secure Computing, RSA Security,
        ISS, Blue Coat, F5 Networks, McAfee and Cisco, we provide government agencies
        with the firewall, authentication, PKI, encryption, and traffic filtering
        products and services to protect your network infrastructure.
 
 l
              Firewall
                  implementation and management/monitoringl
              Intrusion
                  Detection System implementation and management/monitoring (IDS
                  or
                  IPS)l
              Security
                  Information Management System implementation and
                  management/monitoringl
              Load
                  Balancing & High Availability Solutionsl
              User
                  Authenticationl
              Remote
                  Access Controll
              Anti-Virus/Anti-Spaml
              Content
                  Filtering and URL Filteringl
              E-mail
                  Security
 
 With
        our headquarters office located just outside of Washington D.C., IceWEB has
        specialized in Federal Government (DOD and civilian agencies) solutions for
        over
        6 years. We have multiple GSA, GWAC, and BPA agreements with key agencies
        to
        make purchasing simple. More importantly, we have the technical talent and
        manufacturer relationships to help government agencies design, build, secure,
        and manage your network infrastructure.
 
 PRINCIPAL
        CUSTOMERS
 
 For
        the fiscal year ended September 30, 2006 two of our customers represented
        approximately 43% of total revenues for the year and approximately 51% of
        our
        accounts receivable at September 30, 2006 are due from these two customers.
        Both
        of these customers purchase products and services from us on a purchase order
        basis and, accordingly, may elect at any time to purchase similar products
        or
        services from our competitors.
 
 TECHNOLOGY
  IceWEB
        “online” products are web-based systems available from any computer in the World
        via the Internet. IceWEB is leveraging the Internet as the transport mechanism
        to deliver its services due to its wide availability and relatively low cost
        for
        connectivity. IceWEB leverages commercial off-the-shelf (COTS) software whenever
        possible for its three primary advantages: quick time to market/delivery,
        reduced upgrade and maintenance costs, and reduced internal development/R&D
        costs. The key to our success has been in partnering with the best manufacturers
        and selecting software products that can be turned into a Software as a Service
        (SaaS) that can be sold via a subscription.
 
 The
        specific software systems we host include IceMAIL, IcePORTAL, and IceVISTA.
        Each
        of these systems are hosted in a tier-one data center located in Northern
        Virginia technology corridor area. With redundant Internet connections, power
        systems, fire suppression, 24x7 security guards, biometric scanners, and
        network
        security systems, the IceWEB services are very well protected and far exceed
        what individual small business customers could afford if they were to host
        a
        similar system of their own.
 
 IceMAIL
        (www.icemail.com) is a customized implementation of Microsoft Exchange that
        is
        specialized for multi-tenant (multiple customers and domains) use. This
        specialized implementation provides customers all of the features of Microsoft
        Exchange and the email client Microsoft Outlook; however, scales of economy
        are
        gained by hosting multiple customers on our server farm. This enables us
        to
        provide Exchange hosting services at a fraction of the cost that individual
        customers would pay to implement their own internal solution. The IceMAIL
        server
        farm consists of redundant Microsoft Windows servers, Active Directory Servers,
        front-end Exchange servers, SMTP servers, back-end database servers, Storage
        Area Networks (SANs), GoodLink, Blackberry, ActiveSync, and backup systems.
        Network security is provided by multiple firewalls and/or gateways and filtering
        systems. The online purchasing, provisioning, and web-based management consoles
        are based on technology from SWsoft who is a World-wide leader in
        software/control systems for Internet and Application Services Providers
        (ASPs)
        such as IceWEB.
 
 IcePORTAL
        (www.iceweb.com/iceportal_home.asp) is a customized implementation of Microsoft
        SharePoint. The SharePoint system provides integration with Microsoft Exchange,
        and thus IceMAIL, which reduced the need for IceWEB to develop our own modules
        and software code. The IcePORTAL data is stored using Microsoft SQL and a
        Storage Area Network (SAN). Services are provided to customers via the Internet
        and each customer’s “portal” is available through a standard web browser such as
        Internet Explorer. As it is integrated with IceMAIL, the same network security
        and redundant servers and data center systems are leveraged. This enabled
        IceWEB
        to deploy IcePORTAL for minimal additional costs.
 
 IceVISTA
        (www.icewebvista.com) consists of several web hosting technologies and servers.
        Customers are hosted on individual dedicated servers and also shared-host
        web
        servers depending on their need and specialized applications. There are several
        DotNetNuke (DNN) based web sites with some custom-developed modules as well
        as
        static web sites hosted on Microsoft Internet Information Server (IIS) (Windows
        operating system) and Apache running on the Linux operating
        system.
  6
  
 
 LearningStream
        (www.learningstream.com) is running on numerous web servers and streaming
        media
        servers. Course content is streamed via the Internet from Real and Windows
        Media
        servers while online purchasing and the course catalog are hosted on
        Microsoft-based web servers. Additional course content to be added in fiscal
        year 2007 may reside outside of the IceWEB server farms and be streamed directly
        from the course content provider/partner that IceWEB has
        contracted.
  MARKET
        AND TRENDS
 
 The
        market for hosted network applications and wireless access to web content
        is
        expanding exponentially. More and more small businesses are selecting “hosted
        applications” instead of purchasing and deploying internal network servers.
        IceMAIL, IcePORTAL, and IceVISTA are specifically targeted to these small
        business customers.
 
 According
        to IDC, the Software as a Service market will be $8.0 billion by 2007 with
        an
        annual growth rate of 25%. More businesses are outsourcing their software
        services to hosted providers such as IceWEB in order to reduce their up-front
        capital expenditures for software technology. Microsoft says “hosting
        providers...are now positioned to act as a primary software delivery channel for
        everyone from consumers to small businesses and large enterprises”.
 
 SALES
        AND MARKETING
 
 We
        sell our products and services through our direct sales force, online marketing
        and through strategic channel partners. Our direct sales process typically
        includes a demonstration of our product capabilities followed by one or more
        detailed technical reviews. Our employees utilize our software to generate
        leads, sales, demos and references. Our internal operations and sales tracking
        all run on our IceMAIL and IcePORTAL platforms.
 
 In
        June 2006, we entered into an agreement with CompUSA to private label our
        IceMAIL service offering for them. Customers may now purchase IceMAIL
        subscriptions in person at any CompUSA location or via CompUSA’s website
        (www.compusa.com/icemail). IceWEB has conducted training at CompUSA corporate
        and retail stores as well as provided marketing collateral, online
        presentations, and a sales training video. IceWEB is one of the first Hosted
        Exchange providers to enter the retail market so we cannot reliably predict
        the
        success of this and other potential retail partnerships.
 
 During
        fiscal 2005, we did not have an effective marketing strategy in place and
        relied
        mostly upon direct sales and marketing through radio and print advertisements
        in
        regional markets within the National Capital Area. These efforts succeeded
        in
        getting the IceWEB name publicized but did not produce significant revenues.
        The
        CompUSA partnership took several months to train their employees, update
        their
        web site, and begin in store sales so this channel relationship provided
        no
        revenue in FY2005. In FY2006, we have a specific marketing plan that includes
        more concise Internet marketing of the IceMAIL and IcePORTAL products along with
        magazine or print advertisements in primary and secondary markets throughout
        the
        U.S. IceWEB will also contract with a professional marketing firm to further
        enhance our product marketing and improve our Internet search engine
        optimization, pay-per-click advertising, and direct marketing sales pitch.
        Our
        marketing efforts also produce materials in support of prospective sales
        to new
        customers, including brochures, data sheets, white papers, presentations
        and
        demonstrations. For the fiscal years ended September 30, 2006 and 2005 we
        spent
        $225,338 and $56,538, respectively, on marketing.
 
 RESEARCH
        AND DEVELOPMENT
 
 IceWEB
        performed software development and research/development efforts in fiscal
        2006
        relating to the IceMAIL and IcePORTAL products. IceMAIL began sales in December
        2005; however additional development for the online shopping cart, automatic
        provisioning system (based on SWsoft PEM), and web-based management consoles
        was
        a significant amount of effort in Q1 and Q2 of fiscal year 2006. IcePORTAL
        research and development to prove the feasibility of the solution was conducted
        in Q3 and Q4 of fiscal year 2006. The product was not launched to the public
        until January 2007 based on these R&D efforts.
  The
        bulk of our research and development efforts for the coming year will focus
        on
        providing additional hosted application service offerings and improving features
        for our current “online” service offerings.
 
 Additional
        features to be added to IceMAIL and also available individually include
        messaging encryption, content filtering, and “certified” email. These would
        generate additional revenue to IceWEB once fully developed and deployed.
        We
        expect to deploy the first pieces of this solution early in the third quarter
        of
        fiscal 2007. We anticipate that we will fully launch this offering, currently
        called “IceSECURE” by the fourth quarter fiscal 2007.
 
 Additional
        archiving and compliance management services will also be added to IceMAIL
        in
        FY2007. Computer systems, storage, and software will be implemented to provide
        current and future IceMAIL customers with increased data storage options
        including long-term archiving and compliance management to meet industry
        or
        Government-specific regulations for data retention. These services will generate
        additional revenue for IceWEB and attract new customers that must have these
        services in order to outsource their email system to IceWEB.
  7
  
 IceWEB
        will implement additional online purchasing and automated provisioning so
        that
        the IcePORTAL and IceVISTA services become visible and manageable within
        the
        current SWsoft-based web control panel system. Currently, only IceMAIL has
        fully
        automated provisioning and online purchasing. Adding these capabilities to
        IcePORTAL and IceVISTA will reduce our operational support costs while providing
        current and new customers a single web-based management console to manage
        all of
        their IceWEB-based software services.
 
 A
        new LearningStream web site, additional course content, and a new online
        purchasing system will be deployed in Q3 of fiscal 2007. This new content
        and
        ordering system will greatly improve the ease of use of the web site and
        is
        anticipated to increase revenues due to the increased number of online courses
        that will be available.
 
 Our
        technology plan calls for a research and development budget of $250,000 per
        quarter for fiscal 2007 in order to accomplish the above goals.
 
 INTELLECTUAL
        PROPERTY
 
 Our
        success depends in part on our ability to protect our intellectual property.
        The
        source codes, object codes, and documentation related to our products are
        all
        proprietary to us and as to which copyright in favor of our company arose
        from
        the date of creation of the products or the date on which the products were
        assigned to us, whichever is later. We also rely on common law rights to
        our
        trademark and service mark "IceWEB" in both block letters and stylized form.
        To
        protect our proprietary rights, we rely generally on copyright and trade
        secret
        laws, confidentiality agreements with employees and third parties, and
        agreements with consultants, vendors and customers, although we have not
        signed
        such agreements in every case. Despite such protections, a third party could,
        without authorization, copy or otherwise obtain and use our intellectual
        property.
 
 It
        is also possible that our competitors will adopt product or service names
        similar to ours, thereby impeding our ability to build brand identity and
        possibly leading to customer confusion. We can give no assurance that our
        agreements with employees, consultants and others who participate in development
        activities will not be breached, or that we will have adequate remedies for
        any
        breach, or that our trade secrets will not otherwise become known or
        independently developed by competitors. There can be no assurance that we
        will
        be able to adequately protect our trade secrets. Third parties may assert
        infringement claims against us or against third parties upon whom we rely
        and,
        in the event of an unfavorable ruling on any claim, we may be unable to obtain
        a
        license or similar agreement to use technology that we rely upon to conduct
        our
        business.
 
 In
        the future we may pursue copyright protection of our source codes, object
        codes
        and documentation as well as the registration of certain of our trademarks
        and
        service marks in the United States. In general, there can be no assurance
        that
        our efforts to protect our intellectual property rights through copyright,
        trademark and trade secret laws will be effective to prevent misappropriation
        of
        our content. Our failure or inability to protect our proprietary rights could
        materially adversely affect our business, financial condition and results
        of
        operations.
 
 COMPETITION
 
 Our
        competitors include portal vendors, application service providers, software
        vendors, systems integrators and information technology consulting service
        providers who offer some or all of the same products as we do. Our competitors,
        particularly for IceMAIL, IcePORTAL, and IceVISTA, include InterMedia.net,
        MailStreet, Mi8 Inc, and USA.net. Our competitive strategy is to undercut
        the
        pricing model of our competitors while delivering a higher value to customers
        and building brand name recognition for our company and our products. We
        are
        also pursuing retail channels for sales (beginning with our recent CompUSA
        partnership) which to our knowledge, our competitors have not attempted.
        We face
        significant competition from these and other companies, most of which have
        greater brand recognition, are better capitalized than us and can obtain
        financing on more favorable terms. We may never be able to successfully compete
        in our target market.
 
 In
        addition, there are relatively low barriers to entry into the Company's
        business, and the Company does not believe its proprietary technology would
        preclude or inhibit competitors from entering its markets. As such, the Company
        anticipates that new entrants will try to develop competing products and
        services as well as new forums for conducting eCommerce that could be deemed
        competitors. However, the Company believes it can compete successfully by
        relying on the Company's established infrastructure, marketing strategies,
        market futures anticipation, systems and procedures. In addition, the Company
        will continue to add additional products and services in the future and
        periodically revise its methods of doing business and also pursue its expansion
        into international markets, where the Company believes there is an overall
        lower
        level of competition.
 
 STRATEGY
 
 During
        fiscal 2007 the Company plans on greater automation for IceMAIL, IcePORTAL,
        and
        IceVISTA products. By using internal and external technical resources the
        Company will enable customers to manage and control their own environment
        (self
        service) or working with IceWEB Customer Service. IceWEB will be one of the
        few
        companies that allow customers almost total control of their features via
        web-based account management tools. All of our service offerings will have
        online purchasing and automated provisioning (account creation) that reduced
        human intervention for these repeatable tasks. This also helps customers
        with
        the desire for “immediate satisfaction” by having their product or service
        immediately available upon purchase.
  8
  
 
 The
        IceWEB Solutions Group’s focus on network security and the Federal Government
        will continue. We are carefully evaluating new technology products and
        manufacturers. By continuous training of our employees and partnering with
        our
        key vendor partners, we can continue to accelerate our growth in this
        market.
  ACQUISITIONS
 
 We
        plan on continuing to pursue strategic acquisitions that will broaden our
        product offerings and customer base, advance and expand our technological
        abilities, increase our cash flow and profitability, and diversify our
        operations.
 
 EMPLOYEES
 
 As
        of January 31, 2007, IceWEB employed a total of 25 employees, all of whom
        work
        full-time. The Company has no collective bargaining agreements with any unions
        and believes that the overall relations with its employees are satisfactory.
        We
        also from time to time use consultants to fulfill contracting
        requirements.
 
 OUR
        HISTORY
 
 IceWEB
        completed a reverse merger, in March 2002, with OTCBB:DSSC. Prior to this,
        the public entity was 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. 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.
 
 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.
  9
  
 
 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 shareholders 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.
 
 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 we issued
        100,000 shares of our common stock valued at $100,000. At the time of the
        acquisition, the fair value of the assets acquired exceeded the purchase
        price
        by $390,600 which we treated as goodwill for accounting purposes. From the
        date
        of acquisition through September 30, 2006 revenues from PatriotNet were
        approximately $316,000 and represented approximately 6% of our consolidated
        revenues. On December 1, 2006 we sold PatriotNet to Leros Technologies, a
        third
        party, for $150,000 in cash and the assumption of $60,000 in liabilities.
        At
        September 30, 2006 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 John Younts, a related party,
        for the assumption of approximately $200,000 in liabilities. In FY2006, revenues
        for IPS accounting for approximately $457,000 or 9.5% of overall IceWEB
        revenues.
 
