UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark
One)




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




For the
period ended March 31, 2010




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




For the
transition period from _________ to _________




Commission
file number: 0-27865




ICEWEB,
INC.


(Exact
name of small business issuer as specified in its charter)




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




22900
Shaw Road, Suite 111


Sterling, VA
20166


(Address
of principal executive offices)




(571)
287-2380


(Issuer’s
telephone number)




______________________


(Former
name, former address, and former fiscal year, if changed since last
report)




Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.   YesxNoo




Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).   YesoNoo




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




Large accelerated filer
            
            o
            
            Accelerated filer
            
            oNon-accelerated
      filer
            
            o(Do not check if a
      smaller reporting company)
            
            Smaller reporting company
            
            x




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




State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: At May 17, 2010, there were 107,857,417
outstanding shares of common stock, $.001 par value per share.




Transitional Small Business Disclosure
Format (Check one): YesoNox








CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION




This
quarterly report contains forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors that may
cause our actual results, performance or achievements to be materially different
from the results, performance or achievements expressed or implied by the
forward-looking statements. You should not unduly rely on these statements.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They use words such as “anticipate,”
“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “project,”
“contemplate,” “would,” “should,” “could,” or “may.” With respect to any
forward-looking statement that includes a statement of its underlying
assumptions or bases, we believe such assumptions or bases to be reasonable and
have formed them in good faith, assumed facts or bases almost always vary from
actual results, and the differences between assumed facts or bases and actual
results can be material depending on the circumstances. When, in any
forward-looking statement, we express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis, but there can be no assurance that the stated
expectation or belief will result or be achieved or accomplished. All subsequent
written and oral forward-looking statements attributable to us, or anyone acting
on our behalf, are expressly qualified in their entirety by the cautionary
statements.




OTHER
PERTINENT INFORMATION




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


- 2
-





ICEWEB,
INC. AND SUBSIDIARIES


FORM
10-Q


QUARTERLY
PERIOD ENDED MARCH 31, 2010




INDEX




PagePART
      I - FINANCIAL INFORMATIONItem
      1 - Consolidated Financial StatementsConsolidated
      Balance Sheets (unaudited) at March 31, 2010 and September 30,
      2009
                          4Consolidated
      Statements of Operations (unaudited)
                            For
      the three and six months ended March 31, 2010 and 2009
                          5Consolidated
      Statements of Cash Flows (unaudited)
                            For
      the six months ended March 31, 2010 and 2009
                          6Consolidated
      Statements of Comprehensive Income (unaudited)
                            For
      the Three and six months Ended March 31, 2010 and 2009
                          7Notes
      to Unaudited Consolidated Financial Statements
                          8-22Item
      2 - Management’s Discussion and Analysis or Plan of
    Operation
                          23-31Item
      3 - Quantitative and Qualitative Disclosures About Market
    Risk
                          32Item
      4 - Controls and Procedures
                          32PART
      II - OTHER INFORMATIONItem
      1 - Legal Proceedings
                          33Item
      1A - Risk Factors
                          33Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
                          33Item
      3 - Default upon Senior Securities
                          34Item
      4 - Submission of Matters to a Vote of Security Holders
                          34Item
      5 - Other Information
                          34Item
      6 – Exhibits
                          34Signatures
                          35


- 3
-




PART
I - FINANCIAL INFORMATION




Item
1. Consolidated Financial Statements




ICEWEB,
Inc.


Consolidated
Balance Sheets




March 31, 2010
                  (Unaudited)
                
                
                September 30,
                  2009(1)CURRENT ASSETS:Cash
                
                $
                147,300
                
                
                $
                63,310Accounts
      receivable, net
                
                
                891,382
                
                
                
                424,919Inventory,
      net
                
                
                151,937
                
                
                
                151,361Other
      current assets
                
                
                20,625
                
                
                
                6,390Prepaid
      expenses
                
                
                33,396
                
                
                
                25,1801,244,640
                
                
                
                671,160OTHER
      ASSETS:Property
      and equipment, net
                
                
                580,752
                
                
                
                752,162Deposits
                
                
                13,320
                
                
                
                13,320Investment
      in marketable securities available for sale
                
                
                1,920,000
                
                
                
