UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Amendment
No. 2


to
the


FORM
10-K





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





For
the fiscal year ended September 30, 2010





OR





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





For the
transition period from __________ to __________





Commission
File Number 000-27865





IceWEB,
Inc.


(Exact
name of registrant as specified in its charter)





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





22900
      Shaw Road, Suite 111, Sterling, VA
                
                20166(Address
      of principal executive offices)
                
                (Zip
      Code





Registrant’s
telephone number, including area code:  (571) 287-2388





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





Title of each class
                
                
                Name of each exchange on which registeredNone
                
                
                None





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





Common Stock, $0.001 Par
Value


(Title of
class)





Indicate
by checkmark if the registrant is a well-know seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes
 ̈ No þ





Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or 15 (d) of the Act


Yes
 ̈ No þ




Indicate
by checkmark whether the registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes x No  ̈




Indicate
by checkmark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files).   Yes  ̈ No  ̈







Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained in this form, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o




Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a small reporting company. See the
definitions of “large accelerated
filer” and
“smaller
reporting company” in Rule 12b-2 of
the Exchange Act.




Large
      accelerated filer o
              Accelerated
      filer oNon-accelerated
      filer o
              Smaller
      reporting company x




Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).   Yes o No x





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
last sold, or the average of the bid and asked price of such common equity, as
of the last business day of the registrant’s most recently completed second
fiscal quarter. 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 on March 31, 2010, the last business day of the
registrant’s most recently completed second fiscal quarter was $ 20,398,134.





Indicate
the number of shares outstanding of each of the registrant’s classes of common
equity, as of the latest practicable date. The number of common shares issued
and outstanding as of December 17, 2010 was 137,975,867 shares.




DOCUMENTS
INCORPORATED BY REFERENCE





List
hereunder the following documents if incorporated by reference and the part of
the Form 10-K (e.g. Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). None





Explanatory
Paragraph





We are
filing this Amendment No. 2 to our Annual Report on Form 10-K for the fiscal
year ended September 30, 2010 as originally filed on December 29, 2010 (the
“Original Filing”) and amended on January 28, 2011 to revise certain disclosure
in response to comments from the Securities and Exchange Commission.  These
revisions did not result in a restatement of our financial statements for any
period presented herein.  These revisions include certain expense items appearing in our Consolidated
Statement of Operations for fiscal 2009 have been reclassified and Note 13 has
been revised accordingly.




This Form 10-K/A also includesan updated consent of our independent
registered public accounting firm appears as Exhibit23.1 and new
certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
2002 as Exhibits 31.1, 31.2, 32.1 and 32.2.





Except as
described above, no other information in the Original Filing has been updated
and this Amendment continues to speak as of the date of the Original Filing.
Other events occurring after the filing of the Original Filing or other
disclosures necessary to reflect subsequent events have been or will be
addressed in other reports filed with or furnished to the SEC subsequent to the
date of the Original Filing.







TABLE OF
CONTENTS





PART I
                            3ITEM
      1.      BUSINESS
                            3ITEM
      1A.   RISK FACTORS
                            8ITEM
      1B.   UNRESOLVED STAFF COMMENTS
                            14ITEM
      2:      PROPERTIES
                            14ITEM
      3:      LEGAL PROCEEDINGS
                            14ITEM
      4:      (REMOVED AND RESERVED)
                            15PART II
                            16ITEM
      5:      MARKET FOR REGISTRANT’S COMMON EQUITY,
      RELATED STOCKHOLDER MATTERS AND
                              ISSUER
      PURCHASES OF EQUITY SECURITIES
                            16ITEM
      6.      SELECTED FINANCIAL DATA.
                            16ITEM
      7:      MANAGEMENT’S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS
                              OF
      OPERATIONS
                            17ITEM
      7A:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                            24ITEM
      8:      FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA
                            24ITEM
      9:      CHANGES IN AND DISAGREEMENTS WITH
      ACCOUNTANTS ON ACCOUNTING AND
                              FINANCIAL
      DISCLOSURE
                            52ITEM
      9A:   CONTROLS AND PROCEDURES
                            52ITEM
      9B:   OTHER INFORMATION
                            52PART III
                            53ITEM
      10:    DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
      GOVERNANCE
                            53ITEM
      11:    EXECUTIVE COMPENSATION
                            57ITEM
      12:    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND
                              RELATED
      STOCKHOLDER MATTERS
                            61ITEM
      13:    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE
                            63ITEM
      14:    PRINCIPAL ACCOUNTANT FEES AND
    SERVICES
                            64PART IV
                            65ITEM
      15:    EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES
                            65





Cautionary
Statement Regarding Forward Looking Statements





This
Annual Report on Form 10-K contains statements that are considered
forward-looking statements. Forward-looking statements give our current
expectations and forecasts of future events. All statements other than
statements of current or historical fact contained in this annual report,
including statements regarding our future financial position, business strategy,
budgets, projected costs and plans and objectives of management for future
operations, are forward-looking statements. The words “anticipate”, “believe”,
“continue”, “estimate”, “expect”, “intend”, “may”, “plan”, and similar
expressions, as they relate to the Company, are intended to identify
forward-looking statements. These statements are based on our current plans, and
our actual future activities and results of operations may be materially
different from those set forth in the forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from the statements made. Any or all
of the forward-looking statements in this annual report may turn out to be
inaccurate. We have based these forward-looking statements largely on its
current expectations and projections about future events and financial trends
that it believes may affect its financial condition, results of operations,
business strategy and financial needs. The forward-looking statements can be
affected by inaccurate assumptions or by known or unknown risks, uncertainties
and assumptions. We undertake no obligation to publicly revise these
forward-looking statements to reflect events occurring after the date hereof.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained in this annual report.





OTHER
PERTINENT INFORMATION





When used
in this report, the terms the “Company”, “IceWEB”, "we", "our", and "us" refers
to IceWEB, Inc., a Delaware corporation, and our subsidiaries. When used in this
report, “fiscal year 2010” means the year ended September 30, 2010 and "fiscal
year 2009" means the year ended September 30, 2009. The information which
appears on our Web sites is not part of this report.


2




PART
I





ITEM
1. DESCRIPTION OF BUSINESS





Headquartered
just outside of Washington, D.C., we manufacture and market purpose built
appliances, network and cloud attached storage solutions and deliver on-line
cloud computing application services. Our customer base includes U.S. government
agencies, enterprise companies, and small to medium sized businesses (SMB). We
have three key product offerings:





•
            Iceweb
      3000/5000 Unified Network Storage
Solutions


•
            Purpose
      Built Network/Data Appliances


•
            Cloud
      Computing Products/Services





Iceweb,
the Iceweb logo and other trademarks or service marks of Iceweb are the property
of Iceweb.





IceWEB
3000/5000 Unified Data Storage Solutions





IceWEB is
a provider of high performance Unified Data Storage solutions.  Our storage
systems make it possible to run and manage files and applications from a single
device and consolidates file-based and block-based access in a single storage
platform which supports Fibre Channel SAN, IP-based SAN (iSCSI), and NAS
(network attached storage).





A unified
storage system simultaneously enables storage of file data and handles the
block-based I/O (input/output) of enterprise applications.  One advantage
of unified storage is reduced hardware requirements. Instead of separate storage
platforms, like NAS for file-based storage and a RAID disk array for block-based
storage, unified storage combines both modes in a single device. Alternatively,
a single device could be deployed for either file or block storage as
required.





In addition to lower capital
expenditures for the enterprise, unified storage systems can also be simpler to
manage than separate products.  The IceWEB Storage System offers one
platform for file and block data of all kinds.Whether it's
Microsoft Exchange, SQL Server or Oracle databases, virtualized environments,
scanned images, files, video, pictures, graphics, or voice data, IceWEB
maximizes the efficiency of storage by centralizing all data on one platform
secured with strong data protection capabilities.





The IceWEB Storage System is
an all-inclusive storage management system which includes de-duplication;
unlimited snapshots; thin provisioning; local or remote, real-time or scheduled
replication; capacity and utilization reporting, and integration with virtual
server environments.  Unified storage systems enjoy the same level of
reliability as dedicated file or block storage systems.





We
believe that our product offerings have broad appeal in the enterprise and
federal marketplaces, and are used as core building blocks (enabling
technologies) of business critical storage infrastructure for a diverse group of
data intensive key vertical market segments such as geospatial information
systems, entertainment, security and defense, higher education, Internet Service
Providers, Managed Service Providers, Oil and Gas, and Health Care. Our
innovative storage systems deliver levels of performance, scalability,
versatility and simplicity that exceed existing network storage alternatives.
Our Unified Network Storage offering is deployed as storage operating system
software on our network attached storage (NAS), and storage area network (SAN)
hardware products. This Unified Network Storage environment empowers companies
to:





-
            Quickly
      and easily deploy large complex data storage infrastructure
      environments


-
            Reduce
      administrative costs for managing their storage by making complex
      technical tasks far more simple to
accomplish


-
            Reduce
      hardware and capital expenditure costs by more effectively using the
      storage within the system and repurposing older legacy
      hardware


-
            Protect
      their business critical data by leveraging Iceweb’s built-in data
      replication features


-
            Integrate
      with emerging server virtualization software (VMWare, Citrix Xen and
      Microsoft’s Hyper V) to better manage those
  solutions





IceWEB’s
file management system replaces complex and performance-limited products with
high performance, scalable and easy to use systems capable of handling the most
data intensive applications and environments. We believe that our solution
delivers three key benefits:





Performance - which equals or
exceeds all competitive products


Management – which requires
less expertise and time from overburdened technical staffers


Cost – our solutions
typically can be deployed costing two to three times less than those of
ours competitors, and are far more feature rich




3




The
Competitive Landscape





IceWEB
competes with other storage vendors such as Compellent Technologies, Inc.,
Isilon Systems, Inc., and HP LeftHand Networks. In addition, we find ourselves
becoming an alternative in our customers’ eyes to purchasing additional
equipment from large and expensive legacy storage providers such as EMC
Corporation, IBM, Network Appliance and Hitachi Data Systems. With data growing
exponentially within all organizations, budgetary and common sense decision
making is creating a second tier storage marketplace where our IceWEB 3000/5000
products are perceived as compelling data storage solutions. Customers are
recoiling from the high costs and fork-lift upgrades often required by the
larger Tier 1 storage providers that are necessary to accommodate their rapid
data growth. Rather than purchasing additional expensive solutions from their
existing vendors they opt to deploy our products with their versatile and
feature rich capabilities in an overflow or project by project type environment.
Because our storage capacity can be purchased two to three times more cheaply
than the legacy alternatives, these customers are actually able to purchase
ahead of their perceived data growth rate.





Purpose Built Network and
Data Appliances





IceWEB
has been building Purpose Built Network and Data Appliances for several years.
Purpose Built Network and Data Appliances are devices which provide computing
resources (processors and memory), data storage, and specific software for a
specific application. The primary appliance products that IceWEB has built have
historically been centered on a single large business partner, ESRI Corporation.
IceWEB and ESRI have collaborated to create ultra-high performance IceWEB/ESRI
GIS systems that allow customers to access massive amounts of data with
unprecedented speed. ESRI Corporation takes full responsibility for marketing to
their customers and business partners, via their worldwide sales and consultancy
organization.





IceWEB,
in an effort to capitalize on what has been a successful model built within the
Geographical Information System space, with ESRI has expanded our marketing of
our appliance design, manufacturing and support capabilities to additional
prospective partners. In October 2010 IceWEB, Spot Image (a large satellite GIS
data provider based in France), and Google Corporation agreed that IceWEB would
build an appliance to deliver GIS imagery from Spot Image satellite data,
powered by Google Earth Enterprise. This Google Earth Engine appliance will be
marketed worldwide through existing Spot Image and Google business partners.
IceWEB has also recently introduced a Cloud Storage Appliance, a device which
allows organizations and/or service providers to rapidly and easily deploy cloud
based storage services to their constituents and customers. We are aggressively
pursuing other Purpose Built Appliance opportunities and hope that this strategy
will begin to contribute significantly to our business ramping over the next six
months. Our goal is that the Appliance business segment be grown to contribute
approximately 35% of overall business revenue by the end of Fiscal Year 2010. We
expect to achieve this through our ongoing sales, marketing and research and
development efforts, funded by operations.




Cloud
Computing Products and Services





Cloud
Computing Services





In
December 2005, IceWEB launched IceMAIL TM a
packaged software service that provides network –hosted groupware, email,
calendaring and collaboration functionality. Customers are typically
organizations wishing to use Microsoft Exchange and Outlook without having to
procure, maintain and manage their own equipment and software.  Online
services were subsequently expanded to include IcePORTAL TM which
provides customers with a complete Intranet portal and IceSECURE TM a
hosted email encryption service. Originally such hosted services were referred
to with the acronym ‘SaaS’, which stands for Software-as-a-Service. Such
services, hosted across the internet are today commonly referred to as Cloud
Computing.  The benefits of cloud computing are many. First, adoption of an
application, infrastructure, or storage environment which is available
on-demand, with no capital expenditures for the user company represents an
attractive proposition from the financial perspective. Secondly, such models
greatly reduce the need for highly paid internal technical staff, freeing
critical resources to work on more core business related functions. Thirdly, the
application software, hardware, and infrastructure needs of organizations are
constantly growing and evolving – Cloud Computing allows ad-hoc allocation of
resources, cost free software upgrades, and freedom from hardware/infrastructure
obsolescence.





Cloud
Storage Appliances (CSA)





IceWEB
has focused our engineering and research and development efforts on crafting our
products to perform as scalable ‘building blocks’ for those companies or service
providers wishing to rapidly deploy high performance infrastructure to enable
delivery of Cloud based services. In September 2009 IceWEB introduced a line of
devices called “Cloud Storage Appliances” (CSA). A cloud storage appliance is a
purpose built storage device configured for either branch office or central site
deployment which allows the housing and delivery of customer data across not
only their internal networking infrastructure, but also to make that data
available to employees or business partners securely via the internet (often
called the cloud). The CSA line has been built to address concerns within
the enterprise marketplace which revolve around hesitation to entrust corporate
data to third party providers such as Amazon S3, Mozy, Nirvanix, and others, and
to address additional concerns about data access latency and performance.
Companies, by implementing our CSA devices, can gain all of the benefits of
cloud computing, while mitigating vendor lock-in issues, reducing the potential
for security breaches, and maintaining high performance data transfer by
back-hauling the data (and replicating it) from remote branch offices across
existing wide area network links to the corporate IT infrastructure. An
additional obvious benefit derived from the deployment of private or hybrid
storage clouds on the CSA products is that companies do not have to pay
per-megabyte or per-gigabyte transfer and storage fees to third party service
companies.




4




Sale of
IceWEB Virginia, Inc. (doing business as IceWeb Solutions Group)





As
described elsewhere herein, in March 2009 we sold our interest in IceWEB
Virginia, Inc. (dba IceWEB Solutions Group) subsidiary to an unrelated third
party in exchange for the assumption of approximately $3.2 million in
liabilities and 1,000,000 shares of our common stock valued at $80,000. IceWEB
Virginia, Inc. was a provider of computer network security products and services
such as access control, wide area network optimization, content filtering, email
security, intrusion detection, to the Federal, State, and Local government
entities. This subsidiary accounted for 43% and 91% of our revenues for fiscal
years 2009 and 2008, respectively. We sold this business in order for us to be
able to focus on our high margin storage business.





As a
result of this transaction, absent a significant increase in our sales from
other areas of our business our sales in fiscal year 2010 will be substantially
lower than the prior two years.





Our
Customers





Our
products have been sold to customers in the U.S., Canada and Europe across a
broad range of industries, including GIS; oil and gas; state, local and federal
government; and healthcare. We believe that our customers have a high level of
satisfaction with our products and services. During the year ended September 30,
2010 one customer accounted for 10% or more of our consolidated
revenue.





Sales and
Marketing Plans





We intend
to sell of all of our products via full “channel-based” model. In a Channel
Based sales model, companies with products or services build partnerships with
Systems Integrators, other manufacturers, vertical companies (such as ESRI and
Spot Image), and distributors and leverage the sales resources of those groups
to drive sales of products/services. The value of a Channel Based sales model is
twofold. First it allows IceWEB to grow total sales volume significantly while
keeping sales staff (and hence SG&A) low. Rather than building a significant
worldwide sales force of our own, this model allows us to build a small Channel
Organization responsible for identification, training and support of partner
organizations to ensure their success and productivity. The second value of the
Channel Based model is that partners bring their own knowledge of key accounts
and have relationships already in place – this compresses the sales cycle,
increases the close ratio on new business, and funnels more sales into IceWEB
products and services.





As of
September 30, 2010 we have 45 value added resellers, including ESRI, Google,
Utilipath, LLC, Spot Image, James River Technical, Inc., and a distribution
agreement with Promark Technology, Inc.





We
continue to aggressively pursue partner agreements to increase our sales and
market exposure and footprint. Such partner agreements typically take between
three and six months to develop prior to materially increasing sales
revenues.





Manufacturing





Manufacturing
is conducted at company headquarters in Sterling, VA. Utilizing chassis from
premium manufacturers such as AIC Corporation, Intel, SuperMicro, and others,
all systems are built, burned, and tested at this facility by our in-house
engineering and production staff. We manufacture data appliances, Modular
Lightweight Portable enterprise servers (MLP), workgroup servers, data storage
management platforms, as well as an array of database and customized appliances.
We use best-of-breed readily available, commercial off-the-shelf products
sourced from various resellers and suppliers in our manufacturing
process.





Competition





The
market for IceWEB storage is highly competitive and likely to become even more
competitive in the future. Established companies have historically dominated the
storage market, including EMC, Network Appliance, Dell, Hewlett-Packard, Sun
Microsystems, Hitachi Data Systems and IBM.


5




In
addition there is additional competition from smaller companies such as
Compellent Technologies and Isilon. In the future, new competitors will emerge
as well as increased competition, both domestically and internationally, from
other established storage companies. The principal competitive market factors
are:




•
            Industry
      credibility.


•
            Product
      scalability, performance and
reliability


•
            Ease
      of installation and management;


•
            Software
      functionality;


•
            Total
      cost of ownership;


•
            Customer
      support


•
            Market
      presence




IceWEB
competes effectively across all of these factors. In particular, our product
architecture provides significant competitive advantages in terms of
performance, scalability, ease of management and low total cost of ownership.
OEM partners provide us with a significant number of reference accounts which
address credibility and helps marketing to new customers.




Many of
the competitors have longer operating histories, better name recognition, larger
customer bases and significantly greater financial, technical, sales and
marketing resources than we have. Competitors may also be able to devote greater
resources to the development, promotion, sale and support of their products.
Competitors may also have more extensive customer bases and broader customer
relationships than we do, including relationships with potential IceWEB
customers.





Research
and development





Research
and development expenses consist primarily of personnel-related expenses, costs
of prototype equipment, costs of using contractors, allocated facility and IT
overhead expenses and depreciation of equipment used in research and development
activities. We expense research and development costs as incurred. We intend to
continue to invest significantly in our research and development efforts, which
we believe are essential to maintaining our competitive position. As a result,
we expect research and development expenses to increase in absolute dollars,
although we expect these expenses to decrease as a percentage of
revenue.





Intellectual
Property




Success
in our technological markets depends, in part, upon our ability to obtain and
maintain proprietary protection for its products, technology and know-how. This
must be accomplished without infringing the proprietary rights of others and
while simultaneously preventing others from infringing upon our proprietary
rights.




IceWEB
seeks to protect its proprietary positions by, among other methods, filing
patent applications. Patent efforts are focused in the United States and, when
justified by cost and strategic importance, we plan to file related foreign
patent applications in jurisdictions such as the European Union and Japan. The
company has retained an Intellectual Property Law firm and is in the process of
preparing filings for two or more provisional patents (Cloud Storage Appliance
and WISCSI technologies respectively).




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




Copy
right law, trademarks and trade secret agreements are also used to protect and
maintain proprietary positions.  Our proprietary information is protected
by internal and external controls, including contractual agreements with
employees, end-users and channel partners. There is no assurance that these
parties will abide by the terms of their agreements.





Trademarks
are used on some of the IceWEB products and these distinctive marks may be an
important factor in marketing the products. Inline® and Inline logo trademarks
have been registered in the United States.





Purchase
of Interest in VOIS Inc.





As also
described later in this section, in November 2009 we purchased 800,000 common
shares of VOIS Inc. (OTCBB: VOISD), a development stage company that operates a
social commerce website where people can find and do business with buyers and
sellers of on-demand work or manufacturing around the world for $48,000. The
shares represent approximately a 6% interest in VOIS as of September 30,
2010.


6




Our
History





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





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





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





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





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





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





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





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





In May
2004, we acquired substantially all of the assets of DevElements, Inc. of
Virginia, including software licenses, source code, potential patents and
trademarks, cash, hardware, and equipment. As consideration for the purchase of
the assets, we paid DevElements $100,000 and agreed to the assumption of
liabilities up to an aggregate of $150,000. In exchange for the 19% interest in
DevElements, we issued to the stockholders of DevElements 187,500 shares of our
common stock and options to purchase 187,500 shares of common stock exercisable
at a price of $27.20 per share and expiring May 13, 2010. 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.


7




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





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





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





On
November 15, 2006, we acquired certain of the assets of True North Solutions
related to its governmental customer business for $350,000 of which $250,000 was
paid in cash and the balance was paid through the delivery of a $100,000
principal amount promissory note secured by collateral pledge of the assets,
payable immediately upon accomplishment of the novation of the GSA Schedule.
Under the terms of the agreement, we acquired the customers, forecast, contract
renewals, and GSA schedule of True North Solutions. We permitted True North
Solutions to use the purchased assets until December 31, 2006 pursuant to which
we acted as the seller’s subcontractor until the novation of the GSA Schedule
was complete. The novation of the GSA schedule was completed in March, 2009. The
assets acquired in this transaction became the basis for our IceWEB Virginia,
Inc. subsidiary.