 On
        November 15, 2006, IceWEB 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 customers, forecast, contract renewals, and GSA schedule of True North
        Federal.
 
 RISK
        FACTORS
 
 Before
        you invest in our securities, you should be aware that there are various
        risks.
        Additional risks and uncertainties not presently known to us or that we
        currently believe to be immaterial may also adversely affect our business.
        You
        should consider carefully these risk factors, together with all of the other
        information included in this annual report before you decide to purchase
        our
        securities. If any of the following risks and uncertainties develops into
        actual
        events, our business, financial condition or results of operations could
        be
        materially adversely affected and you could lose your entire investment in
        our
        company.
 
 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 $10,871,042 at September 30, 2006. For the
        years
        ended September 30, 2006 and 2005, we had a net loss attributable to common
        shareholders of approximately $4,370,000 and approximately $1,900,000,
        respectively, and cash used in operations was approximately $1,000,000 and
        $920,000, respectively. The report of our independent registered public
        accounting firm on our consolidated financial statements for the fiscal year
        ended September 30, 2006 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
        2006 as compared to fiscal 2005 of approximately 30% and 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, 2006, we had a working capital deficit of $1,626,966 as compared
        to a working capital deficit of $319,137 at September 30, 2005. This change
        is
        primarily attributable to the 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.
  10
  
 
 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:
 
 l
              for
                  a period of three years we will not issue any convertible debt
                  or
                  preferred stock
 
 l
              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,
 l
              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
 
 l
              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.
 
 WHILE
        SHARES OF OUR SERIES A CONVERTIBLE PREFERRED STOCK ARE OUTSTANDING WE ARE
        PROHIBITED FROM UNDERTAKING CERTAIN CAPITAL RAISING TRANSACTIONS WHICH MAY
        MATERIALLY ADVERSELY EFFECT OUR ABILITY TO RAISE FUNDS IN FUTURE
        PERIODS.
 
 The
        designations of the Series A Convertible Preferred Stock prohibit us from
        selling common stock or any other security which is convertible into common
        stock or issuing any rights, options or warrants which entitle the holder
        to
        purchase shares of our common stock at a price less than $0.60 per share,
        subject to adjustment. So long as shares of our Series A Convertible Preferred
        stock are outstanding, this prohibition will prevent us from raising additional
        capital at an effective offering price of less than $0.60 per share. While
        the
        market value of our common stock as of the date of this annual report is
        greater
        than $0.60 per share, we do not know if the trading price of our common stock
        will remain above $0.60 per share in future periods, particularly in light
        of
        the fact that we may be significantly increasing the number of shares of
        our
        common stock which will be freely tradable as a result of sales made by the
        selling security holders under that prospectus. If the market price of our
        common stock should fall to a price range which is near or below $0.60 per
        share
        we may be unable to raise capital in future periods as needed which could
        adversely affect our liquidity, operation of our company and ability to continue
        as a going concern.
 
 In
        addition, under the terms of the Preferred Stock Purchase Agreement for the
        Series A Convertible Preferred Stock for a period of three years beginning
        March
        30, 2005 we have contractually agreed not to issue any additional shares
        of
        preferred stock or any convertible debt, not to enter into any transactions
        which contain a reset provision which could result in additional shares being
        issued at some future date and not to enter into certain other types of
        financing transactions. These contractual limitations may limit our ability
        to
        raise capital as needed in future periods which could adversely affect our
        ability to continue our operations.
 
 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, we entered into a Finance
        Agreement with Sand Hill Finance, LLC for a $1.8 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.
  11
  
 
 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 RELIANT ON REVENUES FROM TWO CUSTOMERS. BECAUSE WE ARE NOT A PARTY TO
        LONG
        TERM AGREEMENTS WITH EITHER CUSTOMER, THE LOSS OF ONE OR BOTH OF THESE CUSTOMERS
        WOULD BE ADVERSE TO OUR FINANCIAL RESULTS IN FUTURE PERIODS.
 
 Revenues
        from two customers represented approximately 43% and approximately 37% of
        total
        revenues for the years ended September 30, 2006 and 2005, respectively, and
        approximately 51% of our accounts receivable at September 30, 2006 are due
        from
        these two customers. Both of these customers purchase products and services
        from
        us on a purchase order basis and, accordingly, may elect at any time to purchase
        similar products or services from our competitors. Until such time, if ever,
        as
        we are able to sufficiently expand our sales efforts and remove this dependency
        on revenues from these two customers, if one or both of them should cease
        purchasing products and services from us our revenues and results of operations
        would be materially adversely affected.
 
 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 and Nasdaq 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
        or
        quoted on Nasdaq, 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 or Nasdaq. 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
        A
        and B CONVERTIBLE PREFERRED STOCK WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.
 
 At
        December 31, 2006 we had outstanding:
 
 l
              9,677,909
                  shares of our common stock,
 
 l
              1,256,667
                  shares of Series A Convertible Preferred Stock which is convertible
                  into
                  1,256,667 shares of our common
                  stock,
 
 l
              1,833,334
                  shares of Series B Convertible Preferred Stock which is convertible
                  into
                  1,833,334 shares of our common
                  stock,
 
 l
              common
                  stock purchase warrants to purchase a total of 6,335,000 shares
                  of our
                  common stock with exercise prices ranging from $0.70 to $9.60 per
                  share,
                  and
  12
  
 
 l
              options
                  granted under our 2000 Management and Director Equity Incentive
                  and
                  Compensation Plan which are exercisable into 1,624,032 shares of
                  our
                  common stock with a weighted average exercise price of $0.78 per
                  share.
 
 The
        conversion of the Series A Convertible Preferred Stock and 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. At December 31, 2006, 5,730,000 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 are 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 will deprive 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 1,256,667 shares of our Series A Convertible Preferred Stock
        and
        1,833,333 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.
 
 THE
        COMPANY DOES NOT HAVE A DISASTER RECOVERY PLAN
 
 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, and the Company does not
        carry business interruption insurance to compensate the 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
        STRATEGY OF SEEKING JOINT VENTURES OR STRATEGIC ALLIANCES MAY BE
        UNSUCCESSFUL
 
 We
        may choose to expand our operations by entering into joint ventures or other
        strategic alliances with other parties. Any such transaction would be
        accompanied by the risks commonly encountered in such transactions. These
        include, among others, the difficulty of assimilating the operations and
        personnel, vicarious liability for the acts or omissions of joint venture
        partners, and other various factors. There can be no assurance should we
        enter
        into any strategic alliance with a third party that we will be successful
        in
        overcoming these risks or any other problems encountered in connection with
        joint ventures or other strategic alliances, or that such transactions will
        not
        have a material adverse effect on our business, financial condition and results
        of operations.
 
 **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 National Association of Securities Dealers, Inc. (NASD) in
        2005
        which is informally known as the "Three Strikes Rule", an NASD 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 three 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.
  13
  
 
 ITEM
        2. DESCRIPTION OF PROPERTY
 
 In
        November 2005, we entered into a three year lease for approximately 7,900
        square
        feet of office space located in the same building in which our principal
        executive offices had been located. This new lease provides for annual base
        rental of approximately $202,000 which escalates to approximately $215,000
        annually in the third year of the lease term. 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
 
 From
        time
        to time, the Company faces litigation in the ordinary course of business.
        Currently, we are involved with litigation with two prior employees, which
        in
        the Company’s opinion will not have a material adverse effect on its financial
        condition. The two related lawsuits have been filed against the Company in
        the
        Circuit Court of Fairfax County, Virginia. Both suits are brought by former
        shareholders of DevElements, Inc., the assets of which were purchased by
        a
        subsidiary of the Company. The plaintiffs seek money damages from the Company
        for alleged breach of the asset purchase agreement, and damages related to
        stock
        options. The Company intends to vigorously defend this litigation. The Company
        believes the litigation is without merit.
 
 
 ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
 PART
        II
 
 ITEM
        5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
 Our
        common stock is quoted on the OTCBB. On April 27, 2005 our symbol was changed
        from ICEW to IWEB in connection with a 1:80 reverse split of our common stock
        effective on that date. 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
                  2005First
                  quarter ended December 31, 2004
              
              $
              5.60
              
              $
              2.40Second
                  quarter ended March 31, 2005
              
              $
              3.20
              
              $
              1.60Third
                  quarter ended June 30, 2005
              
              $
              2.20
              
              $
              0.80Fourth
                  quarter ended September 30, 2005
              
              $
              1.30
              
              $
              0.65Fiscal
                  2006First
                  quarter ended December 31, 2005
              
              $
              1.05
              
              $
              0.65Second
                  quarter ended March 31, 2006
              
              $
              1.70
              
              $
              0.70Third
                  quarter ended June 30, 2006
              
              $
              1.20
              
              $
              0.67Fourth
                  quarter ended September 30, 2006
              
              $
              0.90
              
              $
              0.37Fiscal
                  2007First
                  quarter ended December 31, 2006
              
              $
              0.75
              
              $
              0.35
 
 As
        of February 5, 2007 the last sale price of our common shares as reported
        on the
        OTC Bulletin Board was $0.51 per share. As of January 26 ,2007, there were
        approximately 362 record owners of our common stock.
  14
  
 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.
 
 Under
        the terms of our Series A Convertible Preferred Stock and Series B Convertible
        Preferred Stock or shares of our Series B Convertible Preferred Stock, we
        cannot
        pay dividends on our common stock so long as shares of our Series A Convertible
        Preferred Stock are outstanding. 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
 
 As
        additional consideration under the terms of a $200,000 principal amount
        promissory note due October 29, 2006 that we issued on September 29, 2006
        to a
        principal shareholder of our company, we issued 500,000 shares of common
        stock
        valued at the fair market value on the dates of grant of $.45 per share or
        $225,000. The recipient was an accredited investor and 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. We did not pay any commissions
        or finder's fees in the transaction and we used the funds for general working
        capital.
 
 During
        fiscal 2006, we issued 213,877 shares of common stock to employees in exchange
        for services provided. We valued these common shares at the fair market value
        on
        the date of grant at per share prices ranging from $.88 to $1.15 or
        $196,536. ****
 
 
 SECURITIES
        AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
 
 The
        following table sets forth securities authorized for issuance under our 2000
        Management and Director Equity Incentive and Compensation Plan and any
        compensation plan not approved by our stockholders as of September 30,
        2006.
  Number
                    ofsecurities
                    to be
                
                Weighted
                
                Number
                    ofissued
                    upon
                
                average
                
                securities
                    remainingexercise
                    of
                
                exercise
                
                available
                    for futureof
                    outstanding
                
                price
                    of
                
                issuance
                    under equityoptions,
                    warrants
                
                outstanding
                
                compensation
                    plansand
                    rights (a)
                
                options,
                
                (excluding
                    securitiesand
                    rights
                
                warrants
                
                reflected
                    in column (a))Plan
                    category2000
                    Management and DirectorEquity
                    Incentive andCompensation
                    Plan
                
                
                1,493,806
                
                $
                1.00
                
                
                716,569Equity
                    compensation plansnot
                    approved by stockholders
                
                
                0
                
                
                0
                
                
                0
   ITEM
        6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
 OVERVIEW
 
 We
        provide hosted web-based collaboration solutions that enable organizations
        to
        establish Internet, Intranet, and email/collaboration services immediately
        and
        with little or no up-front capital investment. Our portal and IceMAIL
        collaboration software services are available on a monthly or annual
        subscription basis to small and medium-sized businesses and non-profit and
        government organizations. We also provide consulting services to our larger
        enterprise and government customers including network infrastructure, enterprise
        email/collaboration, and Internet/Intranet portal implementation and support
        services. We offer pre-packaged and custom services, using proven best practices
        to help organizations define their online business objectives and quickly
        deploy
        their Internet, Intranet, and email/collaboration systems. Although most
        of our
        small to medium-sized business customers purchase and activate our solutions
        online, our professional services teams work closely with our government,
        non-profit and larger customers to deploy customized solutions. We also market
        an array of information technology services and third party computer hardware
        and software.
  15
  
 
 Beginning
        in 2001, we began a series of strategic acquisitions which have resulted
        in our
        current business and operations, including:
 
 l
              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,
 
 l
              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,
 
 l
              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,
  l
              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,
                  and
 
 l
              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 the customers.
                  In this
                  transaction we acquired software licenses, source code, potential
                  patents
                  and trademarks, as well as some cash and tangible
                  assets.
 
 l
              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. This brought over 3000
                  customers
                  with recurring subscription-based services into IceWEB. In November
                  2006
                  ,we sold our interest in
                  PatriotNet.
 
 In
        August
        2006, after multiple quarters of collapsing revenue and higher than anticipated
        losses in FY2006, the IceWEB 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.
 
 l
              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 customers, forecast, contract renewals,
                  and
                  GSA schedule of True North Federal. The revenue generated to IceWEB
                  from
                  this division since the acquisition, in November, has exceeded
                  the revenue
                  from the discontinued PatriotNet and IPS operations.
 
 l
              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, 2006 we recorded goodwill impairment
                  of
                  $180,000 related to this transaction. The PatriotNet services constituted
                  9.5% of revenue in FY2006.
 
 l
              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
                  FY2006, revenues for IPS accounting for approximately $400,000
                  or 7% of
                  overall IceWEB revenues.
 
 We
        generate revenues from sales 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:
 
 l
              Further
                  marketing of IceMAIL, a packaged service that provides a network-hosted
                  groupware, email, calendaring, and collaboration solution utilizing
                  Microsoft Exchange, the most widely used enterprise system available.
                  Customers are able to leverage the full capabilities of Microsoft
                  Exchange
                  2003 and Outlook without the initial implementation and maintenance
                  costs
                  associated with such an advanced system.
  16
  
 
 l
              Continued
                  focus on developing strategic partnerships with key retail and
                  small
                  business solution providers such as CompUSA, Simply Wireless, and
                  Intelligent Office--all of which entered into sales and marketing
                  agreements with IceWEB during fiscal
                  2006.
 
 l
              Continued
                  growth in network security sales to existing Federal customers
                  of the
                  former True North Federal solutions.
 
 l
              Raising
                  approximately $4 million of additional working capital through
                  the sale of
                  warrants to expand our marketing, research and development, and
                  refined
                  our debt.
 
 l
              Hiring
                  additional qualified, technical employees,
                  and
 
 l
              Improving
                  our internal financial reporting systems and
                  processes.
 