                -Intangible
      assets, net
                
                
                668,496
                
                
                
                790,042Total
      Assets
                
                $
                4,427,208
                
                
                $
                2,226,684CURRENT
      LIABILITIES:Accounts
      payable and accrued liabilities
                
                $
                1,933,104
                
                
                $
                1,971,376Notes
      payable
                
                
                1,759,410
                
                
                
                1,847,755Deferred
      revenue
                
                
                21,719
                
                
                
                10,2613,714,233
                
                
                
                3,829,392Long-Term
      LiabilitiesNotes
      Payable
                
                
                1,011,480
                
                
                
                934,756Total
      Liabilities
                
                
                4,725,713
                
                
                
                4,764,148Stockholders’
      DeficitSeries
      B convertible preferred stock ($.001 par value; 626,667 shares issued and
      outstanding)
                
                
                626
                
                
                
                626Common
      stock ($.001 par value; 1,000,000,000 shares authorized; 104,605,817
      shares issued and 104,443,317 shares outstanding)
                
                
                104,607
                
                
                
                68,471Additional
      paid in capital
                
                
                23,826,769
                
                
                
                20,064,998Accumulated
      deficit
                
                
                (26,006,507
                )
                
                
                (22,658,559
                )Accumulated
      other comprehensive income
                
                
                1,872,000
                
                
                
                -Subscription
      receivable
                
                
                (83,000
                )
                
                
                -Treasury
      stock, at cost, (162,500 shares)
                
                
                (13,000
                )
                
                
                (13,000
                )Total
      stockholders’ deficit
                
                
                (298,505
                )
                
                
                (2,537,464
                )Total
      Liabilities and stockholders’ deficit
                
                $
                4,427,208
                
                
                $
                2,226,684




(1)
Derived from audited financial statements


See
accompanying notes to unaudited consolidated financial
statements


- 4
-





ICEWEB,
Inc.


Consolidated
Statements of Operations


(Unaudited)




Three Months Ended
                      March 31
                    
                    
                    Six Months Ended
                      March 312010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Sales
                    
                    $
                    1,011,205
                    
                    
                    $
                    1,369,702
                    
                    
                    $
                    1,612,022
                    
                    
                    $
                    3,110,290Cost
      of sales
                    
                    
                    456,094
                    
                    
                    
                    806,391
                    
                    
                    
                    729,718
                    
                    
                    
                    2,074,066Gross
      profit
                    
                    
                    555,111
                    
                    
                    
                    563,311
                    
                    
                    
                    882,304
                    
                    
                    
                    1,036,224Operating
      expenses:Sales
      and marketing
                    
                    
                    472,359
                    
                    
                    
                    195,825
                    
                    
                    
                    785,217
                    
                    
                    
                    422,877Depreciation
      and amortization
                    
                    
                    162,926
                    
                    
                    
                    170,798
                    
                    
                    
                    330,399
                    
                    
                    
                    347,045Research
      and development
                    
                    
                    105,745
                    
                    
                    
                    76,865
                    
                    
                    
                    185,311
                    
                    
                    
                    156,431General
      and administrative
                    
                    
                    1,560,401
                    
                    
                    
                    681,699
                    
                    
                    
                    2,654,370
                    
                    
                    
                    1,135,050Total
      Operating Expenses
                    
                    
                    2,301,431
                    
                    
                    
                    1,125,187
                    
                    
                    
                    3,955,297
                    
                    
                    
                    2,061,403Income
      (loss) From Operations
                    
                    
                    (1,746,320
                    )
                    
                    
                    (561,876
                    )
                    
                    
                    (3,072,993
                    )
                    
                    
                    (1,025,179
                    )Other
      income (expenses):Gain
      from sale of subsidiary
                    
                    
                    -
                    
                    
                    
                    3,452,236
                    
                    
                    
                    -
                    
                    
                    
                    3,452,236Interest
      income
                    
                    
                    -
                    
                    
                    
                    660
                    
                    
                    
                    -
                    
                    
                    
                    1,142Interest
      expense
                    
                    
                    (141,995
                    )
                    
                    
                    (169,080
                    )
                    
                    
                    (274,956
                    )
                    
                    
                    (365,294
                    )Total
      other (expenses):
                    