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





On
December 22, 2007, we acquired 100% of the outstanding stock of Inline
Corporation, (now known as IceWEB Storage Corporation) for $1,925,128 in cash,
plus 503,356 shares of our common stock valued at $276,846, the fair market
value on the date of acquisition. The purchase of Inline Corporation included
the acquisition of assets of $2,688,795, and liabilities of
$614,668.





In March,
2009, we sold 100% of the capital stock of our wholly-owned subsidiary, IceWEB
Virginia, Inc. to an unrelated party. We exchanged our GSA schedule and
1,000,000 shares of our common stock valued at $80,000 for the assumption of
approximately $3.2 million in liabilities. In fiscal 2008, sales for IceWEB
Virginia, Inc. accounted for approximately $14,887,587 or 91% of our total
sales





On
November 3, 2009 we purchased 800,000 shares of common stock from VOIS Inc. for
$48,000 in a private transaction.  Immediately prior to the transaction, on
October 30, 2010 Mr. Mark B. Lucky, our Chief Financial Officer, joined the
Board of VOIS, and on November 2, 2009 Mr. John R. Signorello, our Chief
Executive Officer, purchased 1,125,000 shares of VOIS’ common stock, which then
represented approximately 27% of its outstanding common stock, from a former
executive officer and director of our company for nominal consideration.
 Mr. Lucky resigned his positions with VOIS on October 25,
2010.





ITEM 1A.RISK FACTORS





An
investment in our common stock involves a significant degree of risk. You should
not invest in our common stock unless you can afford to lose your entire
investment. You should consider carefully the following risk factors and other
information in this annual report before deciding to invest in our common stock.
If any of the following risks and uncertainties develop 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.




8




RISKS
RELATED TO 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 approximately $29.6 million at September 30, 2010. For
the Years ended September 30, 2010 and 2009, we had a net loss of approximately
$6.96 million and approximately $2.53 million, respectively. In fiscal year
2010, cash used in operations was approximately $4.13 million and we had
approximately $540,000 of cash on hand at September 30, 2010. The report of our
independent registered public accounting firm on our consolidated financial
statements for the fiscal year ended September 30, 2010 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 an increase
in our sales from continuing operations for fiscal 2010 as compared to fiscal
2009 of approximately 49.7% which is primarily related to the Company’s focus on
its storage business beginning in late fiscal 2009. We cannot assure you that
our sales will increase in future periods, nor can we assure you that they will
not further 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, as well as issue additional equity to raise capital.
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 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 sales, manage our business and control our expenses. At September 30, 2010,
we had a working capital deficit of approximately $1,250,000.





OUR
TARGET MARKETS ARE HIGHLY COMPETITIVE AND DOMINATED BY LARGER COMPANIES AND WE
MAY NOT BE ABLE TO COMPETE EFFECTIVELY.





The
market for our products is highly competitive and we expect competition to
intensify in the future. This competition could result in increased pricing
pressure, reduced gross margins, increased sales and marketing expenses or our
failure to increase, or our loss of, market share, any of which could seriously
harm our business, operating results and financial condition.





Currently,
we face competition from a number of established companies, including EMC
Corporation, or EMC, Hewlett-Packard Company, or HP, Hitachi Limited,
International Business Machines Corporation, or IBM, and Network Appliance,
Inc., or NetApp. We also face competition from a large number of private
companies and recent public company market entrants, such as Isilon Systems,
Inc. Many of our current competitors have, and some of our potential competitors
could have, longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, sales, marketing
and other resources than we have. Potential customers may prefer to purchase
from their existing suppliers rather than a new supplier regardless of product
performance or features.





NetApp is
our primary competition in the high performance unified network storage system
market. They have a significantly greater share of this market than we do. In
addition, they are a substantially larger company with more resources than we
have.





Our
ability to compete effectively in our target markets depends on a number of
factors, including:





•
            our
      products’ scalability, performance, ease of use and cost effectiveness
      relative to that of our competitors’
products;


•
            aggressive
      business tactics by our competitors, including selling at a discount or
      asserting intellectual property rights irrespective of the validity of the
      claims;


•
            our
      success in utilizing new and proprietary technologies to offer products
      and features previously not available in the
  marketplace;


•
            our
      success in identifying new markets, applications and
      technologies;


•
            our
      ability to attract and retain value-added resellers and
    OEMs;


•
            our
      name recognition and reputation;


•
            our
      ability to recruit development engineers and sales and marketing
      personnel; and


•
            our
      ability to protect our intellectual
property.


9




We expect
increased competition from other established and emerging companies, including
companies such as networking infrastructure and storage management companies
that provide complementary technology and functionality. Some of our
competitors, including EMC, HP and NetApp, have made acquisitions of businesses
that allow them to offer more directly competitive and comprehensive solutions
than they had previously offered. Our current and potential competitors may also
establish cooperative relationships among themselves or with third parties. If
so, new competitors or alliances that include our competitors may emerge that
could acquire significant market share.





WE
ARE SUBSTANTIALLY DEPENDENT ON CUSTOMERS IN A LIMITED NUMBER OF INDUSTRIES.
 DOWNTURNS IMPACTING CERTAIN INDUSTRIES MAY RESULT IN REDUCED SALES FOR
US.





In fiscal
year 2010, a substantial amount of our net revenue was generated from Geographic
Information Systems (“GIS”), state, local, and federal government, oil and gas
companies, and our primary distributor, Promark Technology, Inc.  . If,
however, economic conditions change for these industries, or if we are unable to
continue to attract significant numbers of customers in other industries, our
prospects for growth could be reduced.




IF
WE ARE UNABLE TO CONTINUE TO DEVELOP AND INTRODUCE NEW PRODUCTS AND RESPOND TO
TECHNOLOGICAL CHANGES, OUR REVENUE COULD BE REDUCED.





Our
future growth depends on the successful development and introduction of new
systems and software products. Due to the complexity of network storage systems,
these products are subject to significant technical risks that may impact our
ability to introduce these products successfully. Our new products also may not
achieve market acceptance. In addition, our new products must respond to
technological changes and evolving industry standards. If we are unable for
technological or other reasons to develop and introduce new products in a timely
manner in response to changing market conditions or customer requirements, or if
these products do not achieve market acceptance, our revenue could be
reduced.





IMPROVEMENTS
IN ALTERNATIVE MEANS TO ACCELERATE STORAGE PERFORMANCE OR REDUCE STORAGE COSTS
COULD HARM OUR BUSINESS AS THE DEMAND FOR OUR SYSTEMS MAY BE
REDUCED.





Our
products are designed to improve the performance of many applications, including
applications that are based on Microsoft Corporation’s, or Microsoft, protocols.
Accordingly, improvements to Microsoft application protocols to accelerate
storage performance or reduce storage costs may reduce the need for our
products, adversely affecting our business, operating results and financial
condition. Improvement in other application protocols or in the Transmission
Control Protocol could have a similar effect.





IF
WE ARE UNABLE TO CONTINUE TO CREATE VALUABLE INNOVATIONS IN SOFTWARE AND
HARDWARE, WE MAY NOT BE ABLE TO GENERATE ADDITIONAL HIGH-MARGIN REVENUE THAT
WILL ENABLE US TO MAINTAIN OR INCREASE OUR GROSS MARGINS, WHICH COULD REDUCE OUR
REVENUE.





Our
industry has a history of declining network storage hardware prices as measured
on a “dollar per gigabyte of storage capacity” basis. To maintain or increase
our gross margins, we will need to continue to create valuable software that is
included with our network storage systems and/or sold separately as a licensed
software application. Any new feature or application that we develop or acquire
may not be introduced in a timely or cost- effective manner and may not achieve
the broad market acceptance necessary to help increase our overall gross margin.
If we are unable to successfully develop or acquire and then market and sell
additional software and hardware functionality, our revenue could be
reduced.





OUR
ABILITY TO SELL OUR PRODUCTS IS HIGHLY DEPENDENT ON THE QUALITY OF OUR SUPPORT
SERVICES, AND ANY FAILURE TO OFFER HIGH-QUALITY SUPPORT SERVICES COULD REDUCE
OUR PRODUCT SALES AND REVENUE.





After our
products are deployed within our customers’ networks, our customers depend on
our support services organization to resolve issues relating to our products and
how they perform within our customer’s environment. High-quality support
services are therefore critical for the successful marketing and sale of our
products. If we do not succeed in helping our customers to quickly resolve
post-deployment issues and provide ongoing support if our partners do not
effectively assist our customers in deploying our products, it would adversely
affect our ability to sell our products to existing customers and could harm our
prospects with potential customers. In addition, as we expand our operations
internationally, our support services organization will face additional
challenges, which we expect to include those issues that are associated with
delivering support, training and documentation in languages other than English.
As a result, our failure to maintain high-quality support services could reduce
our product sales and revenue.




10




OUR
PRODUCTS ARE HIGHLY TECHNICAL AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE
DEFECTS, WHICH COULD CAUSE DATA UNAVAILABILITY, LOSS OR CORRUPTION THAT MIGHT,
IN TURN, RESULT IN LIABILITY TO OUR CUSTOMERS, HARM TO OUR REPUTATION AND A
REDUCTION OF PRODUCT SALES AND REVENUE.





Our
network storage products are highly technical and complex and are often used to
store information critical to our customers’ business operations. Our products
have contained and may contain undetected errors, defects or security
vulnerabilities that could result in data unavailability, loss or corruption or
other harm to our customers. Some errors in our products may only be discovered
after they have been installed and used by customers. Any errors, defects or
security vulnerabilities discovered in our products after commercial release, as
well as any computer virus or human error on the part of our customer support or
other personnel resulting in a customer’s data unavailability, loss or
corruption could result in a loss of customers or increased support and warranty
costs, any of which may adversely affect our business, operating results and
financial condition. In addition, we could face claims for product liability,
tort or breach of warranty, including claims relating to changes to our products
made by our partners. Our contracts with customers contain provisions relating
to warranty disclaimers and liability limitations, which may be difficult to
enforce. Defending a lawsuit, regardless of its merit, could be costly and might
divert management’s attention and adversely affect the market’s perception of us
and our products. In addition, if our business liability insurance coverage
proves inadequate for a claim, or future coverage is unavailable on acceptable
terms or at all, our product sales and revenue could be reduced.





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





In
December 2005 and as amended during fiscal 2006 and fiscal 2009, we entered into
a Finance Agreement with Sand Hill Finance, LLC for a $2.75 million accounts
receivable factoring line. Under the terms of this agreement we agreed not to
take certain actions including undertaking a transaction which would result in a
change of control of our company or the transfer of more than 20% of our
securities and incurring any indebtedness other than trade credit in the
ordinary course of business. These restrictions may limit our ability to raise
working capital as needed.





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





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





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





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




11




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





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





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





At
September 30, 2010 we had outstanding:





•
            134,443,725
      shares of our common stock,


•
            626,667
      shares of Series B Convertible Preferred Stock owned by our Chief
      Executive Officer which is convertible into 626,667 shares of our common
      stock,


•
            common
      stock purchase warrants to purchase a total of 8,287,100 shares of our
      common stock with exercise prices ranging from $0.20 to $2.00 per share,
      and


•
            Stock
      options granted under our 2000 Management and Director Equity Incentive
      and Compensation Plan which are exercisable into 11,604,404 shares of our
      common stock with a weighted average exercise price of $0.296 per
      share.





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





In
December 2005, we 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.





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





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





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





In
addition, our certificate of incorporation authorizes the issuance of up to
10,000,000 shares of preferred stock with such rights and preferences as may be
determined from time to time by our Board of Directors. We presently have
outstanding 626,667 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.




12




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





Under the
rules of the Securities and Exchange Commission we are required to file our
quarterly reports within 45 days from the end of the fiscal quarter and our
annual report within 90 days from the end of our fiscal year. Under rules
adopted by the Financial Industry Regulatory Authority (FINRA) in 2005 which is
informally known as the “Three Strikes Rule”, a FINRA member is prohibited from
quoting securities of an OTCBB issuer such as our company if the issuer either
fails to timely file these reports or is otherwise delinquent in the filing
requirements three times in the prior two year period or if the issuer’s common
stock has been removed from quotation on the OTCBB twice in that two year
period. If we were to fail to file three 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.





THE
APPLICATION OF THE “PENNY STOCK” RULES TO OUR COMMON STOCK COULD LIMIT THE
TRADING AND LIQUIDITY OF OUR COMMON STOCK, ADVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK AND INCREASE STOCKHOLDER TRANSACTION COSTS TO SELL THOSE
SHARES.




As long
as the trading price of our common stock is below $5.00 per share, the
open-market trading of our common stock will be subject to the “penny stock”
rules, unless we otherwise qualify for an exemption from the “penny stock”
definition. The “penny stock” rules impose additional sales practice
requirements on certain broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). These regulations, if they apply, require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the associated risks. Under these
regulations, certain brokers who recommend such securities to persons other than
established customers or certain accredited investors must make a special
written suitability determination regarding such a purchaser and receive such
purchaser’s written agreement to a transaction prior to sale. These regulations
may have the effect of limiting the trading activity of our common stock,
reducing the liquidity of an investment in our common stock and increasing the
transaction costs for sales and purchases of our common stock as compared to
other securities.




THE
MARKET PRICE FOR OUR COMMON STOCK MAY BE PARTICULARLY VOLATILE GIVEN OUR STATUS
AS A RELATIVELY UNKNOWN COMPANY WITH A LACK OF PROFITS, WHICH COULD LEAD TO WIDE
FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH STOCKHOLDERS PURCHASE SHARES
OF OUR COMMON STOCK MAY NOT BE INDICATIVE OF THE PRICE OF OUR COMMON STOCK THAT
WILL PREVAIL IN THE TRADING MARKET.




The
market for our common stock has been characterized by significant price
volatility when compared to seasoned issuers, and we expect that our stock price
could continue to be more volatile than a seasoned issuer for the indefinite
future. The potential volatility in our share price is attributable to a number
of factors. First, there has been limited trading in our common stock. As a
consequence of this lack of liquidity, any future trading of shares by our
stockholders may disproportionately influence the price of those shares in
either direction. Second, we are a speculative or “risky” investment due to our
limited operating history and lack of profits to date, and uncertainty of future
market acceptance for our potential products. As a consequence of this enhanced
risk, more risk averse investors may, under the fear of losing all or most of
their investment in the event of negative news or lack of progress, be more
inclined to sell their shares on the market more quickly and at greater
discounts than would be the case with the stock of a seasoned issuer. Many of
these factors will be beyond our control and may decrease the market price of
our common stock, regardless of our operating performance. We cannot make any
predictions or projections as to what the prevailing market price for our common
stock will be at any time or as to what effect that the sale of shares or the
availability of shares for sale at any time will have on the prevailing market
price.





In
addition, the market price of our common stock could be subject to wide
fluctuations in response to:





·
            quarterly
      variations in our sales and operating
expenses;


·
            announcements
      of new products or services by us;


·
            fluctuations
      in interest rates;


·
            significant
      sales of our common stock;


·
            the
      operating and stock price performance of other companies that investors
      may deem comparable to us; and


·
            news
      reports relating to trends in our markets or general economic
      conditions.


13




SHARES
ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.




From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144 promulgated under the Securities Act of 1933,
as amended, subject to certain limitations. In general, pursuant to Rule 144, a
stockholder (or stockholders whose shares are aggregated) who is not an
affiliate of our company and who has satisfied a six month holding period may,
as long as we are current in our required filings with the SEC, sell securities
without further limitation. Rule 144 also permits, under certain circumstances,
the sale of securities, without any limitations, by a non-affiliate of our
company who has satisfied a one-year holding period. Affiliates of our company
who have satisfied a six month holding period may sell securities subject to
volume limitations. Any substantial sale of our common stock pursuant to Rule
144 or pursuant to any resale prospectus may have an adverse effect on the
market price of our securities. Currently, almost all of our securities are
either free trading or subject to the release of trading restrictions under the
six month or one year holding periods of Rule 144.




COMPLIANCE
WITH THE RULES ESTABLISHED BY THE SEC PURSUANT TO SECTION 404 OF THE
SARBANES-OXLEY ACT OF 2002 WILL BE COMPLEX. FAILURE TO COMPLY IN A TIMELY MANNER
COULD ADVERSELY AFFECT INVESTOR CONFIDENCE AND OUR STOCK PRICE.




Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require us to perform an annual assessment of our internal controls over
financial reporting and certify the effectiveness of those controls. The
standards that must be met for management to assess the internal controls over
financial reporting as now in effect are complex, and require significant
documentation, testing and possible remediation to meet the detailed standards.
We may encounter problems or delays in completing activities necessary to make
an assessment of our internal controls over financial reporting.




ITEM
1B. UNRESOLVED STAFF COMMENTS.




Not
applicable to a smaller reporting company.





ITEM
2. PROPERTIES.





In
February 2009, we entered into a two year lease for approximately 6,978 square
feet of office space in which our principal executive offices are located for
annual base rental of approximately $74,400. 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.





ITEM
3. LEGAL PROCEEDINGS.





At
September 30, 2010 we are the subject of, or party to, eight known, pending or
threatened, legal actions. As of the date of this report on Form 10-K, one of
the legal proceedings have been resolved. Following is a discussion of
each:





1.
  We were named as the defendant in a legal proceeding brought by
Immixtechnology, Inc. (the plaintiff) in the Fairfax County Circuit Court,
Fairfax, Virginia. The plaintiff asserts that Iceweb failed to pay for certain
computer components purchased from plaintiff.





2.
  We were named as the defendant in a legal proceeding brought by
International Business Machines Corporation-IBM Internet Security Systems
Division (the plaintiff) in the Supreme Court f the State of New York, County of
Westchester. The plaintiff asserts that the Company failed to pay certain
invoices for goods or services sold to IceWeb Virginia, Inc. by plaintiff for
resale to its customers.





3.
  We were named as the defendant in a legal proceeding brought by
Charles Rothermel (the plaintiff) in the Equal Opportunity Commission. The
plaintiff asserts that Iceweb breached its employment agreement with
him.





4.
  We were named as the defendant in a legal proceeding brought by
Charles Rothermel (the plaintiff) in the Equal Opportunity Commission. The
plaintiff asserts that Iceweb discriminated against him on the basis of
age.





5.
  We were named as the defendant in a legal proceeding brought by
FedEx Customer Information Services, Inc. (the plaintiff) in the Circuit Court
of Fairfax County, Virginia. The plaintiff asserts that Iceweb failed to pay for
delivery of services provided by plaintiff.


14




6.
  We were named as the defendant in a legal proceeding brought by
FedEx Customer Information Services, Inc. (the plaintiff) in the Circuit Court
of Fairfax County, Virginia. The plaintiff asserts that Iceweb failed to pay for
delivery of services provided by plaintiff.





7.
  We were named as the defendant in a legal proceeding brought by
Computerlinks of North America, Inc. (the plaintiff) in the Circuit Court of
Travis County, Texas. The plaintiff asserts that Iceweb failed to pay for
delivery of services provided by plaintiff. The plaintiff received a Summary
Judgment for $141,144.22 as of November 5, 2010.





8.
  We were named as the defendant in a legal proceeding brought by FCN,
Inc. (the plaintiff) in the Maryland Court of Special Appeals. The plaintiff
asserts that Iceweb failed to pay for delivery of services provided by
plaintiff. This suit was settled on October 22, 2010 in the amount of
$65,000.





From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business.





ITEM
4. (REMOVED AND RESERVED)




15




PART
II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.





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





High
                    
                    
                    LowFiscal
      2009First
      quarter ended December 31, 2008
                    
                    $
                    0.18
                    
                    
                    $
                    0.041Second
      quarter ended March 31, 2009
                    
                    $
                    0.15
                    
                    
                    $
                    0.052Third
      quarter ended June 30, 2009
                    
                    $
                    0.11
                    
                    
                    $
                    0.05Fourth
      quarter ended September 30, 2009
                    
                    $
                    0.14
                    
                    
                    $
                    0.05Fiscal
      2010First
      quarter ended December 31, 2009
                    
                    $
                    0.235
                    
                    
                    $
                    0.07Second
      quarter ended March 31, 2010
                    
                    $
                    0.23
                    
                    
                    $
                    0.075Third
      quarter ended June 30, 2010
                    
                    $
                    0.47
                    
                    
                    $
                    0.135Fourth
      quarter ended September 30, 2010
                    
                    $
                    0.30
                    
                    
                    $
                    0.105





As of
December 20, 2010 the last sale price of our common shares as reported on the
OTC Bulletin Board was $0.17 per share. As of December 20, 2010, there were
approximately 3,875 record owners of our common stock.





Dividend
Policy





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





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





Recent
Sales Of Unregistered Securities





In July
2010, we issued 2,678,571 shares of common stock valued at $401,786 to Optimus
Capital Partners, LLC as consideration in the settlement of certain litigation.
The recipient was an accredited investor and the issuance was exempt from
registration under the Section Act of 1933 in reliance on an exemption provided
by Section 4(2) of that act.




In
September 2010, we issued 3,000,000 shares of our common stock in full
satisfaction of $1,090,136 of principal and interest due under a convertible
debenture. The recipient was an accredited investor and the issuance was exempt
from registration under the Section Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





None.





ITEM
6. SELECTED FINANCIAL DATA





Not
applicable for a smaller reporting company.


16




ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the accompanying consolidated
financial statements and notes thereto. In addition to historical financial
information, the following discussion contains forward-looking statements that
reflect our plans, estimates and beliefs and are subject to a number of known
and unknown risks and external factors that in addition to general, economic,
competitive and other business conditions, could cause actual results,
performance and achievements to differ materially from those described or
implied in the forward-looking statements, as more fully discussed below and
elsewhere in this filing.





OVERVIEW





IceWEB is
a provider of high performance Unified Data Storage solutions.  Our storage
systems make it possible to run and manage files and applications from a single
device and consolidate file-based and block-based access in a single storage
platform which supports Fibre Channel SAN, IP-based SAN (iSCSI), and NAS
(network attached storage).