 RESULTS
        OF OPERATIONS
 
 FISCAL
        YEAR ENDED SEPTEMBER 30, 2006 AS COMPARED TO FISCAL YEAR ENDED SEPTEMBER
        30,
        2005
 
 The
        following table provides an overview of certain key factors of our results
        of
        operations for the fiscal year ended September 30, 2006 as compared to the
        fiscal year ended September 30, 2005:
 
 Fiscal
                  Year EndedSeptember
                  30,
              
              $
              
              %2006
              
              2005
              
              Change
              
              ChangeRevenues
              
              $
              4,768,993
              
              $
              6,809,590
              
              $
              (2,040,597
              )
              
              -30.0
              %Cost
                  of sales
              
              
              3,462,716
              
              
              4,753,276
              
              $
              (1,290,560
              )
              
              -27.2
              %Marketing
                  and selling
              
              
              225,338
              
              
              56,538
              
              $
              168,800
              
              
              +298.6
              %Depreciation
              
              
              219,024
              
              
              813,860
              
              $
              (594,836
              )
              
              -73.1
              %G&A
                  expenses
              
              
              3,791,086
              
              
              1,994,168
              
              $
              1,796,918
              
              
              +90.1
              %Total
                  operating expenses
              
              
              4,456,248
              
              
              2,864,566
              
              $
              1,591,682
              
              
              +55.6
              %Operating
                  (loss)
              
              
              (3,149,971
              )
              
              (808,252
              )
              $
              2,341,719
              
              
              +289.7
              %Total
                  other income (expenses)
              
              
              (720,416
              )
              
              (
                  95,256
              )
              $
              625,160
              
              
              +656.3
              %Net
                  (loss)
              
              $
              (3,870,387
              )
              $
              (903,508
              )
              $
              2,966,879
              
              
              +328.4
              %Beneficial
                  conversionfeature
                  - preferred stock
              
              
              (500,000
              )
              
              (1,000,000
              )
              $
              (500,000
              )
              
              -50.0
              %Net
                  loss attributable tocommon
                  stockholders
              
              $
              (4,370,387
              )
              $
              (1,903,508
              )
              $
              2,466,879
              
              
              +129.6
              %
 
 
 Other
        key indicators:
 Fiscal 2006
              
              Fiscal
                  2005
              
              %
                  of changeCost
                  of sales as a percentage of revenues
              
              
              72.6
              %
              
              69.8
              %
              
              +2.8
              %Gross
                  profit margin
              
              
              27.4
              %
              
              30.2
              %
              
              -2.8
              %G&A
                  expenses as a percentage of revenues
              
              
              79.5
              %
              
              29.3
              %
              
              +50.2
              %Total
                  operating expenses as apercentage
                  of revenues
              
              
              93.4
              %
              
              42.0
              %
              
              +51.4
              %
 
 
 Revenues
 
 For
        the year ended September 30, 2006, we reported revenues of $4,768,993 as
        compared to revenues of $6,809,590 for the prior year ended September 30,
        2005,
        a decrease of $2,040,597 or approximately 30%.
 
 The
        decrease in the revenues during the year ended September 30, 2006 when compared
        to the prior year is due to a number of factors. The Company was not successful
        in attracting new Federal customers to resell our third party equipment and
        relied too heavily on small number of large customers. The cyclical nature
        of
        Federal hardware/software sales and the Company’s failure to obtain new
        customers was the cause for reduced revenues. During this time, the reduced
        cash
        flow prevented the Company from executing on a marketing plan for the IceWEB
        “online” services such as IceMAIL. This prevented these newer products from
        gaining sufficient new customers to impact revenue.
 
 With
        the
        renewed focus and divestiture of IPS and PatriotNet, and acquisition of True
        North Federal, the Company has greatly improved revenues while reducing
        operational costs. We expect revenues to grow from additional IceWEB “online”
products as well as additional sales of third-party network security
        hardware/software.
  17
  
 
 Cost
        Of Sales
 
 Our
        cost of sales consists of products purchased for resale, salaries of technical
        personnel, and third party contractors. For the year ended September 30,
        2006,
        cost of sales was $3,462,716, or approximately 72.6% of revenues, compared
        to
        $4,753,276, or approximately 69.8% of revenues, for the year ended September
        30,
        2005. The increase in costs of sales as a percentage of revenue and the
        corresponding decrease in our gross profit margin for fiscal 2006 as compared
        to
        fiscal 2005 was the results of an increase during the year in hardware/software
        resell revenues as a percentage of total revenue. As hardware/software resell
        produces less profit margin, the cost of sales increased.
 
 Total
        Operating Expenses
 
 Our
        total operating expenses increased approximately 53.1% to $4,456,248 for
        the
        year ended September 30, 2006 as compared to $2,864,566 for the year ended
        September 30, 2005. These increases include:
 
 Marketing
        and Selling. For the year ended September 30, 2006, marketing and selling
        costs
        were $225,338 as compared to $56,538 for the year ended September 30, 2005,
        an
        increase of $168,800 or approximately 298.6%. This increase was due to an
        increase in stock-based marketing expense of $50,998 during fiscal 2006 as
        a
        result of the issuance of 350,000 shares on our common stock to CompUSA in
        connection with a 24-month Retailer Marketing Agreement. Additional increases
        were the result of an increase in online web marketing, advertising and print
        advertising during fiscal 2006. The Company did not have sufficient sales
        personnel, marketing, and liquidity to effectively sell the wide variety
        of
        products and services—many of which were unrelated to each other.
 
 After
        the Management changes and divestiture of two divisions, the Company believes
        that the we can better sell and market our products in FY2007.
 
 Depreciation
        expense. For the year ended September 30, 2006, depreciation and amortization
        expense amounted to $219,024 as compared to $813,860 for the year ended
        September 30, 2005, a decrease of $594,836 or 73.1%. Depreciation expense
        is
        provided by use of the straight-line method over the estimated useful lives
        of
        the assets. For the year ended September 30, 2006, depreciation expense was
        $199,022 as compared to $51,096 for the prior year ended September 30, 2005.
        The
        increase in depreciation was attributable to the amortization of capitalized
        software development costs of approximately $208,000 related to **software
        developed during fiscal 2006** . Amortization
        expense is related to the customer relationships and software library which
        are
        intangible assets that we generated through our acquisitions of DevElements,
        Inc. and Iplicity, Inc. The decrease in amortization expense of $742,764,
        or
        approximately 97.3%, for fiscal 2006 as compared to fiscal 2005 reflects
        previous amortizations of this intangible asset which has been fully
        amortized.
 
 General
        and administrative expense. For the year ended September 30, 2006, general
        and
        administrative expenses were $3,791,086 as compared to $1,994,168 for the
        year
        ended September 30, 2005, an increase of $1,796,918 or approximately 90.1%.
        For
        the year ended September 30, 2006 and 2005, general and administrative expenses
        consisted of the following:
 
 2006
              
              2005Salaries
                  and related taxes
              
              $
              2,298,551
              
              $
              1,239,641Professional
                  fees
              
              
              133,059
              
              
              186,833Rent
              
              
              225,214
              
              
              201,124Consulting
                  fees
              
              
              217,484
              
              
              4,000Insurance
              
              
              211,918
              
              
              168,753Bad
                  debt
              
              
              78,778
              
              
              3,167Other
                  operating expenses
              
              
              626,082
              
              
              190,650Total
              
              $
              3,791,086
              
              $
              1,994,168
 
 
 l
              For
                  the year ended September 30, 2006, salaries and related taxes increased
                  to
                  $2,298,551 as compared to $1,239,641 for the year ended September
                  30,
                  2005, an increase of $1,058,910 or 85.4%. The increase was attributable
                  to
                  an increase in executive and office salaries in 2006, the granting
                  of
                  stock options in fiscal 2006 to employees which was valued using
                  FASB 123R
                  and resulted in stock-based compensation of $429,913, the issuance
                  of
                  common stock to employees in fiscal 2006 resulting in stock-based
                  compensation of $196,536. In August 2006, we reduced our staff
                  by
                  approximately nine employees and expect salaries and related taxes
                  to
                  decrease in future periods. These reductions were implemented by
                  Management as a cost cutting measure after the August 2006
                  restructuring.
 l
              For
                  the year ended September 30, 2006, professional fees amounted to
                  $133,059
                  as compared to $186,833 for the year ended September 30, 2005,
                  a decrease
                  of $53,774 or 28.8%. The decrease was primarily attributable to
                  a decrease
                  in legal fees incurred due to fewer acquisitions. For the year
                  ended
                  September 30, 2006, rent expense amounted to $225,214 as compared
                  to
                  $201,124 for the year ended September 30, 2005, an increase of
                  $24,090 or
                  12%.
  18
  
 l
              For
                  the year ended September 30, 2006, consulting expense amounted
                  to $217,484
                  as compared to $4,000 for the year ended September 30, 2005, an
                  increase
                  of $213,484. The increase was attributable to a increase in investor
                  relations expense, including stock-based consulting expense of
                  $57,417
                  recorded in fiscal 2006 from the issuance of 100,00 shares of our
                  common
                  stock.
 l
              For
                  the year ended September 30, 2006, insurance expense amounted to
                  $211,918
                  as compared to $168,753 for the year ended September 30, 2005,
                  an increase
                  of $43,165. The increase was attributable to an increase in
                  health insurance expenses.
 l
              For
                  the year ended September 30, 2006, bad debt expense amounted to
                  $78,778 as
                  compared to $3,167 for the year ended September 30, 2005, an increase
                  of
                  $75,611. The increase was primarily attributable to the write-off
                  of an
                  employee advance of $65,202 to John Younts which was deem impaired
                  due to
                  the subsequent sale of IPS.
 l
              For
                  the year ended September 30, 2006, other operating expenses, which
                  includes credit card fees, office expenses and supplies, travel,
                  telephone
                  and communications, and equipment rental, amounted to $626,082
                  as compared
                  to $190,650 for the year ended September 30, 2005, an increase
                  of $435,432
                  or 228%. The increase was primarily attributable to an increase
                  in
                  operations. We expect these expenses to decrease in fiscal 2007
                  due to
                  cost cutting measures.
 
 Impairment
        of goodwill. For the year ended September 30, 2006, we recorded an impairment
        of
        goodwill of $220,800 as compared to $0 for the year ended September 30, 2005,
        an
        increase of $220,800 or 100%. In connection with the sale of our PatriotNet
        subsidiary subsequent to September 30, 2006, we determined that goodwill
        of
        $180,000 attributable to the acquisition of PatriotNet was impaired.
        Additionally, in fiscal 2006, we recorded an impairment of goodwill of related
        to prior acquisitions of $40,800.
 
 LOSS
        FROM
        OPERATIONS
 
 We
        reported a loss from operations of $3,149,971 for the year ended September
        30,
        2006 as compared to a loss from operations of $808,252 for the year ended
        September 30, 2005, an increase of $2,341,719 or approximately
        289.7%.
 
 OTHER
        INCOME (EXPENSES)
 
 Rental
        Revenue. During fiscal 2005, we sub-leased excess space at our principal
        executive offices to third parties. Rental revenue represents revenue from
        this
        sub-lease arrangement. Rental revenue for fiscal 2006 decreased $19,284 or
        approximately 100%, from fiscal 2005 as a result of the termination of the
        sub-leasing arrangement in mid-fiscal 2005. As a result of our move to other
        offices we will not have comparable revenue in future periods.
 
 Interest
        Expense. For the year ended September 30, 2006, interest expense amounted
        to
        $728,619 as compared to $114,540 for the year ended September 30, 2005, an
        increase of $614,079 or 536.1%. The increase in interest expense is attributable
        to the following: (i)In December 2005, we entered a financing agreement with
        Sand Hill Finance LLC for the financing of our accounts receivable balances
        with
        an annual interest rate of 24% and incurred interest expense of approximately
        $83,000; (ii) In connection with certain notes payable, we issued 676,120
        shares
        of our common stock and recorded interest expense $351,805 and accrued interest
        expense of $169,803 in connection with common shares issuable under a loan
        agreement; (iii) In July 2006, we entered into a sale-leaseback equipment
        financing arrangement whereby we borrowed $300,000 and (iv) During fiscal
        2006,
        we amortized deferred financing costs of $20,000.
 
 NET
        LOSS
 
 Our
        net loss was $3,870,387 for the fiscal year ended September 30, 2006 compared
        to
        $903,508 for the year ended September 30, 2005.
 
 BENEFICIAL
        CONVERSION FEATURE - PREFERRED STOCK
 
 During
        fiscal 2006 and 2005, we recorded a deemed preferred stock dividend of $500,000
        and $1,000,000, respectively, which relates to our Series A and B Convertible
        Preferred Stock. This non-cash expense related to the beneficial conversion
        features of those securities and is recorded with a corresponding credit
        to paid
        in capital.
 
 NET
        LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
 
 We
        reported a net loss attributable to common shareholders of $4,370,387 for
        fiscal
        2006 as compared to a net loss attributable to common shareholders of $1,903,508
        in fiscal 2005. This translates to an overall per-share loss available to
        shareholders of $.60 for fiscal 2006 compared to per-share loss of $.32 for
        fiscal 2005.
 
 
 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, 2006 and September 30, 2005:
  19
  
 September
                    30,
                
                $
                      of
                
                %
                      of2006
                
                2005
                
                Change
                
                ChangeWorking
                    capital (deficit)
                
                $
                (1,626,966
                )
                $
                319,137
                
                $
                (1,946,103
                )
                
                -609.8
                %Cash
                
                $
                432,885
                
                $
                557,175
                
                $
                (124,290
                )
                
                -22.3
                %Accounts
                    receivable, net
                
                $
                1,264,065
                
                $
                1,577,460
                
                $
                (313,395
                )
                
                -19.9
                %Total
                    current assets
                
                $
                1,706,621
                
                $
                2,221,916
                
                $
                (515,295
                )
                
                -23.2
                %Property
                    and equipment, net
                
                $
                424,559
                
                $
                259,852
                
                $
                164,707
                
                
                +63.4
                %Goodwill
                
                $
                211,600
                
                $
                41,800
                
                $
                169,800
                
                
                +406.2
                %Intangibles,
                    net
                
                $
                40,000
                
                $
                68,525
                
                $
                (28,525
                )
                
                -41.6
                %Deferred
                    financing costs, net
                
                $
                159,999
                
                $
                180,000
                
                $
                20,001
                
                
                -11.1
                %Total
                    assets
                
                $
                2,595,875
                
                $
                2,788,263
                
                $
                (192,388
                )
                
                -6.9
                %Notes
                    payable
                
                $
                1,200,770
                
                $
                0
                
                $
                1,200,770
                
                
                +100.0
                %Equipment
                    financing payable
                
                $
                262,296
                
                $
                0
                
                $
                262,296
                
                
                +100.0
                %Accounts
                    payable
                
                $
                894,390
                
                $
                904,910
                
                $
                (10,520
                )
                
                -1.2
                %Accrued
                    expenses
                
                $
                679,544
                
                $
                37,488
                
                $
                642,056
                
                
                +1,712.7
                %Advances
                    from related party
                
                $
                8,123
                
                $
                86,001
                
                $
                (77,878
                )
                
                -90.6
                %Preferred
                    stock to be issued
                
                $
                0
                
                $
                408,836
                
                $
                (408,836)
                
                
                -100.0
                %Total
                    current liabilities
                
                $
                3,333,587
                
                $
                1,902,779
                
                $
                1,430,808
                
                
                +75.2
                %Note
                    payable - related parties
                
                $
                328,099
                
                $
                215,625
                
                $
                112,474
                
                
                +52.2
                %Total
                    liabilities
                
                $
                3,666,556
                
                $
                2,118,404
                
                $
                1,548,152
                
                
                +73.1
                %Accumulated
                    (deficit)
                
                $
                (10,871,042
                )
                $
                (6,500,655
                )
                $
                4,370,387
                
                
                +67.2
                %Stockholders'
                    equity (deficit)
                
                $
                (1,070,681
                )
                $
                669,859
                
                $
                (1,740,540
                )
                
                +259.8
                %
  At
        September 30, 2006, we had a working capital deficit of $(1,626,966) compared
        to
        working capital of $319,137 at September 30, 2005, a change of
        $(1,946,103).  The increase is attributable to an increase in borrowing
        under a factoring agreement of $1,000,770, an increase in equipment financing
        payables of $262,296 and an increase in accrued expenses.
 