                    
                    (141,995
                    )
                    
                    
                    3,283,816
                    
                    
                    
                    (274,956
                    )
                    
                    
                    3,088,084Net
      income (loss)
                    
                    $
                    (1,888,315
                    )
                    
                    $
                    2,721,940
                    
                    
                    $
                    (3,347,949
                    )
                    
                    $
                    2,062,905Basic
      income (loss) per common share
                    
                    $
                    (0.02
                    )
                    
                    $
                    0.08
                    
                    
                    $
                    (0.04
                    )
                    
                    $
                    0.07Diluted
      loss per common share
                    
                    $
                    (0.02
                    )
                    
                    $
                    0.08
                    
                    
                    $
                    (0.04
                    )
                    
                    $
                    0.06Weighted
      average common shares outstanding-basic
                    
                    
                    88,205,555
                    
                    
                    
                    32,671,802
                    
                    
                    
                    83,652,224
                    
                    
                    
                    30,736,308Weighted
      average common shares outstanding-diluted
                    
                    
                    88,205,555
                    
                    
                    
                    34,667,320
                    
                    
                    
                    83,652,224
                    
                    
                    
                    32,829,375




See
accompanying notes to unaudited consolidated financial
statements


- 5
-




ICEWEB,
Inc.


Consolidated
Statements of Cash Flows


(Unaudited)




Six Months Ended
                      March 31,2010
                    
                    
                    2009NET
      CASH USED IN OPERATING ACTIVITIES
                    
                    $
                    (1,431,078
                    )
                    
                    $
                    (591,196
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
                    
                    
                    (37,444
                    )
                    
                    
                    (15,118
                    )Investment
      in marketable securities
                    
                    
                    (48,000
                    )
                    
                    
                    —NET
      CASH USED IN INVESTING ACTIVITIES
                    
                    
                    (85,444
                    )
                    
                    
                    (15,118
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayment
      of equipment financing
                    
                    
                    —
                    
                    
                    
                    (45,114
                    )Proceeds
      from the sale of restricted common stock
                    
                    
                    490,000
                    
                    
                    
                    —Proceeds
      from notes payable
                    
                    
                    799,460
                    
                    
                    
                    6,175,684Payments
      on notes payable
                    
                    
                    (811,082
                    )
                    
                    
                    (5,684,478
                    )Proceeds
      from exercise of common stock options
                    
                    
                    1,122,134
                    
                    
                    
                    163,800NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                    
                    
                    1,600,512
                    
                    
                    
                    609,892NET
      INCREASE IN CASH
                    
                    
                    83,990
                    
                    
                    
                    3,578CASH
      - beginning of period
                    
                    
                    63,310
                    
                    
                    
                    4,780CASH
      - end of period
                    
                    $
                    147,300
                    
                    
                    $
                    8,358Supplemental
      disclosure of cash flow information:Cash
      paid for :Interest
                    
                    $
                    274,956
                    
                    
                    $
                    365,294Income
      taxes
                    
                    $
                    —
                    
                    
                    $
                    —




See
accompanying notes to unaudited consolidated financial
statements


- 6
-




ICEWEB,
Inc.


Consolidated
Statements of Comprehensive Income (Loss)


(Unaudited)





Three Months Ended
                
                
                Six Months EndedMarch 31
                
                
                March 312010
                
                
                2009
                
                
                2010
                
                
                2009Net
      income (loss)
                
                $
                (1,888,315
                )
                
                $
                2,721,940
                
                
                $
                (3,347,949
                )
                
                $
                2,062,905Unrealized
      gain on marketable securities
                
                
                -
                
                
                
                -
                
                
                
                1,872,000
                )
                
                
                -Comprehensive
      income (loss)
                
                $
                (1,888,315
                )
                
                $
                2,721,940
                
                
                $
                (1,475,949
                )
                
                $
                2,062,905


- 7
-




ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




NOTE
1 - NATURE OF BUSINESS




Headquartered
just outside of Washington, D.C., we manufacture and market Unified Data
Storage, 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 Storage
Systems