A unified
storage system simultaneously enables storage of file data and handles the
block-based I/O (input/output) of enterprise applications.  One advantage
of unified storage is reduced hardware requirements. Instead of separate storage
platforms, like NAS for file-based storage and a RAID disk array for block-based
storage, unified storage combines both modes in a single device. Alternatively,
a single device could be deployed for either file or block storage as
required.





In addition to lower capital
expenditures for the enterprise, unified storage systems can also be simpler to
manage than separate products.  The IceWEB Storage System offers one
platform for file and block data of all kinds.Whether it's
Microsoft Exchange, SQL Server or Oracle databases, virtualized environments,
scanned images, files, video, pictures, graphics, or voice data, IceWEB
maximizes the efficiency of storage by centralizing all data on one platform
secured with strong data protection capabilities.





The IceWEB Storage System is
an all-inclusive storage management system which includes de-duplication;
unlimited snapshots; thin provisioning; local or remote, real-time or scheduled
replication; capacity and utilization reporting, and integration with virtual
server environments.  Unified storage systems enjoy the same level of
reliability as dedicated file or block storage systems.





We believe our business model
is highly differentiated and provides us with several competitive advantages. We
sell our products through a two-tier channel sales model designed to enable us
to quickly scale and cost effectively increase sales. We have built a strong
internal sales team, which is spread geographically by region throughout the
United States to assist our channel partners with sales calls, service and
support offerings, product matter expertise, configuration and pricing, and
product demonstration.





On
December 22, 2007, we acquired 100% of the outstanding stock of Inline
Corporation, (now known as IceWEB Storage Corporation) for $1,925,128 in cash,
plus 503,356 shares of our common stock valued at $276,846, the fair market
value on the date of acquisition. The purchase of Inline Corporation included
the acquisition of assets of $2,688,795, and liabilities of
$614,668.





In March,
2009, we sold 100% of the capital stock of our wholly-owned subsidiary, IceWEB
Virginia, Inc. to an unrelated party. We exchanged our GSA schedule and
1,000,000 shares of our common stock valued at $80,000 for the assumption of
approximately $3.2 million in liabilities. In fiscal 2008, sales for IceWEB
Virginia, Inc. accounted for approximately $14,887,587 or 91% of our total
sales





On
November 3, 2009 we purchased 800,000 shares of common stock from VOIS Inc. for
$48,000 in a private transaction.  Immediately prior to the transaction, on
October 30, 2010 Mr. Mark B. Lucky, our Chief Financial Officer, joined the
Board of VOIS, and on November 2, 2009 Mr. John R. Signorello, our Chief
Executive Officer, purchased 1,125,000 shares of VOIS’ common stock, which then
represented approximately 27% of its outstanding common stock, from a former
executive officer and director of our company for nominal consideration.
 Mr. Lucky resigned his positions with VOIS on October 25,
2010.





CHANGE IN
PRESENTATION





We have
changed the presentation of our results for the fiscal year ended September 30,
2009 to reflect as discontinued operations the results of operations of our
IceWEB Virginia, Inc. subsidiary in response to comments from the staff of the
SEC.  This change did not result in a restatement of our 2009 financial
statements.  As noted above, we sold 100% of the capital stock of our
wholly-owned subsidiary, IceWEB Virginia, Inc. to an unrelated party in March,
2009.  Discontinued operations reflect the results from IceWEB Virginia,
Inc. through the date of sale.


17




Results
of Operations





FISCAL
YEAR 2010 AS COMPARED TO FISCAL YEAR 2009





The
following table provides an overview of certain key factors of our results of
operations for fiscal year 2010 as compared to fiscal year 2009:





Fiscal Year Ended
                        September 30,
                      
                      
                      $
                      
                      
                      %2010
                      
                      
                      2009
                      
                      
                      Change
                      
                      
                      ChangeSales
                      
                      $
                      3,353,286
                      
                      
                      $
                      2,240,363
                      
                      
                      $
                      1,112,923
                      
                      
                      
                      49.7
                      %Cost
      of sales
                      
                      
                      1,742,110
                      
                      
                      
                      1,326,385
                      
                      
                      
                      415,725
                      
                      
                      
                      31.3
                      %Operating
      Expenses:Sales
      and marketing
                      
                      
                      1,690,684
                      
                      
                      
                      1,004,970
                      
                      
                      
                      685,714
                      
                      
                      
                      68.2
                      %Depreciation
      and amortization
                      
                      
                      662,003
                      
                      
                      
                      696,723
                      
                      
                      
                      (34,720
                      )
                      
                      
                      (5.0
                      )%Research
      and development
                      
                      
                      533,713
                      
                      
                      
                      336,616
                      
                      
                      
                      197,097
                      
                      
                      
                      58.6
                      %General
      and administrative
                      
                      
                      5,325,898
                      
                      
                      
                      3,538,086
                      
                      
                      
                      1,787,812
                      
                      
                      
                      50.5
                      %Total
      operating expenses
                      
                      
                      8,212,298
                      
                      
                      
                      5,576,395
                      
                      
                      
                      2,635,903
                      
                      
                      
                      47.3
                      %Other
      expense
                      
                      
                      (363,111
                      )
                      
                      
                      (460,889
                      )
                      
                      
                      97,778
                      
                      
                      
                      21.2
                      %Loss
      from continuing operations
                      
                      
                      (6,964,233
                      )
                      
                      
                      (5,123,306
                      )
                      
                      
                      (1,840,927
                      )
                      
                      
                      35.9
                      %Income
      from discontinued operations
                      
                      
                      —
                      
                      
                      
                      136,408
                      
                      
                      
                      (136,408
                      )
                      
                      
                      (100.0
                      )%Interest
      expense related to discontinued operations
                      
                      
                      —
                      
                      
                      
                      (205,940
                      )
                      
                      
                      205,940
                      
                      
                      
                      100.0
                      %Gain
      from sale of subsidiary
                      
                      
                      —
                      
                      
                      
                      2,666,236
                      
                      
                      
                      (2,666,236
                      )
                      
                      
                      (100.0
                      )%Net
      loss
                      
                      $
                      (6,964,233
                      )
                      
                      $
                      (2,526,602
                      )
                      
                      
                      (4,437,631
                      )
                      
                      
                      175.6
                      %





Other Key
Indicators:


Fiscal
                              
                              
                              Fiscal2010
                              
                              
                              2009
                              
                              
                              ChangeCost
      of sales as a percentage of sales
                              
                              
                              51.95
                              %
                              
                              
                              59.20
                              %
                              
                              
                              (7.3
                              )%Gross
      profit margin
                              
                              
                              48.05
                              %
                              
                              
                              40.80
                              %
                              
                              
                              7.3
                              %General
      and administrative expenses as a percentage of sales
                              
                              
                              158.83
                              %
                              
                              
                              157.92
                              %
                              
                              
                              0.9
                              %Total
      operating expenses as a percentage of sales
                              
                              
                              244.90
                              %
                              
                              
                              248.91
                              %
                              
                              
                              (4.0
                              )%





Sales





Our sales
increased approximately 49.7% in fiscal year 2010 from fiscal year 2009. Of our
total net sales for fiscal 2010, approximately $3,152,346 is attributable to our
sale of storage products, and approximately $200,940 is attributable to sales
from our online products and services. Of our total net sales for fiscal 2009,
approximately $1,957,856 is attributable to our sale of storage products, and
approximately $282,507 is attributable to sales from our online products and
services.





The
increase in fiscal 2010 net sales from fiscal 2009 is primarily due to the
increase in our IceWEB storage products, as we have refocused our efforts on our
leading edge storage products. We anticipate revenues for fiscal 2011 will
increase due to sales of our Unified Network Storage Solutions and other data
storage products.


.


Cost of
Sales and Gross Profit





Our cost
of sales consists primarily of products purchased to manufacture our storage
products. For fiscal 2010, cost of sales was approximately 52.0% of sales, as
compared to approximately 59.0% of sales, for fiscal 2009. The decrease in costs
of sales as a percentage of revenue and the corresponding increase in our gross
profit margin for fiscal 2010 as compared to fiscal 2009 was the result of an
increase in higher margin storage sales in fiscal 2010. We anticipate that our
cost of sales as a percentage of revenue will remain in the 50% to 55% range in
fiscal 2011, as 95% of our fiscal 2010 revenues are expected to come primarily
from our higher margin storage business.





Total
Operating Expenses





Our total
operating expenses increased approximately 47% for fiscal 2010 as compared to
fiscal 2009. The increase is primarily due to increased headcount in sales and
marketing, increased investment in research and development, and our investment
in launching our channel sales distribution model. This increase
includes:


18




•           
Sales and Marketing.
Sales and marketing expense includes salaries, commission, occupancy, telephone,
travel, and entertainment expenses for direct sales personnel. For the fiscal
year ended September 30, 2010, sales and marketing costs were $1,690,684 as
compared to $1,004,970 for the fiscal year ended September 30, 2009, an increase
of $685,714 or approximately 68.2%. The increase was due primarily to hiring
additional sales and marketing personnel to support our channel distribution
sales and marketing approach during the fiscal year ended September 30,
2010





•           
Depreciation and amortization
expense. For fiscal 2010, depreciation and amortization expense decreased
approximately 5% from fiscal 2009.





Amortization
expense is related to the customer relationships and manufacturing GSA schedule
which are intangible assets that we generated through our acquisition of Inline
Corporation. The GSA schedule is being amortized on a straight-line basis over
three years. Amortization expense was $243,090 for both fiscal 2010 and fiscal
2009.





•           Research and development expense.For fiscal 2010, research and development expenses increased
approximately 59% from fiscal 2009. This increase is related to increased
research and development efforts related to our storage products. We anticipate
the spending on research and development in fiscal 2011 will be approximately
$175,000 per quarter related to developing and enhancing our storage solutions
and pursuing intellectual property patents when we believe it is
warranted.





•           
General and administrative
expense. For fiscal 2010, general and administrative expenses increased
approximately 51% from fiscal 2009. This increase is primarily attributable to
higher stock-based compensation, higher investor relations expense, higher bad
debt expense, and higher legal and professional fees. For fiscal 2010 and 2009,
general and administrative expenses consisted of the following:





2010
                  
                  
                  2009Salaries/benefits
                  
                  $
                  3,483,798
                  
                  
                  $
                  2,897,647Occupancy
                  
                  
                  24,139
                  
                  
                  
                  50,258Professional
      fees
                  
                  
                  659,547
                  
                  
                  
                  82,929Other
                  
                  
                  518,303
                  
                  
                  
                  125,922Consulting
                  
                  
                  193,783
                  
                  
                  
                  85,738Investor
      Relations
                  
                  
                  358,780
                  
                  
                  
                  173,686Travel/Entertainment
                  
                  
                  32,361
                  
                  
                  
                  26,867Internet/Phone
                  
                  
                  8,883
                  
                  
                  
                  35,967Insurance
                  
                  
                  46,304
                  
                  
                  
                  59,072$
                  5,325,898
                  
                  
                  $
                  3,538,086





The
principal changes in fiscal 2010 as compared to fiscal 2009
include:





•
            For
      fiscal 2010, salaries and related taxes and benefits increased
      approximately 20.2% from fiscal 2009. The increase was primarily
      attributable to the increase in headcount, the increase in stock based
      compensation, and expense recorded in accordance with ASC Topic 718,
      “Compensation – Stock Compensation (Formerly SFAS No. 123 (R),
      “Share-Based Payments”), for fiscal 2010 of $329,604, an increase of
      15%.





•
            For
      fiscal 2010, occupancy expense decreased approximately 52% from fiscal
      2009. The decrease was due to consolidation and relocation of office
      locations.





•
            For
      fiscal 2010, professional fees increased $576,619, or approximately 695%
      from fiscal 2009. The increase was primarily attributable to an increase
      in legal fees incurred and the settlement of lawsuits against us in fiscal
      2010.





•
            For
      fiscal 2010, other expense increased approximately 312% from fiscal 2009.
      The increase is primarily due to an increase in bad debt expense of
      $300,000, and hosting fees of
$48,735.





•
            For
      fiscal 2010, consulting expense increased by approximately 126% from
      fiscal 2009. The increase was primarily due to non-recurring consulting
      fees related to our capital raising activities, and human resources
      recruiting fees.





•
            For
      fiscal 2010, investor relations expense increased approximately 107% from
      fiscal 2009. The increase was attributable to an increase in general
      investor relations activity versus fiscal 2009. We expect that in fiscal
      2011 our investor relations activity and related expense will be
      substantially flat.


19




•
            For
      fiscal 2010, internet and telephone expense decreased approximately 75%.
      The decrease was attributable to cost cutting measures adopted by
      us.





•
            For
      fiscal 2010, travel and entertainment expense increased approximately 20%.
      The increase was attributable to an increase in general business, and
      travel-related investor relations
activity.





•
            For
      fiscal 2010, insurance expense decreased approximately 22% from fiscal
      2009. The decrease was attributable to lower premiums paid for general
      business and directors and officer’s
insurance.





TOTAL
OTHER INCOME (EXPENSES)





Interest Expense. For fiscal
2010, interest expense decreased approximately 17%. The decrease in interest
expense is primarily attributable to lower average outstanding note balances
during fiscal 2010, and lower deferred loan fee amortization in fiscal 2010 of
$27,015 as compared to deferred loan fee amortization of $127,015 in fiscal
2009.





LOSS FROM
CONTINUING OPERATIONS





Our loss
from operations increased approximately 42% in fiscal year 2010 as compared to
fiscal year 2009. This increase is primarily the result of increased headcount,
increased research and development efforts, and our investment in our channel
marketing sales programs.





GAIN ON
DISCONTINUED OPERATIONS





Results
from discontinued operations were as follows:





Fiscal Year EndedSeptember 30,2010
                  
                  
                  2009Sales
                  
                  $
                  —
                  
                  
                  $
                  1,694,322Cost
      of sales
                  
                  
                  —
                  
                  
                  
                  1,348,307Operating
      Expenses:Sales
      and marketing
                  
                  
                  —
                  
                  
                  
                  163,694Depreciation
      and amortization
                  
                  
                  —
                  
                  
                  
                  45,913Subtotal
                  
                  
                  —
                  
                  
                  
                  209,607Income
      from discontinued operations
                  
                  
                  —
                  
                  
                  
                  136,408Interest
      expense related to discontinued operations
                  
                  
                  —
                  
                  
                  
                  (205,940
                  )Gain
      from sale of discontinued operations
                  
                  
                  —
                  
                  
                  
                  2,666,236Total
      Gain from discontinued operations
                  
                  $
                  —
                  
                  
                  $
                  2,596,704





During
the fiscal second quarter of 2009 we sold our wholly owned subsidiary, Iceweb
Virginia, Inc. to an unrelated third party.





For 2009
we earned revenues in discontinued operations of $1,694,322.  We had no
comparable discontinued operations in fiscal 2010.





Total
operating expenses of discontinued operations in fiscal 2009 amounted to
$209,607, and consisted of primarily sales and marketing expenses associated
with IceWEB Virginia, Inc. and the amortization of the GSA schedule through the
date of sale of the subsidiary.





Gain (loss) from sale of
assets. During the fiscal year 2009 we recorded a gain of $2,666,236 on
the sale of our IceWEB Virginia, Inc. subsidiary. We did not have a comparable
transaction in fiscal 2010.





NET
LOSS





Our net
loss was $6,964,233 for fiscal 2010 compared to $2,526,602 for fiscal 2009, an
increase of $4,437,631 or approximately 176%.


20




LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
is the ability of a company to generate adequate amounts of cash to meet its
needs for cash.





September 30,
                    2010
                  
                  
                  September 30,
                    2009
                  
                  
                  $
                    Change
                  
                  
                  %
                    ChangeWorking
      Capital
                  
                  $
                  (1,250,033
                  )
                  
                  $
                  (3,158,232
                  )
                  
                  $
                  1,908,199
                  
                  
                  
                  (60.4
                  )%Cash
                  
                  
                  540,156
                  
                  
                  
                  63,310
                  
                  
                  
                  476,846
                  
                  
                  
                  753.2
                  %Accounts
      receivable, net
                  
                  
                  1,529,852
                  
                  
                  
                  424,919
                  
                  
                  
                  1,104,933
                  
                  
                  
                  260.0
                  %Inventory
                  
                  
                  62,197
                  
                  
                  
                  151,361
                  
                  
                  
                  (89,164
                  )
                  
                  
                  (58.9
                  )%Total
      current assets
                  
                  
                  2,170,310
                  
                  
                  
                  671,160
                  
                  
                  
                  1,499,150
                  
                  
                  
                  223.4
                  %Property
      and equipment, net
                  
                  
                  418,873
                  
                  
                  
                  752,162
                  
                  
                  
                  (333,289
                  )
                  
                  
                  (44.3
                  )%Intangibles,
      net
                  
                  
                  546,952
                  
                  
                  
                  790,042
                  
                  
                  
                  (243,090
                  )
                  
                  
                  (30.8
                  )%Marketable
      securities
                  
                  
                  524,800
                  
                  
                  
                  —
                  
                  
                  
                  524,800
                  
                  
                  
                  N/ATotal
      assets
                  
                  $
                  3,674,255
                  
                  
                  $
                  2,226,684
                  
                  
                  $
                  1,447,571
                  
                  
                  
                  70.9
                  %Accounts
      payable and accrued liabilities
                  
                  
                  1,711,619
                  
                  
                  
                  1,971,376
                  
                  
                  
                  (259,757
                  )
                  
                  
                  (13.2
                  )%Notes
      payable-current
                  
                  
                  1,649,140
                  
                  
                  
                  1,847,755
                  
                  
                  
                  (198,615
                  )
                  
                  
                  (10.7
                  )%Deferred
      revenue
                  
                  
                  59,582
                  
                  
                  
                  10,261
                  
                  
                  
                  49,321
                  
                  
                  
                  480.7
                  %Total
      current liabilities
                  
                  
                  3,420,342
                  
                  
                  
                  3,829,392
                  
                  
                  
                  (409,050
                  )
                  
                  
                  (10.7
                  )%Notes
      payable-long term
                  
                  
                  0
                  
                  
                  
                  934,756
                  
                  
                  
                  (934,756
                  )
                  
                  
                  (100.0
                  )%Total
      liabilities
                  
                  
                  3,420,343
                  
                  
                  
                  4,764,148
                  
                  
                  
                  (1,343,805
                  )
                  
                  
                  (28.2
                  )%Accumulated
      deficit
                  
                  
                  (29,622,792
                  )
                  
                  
                  (22,658,560
                  )
                  
                  
                  (6,964,232
                  )
                  
                  
                  30.7
                  %Stockholders’
      equity (deficit)
                  
                  
                  253,912
                  
                  
                  
                  (2,537,464
                  )
                  
                  
                  2,791,376
                  
                  
                  
                  (115.2
                  )%





At
September 30, 2010, we had a working capital deficit of $1,250,033 compared to a
working capital deficit of $3,158,232 at September 30, 2009, a decrease of
$1,908,199. The decrease in the deficit is primarily attributable to the cash
raised in our private placement in June, 2010, in the amount of approximately
$2.3 million. In addition, the changes are primarily attributable to the
decreases in accounts payable and accrued expenses of $259,757, and the decrease
in our current notes payable of $198,615, offset by the increase in accounts
receivable of $1,104,934, and an increase in marketable securities of $524,800.
 Also contributing was the decrease in inventory of $89,164 and the
increase in deferred revenue of $49,321.





Net cash
used in operating activities was $4,128,415 for fiscal 2010 as compared to net
cash used in operating activities of $2,145,514 for fiscal 2009, an increase of
$1,982,901. For fiscal 2010, our cash used in operations of $4,128,415 consisted
of a net loss of $6,964,233, offset by non-cash items totaling $2,835,818
including items such as depreciation and amortization of $662,003, stock based
compensation of $867,365, the amortization of deferred compensation of
$1,627,919, and other non-cash items of $938,282. Additionally, during fiscal
2010 we had a decrease in operating liabilities and an increase in operating
assets which incremented our net loss. This change in operating assets and
liabilities primarily consisted of an increase in accounts receivable of
$1,104,934 attributable to an increase in annual sales, and an increase in
prepaid expenses of $33,545,offset by a decrease in net inventory of $89,164, a
decrease in accounts payable and accrued liabilities of $259,757 and an increase
in deferred revenue of $49,321.





For
fiscal 2009, our cash used in operations of $2,145,514 consisted of a net loss
of $2,526,602, offset by non-cash items totaling $381,088 including items such
as depreciation and amortization of $742,636, stock based compensation of
$1,167,721, the amortization of deferred compensation of $1,016,134, and other
non-cash items of $162,748. Additionally, during fiscal 2010 we had a decrease
in operating liabilities and a decrease in operating assets which offset our net
loss. This change in operating assets and liabilities primarily consisted of a
decrease in accounts receivable of $2,669,191 attributable to a decrease in
annual sales, and a decrease in prepaid expenses of $29,975, a decrease in
deposits of $33,035, and a decrease in net inventory of $248,951, offset by a
decrease in accounts payable and accrued liabilities of $3,020,165 and an
increase in deferred revenue of $2,902.





Net cash
used in investing activities for fiscal 2010 was $133,624 as compared to net
cash used in investing activities of $99,762 for fiscal 2009. During fiscal 2010
we used cash of $85,624 for property and equipment purchases, and $48,000 to
invest in marketable securities. During fiscal 2009, net cash used in investing
activities was $99,762 which was cash used for property and equipment
purchases.




21




Net cash
provided by financing activities for fiscal 2010 was $4,738,885 as compared to
$2,303,806 for fiscal 2009, an increase of $2,435,079. The primary reason for
the increase was due to the proceeds from the sale of common stock of
$2,380,630, and the exercise of common stock options of $2,591,626. In addition
we made payments on notes payable of $1,835,395, and borrowed $1,602,024 under
our financing line.