 Net
        cash used in operating activities was $1,009,521 for the year ended September
        30, 2006 as compared to net cash used in operating activities of $920,515
        for
        the year ended September 30, 2005, an increase of $89,006. The increase in
        cash
        used in operations is primarily due to an increase in net loss. For the year
        ended September 30,2006, our cash used in operations of $1,009,521 consisted
        of
        a net loss of $3,870,387 offset by non-cash items such as depreciation and
        amortization of $227,547, interest expense recorded from stock issued for
        notes
        payable of $351,805, the impairment of goodwill of $220,800, stock-based
        compensation of $734,864 and other non-cash items of $269,307. Additionally, 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 $299,819
        attributable to a decrease in sales, an increase in accounts payable and
        accrued
        expenses of $532,925, and an increase of in accrued interest payable of
        $254,178. For the year ended September 30,2005, our cash used in operations
        of
        $920,515 consisted of a net loss of $903,508 offset by non-cash items such
        as
        depreciation and amortization of $833,580, interest expense recorded from
        stock
        issued for notes payable of $37,500, and other non-cash items of $3,167.
        Additionally, we had a decrease in operating liabilities and an increase
        in
        operating assets. This change in operating assets and liabilities primarily
        consisted of an increase in accounts receivable of $517,920 and a decrease
        in
        accounts payable and accrued expenses of $271,578, and an increase of in
        accrued
        interest payable of $254,178.
 
 Net
        cash used in investing activities for the year ended September 30, 2006 was
        $539,317 as compared to net cash used in investing activities of $233,224
        for
        fiscal 2005. During fiscal 2006, we acquired a company and in connection
        therewith used cash of $185,247. Additionally, we used cash of $354,070 for
        property and equipment purchases and to fund our software development during
        fiscal 2006. In fiscal 2005, we purchased equipment and software amounting
        to
        $224,698 and acquired intangible assets of $8,526 which represented the cash
        used in investing activities. We did not have any company acquisitions or
        similar transactions during fiscal 2005.
 
 Net
        cash provided by financing activities for fiscal 2006 was $1,424,548 as compared
        to $1,532,133 for fiscal 2005, a decrease of $107,585. The primary reason
        for
        the increase was a decrease of $1,377,134 in net proceeds from the sale of
        equity securities and exercise of warrants and options during fiscal 2006
        as
        compared to fiscal 2005 offset by an increase in borrowings of $1,269,549.
 
 At
        September 30, 2005 we had an accumulated deficit of $10,871,042 and the report
        from our independent registered public accounting firm on our audited financial
        statements at September 30, 2006 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. Our revenues declined significantly in fiscal 2006
        from
        fiscal 2005, we reported a net loss of $3,870,387 for fiscal 2006 and a net
        loss
        attributable to common shareholders of $4,370,387. Subsequent to September
        30,
        2006 we have sold two subsidiaries which accounted for approximately 10%
        of our
        fiscal 2006 revenues. There is no assurance that we will be able to maintain
        or
        increase our revenues in fiscal 2007 or that we will report net income in
        any
        future periods.
  20
  
 
 
 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, 2006 we had
        cash
        on hand of $432,885. 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. As of September 30, 2006 and as of
        January 31, 2007, we had approximately $700,000 and $650,000 available under
        this line of credit.
 
 We
        do not have any working capital commitments nor do we not presently have
        any
        external sources of working capital other than what may be available under
        the
        factoring agreement and loans from related parties. Our working capital needs
        in
        future periods 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
        designations of these shares 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 $0.60 per share for the Series A Convertible
        Preferred Stock and $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 A Convertible Preferred Stock and 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 effect 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 unaudited consolidated financial statements, which have been
        prepared in accordance with accounting principles generally accepted in the
        United States of America. The preparation of these 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 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:
  21
  
 
 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. The adoption of SFAS No. 123R will have a negative impact on
        our
        future results of operations.
 
 RECENT
        ACCOUNTING PRONOUNCEMENTS
 
 The
        Financial Accounting Standards Board has recently issued several new accounting
        pronouncements:
 
 In
        February 2006, the FASB issued SFAS 155, which applies to certain "hybrid
        financial instruments," which are instruments that contain embedded derivatives.
        The new standard establishes a requirement to evaluate beneficial interests
        in
        securitized financial assets to determine if the interests represent
        freestanding derivatives or are hybrid financial instruments containing embedded
        derivatives requiring bifurcation. This new standard also permits an election
        for fair value re-measurement of any hybrid financial instrument containing
        an
        embedded derivative that otherwise would require bifurcation under SFAS 133.
        The
        fair value election can be applied on an instrument-by-instrument basis to
        existing instruments at the date of adoption and can be applied to new
        instruments on a prospective basis. The adoption of SFAS No.155 did not have
        a
        material impact on the Company's financial position and results of
        operations.
 
 In
        March
        2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
        Assets, an amendment of FASB Statement No. 140, Accounting for Transfers
        and
        Servicing of Financial Assets and Extinguishments of Liabilities". This
        statement requires all separately recognized servicing assets and servicing
        liabilities be initially measured at fair value, if practicable, and permits
        for
        subsequent measurement using either fair value measurement with changes in
        fair
        value reflected in earnings or the amortization and impairment requirements
        of
        Statement No. 140. The subsequent measurement of separately recognized servicing
        assets and servicing liabilities at fair value eliminates the necessity for
        entities that manage the risks inherent in servicing assets and servicing
        liabilities with derivatives to qualify for hedge accounting treatment and
        eliminates the characterization of declines in fair value as impairments
        or
        direct write-downs. SFAS No. 156 is effective for an entity's first fiscal
        year
        beginning after September 15, 2006. The adoption of this statement is not
        expected to have a significant effect on the Company's future reported financial
        position or results of operations.
 
 In
        July
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation
        of
        FASB Statement No. 109." This interpretation provides guidance for recognizing
        and measuring uncertain tax positions, as defined in SFAS No. 109, "Accounting
        for Income Taxes." FIN No. 48 prescribes a threshold condition that a tax
        position must meet for any of the benefit of an uncertain tax position to
        be
        recognized in the financial statements. Guidance is also provided regarding
        de-recognition, classification, and disclosure of uncertain tax positions.
        FIN
        No. 48 is effective for fiscal years beginning after December 15, 2006. The
        Company does not expect that this interpretation will have a material impact
        on
        its financial position, results of operations, or cash flows.
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, "Fair Value Measurements" ("FAS 157"). This Statement defines fair value
        as
        used in numerous accounting pronouncements, establishes a framework for
        measuring fair value in generally accepted accounting principles and expands
        disclosure related to the use of fair value measures in financial statements.
        The Statement is to be effective for the Company's financial statements issued
        in 2008; however, earlier application is encouraged. The Company is currently
        evaluating the timing of adoption and the impact that adoption might have
        on its
        financial position or results of operations
 
 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.
 
 ITEM
        7. Financial Statements
 
   22
  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 Shareholders’ Equity (Deficit)
                
                
                F-5Consolidated
                    Statements of Cash Flows
                
                
                F-6Notes
                    to Consolidated Financial Statements
                
                
                F-7
                    to F-25
 
  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, 2006 and the related consolidated statements
          of
          operations, changes in stockholders' equity (deficit) and cash flows for
          the
          years ended September 30, 2006 and 2005. 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. 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, 2006 and the consolidated results
          of their
          operations and their cash flows for the years ended September 30, 2006
          and 2005,
          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 $3,870,387
          and
          $903,508 respectively, for the years ended September 30, 2006 and 2005.
          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
 January
          30, 2007
 
 F-2
  **IceWEB,
            INC. AND SUBSIDIARIES**
 **CONSOLIDATED
            BALANCE SHEET**
 **September
            30, 2006**
   CURRENT
                      ASSETS:Cash
                  
                  $
                  432,885Accounts
                      receivable, net of allowance for bad debt of $9,000
                  
                  
                  1,264,065Prepaid
                      expenses
                  
                  
                  9,671Total
                      current assets
                  
                  
                  1,706,621OTHER
                      ASSETS:Property
                      and equipment, net
                  
                  
                  424,559Goodwill
                  
                  
                  211,600Deposits
                  
                  
                  53,096Intangible
                      assets, net of accumulated amortization of $60,000
                  
                  
                  40,000Deferred
                      financing costs, net
                  
                  
                  159,999Total
                      Assets
                  
                  $
                  2,595,875LIABILITIES
                      AND STOCKHOLDERS' DEFICITCURRENT
                      LIABILITIES:Notes
                      payable
                  
                  $
                  1,200,770Note
                      payable - related party
                  
                  
                  178,099Current
                      portion of equipment financing payable
                  
                  
                  79,327Accounts
                      payable
                  
                  
                  894,390Accrued
                      expenses
                  
                  
                  679,544Accrued
                      interest payable
                  
                  
                  254,178Deferred
                      revenue
                  
                  
                  39,156Advances
                      from related party
                  
                  
                  8,123Total
                      current liabilities
                  
                  
                  3,333,587LONG-TERM
                      LIABILITIES:Equipment
                      financing payable, net of current portion
                  
                  
                  182,969Note
                      payable - related party
                  
                  
                  150,000Total
                      long-term liabilities
                  
                  
                  332,969Total
                      Liabilities
                  
                  
                  3,666,556STOCKHOLDERS'
                      DEFICIT:Preferred
                      stock ($.001 par value; 10,000,000 shares authorized)Series
                      A convertible preferred stock ($.001 par value; 1,256,667
                      sharesissued
                      and outstanding)
                  
                  
                  1,257Series
                      B convertible preferred stock ($.001 par value; 1,833,334
                      sharesissued
                      and outstanding)
                  
                  
                  1,833Common
                      stock ($.001 par value; 1,000,000,000 shares authorized;8,857,909
                      shares issued and 8,695,409 shares outstanding)
                  
                  
                  8,859Additional
                      paid-in capital
                  
                  
                  10,148,997Accumulated
                      deficit
                  
                  
                  (10,871,042
                  )Deferred
                      compensation
                  
                  
                  (347,585
                  )Treasury
                      stock, at cost, (162,500 shares)
                  
                  
                  (13,000
                  )Total
                      Stockholders' Deficit
                  
                  
                  (1,070,681
                  )Total
                      Liabilities and Stockholders' Deficit
                  
                  $
                  2,595,875
  See
            accompanying notes to consolidated financial statements
  F-3
 
 IceWEB,
            Inc. and Subsidiaries
 CONSOLIDATED
            STATEMENTS OF OPERATIONS
  
 For
                      the Year EndedSeptember
                      30,2006
                  
                  2005Sales
                  
                  $
                  4,768,993
                  
                  $
                  6,809,590Cost
                      of sales
                  
                  
                  3,462,716
                  
                  
                  4,753,276Gross
                      profit
                  
                  
                  1,306,277
                  
                  
                  2,056,314Operating
                      expenses:Marketing
                      and selling
                  
                  
                  225,338
                  
                  
                  56,538Depreciation
                      and amortization expense
                  
                  
                  219,024
                  
                  
                  813,860General
                      and administrative
                  
                  
                  3,791,086
                  
                  
                  1,994,168Impairment
                      of goodwill
                  
                  
                  220,800
                  
                  
                  -Total
                      operating expense
                  
                  
                  4,456,248
                  
                  
                  2,864,566Loss
                      from operations
                  
                  
                  (3,149,971
                  )
                  
                  (808,252
                  )Other
                      income (expenses):Rental
                      revenue
                  
                  
                  -
                  
                  
                  19,284Interest
                      income
                  
                  
                  8,203
                  
                  
                  -Interest
                      expense
                  
                  
                  (728,619
                  )
                  
                  (114,540
                  )Total
                      other income (expenses):
                  
                  
                  (720,416
                  )
                  
                  (95,256
                  )Net
                      loss
                  
                  
                  (3,870,387
                  )
                  
                  (903,508
                  )Beneficial
                      conversion feature -preferred stock
                  
                  
                  (500,000
                  )
                  
                  (1,000,000
                  )Net
                      loss attributable to common shareholders
                  
                  $
                  (4,370,387
                  )
                  $
                  (1,903,508
                  )Net
                      loss per common share available to common shareholders:Basic
                      and diluted loss per share
                  
                  $
                  (0.60
                  )
                  $
                  (0.32
                  )Weighted
                      average common shares outstanding - basic and diluted
                  
                  
                  7,325,021
                  
                  
                  5,865,935
  See
            accompanying notes to consolidated financial statements
  F-4
 **IceWEB,
              Inc. and Subsidiaries**
 **CONSOLIDATED
              STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)**
 **For
              the years ended September 30, 2006 and 2005**
 **Series
                      A Preferred**
                  
                  **Series
                      B****Preferred**
                  
                  
                  
                  
                  
                  
                  
                  **Additional****Stock**
                  
                  **Stock**
                  
                  **Common
                      Stock**
                  
                  **Subscription**
                  
                  **Paid-In**
                  
                  **Accumulated**
                  
                  **Deferred**
                  
                  **Treasury
                      Stock****Shares**
                  
                  **Amount**
                  
                  **Shares**
                  
                  **Amount**
                  
                  **Shares**
                  
                  **Amount**
                  
                  **Receivable**
                  
                  **Capital**
                  
                  **Deficit**
                  
                  **Compensation**
                  
                  **Share**
                  
                  **Amount**
                  
                  **Total**Balance
                      at September 30, 2004
                  
                  
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  
                  5,429,991
                  
                  $
                  5,430
                  
                  $
                  (52,000
                  )
                  $
                  4,574,373
                  
                  $
                  (4,597,147
                  )
                  $
                  -
                  
                  
                  (162,500
                  )
                  $
                  (13,000
                  )
                  $
                  (82,344
                  )Preferred
                      stock issued for cash
                  
                  
                  1,666,667
                  
                  
                  1,667
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  844,169
                  
                  
                  -
                  
                  
                  
                  
                  
                  -
                  
                  
                  -
                  
                  
                  845,836Preferred
                      A Stock Dividend
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,000,000
                  
                  
                  (1,000,000
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Common
                      stock issued
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  503,129
                  
                  
                  503
                  
                  
                  -
                  
                  
                  469,477
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  469,980Common
                      stock issued in satisfaction of liabilities
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  541,667
                  
                  
                  542
                  
                  
                  (91,477
                  )
                  
                  403,230
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  312,295Common
                      stock issued for exercise of options
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  17,500
                  
                  
                  18
                  
                  
                  -
                  
                  
                  27,582
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  27,600Net
                      loss for the year
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (903,508
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (903,508
                  )Balance
                      at September 30, 2005
                  
                  
                  1,666,667
                  
                  
                  1,667
                  
                  
                  -
                  
                  
                  -
                  
                  
                  6,492,287
                  
                  
                  6,493
                  
                  
                  (143,477
                  )
                  
                  7,318,831
                  
                  
                  (6,500,655
                  )
                  
                  -
                  
                  
                  (162,500
                  )
                  
                  (13,000
                  )
                  
                  669,859Preferred
                      stock issued for cash, net
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,833,334
                  
                  
                  1,833
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  349,618
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  351,451Preferred
                      A stock dividend
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  500,000
                  
                  
                  (500,000
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Conversion
                      of series A preferred to common stock
                  
                  
                  (410,000
                  )
                  
                  (410
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  410,000
                  
                  
                  410
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Cancellation
                      of common shares
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (31,875
                  )
                  
                  (31
                  )
                  