•            Custom Built
Appliances


•           Cloud Based Software and
Services





IceWEB Storage
Systems





IceWEB is
a provider of high performance Unified Network Storage solutions.  We
believe that our product offerings have broad appeal in the small to medium
enterprise (SME) and federal marketplaces, and are used as core building blocks
(enabling technologies) within 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 (ISP’s), Managed Service Providers (MSP’s), oil and
gas, and health care.  Our innovative storage systems deliver levels
of performance, scalability, versatility and simplicity that exceed existing
network storage alternatives at a significantly lower price
point.  Our Unified Network Storage offering is deployed as storage
operating system software on our Network-Attached Storage (NAS) and Storage Area
Network (SAN) systems.  This IceWEB Unified Network Storage
environment empowers companies to quickly and easily deploy large, complex data
storage infrastructure environments; to reduce administrative costs for managing
their storage by making complex technical tasks far more simple to accomplish;
to reduce hardware and capital expenditure costs by more effectively using the
storage within the system and repurposing older legacy hardware; to protect
their business critical data by leveraging the IceWEB 5000 built-in data
replication features; and to integrate with the leading server virtualization
software (VMware, Citrix Xen and Microsofts HyperV) to better manage those
solutions.





The
IceWEB Unified Storage products replace complex and performance-limited products
with high performance, scalable and easy to use systems capable of handling the
most data intensive applications and environments.





Custom Built
Appliances





IceWEB
has been building Purpose Built Network and Data Appliances for several
years.  Purpose Built Network and Data Appliances are systems which
provide computing resources (processors and memory), data storage, and specific
software for a dedicated application.  Historically, the appliance
products that IceWEB has built have supported a single large business partner,
ESRI Corporation.  In this relationship, IceWEB and ESRI have
collaborated to create a family of ultra-high performance IceWEB/ESRI Geographic
Information System (GIS) appliances that give customers access to massive
amounts of data with unprecedented levels of performance.  IceWEB
creates, builds and ships a line of GIS appliances for ESRI which includes a
full set of ESRI GIS data pre-loaded on internal storage.  ESRI
Corporation has the responsibility for marketing these appliances to their
customers and business partners via their worldwide sales and consultancy
organization.  IceWEB also periodically distributes updates for these
GIS appliances, which is a source of recurring revenue for the
Company.





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 2009 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 Based Software and
Services





In
December 2005, IceWEB launched IceMAILTM, a
software service that provides network–hosted groupware, email, calendaring and
collaboration functionality.  Typical customers are organizations
desiring to deploy Microsoft Exchange and Outlook who wish to avoid the overhead
associated with procurement, maintainence and management of their own equipment
and software.   These online services subsequently were expanded
to include IcePORTALTM, which
provides customers with a complete Intranet portal, and IceSECURETM, a
hosted email encryption service.  Formerly referred to as “Software as
a Service” (SaaS), we refer to these hosted services today as Cloud Computing or
Cloud Services.  The benefits of Cloud Computing are
many.  First, adoption of an application, infrastructure or storage
environment is available on demand requiring no capital expenditures by the
customer.  This represents an attractive proposition from a financial
perspective.  Second, this model significantly diminishes the need for
the customer to retain highly-paid internal technical staff to support these
traditional IT functions, freeing these critical resources to focus on tasks
related to the core business.  Finally, 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.





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.





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.


- 8
-




ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





NOTE
1 - NATURE OF BUSINESS (continued)





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.




Copyright
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 for $48,000 an approximately 16% interest
in VOIS Inc. (OTCBB: VOIS), 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.  We acquired a
strategic interest in VOIS to enter the Cloud Computing marketplace and deploy
our storage products in conjunction with VOIS’ product offerings.  In
exchange for this strategic interest, VOIS received access to distribute
IceMAIL, IcePORTAL, and IceSECURE to their existing and prospective new user
base, and IceWEB’s cloud storage network.


- 9
-




ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




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





The
unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) and with the instructions to Securities and Exchange Commission (“SEC”)
Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do
not include all the information and footnote disclosures required by GAAP for
complete financial statements. For further information, these financial
statements should be read in conjunction with the audited consolidated financial
statements and related notes contained in the Company’s Annual Report on Form
10-K (File No. 000-27865) for the year ended September 30, 2009 (“Form
10-K”).