At
September 30, 2010 we had an accumulated deficit of $29,622,792 and the report
from our independent registered public accounting firm on our audited financial
statements at September 30, 2010 contained an explanatory paragraph regarding
doubt as to our ability to continue as a going concern as a result of our net
losses in operations. In spite of our sales, there is no assurance that we will
be able to maintain or increase our sales in fiscal 2010 or that we will report
net income in any future periods.




We do not
have any working capital commitments nor do we not presently have any external
sources of working capital. Historically, our sales 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, 2010 we had cash on hand of $540,156. In addition to
the cash necessary to fund our operating losses, research and development,
marketing and general growth, we will need cash to satisfy certain obligations.
In fiscal 2006, we entered into a receivable factoring agreement with Sand Hill
Finance, LLC under which we can sell certain accounts receivable to the lender
on a full recourse basis at 80% of the face amount of the receivable up to an
aggregate of $1.8 million. This financing agreement was amended in fiscal 2009
to increase the line amount to $2,750,000, and to add an 18 month term loan of
$1,000,000 with an interest rate of 24% per annum. As of September 30, 2010, we
had $1,100,860 available under the line of credit facility.





Our
working capital needs in future periods depend primarily on the rate at which we
can increase our sales 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. 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 sales
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.





Off
Balance Sheet Arrangements.





None.





Accounting
Pronouncements Recently Adopted





In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures” (“ASU 2010-06”) which provides amendments to Subtopic 820-10 that
require new disclosures regarding (1) transfers in and out of Levels 1 and 2
fair value measurements and (2) activity in Level 3 fair value measurements.
Additionally, ASU 2010-06 clarifies existing fair value disclosures about the
level of disaggregation and about inputs and valuation techniques used to
measure fair value. The guidance in ASU 2010-06 became effective for the
Company’s second quarter of fiscal year 2010 and the disclosures required by
this adoption are included in Note 2 “Fair Value Measurements”, except for
disclosures about purchases, sales, issuances, and settlements in the roll
forward activity in Level 3 fair value measurements which are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The adoption of this guidance did not have an impact on the
Company’s consolidated financial statements.





In
December 2008, the FASB issued new accounting guidance that requires enhanced
annual disclosures about the plan assets of a Company’s defined benefit pension
and other postretirement plans intended to provide users of financial statements
with a greater understanding of: (1) how investment allocation decisions are
made, including the factors that are pertinent to an understanding of investment
policies and strategies; (2) the major categories of plan assets; (3) the inputs
and valuation techniques used to measure the fair value of plan assets; (4) the
effect of fair value measurements, using significant unobservable inputs (Level
3) on changes in plan assets for the period; and (5) significant concentrations
of risk within plan assets. The new guidance resulted in enhanced disclosures
beginning with the Company’s Form 10-K for the year ended September 30, 2010
included herein.




22




In
December 2007, the FASB issued new accounting and disclosure guidance related to
non-controlling interests in subsidiaries (previously referred to as minority
interests), which was effective for the Company on October 1, 2009. Among other
things, the new guidance requires that a non-controlling interest in a
subsidiary be presented as a component of equity separate from the parent’s
equity. It also requires that consolidated net income be reported at amounts
that include the amounts attributable to both the parent and the non-controlling
interests. The new guidance has been applied prospectively, except for the
presentation and disclosure requirements, which have been applied
retrospectively to all periods presented herein.





In June
2008, ASC Topic 260, “Earnings Per Share”, was amended to require that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) be treated as participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. This amendment became effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years, and requires that all prior period earnings
per share data presented (including interim financial statements, summaries of
earnings and selected financial data) be adjusted retrospectively to conform to
its provisions. This Topic became effective October 1, 2009, and did not have an
impact on the Company’s consolidated financial statements.





In April
2008, ASC Topic 350, “Intangibles – Goodwill and Other”, was amended to include
a list of factors an entity should consider in developing renewal or extension
assumptions used in determining the useful life of recognized intangible assets.
The new guidance applies to (1) intangible assets that are acquired individually
or with a group of other assets and (2) intangible assets acquired in both
business combinations and asset acquisitions. Under this amendment, entities
estimating the useful life of a recognized intangible asset must consider their
historical experience in renewing or extending similar arrangements or, in the
absence of historical experience, must consider assumptions that market
participants would use about renewal or extension. This amendment required
certain additional disclosures beginning October 1, 2009, and prospective
application to useful life estimates prospectively for intangible assets
acquired after September 30, 2009. This Topic became effective October 1, 2009,
and did not have an impact on the Company’s consolidated financial
statements.





In
December 2007, the FASB amended its guidance on accounting for business
combinations. The new accounting guidance was effective for the company on
October 1, 2009, and is being applied prospectively to all business combinations
subsequent to the effective date. Among other things, the new guidance amends
the principles and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree and the goodwill
acquired. It also establishes new disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. The
adoption of this accounting guidance did not have a significant impact on the
Company’s consolidated financial statements, and the impact it will have on the
Company’s consolidated financial statements in future periods will depend on the
nature and size of business combinations completed subsequent to the date of
adoption.





In
February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topic 855)”
(“ASU 2010-09”) which provides an update to Topic 855, “Subsequent Events”. This
update clarifies that an SEC filer is required to evaluate subsequent events
through the date that the financial statements are issued and removes the
requirement for SEC filers to disclose the date through which subsequent events
have been evaluated. This guidance became effective upon issuance and has been
adopted by the Company.





Recent
Accounting Pronouncements Not Yet Adopted as of September 30, 2010





In April
2010, the FASB issued ASU No. 2010-17, “Revenue Recognition - Milestone Method
(Topic 605)” (“ASU 2010-17”) which provides guidance on defining a milestone and
determining when it may be appropriate to apply the milestone method of revenue
recognition for certain revenue transactions. This guidance is effective on a
prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010 (fiscal year 2011 for
the Company). This accounting guidance is not expected to have a material impact
on the Company’s consolidated financial statements.





In June
2009, ASC Topic 810 was amended to improve financial reporting by enterprises
involved with variable interest entities. This Topic addresses (1) the effects
on certain provisions regarding the consolidation of variable interest entities,
as a result of the elimination of the qualifying special-purpose entity concept
in ASC Topic 860 regarding the accounting for transfers of financial assets, and
(2) concern about the application of certain key provisions of FASB
Interpretation No. 46(R), including those in which the accounting and
disclosures under the Interpretation do not always provide timely and useful
information about an enterprise’s involvement in a variable interest entity.
This guidance is effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009 (fiscal year 2011
for the Company), for interim periods within that first annual reporting period,
and for interim and annual reporting periods thereafter. Earlier application is
prohibited. The adoption of this statement is not expected to have a material
effect on the Company’s consolidated financial statements.




23




In
October 2009, the FASB issued new accounting guidance for revenue recognition
with multiple deliverables. This guidance impacts the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, this new accounting
guidance modifies the manner in which the transaction consideration is allocated
across the separately identified deliverables by no longer permitting the
residual method of allocating arrangement consideration. The new guidance is
effective for the Company prospectively for revenue arrangements entered into or
materially modified beginning in the first quarter of fiscal 2011. Early
adoption is permitted. This accounting guidance is not expected to have a
significant impact on the Company’s consolidated financial
statements.





In July
2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310) - Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses” (“ASU 2010-20”) which requires additional disclosures about an entity’s
allowance for credit losses and the credit quality of its financing receivables.
These amendments affect all entities with financing receivables, excluding
short-term accounts receivable or receivables measured at fair value or lower of
cost or fair value. The guidance on disclosures as of the end of a reporting
period will be effective for the Company on December 31, 2010. The disclosures
about activity that occurs during a reporting period are effective for the
Company’s second quarter of fiscal year 2011. The Company does not expect the
adoption of this guidance to have a material impact on its financial
statements.





ITEM
7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Not
applicable to a smaller reporting company.





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





IceWEB,
Inc. and Subsidiaries


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





CONTENTS




Report
      of Independent Registered Public Accounting Firm
                25Consolidated
      Financial Statements:Consolidated
      Balance Sheets
                26Consolidated
      Statements of Operations
                27Consolidated
      Statement of Changes in Stockholders’ Deficit
                28Consolidated
      Statements of Cash Flows
                29Notes
      to Consolidated Financial Statements
                30
      - 51


24




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
the Board of Directors


IceWEB,
Inc.





We have
audited the accompanying consolidated balance sheets of IceWEB, Inc. and
Subsidiaries as of September 30, 2010 and 2009 and the related consolidated
statements of operations, changes in stockholders’ equity (deficit) and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IceWEB, Inc.
and Subsidiaries, as of September 30, 2010 and September 30, 2009 and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company had net losses of $6,964,233 and
$2,526,602 respectively, for the years ended September 30, 2010 and 2009. These
matters raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regards to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





/s/ Sherb
& Co., LLP


Certified
Public Accountants





Boca
Raton, Florida


December
20, 2010


25





IceWEB,
Inc. and Subsidiaries


Consolidated
Balance Sheets





September 30,
                          2010
                        
                        
                        September 30,
                          2009ASSETSCURRENT
      ASSETS:Cash
                        
                        $
                        540,156
                        
                        
                        $
                        6,310Accounts
      receivable, net of allowance for doubtful accounts of $309,000 and $9,000
      respectively
                        
                        
                        1,529,852
                        
                        
                        
                        424,919Inventory,
      net
                        
                        
                        62,197
                        
                        
                        
                        151,361Other
      current assets
                        
                        
                        6,875
                        
                        
                        
                        6,390Prepaid
      expenses
                        
                        
                        31,230
                        
                        
                        
                        25,1802,170,310
                        
                        
                        
                        671,160OTHER
      ASSETS:Property
      and equipment, net of accumulated depreciation of $2,180,643 and
      $1,761,730 respectively
                        
                        
                        418,873
                        
                        
                        
                        752,162Deposits
                        
                        
                        13,320
                        
                        
                        
                        13,320Marketable
      securities, net
                        
                        
                        524,800
                        
                        
                        
                        —Intangible
      assets, net of accumulated amortization of $668,498 and $425,408,
      respectively
                        
                        
                        546,952
                        
                        
                        
                        790,042Total
      Assets
                        
                        $
                        3,674,255
                        
                        
                        $
                        2,226,684LIABILITIES AND STOCKHOLDERS EQUITY
      (DEFICIT)CURRENT
      LIABILITIES:Accounts
      payable and accrued liabilities
                        
                        $
                        1,711,621
                        
                        
                        $
                        1,971,376Notes
      payable
                        
                        
                        1,649,140
                        
                        
                        
                        1,847,755Deferred
      revenue
                        
                        
                        59,582
                        
                        
                        
                        10,2613,420,343
                        
                        
                        
                        3,829,392Long-Term
      LiabilitiesNotes
      payable
                        
                        
                        —
                        
                        
                        
                        934,756Total
      Liabilities
                        
                        
                        3,420,343
                        
                        
                        
                        4,764,148Stockholders'
      Equity (Deficit)Preferred
      stock ($.001 par value; 10,000,000 shares authorized) Series A convertible
      preferred stock ($.001 par value; 0 shares issued and
      outstanding)
                        
                        
                        —
                        
                        
                        
                        —Series
      B convertible preferred stock ($.001 par value; 626,667 shares issued and
      outstanding)
                        
                        
                        626
                        
                        
                        
                        626Common
      stock ($0.001 par value; 1,000,000,000 shares authorized; 134,443,725 and
      68,469,617 shares issued and outstanding, respectively)
                        
                        
                        134,445
                        
                        
                        
                        68,471Additional
      paid in capital
                        
                        
                        29,360,833
                        
                        
                        
                        20,064,998Accumulated
      deficit
                        
                        
                        (29,622,792
                        )
                        
                        
                        (22,658,560
                        )Accumulated
      other comprehensive income
                        
                        
                        476,800
                        
                        
                        
                        —Subscription
      receivable
                        
                        
                        (83,000
                        )
                        
                        
                        —Treasury
      stock, at cost, (162,500 shares)
                        
                        
                        (13,000
                        )
                        
                        
                        (13,000
                        )Total
      stockholders’ equity (deficit)
                        
                        
                        253,912
                        
                        
                        
                        (2,537,464
                        )Total
      Liabilities and Stockholders’ Equity (Deficit)
                        
                        $
                        3,674,255
                        
                        
                        $
                        2,226,684





See
accompanying notes to consolidated financial statements


26





IceWEB,
Inc. and Subsidiaries


Consolidated
Statements of Operations





For the Year Ended
                                        September 30,2010
                                      
                                      
                                      2009Sales
                                      
                                      $
                                      3,353,286
                                      
                                      
                                      $
                                      2,240,363Cost
      of sales
                                      
                                      
                                      1,742,110
                                      
                                      
                                      
                                      1,326,385Gross
      profit
                                      
                                      
                                      1,611,176
                                      
                                      
                                      
                                      913,978Operating
      expenses:Sales
      and marketing expense
                                      
                                      
                                      1,690,684
                                      
                                      
                                      
                                      1,004,970Depreciation
      and amortization expense
                                      
                                      
                                      662,003
                                      
                                      
                                      
                                      696,723Research
      and development
                                      
                                      
                                      533,713
                                      
                                      
                                      
                                      336,616General
      and administrative
                                      
                                      
                                      5,325,898
                                      
                                      
                                      
                                      3,538,086Total
      operating expenses
                                      
                                      
                                      8,212,298
                                      
                                      
                                      
                                      5,576,395Other
      income (expenses):Gain
      on conversion of debt
                                      
                                      
                                      190,136
                                      
                                      
                                      
                                      —Interest
      income
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,142Interest
      expense
                                      
                                      
                                      (553,247
                                      )
                                      
                                      
                                      (462,031
                                      )Total
      other expenses:
                                      
                                      
                                      (363,111
                                      )
                                      
                                      
                                      (460,889
                                      )Loss
      From Continuing Operations
                                      
                                      
                                      (6,964,233
                                      )
                                      
                                      
                                      (5,123,306
                                      )Income
      from discontinued operations
                                      
                                      
                                      —
                                      
                                      
                                      
                                      136,408Interest
      expense related to discontinued operations
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (205,940
                                      )Gain
      from sale of subsidiary
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,666,236Total
      gain from discontinued operations
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,596,704Net
      loss
                                      
                                      $
                                      (6,964,233
                                      )
                                      
                                      $
                                      (2,526,602
                                      )Net
      loss per common share - basic and diluted:Loss
      from continuing operations
                                      
                                      $
                                      (0.07
                                      )
                                      
                                      $
                                      (0.13
                                      )Gain
      from discontinued operations
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      0.06Net
      Loss
                                      
                                      $
                                      (0.07
                                      )
                                      
                                      $
                                      (0.07
                                      )Weighted
      average common shares outstanding basic and diluted
                                      
                                      
                                      101,379,729
                                      
                                      
                                      
                                      40,911,411





See
accompanying notes to consolidated financial statements


27





IceWEB,
Inc. and Subsidiaries


Consolidated
Statement of Changes in Stockholders' Equity (Deficit)


For
the years ended September 30, 2010 and 2009





Series B
                    
                    
                    
                    
                    
                    Additional
                    
                    
                    
                    
                    
                    Compre-Preferred Stock
                    
                    
                    Common Stock
                    
                    
                    Paid-In
                    
                    
                    Accumulated
                    
                    
                    hensive
                    
                    
                    Subscription
                    
                    
                    Treasury StockShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    Income
                    
                    
                    Receivable
                    
                    
                    Share
                    
                    
                    Amount
                    
                    
                    TotalBalance
      at September 30, 2008
                    
                    
                    1,253,334
                    
                    
                    $
                    1,253
                    
                    
                    
                    24,688,088
                    
                    
                    $
                    24,690
                    
                    
                    $
                    15,953,221
                    
                    
                    $
                    (20,131,957
                    )
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    (162,500
                    )
                    
                    $
                    (13,000
                    )
                    
                    $
                    (4,165,793
                    )Amortization
      of deferred compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,016,137
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,016,137Issuance
      of common stock for cash
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,900,000
                    
                    
                    
                    3,900
                    
                    
                    
                    203,100
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    207,000Cancellation
      of common stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (100,000
                    )
                    
                    
                    (100
                    )
                    
                    
                    100
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Common
      stock issued for exercise of options
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    18,715,000
                    
                    
                    
                    18,715
                    
                    
                    
                    960,585
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    979,300Common
      stock issued in connection with notes payable
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,959,601
                    
                    
                    
                    1,960
                    
                    
                    
                    150,313
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    152,273Conversion
      of series B preferred to common stock
                    
                    
                    (626,667
                    )
                    
                    
                    (627
                    )
                    
                    
                    626,667
                    
                    
                    
                    627
                    
                    
                    
                    
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Common
      stock issued for services
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,725,000
                    
                    
                    
                    1,725
                    
                    
                    
                    130,775
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    132,500Common
      stock issued to employees
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    13,155,261
                    
                    
                    
                    13,154
                    
                    
                    
                    1,154,567
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,167,721Common
      stock issued in connection with disposition of subsidiary
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,000,000
                    
                    
                    
                    1,000
                    
                    
                    
                    79,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    80,000Common
      stock issued in connection with conversion of convertible
      debenture
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,800,000
                    
                    
                    
                    2,800
                    
                    
                    
                    417,200
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    420,000Net
      loss for the year
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,526,602
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,526,602
                    )Balance
      at September 30, 2009
                    
                    
                    626,667
                    
                    
                    
                    626
                    
                    
                    
                    68,469,617
                    
                    
                    
                    68,471
                    
                    
                    
                    20,064,998
                    
                    
                    
                    (22,658,560
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (162,500
                    )
                    
                    
                    (13,000
                    )
                    
                    
                    (2,537,464
                    )Amortization
      of deferred compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,627,919
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,627,919Issuance
      of common stock for cash
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    15,580,000
                    
                    
                    
                    15,580
                    
                    
                    
                    2,365,050
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,380,630Issuance
      of common stock to settle litigation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,678,571
                    
                    
                    
                    2,679
                    
                    
                    
                    399,104
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    401,783Common
      stock issued for exercise of options
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    30,570,600
                    
                    
                    
                    30,571
                    
                    
                    
                    2,561,055
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,591,626Common
      stock issued in connection with subscription receivable
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,000,000
                    
                    
                    
                    2,000
                    
                    
                    
                    81,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (83,000
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Common
      stock issued for services
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,800,000
                    
                    
                    
                    2,800
                    
                    
                    
                    506,684
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    509,484Common
      stock issued to employees
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9,344,937
                    
                    
                    
                    9,345
                    
                    
                    
                    858,020
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    867,365Common
      stock issued in connection with conversion of convertible
      debenture
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,000,000
                    
                    
                    
                    3,000
                    
                    
                    
                    897,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    900,000Other
      Comprehensive income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    476,800
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    476,800Net
      loss for the year
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (6,964,233
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (6,964,233
                    )Net
      Comprehensive loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (6,964,233
                    )
                    
                    
                    476,800
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (6,487,433
                    )Balance
      at September 30, 2010
                    
                    
                    626,667
                    
                    
                    $
                    626
                    
                    
                    
                    134,443,725
                    
                    
                    $
                    134,445
                    
                    
                    $
                    29,360,833
                    
                    
                    $
                    (29,622,792
                    )
                    
                    $
                    476,800
                    
                    
                    $
                    (83,000
                    )
                    
                    
                    (162,500
                    )
                    
                    $
                    (13,000
                    )
                    
                    $
                    253,912





See
accompanying notes to consolidated financial statements


28


IceWEB,
Inc. and Subsidiaries


Consolidated
Statements of Cash Flows





For the Year Ended
                    September 30,2010
                  
                  
                  2009Net
      loss
                  
                  $
                  (6,964,233
                  )
                  
                  $
                  (2,526,602
                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                  
                  
                  662,003
                  
                  
                  
                  742,636Share-based
      compensation
                  
                  
                  867,365
                  
                  
                  
                  1,167,721Amortization
      of deferred compensation
                  
                  
                  1,627,919
                  
                  
                  
                  1,016,134Gain
      on sale of discontinued operations
                  
                  
                  —
                  
                  
                  
                  (2,666,236
                  )Common
      stock issued for services rendered
                  
                  
                  509,484
                  
                  
                  
                  132,500Common
      stock issued for settlement
                  
                  
                  401,783
                  
                  
                  
                  —Amortization
      of deferred finance costs
                  
                  
                  27,015
                  
                  
                  
                  30,248Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                  
                  
                  (1,104,934
                  )
                  
                  
                  2,669,191Prepaid
      expense
                  
                  
                  (33,545
                  )
                  
                  
                  29,975Inventory
                  
                  
                  89,164
                  
                  
                  
                  248,951Deposits
                  
                  
                  —
                  
                  
                  
                  33,035Increase
      (decrease) in:Accounts
      payable and accrued liabilities
                  
                  
                  (259,757
                  )
                  
                  
                  (3,020,165
                  )Deferred
      revenue
                  
                  
                  49,321
                  
                  
                  
                  (2,902
                  )NET
      CASH USED IN OPERATING ACTIVITIES
                  
                  
                  (4,128,415
                  )
                  
                  
                  (2,145,514
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
                  
                  
                  (85,624
                  )
                  
                  
                  (99,762
                  )Investment
      in marketable securities
                  
                  
                  (48,000
                  )NET
      CASH USED IN INVESTING ACTIVITIES
                  
                  
                  (133,624
                  )
                  
                  
                  (99,762
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from notes payable
                  
                  
                  1,602,024
                  
                  
                  
                  7,594,455Payments
      on notes payable
                  
                  
                  (1,835,395
                  )
                  
                  
                  (6,476,949
                  )Proceeds
      from sale of common stock
                  
                  
                  2,380,630
                  
                  
                  
                  207,000Proceeds
      from exercise of common stock options
                  
                  
                  2,591,626
                  
                  
                  
                  979,300NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                  
                  
                  4,738,885
                  
                  
                  
                  2,303,806NET
      INCREASE IN CASH
                  
                  
                  476,846
                  
                  
                  
                  58,530CASH
      - beginning of period
                  
                  
                  63,310
                  
                  
                  
                  4,780CASH
      - end of period
                  
                  $
                  540,156
                  
                  
                  $
                  63,310Supplemental
      disclosure of cash flow information:Cash
      paid for:Interest
                  
                  $
                  526,232
                  
                  
                  $
                  552,886Income
      taxes
                  
                  $
                  —
                  
                  
                  $
                  —NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Common
      stock issued for debt and interest
                  
                  $
                  —
                  
                  
                  $
                  152,273Common
      stock issued in connection with convertible debenture
                  
                  $
                  1,090,136
                  
                  
                  $
                  420,000Common
      stock issued in connection with acquisition/disposition
                  
                  $
                  
                  
                  
                  $
                  80,000





See
accompanying notes to consolidated financial statements


29





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 1 -
ORGANIZATION





IceWEB,
Inc. (the “Company”) began trading publicly in April 2002. Utilizing resources
gained through acquisitions, we have developed two lines of business, IceWEB
Storage products, and IceMAIL which is a hosted Microsoft Exchange application
service. We currently have two wholly owned operating subsidiaries: IceWEB
Storage Corporation (formerly known as Inline Corporation), and IceWEB Online,
Inc.