                  -
                  
                  
                  31
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Common
                      stock issued in connection with acquisition
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  100,000
                  
                  
                  100
                  
                  
                  -
                  
                  
                  99,900
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  100,000Common
                      stock issued for exercise of warrants
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  500,000
                  
                  
                  500
                  
                  
                  -
                  
                  
                  399,500
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  400,000Common
                      stock issued for services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  663,877
                  
                  
                  664
                  
                  
                  -
                  
                  
                  651,872
                  
                  
                  -
                  
                  
                  (456,000
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  196,536Common
                      stock issued in connection with notes payable
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  676,120
                  
                  
                  676
                  
                  
                  -
                  
                  
                  351,129
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  351,805Common
                      stock issued for exercise of options
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  47,500
                  
                  
                  47
                  
                  
                  -
                  
                  
                  31,953
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  32,000Write
                      off of subscription receivable
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  143,477
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  143,477Grant
                      of stock options to employees
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  429,913
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  429,913Grant
                      of warrants in connection with note payable
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  16,250
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  16,250Amortization
                      of deferred compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  108,415
                  
                  
                  
                  
                  
                  
                  
                  
                  108,415Net
                      loss for the year
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (3,870,387
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (3,870,387
                  )Balance
                      at September 30, 2006
                  
                  
                  1,256,667
                  
                  $
                  1,257
                  
                  
                  1,833,334
                  
                  $
                  1,833
                  
                  
                  8,857,909
                  
                  $
                  8,859
                  
                  $
                  -
                  
                  $
                  10,148,997
                  
                  $
                  (10,871,042
                  )
                  $
                  (347,585
                  )
                  
                  (162,500
                  )
                  $
                  (13,000
                  )
                  $
                  (1,070,681
                  )
   See
            accompanying notes to consolidated financial statements
  F-5
 
 IceWEB,
            Inc. and Subsidiaries
 CONSOLIDATED
            STATEMENTS OF CASH FLOWS
 
 For
                      the Year EndedSeptember
                      30,2006
                  
                  2005CASH
                      FLOWS FROM OPERATIONS:Net
                      Loss
                  
                  $
                  (3,870,387
                  )
                  $
                  (903,508
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Depreciation
                      and amortization
                  
                  
                  227,547
                  
                  
                  833,860Interest
                      expense from stock issued for note payable
                  
                  
                  351,805
                  
                  
                  37,500Impairment
                      of goodwill
                  
                  
                  220,800
                  
                  
                  -Stock-based
                      compensation
                  
                  
                  734,864
                  
                  
                  -Interest
                      expense from grant of stock warrants
                  
                  
                  16,250
                  
                  
                  -Write
                      off of subscription receivable
                  
                  
                  143,477
                  
                  
                  -Loss
                      on disposal of property and equipment
                  
                  
                  10,801
                  
                  
                  -Amortization
                      of deferred finance costs
                  
                  
                  20,001
                  
                  
                  -Bad
                      debt
                  
                  
                  78,778
                  
                  
                  3,167Changes
                      in operating assets and liabilities:(Increase)
                      decrease in:Accounts
                      receivable
                  
                  
                  299,819
                  
                  
                  (517,920
                  )Prepaid
                      expense
                  
                  
                  53,878
                  
                  
                  (25,979
                  )Advances
                  
                  
                  (3,900
                  )
                  
                  (61,302
                  )Deposits
                  
                  
                  (36,926
                  )
                  
                  -Increase
                      (decrease) in:Accounts
                      payable
                  
                  
                  (109,131
                  )
                  
                  (156,489
                  )Accrued
                      expense
                  
                  
                  642,056
                  
                  
                  (115,089
                  )Accrued
                      interest payable
                  
                  
                  254,178
                  
                  
                  -Deferred
                      revenue
                  
                  
                  (43,431
                  )
                  
                  (14,755
                  )NET
                      CASH USED IN OPERATING ACTIVITIES
                  
                  
                  (1,009,521
                  )
                  
                  (920,515
                  )CASH
                      FLOWS FROM INVESTING ACTIVITIES:Purchase
                      of property and equipment
                  
                  
                  (354,070
                  )
                  
                  (224,698
                  )Cash
                      used in acquisitions, net
                  
                  
                  (185,247
                  )
                  
                  -Increase
                      in Intangibles
                  
                  
                  -
                  
                  
                  (8,526
                  )NET
                      CASH USED IN INVESTING ACTIVITIES
                  
                  
                  (539,317
                  )
                  
                  (233,224
                  )CASH
                      FLOWS FROM FINANCING ACTIVITIES:Proceeds
                      from equipment financing transaction
                  
                  
                  300,000
                  
                  
                  -Repayment
                      of equipment financing
                  
                  
                  (24,164
                  )Proceeds
                      from notes payable - related party
                  
                  
                  335,222
                  
                  
                  -Repayment
                      of notes payable - related party
                  
                  
                  (222,748
                  )
                  
                  -Payments
                      to related parties
                  
                  
                  (77,878
                  )
                  
                  (219,616
                  )Proceeds
                      from Preferred Stock to be issued
                  
                  
                  -
                  
                  
                  408,836Payment
                      of placement fees and expenses
                  
                  
                  (57,385
                  )
                  
                  -Proceeds
                      from notes payable
                  
                  
                  739,501
                  
                  
                  -Common
                      stock issued for cash
                  
                  
                  -
                  
                  
                  469,477Preferred
                      stock issued for cash
                  
                  
                  -
                  
                  
                  845,836Proceeds
                      from exercise of common stock options
                  
                  
                  32,000
                  
                  
                  27,600Proceeds
                      from exercise of common stock warrants
                  
                  
                  400,000
                  
                  
                  -NET
                      CASH PROVIDED BY FINANCING ACTIVITIES
                  
                  
                  1,424,548
                  
                  
                  1,532,133NET
                      INCREASE (DECREASE) IN CASH
                  
                  
                  (124,290
                  )
                  
                  378,394CASH
                      - beginning of year
                  
                  
                  557,175
                  
                  
                  178,781CASH
                      - end of year
                  
                  $
                  432,885
                  
                  $
                  557,175Supplemental
                      disclosure of cash flow information:Cash
                      paid for :Interest
                  
                  $
                  122,636
                  
                  $
                  28,725Income
                      taxes
                  
                  $
                  -
                  
                  $
                  -NON-CASH
                      INVESTING AND FINANCING ACTIVITIES:Common
                      stock issued for debt and interest
                  
                  $
                  -
                  
                  $
                  270,000Common
                      stock issued for subscription receivable
                  
                  $
                  -
                  
                  $
                  143,177Warrants
                      granted for debt discount and debt issuance costs
                  
                  $
                  208,004
                  
                  $
                  -Preferred
                      stock issued for liability
                  
                  $
                  408,836
                  
                  $
                  -Acquisition
                      details:Fair
                      value of assets acquired
                  
                  $
                  71,570
                  
                  $
                  -Goodwill
                  
                  $
                  390,600
                  
                  $
                  -Liabilities
                      assumed
                  
                  $
                  98,611
                  
                  $
                  -Deferred
                      revenue
                  
                  $
                  78,312
                  
                  $
                  -Common
                      stock issued in connection with acquisition
                  
                  $
                  100,000
                  
                  $
                  -
   See
            accompanying notes to consolidated financial statements
 
 F-6
 **ICEWEB,
                INC and Subsidiaries**
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
                ended September 30, 2006 and 2005**
 
 NOTE
          1 -
          ORGANIZATION
 
 IceWEB,
          Inc. (the “Company”) began trading publicly in April 2002. In June 2003, the
          Company added two subsidiaries, acquiring all of the outstanding stock
          of
          Interlan Communications Incorporated and The Seven Corporation. Interlan
          is a
          full service provider of computer equipment and integration services. The
          Seven
          Corporation provides network engineering services. On October 5, 2003,
          the
          Company 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.
          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 provided 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.
 
 On
          April
          27, 2005, the Company affected a 1:80 reverse split of its issued and
          outstanding common stock. All amounts have been retroactively adjusted
          to
          reflect this split.
 
 NOTE
          2 -
          BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 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
          2006 amounts.
 
 *Going
          Concern*
 
 The
          Company’s auditors stated in their report on the consolidated financial
          statements of the Company for the years ended September 30, 2006 and 2005
          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, 2006, the Company incurred a net loss of $3,870,387 and
          used cash in operations of $1,009,521. 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.
 
 *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 2006 and 2005 include the allowance for doubtful accounts,
          the
          valuation of stock-based compensation, the useful life of property and
          equipment, and the valuation of goodwill.
  F-7
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 *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, 2006. Management performs ongoing
          evaluations of its accounts receivable. Management believes that all remaining
          receivables are fully collectable. Bad debt expense amounted to $78,778
          and
          $3,167 for the years ended September 30, 2006 and 2005, respectively.
 
 *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.
 
 *Goodwill*
 
 Goodwill
          is recorded on a business combination to the extent the cost of an acquired
          entity exceeds the fair value of the net assets acquired.
 
 The
          Company does not amortize goodwill but tests goodwill impairment at least
          on an
          annual basis, or earlier when events or changes in circumstances suggest
          the
          carrying amount may not be fully recoverable. Such evaluation is performed
          by
          comparing the implied fair value of a reporting unit to its carrying value,
          including goodwill. An impairment loss is recognized in the current period
          if
          the carrying amount of an intangible asset is not recoverable and its carrying
          amount exceeds its fair value. The Company performed its latest annual
          impairment test with regard to the carrying value of goodwill as of September
          30, 2006. For the year ended September 30, 2006, the Company recorded an
          impairment to goodwill of $220,800 which has been reflected on the accompanying
          statement of operations.
 
 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.
  F-8
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 *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, 2006, there were options
          and
          warrants to purchase 8,548,806 shares of common stock and 3,090,001 shares
          issuable upon conversion of Series A and B preferred stock which could
          potentially dilute future earnings per share.
 
 *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, 2006, 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.
 
 As
          a
          result of adopting Statement 123(R) on October 1, 2005, the Company’s loss
          before income taxes and net loss for the year ended September 30, 2006,
          are
          approximately $429,900 higher than if it had continued to account for
          share-based compensation under Opinion 25. As a result of adopting Statement
          123(R) on October 1, 2005, the Company’s reported basic and diluted loss per
          share for the year ended September 30, 2006, are $.06 lower than if it
          had
          continued to account for share-based compensation under Opinion 25.
   F-9
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 The
          following table illustrates the effect on net loss and earnings per share
          if the
          company had applied the fair value recognition provisions of Statement
          123 to
          options granted under the Company’s stock option plan for the year ended
          September 30, 2005. For purposes of this pro forma disclosure, the value
          of the
          options is estimated using a Black-Scholes option-pricing formula and amortized
          to expense over the options’ vesting periods.
 
 2005Net
                    loss as reported
                
                $
                (903,508
                )Less:
                    total stock-based employee compensation expense determined under
                    fair
                    value based method, net of related tax effect
                
                
                (380,479
                )Pro
                    forma net loss
                
                $
                (1,283,987
                )Basic
                    and diluted loss per common share:As
                    reported
                
                $
                (.15
                )Pro
                    forma
                
                $
                (.22
                )
 
 Under
          SFAS 123, the fair value of each option grant is estimated on the date
          of grant
          using the Black-Scholes option-pricing model. The following weighted average
          assumptions were used:
 
 Risk
                    free interest rate
                
                
                4
                %Expected
                    dividends
                
                
                0Volatility
                    factor
                
                
                111
                %
 
 *Recent
          Accounting Pronouncements*
 
 In
          February 2006, the FASB issued SFAS 155, which applies to certain "hybrid
          financial instruments," which are instruments that contain embedded derivatives.
          The new standard establishes a requirement to evaluate beneficial interests
          in
          securitized financial assets to determine if the interests represent
          freestanding derivatives or are hybrid financial instruments containing
          embedded
          derivatives requiring bifurcation. This new standard also permits an election
          for fair value remeasurement of any hybrid financial instrument containing
          an
          embedded derivative that otherwise would require bifurcation under SFAS
          133. The
          fair value election can be applied on an instrument-by-instrument basis
          to
          existing instruments at the date of adoption and can be applied to new
          instruments on a prospective basis. The adoption of SFAS No.155 did not
          have a
          material impact on the Company's financial position and results of
          operations.
 
 In
          March
          2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
          Assets, an amendment of FASB Statement No. 140, Accounting for Transfers
          and
          Servicing of Financial Assets and Extinguishments of Liabilities". This
          statement requires all separately recognized servicing assets and servicing
          liabilities be initially measured at fair value, if practicable, and permits
          for
          subsequent measurement using either fair value measurement with changes
          in fair
          value reflected in earnings or the amortization and impairment requirements
          of
          Statement No. 140. The subsequent measurement of separately recognized
          servicing
          assets and servicing liabilities at fair value eliminates the necessity
          for
          entities that manage the risks inherent in servicing assets and servicing
          liabilities with derivatives to qualify for hedge accounting treatment
          and
          eliminates the characterization of declines in fair value as impairments
          or
          direct write-downs. SFAS No. 156 is effective for an entity's first fiscal
          year
          beginning after September 15, 2006. The adoption of this statement is not
          expected to have a significant effect on the Company's future reported
          financial
          position or results of operations.
  In
          July
          2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
          (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation
          of
          FASB Statement No. 109." This interpretation provides guidance for recognizing
          and measuring uncertain tax positions, as defined in SFAS No. 109, "Accounting
          for Income Taxes." FIN No. 48 prescribes a threshold condition that a tax
          position must meet for any of the benefit of an uncertain tax position
          to be
          recognized in the financial statements. Guidance is also provided regarding
          de-recognition, classification, and disclosure of uncertain tax positions.
          FIN
          No. 48 is effective for fiscal years beginning after December 15, 2006.
          The
          Company does not expect that this interpretation will have a material impact
          on
          its financial position, results of operations, or cash flows.
  F-10
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 In
          September 2006, the FASB issued Statement of Financial Accounting Standards
          No.
          157, “Fair Value Measurements” (“FAS 157”). This Statement defines fair value as
          used in numerous accounting pronouncements, establishes a framework for
          measuring fair value in generally accepted accounting principles and expands
          disclosure related to the use of fair value measures in financial statements.
          The Statement is to be effective for the Company’s financial statements issued
          in 2008; however, earlier application is encouraged. The Company is currently
          evaluating the timing of adoption and the impact that adoption might have
          on its
          financial position or results of operations
 
 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, 2006, property and equipment consisted of the following:
 
 Estimated
                  LifeOffice
                    equipment
                
                
                5
                    years
                
                $
                176,840Computer
                    software
                
                
                3
                    years
                
                
                672,265Furniture
                    and fixtures
                
                
                5
                    years
                
                
                30,133Leasehold
                    improvements
                
                
                3
                    years
                
                
                4,553883,791Less:
                    accumulated depreciation
                
                
                
                
                
                (459,232
                )$
                424,559
 
 Depreciation
          expense for the years ended September 30, 2006 and 2005 was $199,022 and
          $51,096
          respectively.
 
 NOTE
          4 -
          INTANGIBLE ASSETS
 
 At
          September 30, 2006, intangible assets consist of the following:
 
 Acquired
                    software library
                
                $
                100,000Less:
                    accumulated amortization
                
                
                (60,000
                )$
                40,000
 
 Amortization
          expense amounted to $20,000 and $762,764 for the years ended September
          30, 2006
          and 2005, respectively.
 