BUSINESS
OF ICEWEB





Since
2005, the Company has been focused on serving the commercial and federal markets
with network security products and proprietary on-line software solutions. In
2008, the Company narrowed its focus and expanded its capabilities by acquiring
INLINE Corporation, a data storage manufacturing company.





In March,
2009, the Company sold its wholly owned subsidiary, IceWEB Virginia, Inc. to an
unrelated third party, and in the process exited its low-margin IT re-seller
business products business to further focus on the higher margin data storage
manufacturing business.





At the
close of fiscal year 2010, the Company has three key product
offerings:





•     Unified
Network Storage Solutions


•     Purpose
Built Network/Data Appliances


•     Cloud
Computing Products/Services





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





Principles
of Consolidation





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





Reclassifications





Certain
reclassifications have been made to previously reported amounts to conform to
2010 amounts. The reclassifications had no impact on previously reported results
of operations or shareholders’ deficit.





Going
Concern





Our
auditors stated in their report on the consolidated financial statements of the
Company for the Years ended September 30, 2010 and 2009 that we have had losses
since inception that raise doubt about our ability to continue as a going
concern. In addition and as discussed further in Note 6, we are not in
compliance with debt covenants under our Financing Agreements with Sand Hill
Finance LLC. For the year ended September 30, 2010 we incurred a net loss of
$6,964,233. 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 we cannot
continue in existence.





Management
has established plans intended to increase the sales of our 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 we will be
able to raise any additional funds.





Fair
value of financial instruments





The
carrying amounts of financial instruments, including cash, accounts receivable,
prepaid expenses, and other current assets, accounts payable and accrued
liabilities, and deposits approximated fair value as of September 30, 2010 and
2009, because of the relatively short-term maturity of these instruments and
their market interest rates.


30





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 2 -
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Marketable
Securities





IceWEB
accounts for the purchase of marketable equity securities in accordance with ASC
320, “Investment – Debt and Equity Securities” with any unrealized gains and
losses included as a net amount as a separate component of stockholders’ equity.
However, those securities may not have the trading volume to support the stock
price if the Company were to sell all their shares in the open market at once,
so the Company may have a loss on the sale of marketable securities even though
they record marketable equity securities at the current market
value.





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 sales and expenses during the
reporting periods. Actual results could differ from those estimates. Significant
estimates in 2010 and 2009 include the allowance for doubtful accounts, the
valuation of stock-based compensation, the allowance for inventory obsolescence
and the useful life of property and equipment and intangible assets, and
litigation reserves.





Cash and
Cash Equivalents





We
consider 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. We recorded a bad debt
allowance of $309,000 as of September 30, 2010. Management performs ongoing
evaluations of its accounts receivable. Management believes that all remaining
receivables are fully collectable. Bad debt expense amounted to $336,568 and
$29,324 for the Years ended September 30, 2010 and 2009,
respectively.





Inventory





Inventory
is valued at the lower of cost or market, on an average cost basis.





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.





Intangible
Assets





Intangible
assets, net consists of the cost of acquired customer relationships. We
capitalize and amortize the cost of acquired intangible assets over their
estimated useful lives on a straight-line basis. The estimated useful life of
our acquired customer relationships is five years.





Long-lived
Assets





In
accordance with ASC Topic 360, “Property, Plant, and Equipment” (formerly
SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”), we review 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.


31





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 2 -
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Advertising





Advertising
costs are expensed as incurred and amounted to $162,862 in fiscal 2010 and
$77,549 million in fiscal 2009.





Revenue
Recognition





We follow
the guidance of Accounting Standards Codification (ASC) Topic 605, “Revenue
Recognition” (formerly Staff Accounting Bulletin (SAB) No. 104, “Revenue
Recognition”) 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 our various revenues streams:





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





We
compute earnings per share in accordance with ASC Topic 260, “Earnings Per
Share” (formerly SFAS No. 128, “Earnings per Share”) Under the provisions of ASC
Topic 260, 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, 2010, there were options and
warrants to purchase 19,891,504 shares of common stock, 626,667 shares issuable
upon conversion of Series B preferred stock, and no shares of Series C preferred
stock outstanding which could potentially dilute future earnings per
share.





Stock-Based
Compensation





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





Prior to
October 1, 2005, we 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 ASC Topic 718,
“Compensation – Stock Compensation (Formerly SFAS No. 123 (R), “Share-Based
Payments. 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, we adopted the fair value recognition provisions of ASC Topic
718, “Compensation – Stock Compensation (Formerly SFAS No. 123 (R),
“Share-Based Payments 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.


32





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





Accounting
Pronouncements Recently Adopted





In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures” (“ASU 2010-06”) which provides amendments to Subtopic 820-10 that
require new disclosures regarding (1) transfers in and out of Levels 1 and 2
fair value measurements and (2) activity in Level 3 fair value measurements.
Additionally, ASU 2010-06 clarifies existing fair value disclosures about the
level of disaggregation and about inputs and valuation techniques used to
measure fair value. The guidance in ASU 2010-06 became effective for the
Company’s second quarter of fiscal year 2010 and the disclosures required by
this adoption are included in Note 2 “Fair Value Measurements”, except for
disclosures about purchases, sales, issuances, and settlements in the roll
forward activity in Level 3 fair value measurements which are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The adoption of this guidance did not have an impact on the
Company’s consolidated financial statements.





In
December 2008, the FASB issued new accounting guidance that requires enhanced
annual disclosures about the plan assets of a Company’s defined benefit pension
and other postretirement plans intended to provide users of financial statements
with a greater understanding of: (1) how investment allocation decisions are
made, including the factors that are pertinent to an understanding of investment
policies and strategies; (2) the major categories of plan assets; (3) the inputs
and valuation techniques used to measure the fair value of plan assets; (4) the
effect of fair value measurements, using significant unobservable inputs (Level
3) on changes in plan assets for the period; and (5) significant concentrations
of risk within plan assets. The new guidance resulted in enhanced disclosures
beginning with the Company’s Form 10-K for the year ended September 30, 2010
included herein.





In
December 2007, the FASB issued new accounting and disclosure guidance related to
non-controlling interests in subsidiaries (previously referred to as minority
interests), which was effective for the Company on October 1, 2009. Among other
things, the new guidance requires that a non-controlling interest in a
subsidiary be presented as a component of equity separate from the parent’s
equity. It also requires that consolidated net income be reported at amounts
that include the amounts attributable to both the parent and the non-controlling
interests. The new guidance has been applied prospectively, except for the
presentation and disclosure requirements, which have been applied
retrospectively to all periods presented herein.





In June
2008, ASC Topic 260, “Earnings Per Share”, was amended to require that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) be treated as participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. This amendment became effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years, and requires that all prior period earnings
per share data presented (including interim financial statements, summaries of
earnings and selected financial data) be adjusted retrospectively to conform to
its provisions. This Topic became effective October 1, 2009, and did not have an
impact on the Company’s consolidated financial statements.





In April
2008, ASC Topic 350, “Intangibles – Goodwill and Other”, was amended to include
a list of factors an entity should consider in developing renewal or extension
assumptions used in determining the useful life of recognized intangible assets.
The new guidance applies to (1) intangible assets that are acquired individually
or with a group of other assets and (2) intangible assets acquired in both
business combinations and asset acquisitions. Under this amendment, entities
estimating the useful life of a recognized intangible asset must consider their
historical experience in renewing or extending similar arrangements or, in the
absence of historical experience, must consider assumptions that market
participants would use about renewal or extension. This amendment required
certain additional disclosures beginning October 1, 2009, and prospective
application to useful life estimates prospectively for intangible assets
acquired after September 30, 2009. This Topic became effective October 1, 2009,
and did not have an impact on the Company’s consolidated financial
statements.





In
December 2007, the FASB amended its guidance on accounting for business
combinations. The new accounting guidance was effective for the company on
October 1, 2009, and is being applied prospectively to all business combinations
subsequent to the effective date. Among other things, the new guidance amends
the principles and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree and the goodwill
acquired. It also establishes new disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. The
adoption of this accounting guidance did not have a significant impact on the
Company’s consolidated financial statements, and the impact it will have on the
Company’s consolidated financial statements in future periods will depend on the
nature and size of business combinations completed subsequent to the date of
adoption.


33





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





Accounting Pronouncements Recently
Adopted(continued)





In
February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topic 855)”
(“ASU 2010-09”) which provides an update to Topic 855, “Subsequent Events”. This
update clarifies that an SEC filer is required to evaluate subsequent events
through the date that the financial statements are issued and removes the
requirement for SEC filers to disclose the date through which subsequent events
have been evaluated. This guidance became effective upon issuance and has been
adopted by the Company.





Recent
Accounting Pronouncements Not Yet Adopted as of September 30, 2010





In April
2010, the FASB issued ASU No. 2010-17, “Revenue Recognition - Milestone Method
(Topic 605)” (“ASU 2010-17”) which provides guidance on defining a milestone and
determining when it may be appropriate to apply the milestone method of revenue
recognition for certain revenue transactions. This guidance is effective on a
prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010 (fiscal year 2011 for
the Company). This accounting guidance is not expected to have a material impact
on the Company’s consolidated financial statements.





In June
2009, ASC Topic 810 was amended to improve financial reporting by enterprises
involved with variable interest entities. This Topic addresses (1) the effects
on certain provisions regarding the consolidation of variable interest entities,
as a result of the elimination of the qualifying special-purpose entity concept
in ASC Topic 860 regarding the accounting for transfers of financial assets, and
(2) concern about the application of certain key provisions of FASB
Interpretation No. 46(R), including those in which the accounting and
disclosures under the Interpretation do not always provide timely and useful
information about an enterprise’s involvement in a variable interest entity.
This guidance is effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009 (fiscal year 2011
for the Company), for interim periods within that first annual reporting period,
and for interim and annual reporting periods thereafter. Earlier application is
prohibited. The adoption of this statement is not expected to have a material
effect on the Company’s consolidated financial statements.





In
October 2009, the FASB issued new accounting guidance for revenue recognition
with multiple deliverables. This guidance impacts the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, this new accounting
guidance modifies the manner in which the transaction consideration is allocated
across the separately identified deliverables by no longer permitting the
residual method of allocating arrangement consideration. The new guidance is
effective for the Company prospectively for revenue arrangements entered into or
materially modified beginning in the first quarter of fiscal 2011. Early
adoption is permitted. This accounting guidance is not expected to have a
significant impact on the Company’s consolidated financial
statements.





In July
2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310) - Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses” (“ASU 2010-20”) which requires additional disclosures about an entity’s
allowance for credit losses and the credit quality of its financing receivables.
These amendments affect all entities with financing receivables, excluding
short-term accounts receivable or receivables measured at fair value or lower of
cost or fair value. The guidance on disclosures as of the end of a reporting
period will be effective for the Company on December 31, 2010. The disclosures
about activity that occurs during a reporting period are effective for the
Company’s second quarter of fiscal year 2011. The Company does not expect the
adoption of this guidance to have a material impact on its financial
statements.


34





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 3 -
PROPERTY AND EQUIPMENT





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





Estimated
                          Life
                        
                        2010
                        
                        
                        2009Office
      equipment
                        
                        5
      years
                        
                        $
                        699,282
                        
                        
                        $
                        637,920Computer
      software
                        
                        3
      years
                        
                        
                        612,379
                        
                        
                        
                        607,278Furniture
      and fixtures
                        
                        5
      years
                        
                        
                        261,385
                        
                        
                        
                        261,385Leasehold
      improvements
                        
                        5
      years
                        
                        
                        1,026,470
                        
                        
                        
                        1,007,2502,599,516
                        
                        
                        
                        2,513,833Less:
      accumulated depreciation
                        
                        
                        
                        
                        (2,180,643
                        )
                        
                        
                        (1,761,671
                        )$
                        418,873
                        
                        
                        $
                        752,162





Depreciation
expense for the years ended September 30, 2010 and 2009 was $418,913 and
$453,633 respectively.





NOTE 4 -
INTANGIBLE ASSETS





At
September 30, 2010, intangible assets consist of the following:





2010
                  
                  
                  2009Manufacturing
      GSA Schedule
                  
                  $
                  750,000
                  
                  
                  $
                  750,000Customer
      relationships  intangible
                  
                  
                  465,451
                  
                  
                  
                  465,4511,215,451
                  
                  
                  
                  1,215,451Less:
      accumulated amortization
                  
                  
                  (668,499
                  )
                  
                  
                  (425,409
                  )$
                  546,952
                  
                  
                  $
                  790,042





Amortization
expense amounted to $243,090 for both of the Years ended September 30, 2010 and
2009.





Amortization
expense subsequent to the year ended September 30, 2010 is as
follows:





Years
      ending September 30:2011
                  
                  $
                  243,0902012
                  
                  
                  243,0902013
                  
                  
                  60,772$
                  546,952





NOTE 5 -
RELATED PARTY TRANSACTIONS





From time
to time we have borrowed operating funds from Mr. John Signorello, our Chief
Executive Officer, for working capital. The advances were payable upon demand
and were interest free. During fiscal 2009 Mr. Signorello advanced $66,300 to
us, and we repaid $66,300. The highest amount that we owed Mr. Signorello during
fiscal 2009 was $25,000. At each of the last three fiscal year ends, 2008, 2009,
and 2010, the amount owed to Mr. Signorello was $0. As of December 13, 2010, the
amount owed to Mr. Signorello was $0.





On June
8, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04,
valued at $40,000 to Jack Bush, a member of our Board of Directors. The fair
market value of our common stock on the date of the transaction was $0.07 per
share. The shares were issued at a discount to the fair market value of our
common stock of approximately 43% due to their restricted status, because we
needed the cash, our access to capital was limited, and it was the price
negotiated and agreed to by the buyer.


35





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 5 -
RELATED PARTY TRANSACTIONS (continued)





On August
10, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04,
valued at $40,000 to Joseph Druzak, a member of our Board of Directors. The fair
market value of our common stock on the date of the transaction was $0.10 per
share. The shares were issued at a discount to the fair market value of our
common stock of approximately 60% due to their restricted status, because we
needed the cash, our access to capital was limited, and it was the price
negotiated and agreed to by the buyer.





During
October, 2009, we sold 2,000,000 shares of common stock at a per share price of
$0.042, valued at $83,000 to Florence Signorello, an accredited investor who is
the mother of John Signorello, our chief executive officer. The fair market
value of our common stock on the date of the transaction was $0.145 per share.
As of June 30, 2010 we had not received the proceeds from the investor and as a
result we recorded the subscription receivable as a contra equity account on our
balance sheet.





During
November, 2009, we sold 1,000,000 shares of common stock, valued at $130,000 to
Hal Compton, a member of our Board of Director for $40,000, and recognized stock
based compensation expense of $90,000. The shares were issued at a discount to
the fair market value of our common stock of approximately 69% due to their
restricted status, because we needed the cash, our access to capital was
limited, and it was the price negotiated and agreed to by the
buyer.





We and
certain of our affiliates have entered into a series of transactions involving
VOIS Inc. (OTCBB: VOIS), a public company which had developed and launched a
social commerce website.  On November 3, 2009 we purchased 160,000,000
shares of the common stock of VOIS Inc., which represented approximately 16% of
that company, for $48,000 in a private transaction exempt from registration
under the Securities Act of 1933 in reliance on an exemption provided by Section
4(2) of that act resulting in gross proceeds to us of $48,000. At the time of
our investment, Mr. Mark Lucky, our Chief Financial Officer, was a member of
VOIS’ board of directors, having been elected in October 2009.  In exchange
for this strategic interest, VOIS received non-exclusive access to distribute
IceMAIL, IcePORTAL and IceSECURE to their existing and prospective new user
base, and our cloud storage network.  Mr. Lucky resigned his positions with
VOIS in September 2010.  As of the date hereof, VOIS has not integrated
this access within its business and we have had no subsequent business
relationship with it, other than as set forth herein.





Prior to
our investment in VOIS, both Messrs. John R. Signorello and Robert Druzak had
personal relationships with the founders of VOIS.  In an unrelated
transaction in November 2009 Mr. Signorello, a member of our board of directors
and our CEO, purchased 225,000,000 shares of VOIS’ common stock from a former
officer and director of VOIS for nominal consideration in a private transaction.
 The shares of common stock purchased by Mr. Signorello represented
approximately 27% of VOIS’ outstanding common stock purchase of the shares by
us.  Thereafter, in an unrelated transaction in January 2010 Mr. Druzak
purchased 225,000,000 shares of VOIS’ common stock from a former officer and
director of VOIS for nominal consideration in a private transaction.  The
shares of common stock purchased by Mr. Druzak represented approximately 22% of
VOIS’ outstanding common stock.  Immediately following the closing of this
transaction Mr. Druzak was appointed to VOIS’ board of directors and named
President and Chief Executive Officer of VOIS.  Mr. Druzak, the brother of
Joseph Druzak, a member of our board, was formerly a vice president of our
company from March 2005 to January, 2010, but was not considered an executive
officer of our company.  Mr. Robert Druzak resigned his positions with VOIS
in March 2010.





While
five out of the 6 board members qualify as unrelated and independent, as
they are independent from management and free from any interest, function,
business or other relationship that could, or could reasonably be perceived to,
materially interfere with the Director’s ability to act in the our best
interest, we do not have any policies or procedures for the review, approval or
ratification of any related party transactions and no review or ratification of
any of the foregoing related party truncations by our board has
occurred.





NOTE 6 -
NOTES PAYABLE





Sand Hill
Finance, LLC





On
December 19, 2005, we entered into a Financing Agreement with Sand Hill Finance,
LLC pursuant to which, together with related amendments, we may borrow up to 80%
on our accounts receivable balances up to a maximum of $1,800,000. In
conjunction with the acquisition of Inline Corporation in December, 2007, the
lending limit on the credit facility was increased to
$2,750,000.


36





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 6 -
NOTES PAYABLE (continued)





In
addition, in November, 2008 we and Sand Hill Finance, LLC entered into a 36
month term convertible debenture agreement in the amount of $1,000,000. On
September 7, 2010, Sand Hill Finance, LLC converted the remaining balance of
$1,090,136 of this convertible debenture in exchange for three million shares of
our common stock.  The debenture was converted at a price of $0.36338 per
share.  The conversion price was subject to a floor of $0.30 per share
resulting in a gain on conversion of $190,136.





Amounts
borrowed under the Financing Agreement are secured by a first security interest
in substantially all of our assets. At September 30, 2010, the principal amount
due under the Financing Agreement amounted to $1,649,140. This amount is
included in the note payable balance of $1,649,140 on the balance sheet at
September 30, 2010.





Interest
is payable under the Financing Agreement at a rate of 1.75% per month on the
average loan balance outstanding during the year, equal to an annual interest of
approximately 21% per year. We 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, we are obligated
to pay a commitment fee of 1% of the credit limit annually, such amounts are
payable on the anniversary of the agreement.





In
connection with the Financing Agreement, we 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 our common stock minus the aggregate
exercise price of the warrant by the fair market value of one share of common
stock. The number of shares issuable upon the exercise of the warrant and the
exercise price are subject to adjustment in the event of stock dividends, stock
splits and reclassifications. The fair value of the warrant of $16,250 has been
recorded as an addition to paid-in capital and interest expense during the year
ended September 30, 2007.





In
connection with the term loan, we issued Sand Hill Finance, LLC a seven-year
common stock purchase warrant to purchase 120,000 shares of our common stock at
an exercise prices $1.00 per share. The warrant contains a cashless exercise
provision which means that at the option of the holder, the warrant is
convertible into a number of shares of our common stock as determined by
dividing the aggregate fair market value of our common stock minus the aggregate
exercise price of the warrant by the fair market value of one share of common
stock. The number of shares issuable upon the exercise of the warrant and the
exercise price are subject to adjustment in the event of stock dividends, stock
splits and reclassifications. The fair value of the warrant of $13,587 has been
recorded as an addition to paid-in capital and deferred finance costs during the
year ended September 30, 2009.





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 restricts us from undertaking certain
transactions without the written consent of the creditor including (i) permit or
suffer a change in control involving 20% of its securities, (ii) acquire assets,
except in the ordinary course of business, involving payment of $100,000 or
more, (iii) sell, lease, or transfer any of its property except for sales of
inventory and equipment in the ordinary course of business, (iv) transfer, sell
or license any intellectual property, (v) declare or pay a dividend on stock,
except payable in the form of stock dividends (vi) incur any indebtedness other
than trade credit in the ordinary course of business and (vii) permit any lien
or security interest to attach to any collateral. Sand Hill Finance provided a
waiver with respect to our disposition of IceWEB, Virginia, Inc. in March, 2010,
as discussed herein.