 Amortization
          expense subsequent to the year ended September 30, 2006 is as
          follows:
 
 Years
                    ending September 30:2007
                
                $
                20,0002008
                
                
                20,000$
                40,000
 
  F-11
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 NOTE
          5 -
          RELATED PARTY TRANSACTIONS
 
 Note
          Payable - Related Party
 
 During
          June to September 2006, a company that the Company’s chief executive officer is
          a shareholder in lent funds to the Company for working capital purposes.
          The
          loan was due no later than 30 days from that date of funding. As consideration
          for providing the funding, the Company agreed to issue 1.54 shares of common
          stock for each dollar lent under the loan. During the year ended September
          30,
          2006, the Company borrowed approximately $335,000 under this loan agreement
          and
          repaid approximately $157,000. At September 30, 2006, the Company owed
          this
          related party $178,099. In connection with this agreement, in June 2005,
          the
          Company issued 176,120 shares of common stock. The Company valued these
          common
          shares at the fair market value on the dates of grant of $.72 per share
          or
          $126,805 based on the trading price of common shares. Accordingly, the
          Company
          recorded interest expense of $126,805. Additionally, the related party
          is due
          339,606 common shares under the loan agreement. At September 30, 2006,
          the
          Company valued these common shares at the fair market value on the dates
          of
          grant of $.50 per share or $169,803 based on the trading price of common
          shares.
          Accordingly, the Company recorded additional interest expense of $169,803
          and an
          accrued interest payable of $169,803 which has been reflected on the
          accompanying consolidated balance sheet.
 
 Note
          Payable - Related Party - Long-term
 
 At
          September 30, 2006, the Company owed $150,000 of principal under a promissory
          note to a shareholder of the Company. The note bears interest at the rate
          of
          12.5% per annum and was due on demand. In May 2005, the Company issued
          to this
          stockholder 125,000 shares of common stock as consideration for the extension
          of
          the maturity date of the note by 10 years to
          September 30, 2014 which
          had
          been orally agreed to in fiscal 2004. The shares were valued at $200,000,
          the
          fair value at the date of issuance. The
          cost
          associated with these shares has been accounted for as deferred finance
          charges,
          and is being amortized over the life of the deferral period. For the years
          ended
          September 30, 2006 and 2005, amortization of deferred financing costs amounted
          to $20,000 and $20,000, respectively, and is included in interest expense
          on the
          accompanying consolidated statements of operation. The
          note
          remains outstanding and at September 30, 2006, the Company owed the stockholder
          the $150,000 principal plus accrued interest of approximately
          $84,375.
 
 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, 2006, amounts due to this related
          party amounted to $8,123.
 
 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. Amounts borrowed under the Financing Agreement are
          secured by a first security interest in substantially all of the Company’s
          assets. At September 30, 2006, the principal amount due under the Financing
          Agreement amounted to $1,000,770.
 
 Interest
          is payable at a rate of 2% per month on the average 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 payable
          on the
          anniversary of the agreement.
  F-12
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 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.
 
 The
          Financing Agreement contains a number of positive and negative covenants,
          including a requirement for the Company to provide monthly unaudited financial
          statements within 20 days of each month-end and audited financial statements
          together with an accountant’s opinion within 90 days of the end of each fiscal
          year. As of January 20, 2007, the Company has not provided such financial
          statement to such creditor and was in breach of this covenant.
 
 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
          less, (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.
 
 Comerica
 
 In
          December 2005, the Company repaid the balance due Comerica under the Loan
          and
          Security Agreement which was in effect during 2005.
 
 Note
          Payable - Other
 
 On
          September 29, 2006, the Company borrowed $200,000 from a shareholder. The
          note
          was payable on October 29, 2006 and bears interest at 12% per annum. In
          the
          event of default, the Company shall pay the note holder a liquidating damage
          of
          2% of the principal amount of the note for every 30 days the note remains
          unpaid. In connection with the note, the Company issued 500,000 restricted
          shares of common stock to the note holder. The Company valued these common
          shares at the fair market value on the dates of grant of $.45 per share
          or
          $225,000 based on the trading price of common shares. Accordingly, for
          the year
          ended September 30, 2006, the Company recorded interest expense of $225,000
          related to these shares. At September 30, 2006, principal amount due under
          this
          note amounted to $200,000. The Company repaid this loan in October
          2006.
 
 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 payment
          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, 2006. 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, 2006, amount due under this equipment financing
          arrangement amounted to $262,296. As of January 15, 2007, the Company is
          in
          default.
  F-13
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 NOTE
          8 -
          COMMITMENTS
 
 T he
          Company leases office space in Herndon, Virginia under a three-year operating
          lease that expires on February 28, 2009. The office lease agreement has
          certain
          escalation clauses and renewal options. Additionally, the Company has lease
          agreements with for computer equipment an office copy and fax machine.
          Future
          minimum rental payments required under these operating leases are as follows:
 
 Year
                    ending September 30:2007
                
                $
                260,5152008
                
                
                245,7432009
                
                
                35,764$
                542,022
 
 
 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, 2006 the Company had unused net operating loss carry forwards
          of
          approximately $7,760,000 available to reduce its future federal taxable
          income.
          Net operating loss carryforwards expire between 2021 and 2026. 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 greater than
          a 50%
          change in ownership).
 
 Deferred
                    Tax Asset:Tax
                    benefit of net operating loss carry forward
                
                $
                2,918,294Allowance
                    for doubtful accounts
                
                
                3,3842,921,678Less:
                    valuation allowance
                
                
                (2,921,678
                )Total
                    deferred tax asset
                
                $
                -
 
 The
          table
          below summarizes the differences between the Company’s effective tax rate and
          the statutory federal rate as follows for fiscal 2006 and 2005. The effective
          tax rate is 34% Federal and 6% Virginia State reduced by 2.4% Federal tax
          benefit:
 
 2006
                
                2005Computed
                    "expected" tax benefit
                
                
                (34.0
                )%
                
                (34.0
                )%State
                    income taxes
                
                
                (3.6
                )%
                
                (3.6
                )%Other
                    permanent differences
                
                
                9.5
                %
                
                0.0
                %Change
                    in valuation allowance
                
                
                28.1
                %
                
                37.6
                %Effective
                    tax rate
                
                
                0.0
                %
                
                0.0
                %
  The
          valuation allowance at September 30, 2006 was $2,921,678. The increase
          during
          fiscal 2006 was $1,086,384.
  F-14
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 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. At September
          30, 2006 the Company had approximately $270,000 in excess of FDIC insured
          limits. The Company has not experienced any losses in such accounts.
 
 Major
          Customers
 
 Sales
          to
          two customers represented approximately 43% and 37% of total sales for
          the years
          ended September 30, 2006 and 2005, respectively. As of September 30, 2006
          approximately 51% of the Company's accounts receivable was due from these
          two
          customers.
 
 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.
 
 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.
  F-15
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 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 2006, Series A Preferred stockholders’ converted 410,000 share of Series
          A Preferred Stock into 410,000 shares of common stock.
 
 On
          the
          date of issuance of the Series A Preferred Stock, the effective conversion
          price
          was at a discount to the price of the common stock into which it was
          convertible. In fiscal 2005, the Company recorded a $1,000,000 preferred
          stock
          dividend related to the beneficial conversion feature and the fair value
          of the
          warrants granted in connection with the preferred stock.
 
 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,
                    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, 2006 and 2005**
 
 *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.
 
 In
          February 2006, the Company’s Board of Directors elected to reduce the exercise
          price of the Series A Preferred Stock Series “A”, “B”, and “C” warrants to $.80
          per share.
 
 *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, 2006 and 2005**
 
 ·
                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.
 
 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 is using 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,
 ·
                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,
  F-18
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
  ·
                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.
 
 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.
  F-19
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
  In
          February 2006, the Company’s Board of Directors elected to reduce the exercise
          price of the Series B Preferred Stock Series “D”, “E”, and “F” warrants to $.80
          per share.
  *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
          2005 Transaction*
 
 During
          the year ended September 30, 2005, the Company sold 503,129 shares of common
          stock to accredited investors for $469,477, such sale exempt from SEC
          registration pursuant to Section 4(2). The investors were sophisticated
          and had
          access to the consolidated financial statements of the corporation.
 
 The
          Company issued 541,667 shares of common stock for cash and in exchange
          for or
          assumption of liabilities in the total amount of $403,230.
 
 During

          the year ended September 30, 2005, 17,500 shares of common stock were issued
          in
          connection with the exercise of stock options.
 
 *Fiscal
          2006 Transaction*
 
 During
          fiscal 2006, Series A preferred stockholders’ converted 410,000 shares of Series
          A Preferred Stock into 410,000 shares of common stock.
 
 In
          March
          2006, the Company cancelled 31,875 common shares.
 
 On
          March
          15, 2006, in connection with a 12-month consulting agreement, the Company
          issued
          100,000 shares of common stock for investor relations services rendered
          and to
          be rendered in the future. The Company valued these common shares at the
          fair
          market value on the date of grant at per share price of $1.06 or $106,000.
          In
          connection with issuance of these shares, for the year ended September
          30, 2006,
          the Company recorded stock-based consulting expense of $57,417 and deferred
          compensation of $48,583 which will amortized over the remaining service
          period.
 
 As
          discussed in Note 13, on March 22, 2006, the Company issued 100,000 shares
          of
          common stock in connection with the acquisition of Patriotnet. The Company
          valued these common shares at the fair market value on the dates of the
          acquisition of $1.00 per share or $100,000 based on the trading price of
          common
          shares.
 
 During
          March 2006, in connection with the exercise of 500,000 stock warrants,
          the
          Company issued 500,000 shares of common stock for cash proceeds of
          $400,000.
 
 In
          May
          and June 2006, in connection with the exercise of 47,500 stock options,
          the
          Company issued 47,500 shares of common stock for cash proceeds of
          $32,000.
 
 In
          connection with a note agreement, in June 2006, the Company issued 176,120
          share
          of common stock. The Company valued these common shares at the fair market
          value
          on the dates of grant of $.72 per share or $126,805 based on the trading
          price
          of common shares. Accordingly, the Company recorded interest expense of
          $126,805.
  F-20
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 On
          June
          16, 2006, in connection with a 24-month retailer marketing agreement (see
          Note
          15), the Company issued 350,000 shares of common stock to a national retail
          organization. The Company valued these common shares at the fair market
          value on
          the date of grant at per share price of $1.00 or $350,000. In connection
          with
          issuance of these shares, for the year ended September 30, 2006, the Company
          recorded marketing expense of $50,998 and deferred compensation of $299,002
          which will amortized over the remaining service period.
 
 In
          connection with a note payable, on September 29, 2006, the Company issued
          500,000 restricted shares of common stock to the note holder. The Company
          valued
          these common shares at the fair market value on the dates of grant of $.45
          per
          share or $225,000 based on the trading price of common shares.
 
 During
          fiscal 2006, the Company issued 213,877 shares of common stock to employees
          in
          exchange for services provided. The Company valued these common shares
          at the
          fair market value on the date of grant at per share prices ranging from
          $.88 to
          $1.15 or $196,536. In connection with issuance of these shares, for the
          year
          ended September 30, 2006, the Company recorded stock-based compensation
          expense
          of $196,536
 
 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. During the year ended September 30, 2006,
          the
          warrant holder exercised 500,000 warrants at an exercise price of $.80
          for net
          proceeds of $400,000.
 
 A
          summary
          of the status of the Company's outstanding common stock warrants as of
          September
          30, 2006 and changes during the period ending on that date is as follows:
  Year
                    Ended September 30, 2006
                
                Year
                    Ended September 30, 2005Number
                    of Warrants
                
                Weighted
                    Average Exercise Price
                
                Number
                    of Warrants
                
                Weighted
                    Average Exercise PriceCommon
                    Stock WarrantsBalance
                    at beginning of year
                
                
                5,490,000
                
                $
                4.88
                
                
                240,000
                
                $
                7.68Granted
                
                
                2,300,000
                
                
                3.74
                
                
                5,250,000
                
                
                4.76Exercised
                
                
                (500,000
                )
                
                0.80
                
                
                -
                
                
                -Forfeited
                
                
                (235,000
                )
                
                3.43
                
                
                -
                
                
                -Balance
                    at end of year
                
                
                7,055,000
                
                $
                4.88
                
                
                5,490,000
                
                $
                4.88Warrants
                    exercisable at end of year
                
                
                7,055,000
                
                $
                4.88Weighted
                    average fair value of
                  warrants
                    granted or re-priced during
                  the
                    year
                
                
                
                
                $
                3.74
 
  F-21
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 The
          following table summarizes information about common stock warrants outstanding
          at September 30, 2006:
  Warrants
                    Outstanding
                
                Warrants
                  ExercisableRange
                    of Exercise Price
                
                Number
                    Outstanding at September 30, 2006
                
                Weighted
                    Average Remaining Contractual Life
                
                Weighted
                    Average Exercise Price
                
                Number
                  Exercisable
                    at
                  September
                    30, 2006
                
                Weighted
                    Average Exercise Price$
                0.35
                
                
                720,000
                
                
                3.50
                    Years
                
                $
                0.35
                
                
                720,000
                
                $
                0.350.70
                
                
                175,000
                
                
                3.50
                    Years
                
                
                0.70
                
                
                175,000
                
                
                0.701.00
                
                
                50,000
                
                
                5.2
                    Years
                
                
                1.00
                
                
                50,000
                
                
                1.002.00
                
                
                1,785,000
                
                
                4.0
                    Years
                
                
                2.00
                
                
                1,785,000
                
                
                2.004.00
                
                
                287,500
                
                
                1.25
                    Years
                
                
                4.00
                
                
                287,500
                
                
                4.004.80
                
                
                1,875,000
                
                
                3.75
                    Years
                
                
                4.80
                
                
                1,875,000
                
                
                4.808.00
                
                
                287,500
                
                
                3.25
                    Years
                
                
                8.00
                
                
                287,500
                
                
                8.009.60
                
                
                1,875,000
                
                
                3.75
                    Years
                
                
                9.60
                
                
                1,875,000
                
                
                9.607,055,000
                
                
                
                
                $
                4.88
                
                
                7,055,000
                
                $
                4.88
 
 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.
 
 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 2006, the Plan permits the grant of options and shares
          for up
          to 2,500,000 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.
  F-22
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 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 30,2006
                
                2005Expected
                    volatility
                
                80%
                    - 572%Expected
                    term
                
                5
                    Years
                
                5
                    yearsRisk-free
                    interest rate
                
                4.36%
                    - 5.08%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 and employee termination 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, 2006, total stock-based compensation charged to
          operations for option-based arrangements amounted to $429,913. At September
          30,
          2006, there was approximately $182,500 or total unrecognized compensation
          expense related to non-vested option-based compensation arrangements under
          the
          Plan.
  A
          summary
          of the status of the Company's outstanding stock options as of September
          30,
          2006 and changes during the period ending on that date is as follows:
  Year
                    Ended September 30, 2006
                
                Year
                    Ended September 30, 2005Number
                    of Options
                
                Weighted
                    Average Exercise Price
                
                Number
                    of Options
                
                Weighted
                    Average Exercise PriceStock
                    optionsBalance
                    at beginning of year
                
                
                882,479
                
                $
                1.55
                
                
                856,131
                
                $
                1.99Granted
                
                
                1,049,375
                
                
                0.62
                
                
                470,250
                
                
                1.21Exercised
                
                
                (47,500
                )
                
                0.67
                
                
                -
                
                
                -Forfeited
                
                
                (390,548
                )
                
                1.27
                
                
                (443,902
                )
                
                2.01Balance
                    at end of year
                
                
                1,493,806
                
                $
                1.00
                
                
                882,479
                
                $
                1.55Options
                    exercisable at end of year
                
                
                946,331
                
                $
                1.24Weighted
                    average fair value of options
                  granted
                    during the year
                
                
                
                
                $
                0.62
                
                
                
                
                $
                1.21
 
 The
          following table summarizes information about employee stock options outstanding
          at September 30, 2006:
 
 Options
                    Outstanding
                
                Options
                    ExercisableRange
                    of Exercise Price
                
                Number
                    Outstanding at September 30, 2006
                
                Weighted
                    Average Remaining Contractual Life
                
                Weighted
                    Average Exercise Price
                
                Number
                  Exercisable
                    at
                  September
                    30, 2006
                
                Weighted
                    Average Exercise Price$
                0.47-0.51
                
                
                375,000
                
                
                4.93
                    Years
                
                $
                0.48
                
                
                16,800
                
                $
                0.470.65-0.88
                
                
                799,649
                
                
                3.32
                    Years
                
                
                0.73
                
                
                619,967
                
                
                0.721.20-1.60
                
                
                89,157
                
                
                1.60
                    Years
                
                
                1.51
                
                
                79,564
                
                
                1.532.16-2.40
                
                
                154,375
                
                
                0.10
                    Years
                
                
                2.26
                
                
                154,375
                
                
                2.263.20-3.80
                
                
                75,625
                
                
                2.00
                    Years
                
                
                3.20
                
                
                75,625
                
                
                3.201,493,806
                
                
                
                
                $
                1.00
                
                
                946,331
                
                $
                1.24
  F-23
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
  NOTE
          13 -
          ACQUISITION AND DISPOSITION
 
 On
          March
          22, 2006, the Company acquired certain assets and liabilities of PatriotNet,
          Inc. a professional Internet Service Provider (ISP) servicing over 3,500
          customers with T-1, DSL, dial up lines and email services. In consideration
          for
          the purchase of the net assets and liabilities including accounts receivable,
          equipment and intangibles for customer contracts, the Company paid to PatriotNet
          (a non-related party to the Company) (a) the payment of cash consideration
          to
          PatriotNet of $190,000 at Closing and (b) the issuance by the Company of
          100,000
          (restricted under Rule 144) shares of its common stock at Closing, valued
          at
          $1.00 dollar per share of $100,000.
 
 The
          Company accounted for this acquisition using the purchase method of accounting
          in accordance with SFAS No. 141. On the date of acquisition, the fair value
          of
          net assets exceeded the purchase price by $390,600. The excess had been
          applied
          to goodwill. The results of operations of PatriotNet are included in the
          consolidated results of operations of the Company from the acquisition
          date.
          Subsequent to September 30, 2006, 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.
 
 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,
          2006 and 2005 all material assets and revenues of IceWEB were in the United
          States.
 
 NOTE
          15 -
          RETAILER MARKETING AGREEMENT
 
 On
          June
          16, 2006, the Company signed a Retailer Marketing Agreement (the “Marketing
          Agreement”) with a national retailing organization pursuant to which such
          retailing organization agreed to promote and sell the Company’s iceMAIL service.
          The terms of the Marketing Agreement provide for the Company to pay a commission
          on sales of it iceMail service originated by the retailing organization
          and
          create, host and maintain a co-branded website in a mutually agreed format.
          In
          connection with the Marketing Agreement, the Company issued the retailing
          organization 350,000 shares of common stock with a fair value of $350,000.
          The
          Marketing Agreement also provides the national retailer with pro rata preemptive
          rights with respect to private placements in which the Company sells and
          issues
          any equity securities of the Company, any debt securities that are convertible
          or exchangeable for any equity security, or any option, warrant or other
          right
          to purchase equity securities (other than options that may be issued to
          employees of the Company). The Marketing Agreement also provides the retailer
          with additional equity incentive pursuant to which the Company will issue
          additional common stock with a fair value of up to $350,000 in return for
          meeting milestones as defined in the Marketing Agreement related to sales
          and
          availability of product in such retailers’ stores. As of September 30, 2006,
          none of the additional milestones have been met and none of the additional
          equity incentive has been paid.
  F-24
 **ICEWEB,
              INC and Subsidiaries**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
              ended September 30, 2006 and 2005**
 
 NOTE
          16 -
          CONTINGENCIES
 
 From
          time
          to time, the Company faces litigation in the ordinary course of business.
          Currently, we are involved with litigation with two prior employees, which
          in
          the Company’s opinion will not have a material adverse effect on its financial
          condition. The two related lawsuits have been filed against the Company
          in the
          Circuit Court of Fairfax County, Virginia. Both suits are brought by former
          shareholders of DevElements, Inc., the assets of which were purchased by
          a
          subsidiary of the Company. The plaintiffs seek money damages from the Company
          for alleged breach of the asset purchase agreement, and damages related
          to stock
          options. The Company intends to vigorously defend this litigation. The
          Company
          believes the litigation is without merit.
 
 NOTE
          17 -
          SUBSEQUENT EVENTS
 
 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 $350,000 of which $250,000
          was
          paid in cash at closing and the balance shall be evidenced by a promissory
          note
          secured by collateral pledge of the assets, payable immediately upon
          accomplishment of the novation of the GSA Schedule.
 
 During
          November 2006, in connection with the exercise of 720,000 stock warrants,
          the
          Company issued 720,000 shares of common stock for cash proceeds of
          $252,000.
 
 During
          November 2006, in connection with the exercise of 100,000 stock options,
          the
          Company issued 100,000 shares of common stock for cash proceeds of
          $35,000.
 
 During
          the three months ended December 31, 2006, the Company granted 215,000 stock
          options to employees at exercise prices ranging from $0.43 to $0.54 per
          share.
          The options vest over a 3-year period and expire five years from grant
          date.
 
 On
          November 29, 2006, the Company granted 100,000 stock options to an employee
          at
          exercise prices of $.35 per share. The options vest immediately and expire
          five
          years from grant date.
 
 F-25
 ITEM
        8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE
 
 Not
        applicable.
 
 ITEM
        8A. CONTROLS AND PROCEDURES
 
 As
        required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
        September 30, 2006, 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 who is also our principal financial
        and
        accounting 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 concluded that we do not 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, to allow timely decisions regarding required
        disclosure. In August 2006 our then Chief Financial Officer terminated his
        employment with us. During the course of our 2006 audit, we determined that
        we
        experienced certain material weaknesses of our internal controls during fiscal
        2006 related to our failure to timely reconcile the sub-detail reports of
        our
        general ledger, including cash, accounts payable and accounts receivable,
        and in
        the recordation of equity transactions. We do not presently have a full time
        Chief Financial Officer or an accounting staff which is sufficiently experienced
        in the proper application of generally accepted accounting principles. Our
        Chief
        Executive Officer who is not an accounting professional is presently serving
        as
        our principal financial and accounting officer, our accounting staff is
        comprised of one person and are currently relying upon the services of an
        outside consultant to augment our accounting department. Until we expand
        our
        staff to include a senior financial officer who has the requisite experience
        necessary, as well as supplement the staff of our accounting department to
        include a sufficient number of properly trained employees, it is possible
        that
        we will have material weaknesses in our disclosure controls in future
        periods.
 
 There
        have been no changes in our internal control over financial reporting during
        our
        fourth fiscal quarter that has materially affected, or is reasonably likely
        to
        materially affect, our internal control over financial reporting.
  ITEM
        8B. OTHER INFORMATION
 
 Between
        June 2006 and September 30, 2006 Bluepoint Financial LLC lent us funds for
        working capital purposes. The shareholders of Bluepoint Financial include
        Mr.
        Robert Druzak, a principal shareholder of our company and the brother of
        Mr.
        Joseph Druzak, a member of our Board of Directors, and Mr. John Signorello,
        our
        CEO and Chairman. The loans were 30 day terms and we agreed to issue the
        related
        party 1.54 shares of our common stock for each dollar lent to us as interest.
        As
        of September 30, 2006 we had borrowed approximately $335,000 under this loan
        arrangement, of which approximately $179,000 had been repaid. In June 2006
        we
        issued 176,120 shares of our common stock valued at $126,805 and at September
        30, 2006 we were obligated to issue Bluepoint Financial an additional 339,606
        shares of our common stock valued at $169,803 which we are recording as interest
        expense in the financial statements appearing elsewhere in this annual report. ****
 
 On
        July
        6, 2006 we entered into a sale/leaseback for certain computer and office
        equipment we owned. We sold this equipment to an unrelated third party for
        $300,000. At the time of the transaction we were carrying the equipment with
        a
        net book value of $37,486. Contemporaneous with the sale, we entered into
        a
        36-month agreement with the purchaser wherein we have leased this equipment
        at
        $10,398 per month. We paid a $30,000 security deposit at the time of the
        lease.
 
 On
        September 29, 2006 we borrowed $200,000 from Mr. Robert Druzak, a principal
        shareholder of our company and the brother of Mr. Joseph Druzak, a member
        of our
        Board of Directors, for working capital purposes. The note had a term of
        30 days
        and bore interest at 12% per annum. In connection with the note we issued
        the
        lender 500,000 shares of our common stock valued at $225,000 as additional
        consideration for making the loan. We repaid the loan in October
        2006.
  23
  
 
 In
        November 2006 we sold 100% of the capital stock of our wholly-owned subsidiary,
        Integrated Power Solutions, Inc. (IPS) to John Younts, a former employee
        and
        shareholder, for the assumption by John Younts of approximately $180,000
        in
        liabilities and the assignment of accounts receivable of approximately $54,000.
        IPS sold back-up generator power solutions to companies for which it received
        a
        commission. Sales from IPS accounting to approximately 1% of our sales in
        fiscal
        2006. Although IPS is a party to our financing arrangement with Sand Hill
        LLC
        discussed elsewhere in this document,**,
        we do not intend to permit IPS to borrow funds under this
        agreement.**
 
 In
        fiscal 2006, we increased the **shares
        covered by our 2000 Management and Director Equity Incentive and Compensation
        Plan to** permit
        the grant of options and shares for up to 2,500,000 shares of the Company’s
        common stock.
 
 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 we issued
        100,000 shares of our common stock valued at $100,000. At the time of the
        acquisition, the fair value of the assets acquired exceeded the purchase
        price
        by $390,600 which we treated as goodwill for accounting purposes. From the
        date
        of acquisition through September 30, 2006 revenues from PatriotNet were
        approximately $450,000 and represented approximately 9.5% of our consolidated
        revenues. In November 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, 2006 we recorded goodwill impairment of $180,000 related to
        this
        transaction.
 
 **PART
        III**
 
 ITEM
        9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH
        SECTION 16(A) OF THE EXCHANGE ACT
 
 
 Name
              Age
              PositionsJohn
                  R. Signorello
              41
              Chairman
                  and Chief Executive OfficerJames
                  M. Bond
              36
              Chief
                  Technology OfficerHarold
                  F. Compton (1)(2)
              57
              DirectorRaymond
                  H. Pirtle (2)
              64
              DirectorJoseph
                  L. Druzak (1)
              53
              DirectorJack
                  Bush(1)
              70
              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 17 th 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. From 1998 through 2000, Mr. Signorello
        served as a Director for a publicly traded Internet Venture Fund. 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.
 
 James
        M. Bond. Mr. Bond has served as our Chief Information Officer since August
        2005
        and our Vice President of Program Services since June 2003. His responsibilities
        include management of our consulting services practice which is focused on
        network infrastructure and enterprises messaging services. Mr. Bond is also
        responsible for developing new services and product offerings. From August
        2000
        until our acquisition of the company in June 2003, Mr. Bond was President
        of The
        Seven Corporation, which is now our consulting services division. Mr. Bond
        has
        over 16 years of information technology design and implementation experience.
        He
        has been the architect of and has implemented solutions for medium and large
        corporate and government organizations with some multi-year projects exceeding
        $50M. Mr. Bond served as Vice President with Steelcloud from 1997 until 2000
        where he ran the Professional Services division with over 50 consulting
        engineers and revenues exceeding $15M annually. Mr. Bond's earlier work
        experience includes senior engineering, architecture/design, and project
        management responsibilities with companies such as Electronic Data Systems
        (EDS)
        and Computer Sciences Corporation (CSC). Mr. Bond holds a Bachelor degree
        from
        the University of Maryland in Computer Science and is currently pursuing
        a
        Master's Degree. He has been a certified engineer for products and companies
        including Microsoft, Novell, 3Com, NetFRAME, Tricord, and served on the
        Microsoft Architect's Council for the Mid-Atlantic region. Mr. Bond is also
        a
        certified Project Management Professional (PMP).
 
 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 has been a member of the Board of Directors of Linens `N Things,
        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
        H. 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, and TriCell, Inc., a wholesale distributor
        and worldwide trading operation of cellular telephones and accessories.
 
 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), Vice Chairman and Director of FPE
        Corporation (Framed Picture Enterprises) and Co-Chairman of Country Sampler
        stores. 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-quoted 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-quoted 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 potions 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.
 
 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
        for
        one year or until his or her successor is elected and qualified.
 
 Committees
        of the Board of Directors
 
 Our
        Board of Directors has created both an Audit Committee and a Compensation
        Committee.
 
 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:
 
 o
              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;
 
 o
              Resolve
                  any disagreements between management and the auditor regarding
                  financial
                  reporting;
  25
  
 
 o
              Pre-approve
                  all auditing and permitted non-audit services performed by our
                  external
                  audit firm;
 
 o
              Retain
                  independent counsel, accountants, or others to advise the committee
                  or
                  assist in the conduct of an
                  investigation;
 
 o
              Seek
                  any information it requires from employees - all of whom are directed
                  to
                  cooperate with the committee's requests - or external
                  parties;
 
 o
              Meet
                  with our officers, external auditors, or outside counsel, as necessary;
                  and
 
 o
              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:
 
 o
              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
 
 o
              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.
 
 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. As we expand
        our
        Board of Directors with additional independent directors the number of directors
        serving on the Audit Committee will also increase.
 
 Compensation
        Committee. The Compensation Committee was appointed by the Board to discharge
        the Board's responsibilities relating to:
 
 o
              compensation
                  of our executives,
 
 o
              equity-based
                  compensation plans, including, without limitation, stock option
                  and
                  restricted stock plans, in which officers or employees may participate,
                  and
 
 o
              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 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:
 
 o
              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
 
 o
              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.
 
 
 No
        committee member is permitted to simultaneously serve on the audit committees
        of
        more than two other public companies. 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.
 
 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:
  26
  
 o
              honest
                  and ethical conduct,
 
 o
              full,
                  fair, accurate, timely and understandable disclosure in regulatory
                  filings
                  and public statements,
 
 o
              compliance
                  with applicable laws, rules and
                  regulations,
 
 o
              the
                  prompt reporting violation of the code,
                  and
 
 o
              accountability
                  for adherence to the Code.
 
 A
        copy of our Code of Business Conduct and Ethics is filed as an exhibit to
        our
        annual report for the period ended September 30, 2006 as filed with the US
        Securities and Exchange Commission, and 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.
 