37





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 7 -
INVENTORY





Inventory
consisted of the following:





September
      30,
                    2010
                  
                  
                  September
      30,
                    2009Raw
      materials
                  
                  $
                  49,757
                  
                  
                  $
                  78,966Work
      in progress
                  
                  
                  9,330
                  
                  
                  
                  14,862Finished
      goods
                  
                  
                  3,110
                  
                  
                  
                  57,53362,197
                  
                  
                  
                  151,361Less:
      reserve for obsolescence
                  
                  
                  —
                  
                  
                  
                  —$
                  62,197
                  
                  
                  $
                  151,361





NOTE 8 -
COMMITMENTS





We lease
office space in Sterling, Virginia under a two-year operating lease that expires
on March 31, 2011. The office lease agreement has certain escalation clauses and
renewal options. Additionally, we have lease agreements for computer equipment
and an office copier/fax machine. Future minimum rental payments required under
these operating leases are as follows:




Years
      ending September 30:2011
                  
                  $
                  37,6112012
                  
                  
                  —2013
                  
                  
                  —2014
                  
                  
                  —2015
      and thereafter
                  
                  
                  —$
                  37,611





Rent
expense was $78,076 and $71,399 for the years ended September 30, 2010 and
2009.





NOTE 9 -
INCOME TAXES





We
account for income taxes under the provisions of ASC 740-10-25. ASC 740-10-25
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. Benefits from tax positions should be recognized in the
financial statements only when it is more likely than not that the tax position
will be sustained upon examination by the appropriate taxing authority that
would have full knowledge of all the relevant information. A tax position that
meets the more-likely-than-not recognition threshold is measured at the largest
amount of benefit that is greater than fifty percent likely of being realized
upon ultimate settlement. Tax positions that previously failed to meet the
more-likely-than not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. ASC 740-10-25 also
provides guidance on the accounting for and disclosure of unrecognized tax
benefits, interest, and penalties. ASC 740-10-25 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. ASC 740-10-25 additionally requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax
assets.  At September 30, 2010 and 2009 the Company has no unrecognized tax
benefits, interest, or penalties.


38





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 9 -
INCOME TAXES (continued)





A summary
of our deferred tax is as follows:





2010
                  
                  
                  2009Deferred
      Tax Assets:Tax
      benefit of net operating loss carry forward
                  
                  $
                  5,360,000
                  
                  
                  $
                  4,146,000Grant
      of stock options/restricted stock to employees
                  
                  
                  —
                  
                  
                  
                  1,768,000Unpaid
      accrued salaries
                  
                  
                  17,000
                  
                  
                  
                  31,000Allowance
      for doubtful accounts
                  
                  
                  113,000
                  
                  
                  
                  —Reserve
      for legal settlement
                  
                  
                  353,000
                  
                  
                  
                  451,000Amortization
      of leasehold improvements
                  
                  
                  182,000
                  
                  
                  
                  115,000Amortization
      of intangibles
                  
                  
                  302,000
                  
                  
                  
                  175,0006,327,000
                  
                  
                  
                  6,686,000Less:
      valuation allowance
                  
                  
                  (6,327,000
                  )
                  
                  
                  (6,686,000
                  )Net
      deferred tax assets
                  
                  $
                  —
                  
                  
                  $
                  —





As of
September 30, 2010 we had unused net operating loss carry forwards of
approximately $14,200,000 available to reduce our future federal taxable income.
Net operating loss carryforwards expire through fiscal years ending 2030.
Internal Revenue Code Section 382 places a limitation on the amount of taxable
income that can be offset by carryforwards after a change in control (generally
a greater than 50% change in ownership).





The
valuation allowance at September 30, 2010 was $6,327,000. The decrease during
fiscal 2010 was approximately $359,000.





Net
operating loss carryforwards and the associated deferred tax asset were reduced
during fiscal September 30, 2009 to reflect the impact of the disposition of
IceWEB Virginia, Inc. in a stock sale transaction in the second
quarter.





The table
below summarizes the differences between our effective tax rate and the
statutory federal rate as follows for fiscal 2010 and 2009. The effective tax
rate is 34% Federal and 3.6% State after Federal tax benefit:




2010
                    
                    
                    2009Computed
      “expected” tax benefit
                    
                    
                    (34.0
                    )%
                    
                    
                    (34.0
                    )%State
      income taxes
                    
                    
                    (3.6
                    )%
                    
                    
                    (3.6
                    )%Other
      permanent differences
                    
                    
                    1.0
                    %
                    
                    
                    42.0
                    %Change
      in valuation allowance
                    
                    
                    36.6
                    %
                    
                    
                    (4.4
                    )%Effective
      tax rate
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %





NOTE 10 -
CONCENTRATION OF CREDIT RISK





Bank
Balances





We
maintain our 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). During October 2009, the FDIC
increased the insured amounts at participating financial institutions from
$100,000 to $250,000 and provided unlimited coverage for non-interest bearing
transaction accounts. At September 30, 2010 we had no amounts in excess of FDIC
insured limits. We have not experienced any losses in such
accounts.





Major
Customers





Sales to
eight customers represented approximately 89% of total sales for the year ended
September 30, 2010. As of September 30, 2010 approximately 83% of our accounts
receivable was due from one customer. Sales to ten customers represented
approximately 63% in 2009.


39





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 11 -
STOCKHOLDERS’ EQUITY (DEFICIT)





Preferred
Stock





Our
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. Our 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, Our 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, we 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, we
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





On March
30, 2005, we entered into a Preferred Stock Purchase Agreement and related
agreements with Barron Partners LP. Under the terms of this agreement, we 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. We 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. We 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.
We 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.





All
shares of Series A Convertible Preferred Stock were converted into shares of our
common stock in fiscal 2008. As of September 30, 2010 there are no Series A
Convertible Preferred shares outstanding. The warrants issued in conjunction
with the Series A Convertible Preferred Stock transaction were fully converted
into shares of our common stock in fiscal 2008. There are no outstanding
warrants related to the Series A Convertible Preferred Stock transaction at
September 30, 2010.





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, we 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, we 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,





•
            each
      share of Series B Convertible Preferred Stock is convertible at the option
      of the holder into one share of our 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 our common stock. The conversion ratio is also subject
      to adjustment in the event we 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, and any of its affiliates beneficially owning more than 4.9% of
      our outstanding common shares following such conversion. This provision
      may be waived or amended only with the consent of the holders of all of
      the Series B Convertible Preferred Stock and the consent of the holders of
      a majority of our outstanding shares of common stock who are not
      affiliates,


40





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 11 -
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)





•
            so
      long as the Series B Convertible Preferred Stock is outstanding, we have
      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 we should elect to undertake such an issuance and the Series B
      holders consent, the conversion ratio would be reduced. Further, if we
      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 our 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, 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 of the Series B Convertible Preferred
      Stock.





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





During
fiscal 2009, Series B Preferred stockholders’ converted 626,667 shares of Series
B Preferred Stock into 580,000 shares of common stock.





During
fiscal 2009, the remaining 626,667 shares of Series B Preferred Stock were
acquired from the original holders by John Signorello, the Company’s CEO, for
total consideration of $75,000.





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





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


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





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





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





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





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


41





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 11 -
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)





•
            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 our Series B Convertible Preferred Stock,
we 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.





We also
issued Liberty Company LLC, a broker dealer which served as finder for us 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.





The
warrants issued in conjunction with the Series B Convertible Preferred Stock
transaction were fully converted into shares of our common stock in fiscal 2009.
There are no outstanding warrants related to the Series B Convertible Preferred
Stock transaction.





Common
Stock





Fiscal
2009 Transactions





On
October 28, 2008 we issued 3,431,680 shares of restricted common stock at a per
share price of $0.07, valued at $240,218, in lieu of pay to our employees. The
issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.


42





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 11 -
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)





On
February 18, 2009 we issued 480,000 shares of restricted common stock at a per
share price of $0.14, valued at $67,200, in lieu of pay to our employees. The
issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.





On March
26, 2009 we issued 6,243,581shares of restricted common stock at a per share
price of $0.09, valued at $560,305, in lieu of pay to our employees. The
issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.





On August
19, 2009 we issued 3,000,000 shares of restricted common stock at a per share
price of $0.10 valued at $300,000, in lieu of pay to our employees. The issuance
was exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.





On June
3, 2009 we sold 1,400,000 shares of common stock at a per share price of $0.03,
valued at $42,000 to an accredited investor and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





On June
8, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04,
valued at $40,000 to an accredited investor and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





On June
11, 2009 we sold 500,000 shares of common stock at a per share price of $0.03,
valued at $15,000 to an accredited investor and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





On August
10, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.08,
valued at $80,000 to an accredited investor and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





On March
10, 2009, we issued 25,000 shares of our common stock valued at $2,500 in
satisfaction of debt in the amount of $2,500, which related to services rendered
to the Company. The recipient was an accredited investor and the issuance was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.





On March
11, 2009, we issued 100,000 shares of our common stock valued at $4,000 in
satisfaction of debt in the amount of $4,000, which related to services rendered
to the Company. The recipient was an accredited investor and the issuance was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.





On June
25, 2009, we issued 100,000 shares of our common stock valued at $6,000 in
satisfaction of debt in the amount of $6,000, which related to services rendered
to the Company. The recipient was an accredited investor and the issuance was
exempt from registration under the Securities Act of 1933 in reliance on an
exemption provided by Section 4(2) of that act.





On
September 2, 2009, we issued 1,500,000 shares of our common stock valued at
$120,000 in satisfaction of debt in the amount of $120,000, which related to
services rendered to the Company. The recipient was an accredited investor and
the issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.





In March,
2009, in conjunction with the sale of its subsidiary IceWEB Virginia, Inc., the
Company issued 1,000,000 shares of our common stock to the purchaser, valued at
$80,000. The recipient was an accredited investor and the issuance was exempt
from registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





During
fiscal 2009, we issued 18,715,000 of our common stock in connection with the
exercise of options under our stock option plan.





In the
fiscal first quarter of 2009, we issued 1,959,601 shares of common stock in
connection with payments on a short term note payable, valued at
$152,273.


43





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 11 -
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)





Fiscal
2010 Transactions





During
November, 2009, we sold 1,000,000 shares of common stock, valued at $130,000 to
a Director for $40,000, and recognized stock based compensation expense of
$90,000. The purchaser was an accredited investor and the issuance was exempt
from registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





During
November, 2009, we sold 1,500,000 shares of common stock at a per share price of
$0.10, valued at $150,000 to an accredited investor, and the issuance was exempt
from registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





During
March, 2010, we sold 3,000,000 shares of common stock at a per share price of
$0.10, valued at $300,000 to four accredited investors. The issuances were
exempt from registration under the Securities Act of 1933 in reliance on
exemptions provided by Section 4(2) of that act.





During
March, 2010, we issued 1,000,000 shares of common stock at a per share price of
$0.17, valued at $170,000 to an accredited investor for services rendered. The
issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.





During
February, 2010 we issued 8,800,000 shares of restricted common stock at a per
share price of $0.086, valued at $756,800, in lieu of pay to five of our
employees, including two executive officers. The recipients were accredited
investors and the issuances were exempt from registration under the Securities
Act of 1933 in reliance on exemptions provided by Section 4(2) of that
act.





During
April and May, 2010 we sold 10,080,000 units of our securities to 35
accredited investors in a private placement exempt from registration under the
Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of
that act and Regulation D, with each unit consisting of one share of our common
stock and one 12 month common stock purchase warrants. We received gross
proceeds of $2,316,000 in this offering. Jesup & Lamont Securities
Incorporated, a broker-dealer and member of FINRA, acted as finder for us in the
offering and we paid Jesup & Lamont Securities Incorporated a fee of
$162,120 and issued them one-year common stock purchase warrants to purchase an
aggregate of 877,100 shares of our common stock at an exercise price of $0.40
per share. In addition, we paid Jesup & Lamont  Securities Incorporated
legal expenses totaling $25,000 incurred in the preparation of the various
transactional documents. We are using the net proceeds of this offering for
general working capital.





In July
2010, we issued 2,678,571 shares of common stock valued at $401,786 to Optimus
Capital Partners, LLC as consideration in the settlement of certain litigation.
The recipient was an accredited investor and the issuance was exempt from
registration under the Section Act of 1933 in reliance on an exemption provided
by Section 4(2) of that act.





In
September 2010, we issued 3,000,000 shares of our common stock in full
satisfaction of $1,090,136 of principal and interest due under a convertible
debenture. The recipient was an accredited investor and the issuance was exempt
from registration under the Section Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.





During
fiscal 2010, in conjunction with certain employment agreements, we issued
494,937 shares of restricted common stock valued at $97,065, in lieu of pay to
non-executive employees. The recipients were accredited investors and the
issuances were exempt from registration under the Securities Act of 1933 in
reliance on exemptions provided by Section 4(2) of that act.





During
May, 2010, we issued 200,000 shares of common stock at a per share price of
$0.30, valued at $60,000 to an accredited investor for services rendered. The
issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.





During
fiscal 2010, in conjunction with a consulting agreement, we issued 250,000
shares of restricted common stock valued at $56,234, in lieu of pay to
non-executive employees. The recipients were accredited investors and the
issuances were exempt from registration under the Securities Act of 1933 in
reliance on exemptions provided by Section 4(2) of that
act.


44


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 11 -
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)





In June
2010, we issued 1,300,000 shares of common stock valued at $210,000 as partial
consideration in the settlement of certain litigation. The recipients were an
accredited investor and the issuance was exempt from registration under the
Section Act of 1933 in reliance on an exemption provided by Section 4(2) of that
act.





Common
Stock Warrants





A summary
of the status of our outstanding common stock warrants as of September 30, 2010
and 2009 and changes during the period ending on that date is as
follows:




Year
      Ended September 30,
                      2010
                    
                    
                    Year
      Ended September 30,
                      2009Number
      of
                      Warrants
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Number
      of
                      Warrants
                    
                    
                    Weighted
                      Average
                      Exercise
                      PriceCommon Stock WarrantsBalance
      at beginning of year
                    
                    
                    225,000
                    
                    
                    $
                    1.78
                    
                    
                    
                    300,000
                    
                    
                    $
                    1.25Granted
                    
                    
                    8,137,100
                    
                    
                    
                    0.40
                    
                    
                    
                    —
                    
                    
                    
                    —Exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Forfeited
                    
                    
                    (75,000
                    )
                    
                    
                    6.00
                    
                    
                    
                    (75,000
                    )
                    
                    
                    0.65Balance
      at end of year
                    
                    
                    8,287,100
                    
                    
                    $
                    0.40
                    
                    
                    
                    225,000
                    
                    
                    $
                    1.78Warrants
      exercisable at end of year
                    
                    
                    8,287,100
                    
                    
                    $
                    0.40Weighted
      average fair value of warrants granted or re-priced during the
      year
                    
                    
                    
                    
                    
                    $
                    —





The
following table summarizes information about common stock warrants outstanding
at September 30, 2010:




Warrants
      Outstanding
                            
                            
                            Warrants
      ExercisableWeightedNumber
                            
                            Average
                            
                            Weighted
                            
                            
                            Number
                            
                            
                            WeightedRange
      of
                            
                            Outstanding
      at
                            
                            Remaining
                            
                            Average
                            
                            
                            Exercisable
      at
                            
                            
                            AverageExercise
                            
                            September
      30,
                            
                            Contractual
                            
                            Exercise
                            
                            
                            September
      30,
                            
                            
                            ExercisePrice
                            
                            2010
                            
                            Life
                            
                            Price
                            
                            
                            2010
                            
                            
                            Price$
                            0.20
                            
                            
                            200,000
                            
                            0.57 Years
                            
                            $
                            0.20
                            
                            
                            
                            200,000
                            
                            
                            $
                            0.20$
                            0.40
                            
                            
                            7,792,100
                            
                            0.65 Years
                            
                            $
                            0.40
                            
                            
                            
                            7,792,100
                            
                            
                            $
                            0.40$
                            0.50
                            
                            
                            290,000
                            
                            3.03 Years
                            
                            $
                            0.50
                            
                            
                            
                            290,000
                            
                            
                            $
                            0.50$
                            2.00
                            
                            
                            5,000
                            
                            0.81 Years
                            
                            $
                            2.00
                            
                            
                            
                            5,000
                            
                            
                            $
                            2.008,287,100
                            
                            
                            
                            $
                            0.40
                            
                            
                            
                            8,287,100
                            
                            
                            $
                            0.40





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 our stock at
exercise prices determined by our Board of Directors. The Plan was approved by
our stockholders in August 2001.


45





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 12 -
STOCK OPTION PLAN (continued)





The
purpose of the Plan is to advance our 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, we believe 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 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 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 2010, the Plan permits the grant of options and shares for up
to 60,000,000 shares of our common stock. The Plan terminates 10 years from the
date of the Plan’s adoption by our 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 our common stock,
no more than five years after the date of the grant. The exercise price of the
stock options may be paid in either cash, or delivery of unrestricted shares of
common stock having a fair market value on the date of delivery equal to the
exercise price, or surrender of shares of common stock subject to the stock
option which has a fair market value equal to the total exercise price at the
time of exercise, or a combination of the foregoing methods.





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




Year
      Ended September 30,2010
                      
                      
                      2009Expected
      volatility
                      
                      
                      129%
      - 325
                      %
                      
                      
                      149%
      - 183
                      %Expected
      term
                      
                      1 -
      5 Years
                      
                      
                      1 -
      5 YearsRisk-free
      interest rate
                      
                      
                      0.03% - 0.48
                      %
                      
                      
                      2.53% - 4.76
                      %Forfeiture
      Rate
                      
                      
                      0%
      - 45
                      %
                      
                      
                      0%
      - 45
                      %Expected
      dividend yield
                      
                      
                      0
                      %
                      
                      
                      0
                      %





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





For the
year ended September 30, 2010, total stock-based compensation charged to
operations for option-based arrangements amounted to $1,627,920. At September
30, 2010, there was approximately $447,076 of total unrecognized compensation
expense related to non-vested option-based compensation arrangements under the
Plan.


46





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 12 -
STOCK OPTION PLAN (continued)





A summary
of the status of our outstanding stock options as of September 30, 2010 and
changes during the period ending on that date is as follows:




Year
      Ended September 30,
                      2010
                    
                    
                    Year
      Ended September 30,
                      2009Number
      of
                      Options
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Aggregate
                      Intrinsic
                      Value
                    
                    
                    Number
      of
                      Options
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Aggregate
                      Intrinsic
                      ValueStock optionsBalance
      at beginning of year
                    
                    
                    10,944,483
                    
                    
                    $
                    0.27
                    
                    
                    
                    
                    
                    
                    6,583,827
                    
                    
                    $
                    0.61
                    
                    
                    $Granted
                    
                    
                    32,410,000
                    
                    
                    
                    0.09
                    
                    
                    
                    
                    
                    
                    24,395,000
                    
                    
                    
                    0.06Exercised
                    
                    
                    (30,570,600
                    )
                    
                    
                    0.09
                    
                    
                    
                    
                    
                    
                    (18,715,000
                    )
                    
                    
                    0.05Forfeited
                    
                    
                    (1,179,479
                    )
                    
                    
                    0.16
                    
                    
                    
                    
                    
                    
                    (1,319,344
                    )
                    
                    
                    0.28Balance
      at end of year
                    
                    
                    11,604,404
                    
                    
                    $
                    0.27
                    
                    
                    $
                    1,351,502
                    
                    
                    
                    10,944,483
                    
                    
                    $
                    0.27
                    
                    
                    $
                    147,150Options
      exercisable at end of year
                    
                    
                    9,691,237
                    
                    
                    $
                    0.30
                    
                    
                    $
                    1,037,335
                    
                    
                    
                    4,123,134
                    
                    
                    $
                    0.47
                    
                    
                    $
                    109,006Weighted
      average fair value of options granted during the year
                    
                    
                    
                    
                    
                    $
                    0.078
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    0.04





The
following table summarizes information about employee stock options outstanding
at September 30, 2010:




Options
      Outstanding
                      
                      Options
      ExercisableRange
      of
                        Exercise
                        Price
                      
                      Number
                        Outstanding
      at
                        September
      30,
                        2010
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      Number
                        Exercisable
      at
                        September
      30,
                        2010
                      
                      Weighted
                        Average
                        Exercise
                        Price$
                      0.001-0.25
                      
                      
                      7,649,400
                      
                      2.13
      Years
                      
                      $
                      0.11
                      
                      5,880,033
                      
                      $
                      0.110.30-0.48
                      
                      
                      695,000
                      
                      2.25
      Years
                      
                      
                      0.41
                      
                      556,750
                      
                      
                      0.450.54-0.60
                      
                      
                      2,475,004
                      
                      1.87
      Years
                      
                      
                      0.58
                      
                      2,469,454
                      
                      
                      0.590.61-0.80
                      
                      
                      785,000
                      
                      1.13
      Years
                      
                      
                      0.70
                      
                      785,000
                      
                      
                      0.6911,604,404
                      
                      
                      
                      $
                      0.27
                      
                      9,691,237
                      
                      $
                      0.30





NOTE 13 -
DISCONTINUED OPERATIONS





On March
30, 2009, we completed the sale of IceWEB Virginia, Inc., a wholly owned
subsidiary, to ABC Networks, Inc., a privately held U.S. company. Pursuant to
the terms of the transaction, ABC Networks, Inc. acquired 100% of the
outstanding common stock of IceWEB, Virginia, Inc.