 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, 2006 and Forms 5 and amendments thereto furnished to us with
        respect to the fiscal year ended September 30, 2006, 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, 2006.
  Specifically,
        during fiscal 2006 our board members H arold
        F. Compton , Raymond Pirtle, Joseph L. Druzak and Jack Bush were each granted
        options to purchase 50,000 shares of our common stock at an exercise price
        of
        $0.47 per share.
 
 Additionally,
        during fiscal 2006, John
        R. Signorello was granted options to purchase 50,000 shares of our common
        stock
        at an exercise price of $0.47 per share and James Bond was granted options
        to
        purchase 50,000 shares of our common stock at an exercise price of $0.51
        per
        share and options to purchase 40,000 shares of our common stock at an exercise
        price of $0.65 per share.
 
 ITEM
        10. Executive Compensation
 
 Cash
        Compensation
 
 The
        following table summarizes all compensation recorded by us in each of the
        last
        three fiscal years for our Chief Executive Officer and each other executive
        officers serving as such whose annual compensation exceeded
        $100,000.
 Annual
                    Compensation
                
                Long-Term
                    CompensationOther
                
                
                
                Restricted
                
                SecuritiesName
                    and
                
                
                
                
                
                Annual
                
                
                
                Stock
                
                UnderlyingPrincipal
                
                Fiscal
                
                Salary
                
                Bonus
                
                Compensation
                
                Awards
                
                Options
                
                All
                    OtherPosition
                
                Year
                
                ($)
                
                ($)
                
                ($)
                
                ($)
                
                SAR
                    (#)
                
                CompensationJohn
                    R. Signorello
                
                
                2004
                
                $
                80,000
                
                $
                -0-
                
                $
                -0-
                
                $
                -0-
                
                
                -0-
                
                
                -0-Chief
                    Executive
                
                
                2005
                
                $
                120,000
                
                $
                -0-
                
                $
                -0-
                
                $
                -0-
                
                
                -0-
                
                
                -0-_________
                
                
                2006
                
                $
                150,000
                
                $
                -0-
                
                $
                15,800
                
                $
                -0-
                
                
                50,000
                    (1
                )
                
                -0-James
                    M. BondChief
                    Technology
                
                
                2005
                
                $
                120,000
                
                $
                -0-
                
                $
                -0-
                
                $
                -0-
                
                
                -0-
                
                
                -0-2006
                
                $
                120,000
                
                $
                -0-
                
                $
                42,600
                
                $
                -0-
                
                
                90,000(2
                )
                
                -0-
  (1)
              In
                  fiscal year 2006, Mr. Signorello was granted options to purchase
                  50,000
                  shares at $0.47 cents per share, expiring in 2011. These options
                  were
                  valued at $15,800 and are included in Other Annual
                  Compensation.
 (2)
              In
                  fiscal year 2006, Mr. Bond was granted options to purchase 40,000
                  shares
                  at $0.65 cents per share, expiring in 2010. Mr. Bond was also granted
                  options to purchase 50,000 shares at $0.51 cents per share, expiring
                  in
                  2011. These options were valued at an aggregate of $42,600 and
                  are
                  included in Other Annual
                  Compensation.
   27
  
 
 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, we have reserved
        an
        aggregate of 2,500,000 shares of common stock for issuance under the Plan.
        At
        December 31, 2006 we have granted options to purchase 1,624,032 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 share 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:
 
 o
              cash,
                  or
 
 o
              delivery
                  of unrestricted shares of our common stock having a fair market
                  value on
                  the date of delivery equal to the exercise price,
                  or
 
 o
              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
 
 o
              a
                  combination of the foregoing
                  methods.
 
 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.
  28
  
 
 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:
 
 o
              the
                  fair market value of the number of shares subject to
                  the
 performance
                  shares agreement on the date of award,
                  or
 
 o
              part
                  or all of any increase in the fair market value since
                  such
 date,
                  or
 
 o
              part
                  or all of any dividends paid or payable on the number of
                  shares
 subject
                  to the performance share agreement,
                  or
 
 o
              any
                  other amounts which in the Board's sole discretion
                  are
 reasonably
                  related to the achievement of the applicable
                  performance
 goals,
                  or
 
 o
              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,
 
 o
              cash,
                  or
 
 o
              by
                  delivery of unrestricted shares of our common stock having a
                  fair
 o
              market
                  value on the date of such delivery equal to the
                  total
 o
              purchase
                  price, or
 
 o
              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 a one-year
        promissory note as payment for the purchase price or, at our option, we may
        pay
        same in cash at closing.
  29
  
 
 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:
 
 o
              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
 
 o
              affects
                  outstanding Plan options or any exercise right there under,
                  or
 
 o
              extends
                  the term of any Plan option beyond 10 years,
                  or
 
 o
              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.
 
 Stock
        Option Information
 
 The
        following table sets forth certain information with respect to stock options
        granted in fiscal 2006 to the Named Executive Officers.
 
 Option
        Grants in Year Ended September 30, 2006
 (individual
        grants)
 
 NO.
                  OF SECURITIES
              
              %
                  OF TOTAL OPTIONS/SARsUNDERLYING
                  OPTIONS
              
              GRANTED
                  TO EMPLOYEES
              
              EXERCISE
              
              EXPIRATIONNAME
              
              SARs
                  GRANTED
              
              IN
                  FISCAL YEAR
              
              PRICE
              
              DATEJohn
                  R. Signorello
              
              
              50,000
              
              
              4.8
              %
              $
              0.47
              
              
              Sept.
                  6, 2011James
                  M. Bond
              
              
              90,000
              
              
              8.6
              %
              $
              (1
              )
              
              (1
              )
  (1)
        Includes options to purchase 40,000 shares of our common stock with an exercise
        price of $0.65 per share expiring December 14, 2010 and options to purchase
        50,000 shares of our common stock with an exercise price of $0.51 per share
        expiring August 25, 2011.
 
  The
        following table sets forth certain information regarding stock options held
        as
        of September 30, 2006 by the Named Executive Officers.
 
 Aggregate
        Option Exercises in Year Ended September 30, 2006 and Year-End Option
        Values
 
   SHARES
              
              
              
              NO.
                  OF SECURITIES
                UNDERLYING
                  UNEXERCISED
              
              VALUE
                  OF UNEXERCISEDACQUIRED
              
              VALUE
              
              OPTIONS
                    AT
              
              IN-THE-MONEY
                  OPTIONS ATON
              
              REALIZED
              
              SEPTEMBER
                    30, 2006
              
              SEPTEMBER
                  30, 2006NAME
              
              EXERCISE
              
              $
              
              EXERCISABLE
              
              UNEXERCISABLE
              
              EXERCISABLE
              
              UNEXERCISABLEJohn
                  R. Signorello
              
              
              0
              
              
              0
              
              
              125,000
              
              
              50,000
              
              
              0
              
              
              50,000James
                  M. Bond
              
              
              0
              
              
              0
              
              
              138,625
              
              
              47,000
              
              
              0
              
              
              0
 
 ITEM
        11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
        STOCKHOLDER MATTERS
 
 At
        February 5, 2007, there were 9,677,909 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 February 5, 2007, information
        known to us relating to the beneficial ownership of these shares
        by:
 
 o
              each
                  person who is the beneficial owner of more than 5% of the outstanding
                  shares of common stock;
 o
              each
                  director;
  30
  
 o
              each
                  executive officer; and
 o
              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 205 Van Buren, Suite 150, Herndon, Virginia 20170.
 
 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 February 5, 2007 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 February 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
              
              Amount
                  and Nature of
              
              PercentageBeneficial
                  Owner
              
              BeneficialOwnership
              
              of
                  ClassJohn
                  R. Signorello (1)
              
              
              2,401,164
              
              
              24.8
              %James
                  M. Bond (5)
              
              
              235,125
              
              
              2.4
              %Hal
                  Compton (2)
              
              
              80,000
              
              
              *Raymond
                  H. Pirtle (3)
              
              
              80,000
              
              
              *Joseph
                  L. Druzak (4)
              
              
              283,126
              
              
              3.0
              %Jack
                  Bush (6)
              
              
              80,000
              
              
              *All
                  executive officers andas
                  a group (six persons)
              
              
              3,159,415
              
              
              30.3
              %
 _________
 *
        represents less than 1%
 
 (1)
        The number of shares beneficially owned by Mr. Signorello includes options
        to
        purchase 50,000 shares of our common stock at an exercise price of $1.60
        per
        share, options to purchase 75,000 shares of our common stock at an exercise
        price of $3.20 per share and options to purchase 50,000 shares of our common
        stock at an exercise
 price
        of $0.47 per share.
 
 (2)
        The number of shares beneficially owned by Mr. Compton includes options to
        purchase 30,000 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.
 
 (3)
        The number of shares beneficially owned by Mr. Pirtle includes options to
        purchase 30,000 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.
 
 (4)
        The number of shares beneficially owned by Mr. Druzak includes Series H Common
        Stock Purchase Warrants exercisable into 50,000 shares of our common stock
        at an
        exercise price of $4.00 per share and Series I Common Stock Purchase Warrants
        exercisable into 50,000 shares of our common stock at an exercise price of
        $8.00
        per share, and includes options to purchase 30,000 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.
 
 (5)
        The number of shares beneficially owned by Mr. Bond includes options to purchase
        45,625 shares of our common stock at an exercise price of $0.88 per share,
        options to purchase 40,000 shares of our common stock at an exercise price
        of
        $0.65 per share and options to purchase 50,000 shares of our common stock
        at an
        exercise price
        of $0.51 per share.
 
 (6)
        The number of shares beneficially owned by Mr. Bush includes options to purchase
        30,000 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.
 
 ITEM
        12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
 From
        time to time we have borrowed funds from Mr. Signorello, our Chairman and
        CEO,
        for working capital. At September 30, 2006 we owed Mr. Signorello $8,123.
        These
        advances are short-term and non-interest bearing. We will repay Mr. Signorello
        this amount as working capital is available to us.
  31
  
 
 During
        June to September 2006, Bluepoint Financial LLC, lent funds to the Company
        for
        working capital purposes. The shareholders of Bluepoint Financial LLC include
        Mr. Robert Druzak, a principal shareholder of our company the brother of
        Mr.
        Joseph Druzak, a member of our Board of Directors, and Mr. John R. Signorello,
        our Chairman and CEO. The loan was due no later than 30 days from that date
        of
        funding. As consideration for providing the funding, we agreed to issue 1.54
        shares of common stock for each dollar lent under the loan. During the year
        ended September 30, 2006, we borrowed approximately $335,000 under this loan
        agreement and repaid approximately $157,000. At September 30, 2006, we owed
        this
        related party $178,099. In connection with this agreement, in June
        2006 **,** we
        issued 176,120 shares of common stock. We valued these common shares at the
        fair
        market value on the dates of grant of $.72 per share or $126,805 based on
        the
        trading price of common shares. Accordingly, we recorded interest expense
        of
        $126,805. Additionally, the related party is due 339,606 common shares under
        the
        loan agreement. At September 30, 2006, we valued these common shares at the
        fair
        market value on the dates of grant of $.50 per share or $169,803 based on
        the
        trading price of common shares. Accordingly, we recorded additional interest
        expense of $169,803 and an accrued interest payable of $169,803 which has
        been
        reflected on the accompanying consolidated balance sheet.
 
 In
        November 2006 we sold 100% of the capital stock of our wholly-owned subsidiary,
        Integrated Power Solutions, Inc. to John Younts, a former employee and a
        shareholder, for the assumption of approximately $200,000 in liabilities.
        In
        fiscal 2006, revenues for IPS accounting for approximately $457,000 or 9.5%
        of
        overall IceWEB revenues.
 
 
 ITEM
        13. EXHIBITS
 
 2.1
              Agreement
                  and Plan of Reorganization and Stock Purchase Agreement
                  withDisease
                  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)10.1
              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)14.1
              Code
                  of Business Conduct and Ethics (16)21.1
              Subsidiaries
                  of the small business issuer (16)31.1
              Section
                  302 Certification of Chief Executive Officer *31.2
              Section
                  302 Certification of Principal financial and accounting officer
                  *32.1
              Section
                  906 Certification of Chief Executive Officer
                  *
 
 _________
 *
        filed herewith
  32
  
 
 (1)
              Incorporated
                  by reference to the Form 10-SB, file number 000-27865,filed
                  with on October 28, 1999, as amended.(2)
              Incorporated
                  by reference to the definitive Information Statement onSchedule
                  14C as filed on June 18, 2001.(3)
              Incorporated
                  by reference to the definitive Information Statement onSchedule
                  14C as filed on June 26, 2001.(4)
              Incorporated
                  by reference to the Report on Form 8-K as filed on June 6,
                  2001.(5)
              Incorporated
                  by reference to the Report on Form 8-K as filed on July 26,
                  2001.(6)
              Incorporated
                  by reference to the definitive Information Statement onSchedule
                  14C as filed on July 23, 2001.(7)
              Incorporated
                  by reference to the Report on Form 8-K as filed on December 4,
                  2001.(8)
              Incorporated
                  by reference to the Report on Form 8-K as filed on April 4,
                  2002.(9)
              Incorporated
                  by reference to the Report on Form 8-K as filed on August 1,
                  2003.(10)
              Incorporated
                  by reference to the Report on Form 8-K/A as filed on February 20,
                  2004.(11)
              Incorporated
                  by reference to the definitive Information Statement onSchedule
                  14C as filed on August 20, 2004.(12)
              Incorporated
                  by reference to the Report on Form 8-K as filed on April 5,
                  2005.(13)
              Incorporated
                  by reference to the definitive Information Statement onSchedule14C
                  as filed on April 4, 2005.(14)
              Incorporated
                  by reference to Amendment No. 1 to the Report on Form8-K/A
                  as filed on February 20, 2004.(15)
              Incorporated
                  by reference to the Report on Form 8-K as filed on July 23,
                  2004.(16)
              Incorporated
                  by reference to the registration statement on Form SB-2, SEC file
                  number333-126898,
                  as amended.(17)
              Incorporated
                  by reference to our Annual Report on Form 10-KSB as filed on January
                  18,
                  2006.(18)
              Incorporated
                  by reference to the Report on Form 8-K as filed on January 30,
                  2006.(19)
              Incorporated
                  by reference to the registration statement on Form SB-2/A, SEC
                  file
                  number333-126898
                  filed on January 30. 2006.(20)
              Incorporated
                  by reference to the Report on Form 8-K as filed on June 22,
                  2006.
  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, 2006 and 2005 is $45,000 and $39,000,
        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, 2006 and 2005 were
        $0
        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, 2006 and 2005 is $0 and $1,500, respectively.
 
 ALL
        OTHER FEES
 
 There
        were no other fees billed by our principal accountant for the fiscal years
        ended
        September 30, 2006 and 2005, 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 2006 were pre-approved
        by
 the
        entire Board of Directors.
 
 
  33
  
 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.February
                  07, 2007
              By:
              /s/
                  John R. SignorelloJohn
                  R. Signorello, CEOPrincipal
                  executive officerand
                  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,
              
              February
                  7, 2007John
                  R. Signorello
              
              principal
                  financial and accounting officer/s/
                  Hal Compton
              
              Director
              
              February
                  7, 2007Hal
                  Compton/s/
                  Raymond H. Pirtle, Jr.
              
              Director
              
              February
                  7, 2007Raymond
                  H. Pirtle, Jr./s/
                  Joseph Druzak
              
              Director
              
              February
                  7, 2007Joseph
                  Druzak/s/
                  Jack Bush
              
              Director
              
              February
                  7, 2007Jack
                  Bush
 
  34