The
aggregate sales price consisted of the following:




Common
      stock issued to purchaser
                    
                    $
                    80,000Net
      book value of disposed subsidiary
                    
                    
                    (2,746,236
                    )$
                    (2,666,236
                    )


47




IceWEB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended September 30, 2010 and 2009
 
 NOTE 13 -
DISCONTINUED OPERATIONS (continued)
 
 The
following table summarizes the estimated fair values of IceWeb Virginia’s assets
and liabilities disposed of at the date of the sale:
 Intangible
      assets, net
                    
                    $
                    (53,565
                    )IceWEB,
      Inc. common stock
                    
                    
                    (80,000
                    )Accounts
      payable and accrued liabilities
                    
                    
                    2,799,801Estimated
      gain on the sale
                    
                    $
                    2,666,236
 
 IceWEB
Virginia, Inc. operated as a value-added reseller of primarily IT security
products to the Federal government.  The results of operations of
discontinued operations were as follows:
 
 Results
from discontinued operations were as follows:
 
 Fiscal
      Year Ended
                        September
      30,2010
                      
                      
                      2009Sales
                      
                      $
                      —
                      
                      
                      $
                      1,694,322Cost
      of sales
                      
                      
                      —
                      
                      
                      
                      1,348,307Operating
      Expenses:Sales
      and marketing
                      
                      
                      —
                      
                      
                      
                      163,694Depreciation
      and amortization
                      
                      
                      —
                      
                      
                      
                      45,913Subtotal
                      
                      
                      —
                      
                      
                      
                      209,607Income
      from discontinued operations
                      
                      
                      —
                      
                      
                      
                      136,408Interest
      expense related to discontinued operations
                      
                      
                      —
                      
                      
                      
                      (205,940
                      )Gain
      from sale of discontinued operations
                      
                      
                      —
                      
                      
                      
                      2,666,236Total
      Gain from discontinued operations
                      
                      $
                      —
                      
                      
                      $
                      2,596,704
 
 During
the fiscal second quarter of 2009 we sold our wholly owned subsidiary, Iceweb
Virginia, Inc. to an unrelated third party.
 
 For 2009
we earned revenues in discontinued operations of $1,694,322.  We had no
comparable discontinued operations in fiscal 2010.
 
 Total
operating expenses of discontinued operations in fiscal 2009 amounted to
$209,607, and consisted of primarily sales and marketing expenses associated
with IceWEB Virginia, Inc. and the amortization of the GSA schedule through the
date of sale of the subsidiary.
 
 Gain from sale of assets.
During the fiscal year 2009 we recorded a gain of $2,666,236 on the sale of our
IceWEB Virginia, Inc. subsidiary. We did not have a comparable transaction in
fiscal 2010.
 NOTE 14 -
INVESTMENTS
 (a)
Summary of Investments
 
 Marketable Equity
Securities:
 
 In
November, 2009 we acquired 800,000 shares of VOIS Inc. common stock for $48,000.
The Company was able to negotiate a purchase price less than the then trading
price of VOIS’ common stock based upon the illiquid nature of the investment and
the lack of any other willing purchasers for VOIS securities. Due to the
illiquid nature of the VOIS Inc. common stock we applied a discount factor of
20% to the fair value of the marketable security.
 
 As of
September 30, 2010,  the Company’s investments in marketable equity
securities are based on the September 30, 2010  stock price as reflected on
the OTCBB stock exchange , reduced by a discount factor if those shares have
selling restrictions. These marketable equity securities are summarized as
follows:
  48





IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 14 -
INVESTMENTS (continued)





SEPTEMBER 30, 2010
                            
                            Cost
                            
                            
                            Gross
                              Unrealized
                              Gains
                            
                            
                            Gross
                              Unrealized
                              Losses
                            
                            
                            Fair
                              ValuePublicly
      traded equity securities
                            
                            $
                            48,000
                            
                            
                            $
                            476,800
                            
                            
                            $
                            —
                            
                            
                            $
                            524,800Total
                            
                            $
                            48,000
                            
                            
                            $
                            476,800
                            
                            
                            $
                            —
                            
                            
                            $
                            524,800





The
unrealized gains are presented in comprehensive income  in the
consolidated statement of operations and comprehensive income.





(b)
Gains and Losses on Investments





The
following table summarizes the realized net gains (losses) associated with the
Company’s investments:





Fiscal
      Year EndedSeptember302010
                    
                    
                    2009Net
      gains/(loss) on investments in publicly traded equity
      securities
                    
                    $
                    476,800
                    
                    
                    $
                    —Net
      gains on investments
                    
                    $
                    476,800
                    
                    
                    $
                    —





On
January 1, 2008, the Company adopted ASC 820, which, among other things, defines
fair value, establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category measured at fair
value on either a recurring or nonrecurring basis. The Company did not adopt the
ASC 820 fair value framework for nonfinancial assets and liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
at least annually. ASC 820 clarifies that fair value is an exit price,
representing the amount that would either be received to sell an asset or be
paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions, ASC 820
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value as follows:





Level 1. Observable inputs
such as quoted prices in active markets for identical assets or
liabilities;





Level 2. Inputs, other than
the quoted prices in active markets, that are observable either directly or
indirectly; and





Level 3. Unobservable inputs
in which there is little or no market data, which require the reporting entity
to develop its own assumptions.





Investment
Measured at Fair Value on a Recurring Basis:





Fair Value Measurements
    Using:Quoted Prices
                    in Active
                    Markets
                    (Level 1)
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)Marketable
      Equity Securities, net of discount for effect of
    restriction
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  524,800




49


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 14 -
INVESTMENTS (continued)





We
categorize the securities as investments in marketable securities available for
sale. These securities are quoted either on an exchange or inter-dealer
quotation (pink sheet) system. The securities are restricted and cannot be
readily resold by us absent a registration of those securities under the
Securities Act of 1933 (the “Securities Act”) or the availabilities of an
exemption from the registration requirements under the Securities Act. As these
securities are often restricted, we are unable to liquidate them until the
restriction is removed. Unrealized gains or losses on marketable securities
available for sale are recognized as an element of comprehensive income based on
changes in the fair value of the security. Once liquidated, realized gains or
losses on the sale of marketable securities available for sale are reflected in
our net income for the period in which the security was liquidated.





Under the
guidance of ASC 320, “Investments”, we periodically evaluate
other-than-temporary impairment (OTTI) of securities to determine whether a
decline in their value is other than temporary. Management utilizes criteria
such as the magnitude and duration of the decline, in addition to the reasons
underlying the decline, to determine whether the loss in value is other than
temporary. The term “other-than-temporary” is not intended to indicate that the
decline is permanent. It indicates that the prospects for a near term recovery
of value are not necessarily favorable, or that there is a lack of evidence to
support fair values equal to, or greater than, the carrying value of the
investment. Once a decline in value is determined to be other than temporary,
the value of the security is reduced and a corresponding impairment charge to
earnings is recognized. In the assessment of OTTI for various securities at
September 30, 2010 the guidance in ASC 320, “the Investment-Debt and Equity
Securities,” is carefully followed.





There
were no impairment charges on investments in publicly traded equity securities
for the year ended September 30, 2010 or for the year ended September 30,
2009.





The
Company has evaluated its publicly traded equity securities as of September 30,
2010, and has determined that there were no unrealized losses that indicate an
other-than-temporary impairment. This determination was based on several
factors, which include the length of time and extent to which fair value has
been less than the cost basis and the financial condition and near-term
prospects of the issuer, and the Company’s intent and ability to hold the
publicly traded equity securities for a period of time sufficient to allow for
any anticipated recovery in market value.





NOTE 15 -
COMPREHENSIVE INCOME (LOSS)





Comprehensive
income is comprised of net income and other comprehensive income or loss. Other
comprehensive income or loss refers to revenue, expenses, gains and losses that
under accounting principles generally accepted in the United States are included
in comprehensive income but excluded from net income as these amounts are
recorded directly as an adjustment to stockholders’ equity.





Our other
comprehensive income consists of unrealized gains on marketable securities
available for sale of $476,800.





NOTE 16 -
SEGMENT REPORTING





Although
the Company has a number of operating divisions, separate segment data has not
been presented as they meet the criteria for aggregation as permitted by ASC
Topic 280, “Segment Reporting” (formerly Statement of Financial Accounting
Standards (SFAS) No. 131, “Disclosures About Segments of an Enterprise and
Related Information”).





Our chief
operating decision-maker is considered to be our 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,
the Company has determined that it operates in a single operating segment,
specifically, web communications services. For the periods ended September 30,
2010 and 2009 all material assets and revenues of the Company were in the United
States.


50


IceWEB,
Inc. and Subsidiaries


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
ended September 30, 2010 and 2009





NOTE 17 -
SUBSEQUENT EVENTS





Subsequent
to September 30, 2010 we have issued 265,475 shares of our common stock valued
at $60,000 to our employees in conjunction with their compensation. In addition,
subsequent to September 30, 2010 we issued 100,000 shares of our common stock to
a consultant for services rendered, valued at $21,692.





We have
evaluated events and transactions that occurred subsequent to September 30, 2010
through the date the financial instruments were issued, for potential
recognition or disclosure in the accompanying financial statements. Other than
the disclosures shown, we did not identify any events or transactions that
should be recognized or disclosed in the accompanying financial
statements.





NOTE 18 -
COMMITMENTS AND CONTINGENCIES





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


51


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





None.





ITEM
9A. CONTROLS AND PROCEDURES





Evaluation of Disclosure
Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have conducted an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and
Exchange Act of 1934, as of the end of the period covered by this report. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded as of the evaluation date that our disclosure controls and procedures
were effective such that the information relating to our company, required to be
disclosed in our Securities and Exchange Commission reports (i) is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms and (ii) is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.





Management's Annual Report
on Internal Control Over Financial Reporting





Our
management, including our Chief Executive Officer and Chief Financial Officer,
is responsible for establishing and maintaining adequate internal control over
financial reporting to provide reasonable assurance regarding the reliability of
our financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets, (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors, and
(iii) provide reasonable assurance regarding prevention or timely detection of
the unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.





Management
assessed our internal control over financial reporting as of September 30, 2010,
the end of our fiscal year. Management based its assessment on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management’s assessment
included an evaluation of such elements as the design and operating
effectiveness of key financial reporting controls, process documentation,
accounting policies, and our overall control environment.





Based on
its assessment, our management has concluded that our internal control over
financial reporting was effective as of September 30, 2010 to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with
generally accepted accounting principles. As described elsewhere herein, we have
changed the presentation of discontinued operations in our 2009 financial
statements in response to comments from the staff of the SEC. As this change did
not result in a restatement of our 2009 financial statements, our management
concluded that the change in presentation was not a weakness in internal control
over financial reporting based upon their assessment of our internal control
over financial reporting for the year ended September 30, 2010.





Changes in Internal Controls
Over Financial Reporting





There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation required by paragraph (d) of Rules 13a-15 or
15d-15 under the Exchange Act that occurred during the Registrant’s last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





ITEM
9B. OTHER INFORMATION





None.


52





PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
following individuals serve as our executive officers and members of our Board
of Directors:





Name
                
                Age
                
                PositionsJohn
      R. Signorello
                
                44
                
                Chairman
      and Chief Executive OfficerMark
      B. Lucky
                
                52
                
                Chief
      Financial OfficerHarold
      F. Compton (1)(2)
                
                63
                
                DirectorRaymond
      H. Pirtle (2)
                
                67
                
                DirectorJoseph
      L. Druzak (1)
                
                56
                
                DirectorJack
      Bush(1)
                
                73
                
                DirectorHarry
      E. Soyster
                
                73
                
                Director





(1)
Member of the Compensation Committee


(2)
Member of the Audit Committee





John R. Signorello .
Mr. Signorello has served as Chairman of the Board and CEO since March 2000.
From 1991 until September 1997, Mr. Signorello served as the Chief Executive
Officer of STMS -”Solutions That Make Sense” - a private technology company he
founded that specialized in computer networks, systems integration and
information technology. In 1996, STMS was ranked the 17th fastest
growing technology company in America by The National Technology Council’s “The
Fast Five Hundred”. In September 1997, they were acquired by Steelcloud (Nasdaq:
SCLD), and Mr. Signorello remained as Vice President of Sales and Marketing
until November 1998. 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.





We
believe that as a result of his years of managerial and operational experience,
Mr. Signorello brings to the board of directors a demonstrated management
ability at senior levels. In addition, his experience with a variety of
technology companies brings valuable insight to his role as CEO and to our board
of directors. These experiences, qualifications and attributes have led to our
conclusion that Mr. Signorello should be serving as a member of our Board of
Directors in light of our business and structure.





Mark B. Lucky. Mark
B. Lucky has served as our Chief Financial Officer since March 2007. Since
October 30, 2010 he has also served as a member of the Board of Directors of
VOIS Inc. (OTCBB: VOIS), an entity in which we purchased an interest as
described elsewhere herein. He has over 20 years professional experience in high
growth/start-up ventures and established companies with multi-industry
experience including financial services, technology, software, real estate,
biotech and entertainment and media. Prior to joining IceWEB, he consulted at
Bearing Point on their financial restatement project. From 2004 to 2005 he was
Vice President of Finance and Administration at Galt Associates, Inc., a
Sterling, Virginia informatics/ technology and medical research services company
and from 2001 to 2004 he was Vice President of Finance and Administration of
MindShare Design, Inc., a San Francisco, California based internet technology
company. While at both Galt Associates, Inc. and MindShare Design, Inc. Mr.
Lucky was the senior financial officer for the Company, providing strategic and
tactical analysis and managing day to day finance, accounting, cash management,
reporting and human resource responsibilities. During his career Mr. Lucky has
also been employed by Axys Pharmaceuticals, Inc., a NASDAQ-listed South San
Francisco, California-based early stage drug discovery biotech company (acting
CFO and Senior Director of Finance), PriceWaterhouseCoopers, LLC, COMPASS
Management and Leasing, Inc. (Vice President - Finance 1997 to 1998), Mindscape,
Inc. (Director of Financial Planning and Analysis 1995 to 1996), The Walt Disney
Company (Manager, Operations Planning & Analysis, Manager of Corporate
Planning 1991 to 1995), and KPMG. Mr. Lucky is a member of the Board of
Directors of VOIS Inc. and HASCO Medical, Inc. Mr. Lucky is a CPA and received
his B.A., Economics, from the University of California.





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


53





We
believe that as a result of his years of managerial and operational experience,
Mr. Compton brings to the board of directors demonstrated management ability at
senior levels. In addition, his experience as a director of a variety of
companies, and his more than 30 years of experience as a retailer brings
valuable insight to our board of directors. These experiences, qualifications
and attributes have led to our conclusion that Mr. Compton should be serving as
a member of our Board of Directors in light of our business and
structure.





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





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. These experiences,
qualifications and attributes have led to our conclusion that Mr. Pirtle should
be serving as a member of our Board of Directors in light of our business and
structure.





Joseph L. Druzak. Mr.
Druzak has been a member of our Board of Directors since June 2005. 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.





With his
years of managerial and operational experience, Mr. Druzak brings to the board
of directors demonstrated management ability at senior levels and his insight
and direction will assist the company in achieving its objectives. We believe
that these experiences, qualifications and attributes have led to our conclusion
that Mr. Druzak should be serving as a member of our Board of Directors in light
of our business and structure.





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





We
believe that Mr. Bush’s extensive senior management, operational, and board
experience bring valuable knowledge to our board of directors and that these
experiences, qualifications and attributes have led to our conclusion that Mr.
Bush should be serving as a member of our Board of Directors in light of our
business and structure.





Harry E. Soyster.General Soyster has been a member of our Board of Directors since March
2009. General Soyster served as Director, Defense Intelligence Agency during
Desert Shield/Storm. He also served as Deputy Assistant Chief of Staff for
Intelligence, Department of the Army; Commanding General, U.S. Army Intelligence
and Security Command; and in the Joint Reconnaissance Center, Joint Chiefs of
Staff. In Vietnam, he was a field artillery battalion operations officer, and
was twice decorated for valor and wounded in action. Upon retirement, General
Soyster was Vice President for International Operations with Military
Professional


54





Resources
Incorporated where he helped pioneer the concept of providing retired military
expertise to support emerging democracies in Eastern Europe and Africa. In 2006,
he served as Special Assistant to the SEC Army for World War II 60th
Anniversary Commemorations. Currently, he serves as consultant to numerous
corporations and participates in studies by the Center for Strategic and
International Studies and the National Institute for Public Policy. In 1957,
General Soyster graduated from the United States Military Academy with a
Bachelor of Science degree in Engineering. He also holds a Masters of Science
degree in Chemistry from Pennsylvania State University in Chemistry and a
Masters of Science degree in Management from the University of Southern
California. His military education includes completion of the Field Artillery
School, Basic and Advanced Courses; the U.S. Army Command and General Staff
College; and the National War College. General Soyster has an active TS/SCI (Top
Secret/Sensitive Compartmented Information) clearance.





General
Soyster provides our board with extensive knowledge, experience, and
relationships with agencies in the federal government. He has significant
organizational, operational, and managerial experience and we believe he brings
valuable insight to growing our company and assist us in meeting our business
objectives. We believe that these experiences, qualifications and attributes
have led to our conclusion that General Soyster should be serving as a member of
our Board of Directors in light of our business and structure.





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





Committees
of the Board of Directors





Our Board
of Directors has created both an Audit Committee and a Compensation Committee.
We do not have a Nominating Committee or any committee performing a similar
function. The functions that such a committee would undertake are being
undertaken by the entire board as a whole. We do not have a policy regarding the
consideration of any director candidates which may be recommended by our
stockholders, including the minimum qualifications for director candidates, nor
has our Board of Directors established a process for identifying and evaluating
director nominees. We have not adopted a policy regarding the handling of any
potential recommendation of director candidates by our stockholders, including
the procedures to be followed. Our Board has not considered or adopted any of
these policies as we have never received a recommendation from any stockholder
for any candidate to serve on our Board of Directors or any inquiry as to what
the procedures may be if a stockholder wished to make such a recommendation.
Since 2009 the Board has been developing a nominating and approval process and
policy to guide the handling of potential recommendations of board candidates.
While there have been no nominations of additional directors proposed, in the
event such a proposal is made, all members of our Board will participate in the
consideration of director nominees.





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





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


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


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


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


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


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


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





Each
Audit Committee member is required to:





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


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


55


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 considered an “audit committee financial expert” under the definition
under Item 407 of Regulation S-K. As we expand our Board of Directors with
additional independent directors the number of directors serving on the Audit
Committee will also increase.





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





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





•
            compensation
      of our executives,


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


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





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





Each
Compensation Committee member is required to:





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


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





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





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





Code of
Ethics





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





•
            honest
      and ethical conduct,


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


•
            compliance
      with applicable laws, rules and
regulations,


•
            the
      prompt reporting violation of the code,
and


•
            accountability
      for adherence to the Code.





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


56





Section
16(a) Beneficial Reporting Compliance





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, 2010 and Forms 5 and amendments thereto furnished to us with
respect to the fiscal year ended September 30, 2010, 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, 2010,
except as set forth below:





•
            Mr.
      Signorello failed to file 1 report covering 1
  transaction,


•
            Mr.
      Druzak failed to file 1 reports covering 1 transaction,
  and


•
            Mr.
      Lucky failed to file 1 reports covering 1
  transaction.





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





ITEM
11. EXECUTIVE COMPENSATION





Summary
Compensation Table





The
following table summarizes all compensation recorded by us in each of the last
two completed fiscal years for our principal executive officer, each other
executive officer serving as such whose annual compensation exceeded $100,000
and up to two additional individuals for whom disclosure would have been made in
this table but for the fact that the individual was not serving as an executive
officer of our company at September 30, 2010. The value attributable to any
option awards is computed in accordance with accordance with ASC Topic 718,
“Compensation – Stock Compensation (Formerly SFAS No. 123 (R), “Share-Based
Payments. The assumptions made in the valuations of the option awards are
included in Note 12 of the Notes to our Financial Statements for fiscal 2010
appearing later in this report.





SUMMARY COMPENSATION
TABLE





Name
      and
                          principal
      position
                          (a)
                        
                        Year
                          (b)
                        
                        Salary
                          ($)
                          (c)
                        
                        
                        Bonus
                          ($)
                          (d)
                        
                        
                        Stock
                          Awards
                          ($)
                          (e)
                        
                        
                        Option
                          Awards
                          ($)
                          (f)
                        
                        
                        Non-Equity
                          Incentive
      Plan
                          Compensation
                          ($)
                          (g)
                        
                        
                        Nonqualified
                          Deferred
                          Compensation
                          Earnings
                          ($)
                          (h)
                        
                        
                        All
                          Other
                          Compensation
                          ($)
                          (i)
                        
                        
                        Total
                          ($)
                          (j)John  Signorello
      (1)
                        
                        2010
                        
                        
                        239,559
                        
                        
                        
                        —
                        
                        
                        
                        430,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        8,914
                        
                        
                        
                        678,4762009
                        
                        
                        145,230
                        
                        
                        
                        —
                        
                        
                        
                        392,789
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        8,174
                        
                        
                        
                        556,342Mark
      B. Lucky (2)
                        
                        2010
                        
                        
                        201,424
                        
                        
                        
                        —
                        
                        
                        
                        197,800
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        8,923
                        
                        
                        
                        408,1472009
                        
                        
                        147,500
                        
                        
                        
                        —
                        
                        
                        
                        176,148
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        7,403
                        
                        
                        
                        331,051





(1)        Mr.
Signorello is our Chief Executive Officer. All other compensation in fiscal 2010
includes $8,914 which represents the value of health insurance premiums we pay
for Mr. Signorello. In fiscal 2010, we granted him 5,000,000 shares of our
restricted common stock, valued at $430,000. All other compensation in fiscal
2009 includes $8,174 which represents the value of health insurance premiums we
pay for Mr. Signorello. In fiscal 2009, we granted him 8,147,222 shares of our
restricted common stock, valued at $392,789. The compensation for Mr. Signorello
in fiscal 2009 included $26,500 in salary that had been accrued and not yet
paid. The compensation table above excludes the compensation provided to Mr.
Signorello as a member of the Board of Directors.





(2)        Mr.
Lucky is our Chief Financial Officer. All other compensation in fiscal 2010 and
2009 represents the value of health insurance premiums we pay for Mr. Lucky. In
fiscal 2010, we granted him 2,300,000 shares of our restricted common stock,
valued at $197,800. In fiscal 2009, we granted him 3,100,606 shares of our
restricted common stock, valued at $176,148. The compensation for Mr. Lucky in
fiscal 2009 included $40,000 in salary that had been accrued and not yet
paid.


57


How Mr.
Signorello’s compensation is determined





Mr.
Signorello, who has served as our CEO since March 2000, is not a party to an
employment agreement with our company. His compensation is determined by the
Compensation Committee of our Board of Directors. The Compensation Committee
considered a number of factors in determining Mr. Signorello’s compensation
including the scope of his duties and responsibilities to our company and the
time he devotes to our business. The Compensation Committee did not consult with
any experts or other third parties in fixing the amount of Mr. Signorello’s
compensation. During fiscal 2010 Mr. Signorello’s compensation package included
a base salary of $250,000 and company provided health care benefits. Mr.
Signorello’s compensation excludes option grants he received as a member of the
Board of Directors.





How Mr.
Lucky’s compensation is determined





Mr.
Lucky, who has served as our CFO since March 2007, is not a party to an
employment agreement with our company. His compensation is determined by the
Compensation Committee of our Board of Directors. The Compensation Committee
considered a number of factors in determining Mr. Lucky’s compensation including
the scope of his duties and responsibilities to our company and the time he
devotes to our business. The Compensation Committee did not consult with any
experts or other third parties in fixing the amount of Mr. Lucky’s compensation.
During fiscal 2010 Mr. Lucky’s compensation package included a base salary of
$200,000 and company provided health care benefits. Mr. Lucky did not receive
any stock option grants during this fiscal year. The amount of compensation
payable to Mr. Lucky can be increased at any time upon the determination of the
Compensation Committee of our Board of Directors.





Director
Compensation





We have
not established standard compensation arrangements for our directors and the
compensation payable to each individual for their service on our Board is
determined from time to time by our Board of Directors based upon the amount of
time expended by each of the directors on our behalf. The following table
provides information concerning the compensation of our directors for their
services as members of our Board of Directors for the fiscal year ended
September 30, 2010.





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





Outstanding
Equity Awards at Fiscal Year-End





The
following table provides information concerning unexercised options, stock that
has not vested and equity incentive plan awards for each named executive officer
outstanding as of September 30, 2010:


58





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END





OPTION
      AWARDS
                              
                              STOCK
      AWARDSName
                                (a)
                              
                              Number
      of
                                Securities
                                Underlying
                                Unexercised
                                Options
                                (#)
                                Exercisable
                                (b)
                              
                              
                              Number
      of
                                Securities
                                Underlying
                                Unexercised
                                Options
                                (#)
                                Unexercisable
                                (c)
                              
                              
                              Equity
                                Incentive
                                Plan
                                Awards:
                                Number
      of
                                Securities
                                Underlying
                                Unexercised
                                Unearned
                                Options
                                (#)
                                (d)
                              
                              
                              Option
                                Exercise
                                Price
                                ($)
                                (e)
                              
                              Option
                                Expiration
                                Date
                                (f)
                              
                              Number
                                of
                                Shares
                                or
                                Units
                                of
                                Stock
                                That
                                Have
                                Not
                                Vested
                                (#)
                                (g)
                              
                              
                              Market
                                Value
                                of
                                Shares
                                or
                                Units
                                of
                                Stock
                                That
                                Have
                                Not
                                Vested
                                ($)
                                (h)
                              
                              
                              Equity
                                Incentive
                                Plan
                                Awards:
                                Number
                                of
                                Unearned
                                Shares,
                                Units
      or
                                Other
                                Rights
                                That
                                Have
      Not
                                Vested
                                (#)
                                (i)
                              
                              
                              Equity
                                Incentive
                                Plan
                                Awards:
                                Market
                                or
      Payout
                                Value
      of
                                Unearned
                                Shares,
                                Units
      or
                                Other
                                Rights
                                That
                                Have
      Not
                                Vested
                                (#)
                                (j)John
      R. Signorello
                              
                              
                              100,000
                              
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              $
                              0.70
                              
                              04/29/2012500,000
                              
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              $
                              0.58
                              
                              05/06/2015250,000
                              
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              $
                              0.60
                              
                              09/06/2012250,000
                              
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              $
                              0.10
                              
                              03/09/201450,000
                              
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              $
                              0.47
                              
                              09/06/2011Mark
      Lucky
                              
                              
                              100,000
                              
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              $
                              0.58
                              
                              05/06/2012150,000
                              
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              $
                              0.55
                              
                              06/14/2012150,000
                              
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              $
                              0.60
                              
                              09/06/201229,167
                              
                              
                              
                              20,833
                              
                              
                              
                              
                              
                              
                              $
                              0.001
                              
                              03/18/2013





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, June, 2007, February, 2010,
and October, 2010, we have reserved an aggregate of 60,000,000 shares of common
stock for issuance under the Plan. At November 30, 2010 we have granted options
to purchase 10,944,108 shares of our common stock under the Plan. Our Board of
Directors (or at their discretion a committee of our Board members) administers
the Plan including, without limitation, the selection of recipients of awards
under the Plan, the granting of stock options, restricted shares or performance
shares, the determination of the terms and conditions of any such awards, the
interpretation of the Plan and any other action they deem appropriate in
connection with the administration of the Plan.





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





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


59





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





•
            cash,
      or


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


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


•
            a
      combination of the foregoing
methods.





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





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





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





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





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





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


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


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


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


•
            any
      combination of the foregoing.


60





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





•
            cash,
      or


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


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


•
            purchase
      price, or


•
            a
      combination of either of these
methods.





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





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





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





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





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


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


•
            extends
      the termination date of the Plan.





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





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





At
December 22, 2010, there were 136,725,867 shares of our common stock issued and
outstanding. Our common stock is the only outstanding class of our voting
securities. The following table sets forth, as of December 22, 2010, information
known to us relating to the beneficial ownership of these shares
by:





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


•
            each
      director;


•
            each
      executive officer; and


•
            all
      executive officers and directors as a
group.





Unless
otherwise indicated, the address of each beneficial owner in the table set forth
below is care of 22900 Shaw Road, Suite 111, Sterling, Virginia
20166.





We
believe that all persons named in the table have sole voting and investment
power with respect to all shares of beneficially owned by them. Under securities
laws, a person is considered to be the beneficial owner of securities he owns
and that can be acquired by him within 60 days from December 22, 2010 upon the
exercise of options, warrants, convertible securities or other understandings.
We determine a beneficial owner’s percentage ownership by assuming that options,
warrants or convertible securities that are held by him, but not those held by
any other person and which are exercisable within 60 days of December 15, 2010,
have been exercised or converted. Unless otherwise noted, the address of each of
these principal stockholders is our principal executive
offices.


61





Name of Beneficial Owner
                    
                    Amount and
                      Nature of
                      Beneficial
                      Ownership
                    
                    
                    Percentage
                      of ClassJohn
      R. Signorello (1)
                    
                    
                    16,384,785
                    
                    
                    
                    11.88
                    %Hal
      Compton (2)
                    
                    
                    2,231,833
                    
                    
                    
                    1.62
                    %Raymond
      H. Pirtle (3)
                    
                    
                    428,167
                    
                    
                    
                    0.31
                    %Joseph
      L. Druzak (4)
                    
                    
                    1,645,293
                    
                    
                    
                    1.20
                    %Mark
      B. Lucky (5)
                    
                    
                    5,729,167
                    
                    
                    
                    4.18
                    %Ed
      Soyster (6)
                    
                    
                    57,750
                    
                    
                    
                    0.04
                    %Jack
      Bush (7)
                    
                    
                    1,678,167
                    
                    
                    
                    1.22
                    %All
      executive officers and as a group (seven persons)
                    
                    
                    24,816,918
                    
                    
                    
                    20.46
                    %





(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 $0.47 per
share, options to purchase 100,000 shares of our common stock at an exercise
price of $0.70 per share, options to purchase 500,000 shares of our common stock
at an exercise price of $0.58 per share, options to purchase 250,000 shares of
our common stock at an exercise price of $0.60 per share, and options to
purchase 250,000 shares of our common stock at an exercise price of $0.10 per
share. The number of shares beneficially owned by Mr. Signorello excludes
626,667 shares of our common stock issuable upon the conversion of 626,667
shares of Series B Convertible Preferred Stock. Under the designations, rights
and preferences of such security, the Series B Convertible Preferred Stock is
not convertible by the holder if such conversion would result in the holder
becoming the beneficial owner of in excess of 4.99% of our common stock. This
provision may be waived or amended only with the consent of the holders of all
of the Series B Convertible Preferred Stock and the consent of the holders of a
majority of our outstanding shares of common stock w ho are not our
affiliates.





(2) The
number of shares beneficially owned by Mr. Compton includes options to purchase
50,000 shares of our common stock at an exercise price of $0.47 per share,
options to purchase 100,000 shares of our common stock at an exercise price of
$0.70, options to purchase 150,000 shares of our common stock at an exercise
price of $0.60 per share, options to purchase 206,833 shares of our common stock
at an exercise price of $0.001 per share, and options to purchase 250,000 shares
of our common stock at an exercise price of $0.10 per share.





(3) The
number of shares beneficially owned by Mr. Pirtle includes options to purchase
50,000 shares of our common stock at an exercise price of $0.47 per share,
options to purchase 100,000 shares of our common stock at an exercise price of
$0.70 per share, options to purchase 150,000 shares of our common stock at an
exercise price of $0.60 per share, and options to purchase 128,167 shares of our
common stock at an exercise price of $0.001 per share.





(4) The
number of shares beneficially owned by Mr. Druzak includes options to purchase
50,000 shares of our common stock at an exercise price of $0.47 per share,
options to purchase 100,000 shares of our common stock at an exercise price of
$0.70 per share, options to purchase 150,000 shares of our common stock at an
exercise price of $0.60 per share, and options to purchase 42,167 shares of our
common stock at an exercise price of $0.001 per share.





(5) The
number of shares beneficially owned by Mr. Lucky includes options to purchase
100,000 shares of our common stock at an exercise price of $0.58 per share,
options to purchase 150,000 shares of our common stock at an exercise price of
$0.55 per share, options to purchase 150,000 shares of our common stock at an
exercise price of $0.60 per share, and options to purchase 29,167 shares of our
common stock at an exercise price of $0.001 per share.





(6) The
number of shares beneficially owned by Mr. Soyster includes options to purchase
24,750 shares of our common stock at an exercise price of $0.37 per share, and
options to purchase 33,000 shares of our common stock at an exercise price of
$0.001 per share.





(7) The
number of shares beneficially owned by Mr. Bush includes options to purchase
50,000 shares of our common stock at an exercise price of $0.47 per share,
options to purchase 100,000 shares of our common stock at an exercise price of
$0.70 per share, options to purchase 150,000 shares of our common stock at an
exercise price of $0.60 per share, options to purchase 128,167 shares of our
common stock at an exercise price of $0.001 per share, and options to purchase
250,000 shares of our common stock at an exercise price of $0.10 per
share.


62





Securities
Authorized For Issuance Under Equity Compensation Plans





The
following table sets forth securities authorized for issuance under equity
compensation plans, including individual compensation arrangements, by us under
our 2000 Management and Director Equity Incentive and Compensation Plan and any
compensation plans not previously approved by our stockholders as of September
30, 2010.





Number of
                  securities to be
                  issued upon
                  exercise of
                  outstanding
                  options,
                  warrants and
                  rights (a)
                
                
                Weighted
                  average
                  exercise
                  price of
                  outstanding
                  options,
                  warrants and
                  rights (b
                
                
                Number of
                  securities
                  remaining
                  available for
                  future issuance
                  under equity
                  compensation
                  plans (excluding
                  securities
                  reflected in
                  column (a)) (c)Plan
      categoryPlans
      approved by our stockholders:2000
      Management and Director Equity Incentive and Compensation
    Plan
                
                
                11,604,404
                
                
                $
                0.296
                
                
                
                74,752Plans
      not approved by stockholders:None
                
                
                0
                
                
                
                n/a
                
                
                
                n/a





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





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





From time
to time we have borrowed operating funds from our Mr. John Signorello, our Chief
Executive Officer, for working capital. The advances were payable upon demand
and were interest free.   During fiscal 2009 Mr. Signorello advanced
$66,300 to us, and we repaid $66,300. The highest amount that we owed Mr.
Signorello during fiscal 2009 was $25,000. At each of the last three fiscal year
ends, 2008, 2009, and 20010, the amount owed to Mr. Signorello was $0. As of
December 21, 2010, the amount owed to Mr. Signorello was $0.





On June
8, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04,
valued at $40,000 to Jack Bush, a member of our Board of Directors. The fair
market value of our common stock on the date of the transaction was $0.07 per
share. The shares were issued at a discount to the fair market value of our
common stock of approximately 43% due to their restricted status, because we
needed the cash, our access to capital was limited, and it was the price
negotiated and agreed to by the buyer.





On August
10, 2009 we sold 1,000,000 shares of common stock at a per share price of $0.04,
valued at $40,000 to Joseph Druzak, a member of our Board of Directors. The fair
market value of our common stock on the date of the transaction was $0.10 per
share. The shares were issued at a discount to the fair market value of our
common stock of approximately 60% due to their restricted status, because we
needed the cash, our access to capital was limited, and it was the price
negotiated and agreed to by the buyer.





During
March, 2009, we sold 2,000,000 shares of common stock at a per share price of
$0.042, valued at $83,000 to Florence Signorello, an accredited investor who is
the mother of John Signorello, our chief executive officer. The fair market
value of our common stock on the date of the transaction was $0.145 per share.
As of June 30, 2010 we had not received the proceeds from the investor and as a
result we recorded the subscription receivable as a contra equity account on our
balance sheet.





During
November, 2009, we sold 1,000,000 shares of common stock, valued at $130,000 to
Hal Compton, a member of our Board of Director for $40,000, and recognized stock
based compensation expense of $90,000. The shares were issued at a discount to
the fair market value of our common stock of approximately 69% due to their
restricted status, because we needed the cash, our access to capital was
limited, and it was the price negotiated and agreed to by the
buyer.


63





We and
certain of our affiliates have entered into a series of transactions involving
VOIS Inc. (OTCBB: VOIS), a public company which had developed and launched a
social commerce website. On November 3, 2009 we purchased 160,000,000 shares of
the common stock of VOIS Inc., which represented approximately 16% of that
company, for $48,000 in a private transaction exempt from registration under the
Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of
that act resulting in gross proceeds to us of $48,000. At the time of our
investment, Mr. Mark Lucky, our Chief Financial Officer, was a member of VOIS’
board of directors, having been elected in October 2009. In exchange for this
strategic interest, VOIS received non-exclusive access to distribute IceMAIL,
IcePORTAL and IceSECURE to their existing and prospective new user base, and our
cloud storage network. Mr. Lucky resigned his positions with VOIS in September
2010. As of the date hereof, VOIS has not integrated this access within its
business and we have had no subsequent business relationship with it, other than
as set forth herein.





Prior to
our investment in VOIS, both Messrs. John R. Signorello and Robert Druzak had
personal relationships with the founders of VOIS. In an unrelated transaction in
November 2009 Mr. Signorello, a member of our board of directors and our CEO,
purchased 225,000,000 shares of VOIS’ common stock from a former officer and
director of VOIS for nominal consideration in a private transaction. The shares
of common stock purchased by Mr. Signorello represented approximately 27% of
VOIS’ outstanding common stock purchase of the shares by us. Thereafter, in an
unrelated transaction in January 2010 Mr. Druzak purchased 225,000,000 shares of
VOIS’ common stock from a former officer and director of VOIS for nominal
consideration in a private transaction. The shares of common stock purchased by
Mr. Druzak represented approximately 22% of VOIS’ outstanding common stock.
Immediately following the closing of this transaction Mr. Druzak was appointed
to VOIS’ board of directors and named President and Chief Executive Officer of
VOIS. Mr. Druzak, the brother of Joseph Druzak, a member of our board, was
formerly a vice president of our company from March 2005 to January, 2010, but
was not considered an executive officer of our company. Mr. Robert Druzak
resigned his positions with VOIS in March 2010.





Director
Independence





Messrs.
Compton, Pirtle, Druzak, Soyster, and Bush, members of our Board of Directors,
are “independent” within the meaning of Rule 5605 of the NASDAQ Marketplace
Rules.





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, 2010 and 2009 is $66,000 and $61,500,
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, 2010 and 2009 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, 2010 and 2009 is $0 and $0, respectively.





ALL OTHER
FEES





There
were no other fees billed by our principal accountant for the fiscal Years ended
September 30, 2010 and 2009, 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 2010 were pre-approved by the entire Board of
Directors.


64





PART
IV





ITEM
15. EXHIBITS





2.1
              
              Agreement
      and Plan of Reorganization and Stock Purchase Agreement with Disease S.I.
      Inc.(4)2.2
              
              Agreement
      and Plan of Merger with IceWEB Communications, Inc. (8)2.3
              
              Agreement
      and Plan of Merger with Seven Corporation (9)3.1
              
              Certificate
      of Incorporation (1)3.2
              
              Certificate
      of Amendment to Certificate of Incorporation (1)3.3
              
              Certificate
      of Amendment to Certificate of Incorporation (1)3.4
              
              Certificate
      of Amendment to Certificate of Incorporation (1)3.5
              
              Certificate
      of Amendment to Certificate of Incorporation (2)3.6
              
              Certificate
      of Amendment to Certificate of Incorporation (3)3.7
              
              Certificate
      of Amendment to Certificate of Incorporation (11)3.8
              
              Certificate
      of Designations of Series A Convertible Preferred Stock
    (12)3.9
              
              Certificate
      of Amendment to Certificate of Incorporation (13)3.10
              
              Bylaws
      (1)3.11
              
              Certificate
      of Designations of Series B Convertible Preferred Stock
    (17)4.1
              
              Form
      of Common Stock Purchase Warrant “A” (12)4.2
              
              Form
      of Common Stock Purchase Warrant “B” (12)4.3
              
              Form
      of Common Stock Purchase Warrant “C” (12)4.4
              
              Form
      of Series H Common Stock Purchase Warrant (16)4.5
              
              Form
      of Series I Common Stock Purchase Warrant (16)4.6
              
              Form
      of $0.70 Common Stock Purchase Warrant “A” (16)4.7
              
              Form
      of Comerica Bank warrant (16)4.8
              
              Form
      of Common Stock Purchase Warrant “D” (17)4.9
              
              Form
      of Common Stock Purchase Warrant “E” (17)4.10
              
              Form
      of Common Stock Purchase Warrant “F” (17)4.11
              
              Form
      of Common Stock Purchase Warrant “G” (18)4.12
              
              Form
      of Common Stock Purchase Warrant for Sand Hill Finance LLC
      (18)4.13
              
              Secured
      Convertible Debenture for Sand Hill Finance LLC (25)4.14
              
              Warrant
      Amendment Agreement with Sand Hill Finance LLC (25)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)10.18
              
              Stock
      Purchase Agreement with Inline Corporation (21)10.19
              
              First
      Amendment to Stock Purchase Agreement with Inline Corporation
      (21)10.20
              
              Convertible
      Debenture with Sand Hill Finance LLC (22)10.21
              
              Stock
      Purchase Agreement for Sale of IceWEB Virginia, Inc.
  (23)10.22
              
              Series
      C Preferred Stock Purchase Agreement (24)14.1
              
              Code
      of Business Conduct and Ethics (16)21.1
              
              Subsidiaries
      of the registrant (16)23.1
              
              Consent
      of Sherb & Co., LLP *


65





31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer
    *31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer
    *32.1
              
              Section
      906 Certification of Chief Executive Officer *32.2
              
              Section
      906 Certification of Chief Financial Officer
*





* filed
herewith





(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
      on   Schedule 14C as filed on June 18,
  2001.(3)
              
              Incorporated
      by reference to the definitive Information Statement
      on   Schedule 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 on Schedule 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 on Schedule 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 on Schedule14C as
      filed on April 4, 2005.(14)
              
              Incorporated
      by reference to Amendment No. 1 to the Report on Form 8-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 number
      333-126898, 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 number
      333-126898 filed on January 30. 2006.(20)
              
              Incorporated
      by reference to the Report on Form 8-K as filed on June 22,
      2006.(21)
              
              Incorporated
      by reference to the Report on Form 8-K as filed on January 3,
      2009.(22)
              
              Incorporated
      by reference to the Report on Form 8-K as filed on December 1,
      2009.(23)
              
              Incorporated
      by reference to the Report on Form 8-K as filed on April 15,
      2010.(24)
              
              Incorporated
      by reference to the Report on Form 8-K as filed on July 31,
      2010.(25)
              
              Incorporated
      by reference to the registration statement on Form S-1, SEC file number
      333-167501, as amended.


66


SIGNATURES





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





ICEWEB,
      INC.February
      10, 2011
                By:
                /s/
      John R. SignorelloJohn
      R. Signorello, Chairman and Chief Executive Officer,
                  principal
      executive officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, 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
              
              Chairman
      of the Board and CEO, principal
              
              February
      10, 2011John
      R. Signorello
              
              executive
      officer/s/ Mark B. Lucky
              
              Chief
      Financial Officer, principal financial
              
              February
      10, 2011Mark
      B. Lucky
              
              and
      accounting officer/s/ Hal Compton
              
              Director
              
              February
      10, 2011Hal
      Compton/s/ Raymond H. Pirtle, Jr.
              
              Director
              
              February
      10, 2011Raymond
      H. Pirtle, Jr./s/ Joseph Druzak
              
              Director
              
              February
      10, 2011Joseph
      Druzak/s/ Jack Bush
              
              Director
              
              February
      10, 2011Jack
      Bush/s/ Harry E. Soyster
              
              Director
              
              February
      10, 2011Harry
      E. Soyster


67