The
unaudited consolidated financial statements contain all normal recurring
accruals and adjustments that, in the opinion of management, are necessary to
state fairly the Company’s consolidated financial position at March 31, 2010,
and the consolidated results of its operations for the three and six months
ended March 31, 2010 and 2009, and the consolidated cash flows for the three and
six months ended March 31, 2010 and 2009. The results of operations for the
three and six months ended March 31, 2010 are not necessarily indicative of the
results to be expected for the full year.





The
consolidated balance sheet at September 30, 2009 has been derived from the
audited consolidated financial statements at that date but does not include all
footnote disclosures required by GAAP.





The
Company’s significant accounting policies are disclosed in the Company’s Form
10-K.  These financial statements consider subsequent events through
the date of filing with the Securities and Exchange Commission.




Fiscal
Year


The
fiscal year ends on September 30. References to fiscal 2010, for example, refer
to the fiscal year ending September 30, 2010.





Recent
Accounting Pronouncements





Subsequent
Events:  In February 2010, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2010-09“Subsequent Events (Topic 855) –
Amendments to Certain Recognition and Disclosure
Requirements.”ASU 2010-09 amends the subsequent events
disclosure guidance.  The amendments include a definition of an SEC
filer, requires an SEC filer or conduit bond obligor to evaluate subsequent
events through the date the financial statements are issued, and removes the
requirement for an SEC filer to disclose the date through which subsequent
events have been evaluated.  ASU 2010-09 was effective upon issuance
except for the use of the issued date for conduit debt obligors.  The
impact of ASU 2010-09 on our disclosures is reflected in Note 15 - Subsequent
Events.





Fair Value Measurements and
Disclosures:  In January 2010, the FASB issued ASU No. 2010-06
“Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value
Measurements.”  ASU 2010-06 amends the fair value disclosure
guidance.  The amendments include new disclosures and changes to
clarify existing disclosure requirements.  ASU 2010-06 was effective
for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and settlements of
Level 3 fair value measurements.  Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years.  The impact of ASU 2010-06 on our disclosures is
reflected in Note 10 - Fair Value Measurements.





Consolidations:  In
December 2009, the FASB issued ASU No. 2009-17 (formerly Statement No. 167),
“Consolidations (Topic 810) –
Improvements to Financial Reporting for Enterprises involved with Variable
Interest Entities”. ASU 2009-17 amends the consolidation guidance
applicable to variable interest entities. The amendments to the consolidation
guidance affect all entities, as well as qualifying special-purpose entities
(QSPEs) that are currently excluded from previous consolidation guidance. ASU
2009-17 was effective as of the beginning of the first annual reporting period
that begins after November 15, 2009. ASU 2009-17 did not have an impact on our
financial condition, results of operations, or disclosures.





Accounting for Transfers of
Financial Assets:  In December 2009, the FASB issued ASU No.
2009-16 (formerly Statement No. 166), “Transfers and Servicing (Topic 860)
– Accounting for Transfers of Financial Assets”. ASU 2009-16 amends the
derecognition accounting and disclosure guidance. ASU 2009-16 eliminates the
exemption from consolidation for QSPEs and also requires a transferor to
evaluate all existing QSPEs to determine whether they must be consolidated. ASU
2009-16 was effective as of the beginning of the first annual reporting period
that begins after November 15, 2009. ASU 2009-16 did not have an impact on our
financial condition, results of operations, or disclosures.





Reclassifications




Certain
reclassifications have been made to previously reported amounts to conform to
fiscal 2010 amounts.




Going
Concern




The
Company’s auditors stated in their report on the consolidated financial
statements of the Company for the years ended September 30, 2009 and 2008 that
the Company is dependent on outside financing and has had losses since inception
that raise doubt about its ability to continue as a going concern. For the six
months ended March 31, 2010, the Company had a net loss of $3,347,949 which
included noncash expenses of $2,496,439.  Cash used in operations
totaled $1,431,078.  The consolidated financial statements do not
include any adjustments related to the recovery and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.




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





Use
of estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of revenue and expenses during the reporting period. 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 useful life of intangible assets and property and equipment,
and the valuation of goodwill.





Cash
and Cash Equivalents




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





Accounts
Receivable




Accounts
receivable consists of normal trade receivables. The Company recorded a bad debt
allowance of $9,000 as of March 31, 2010. Management performs ongoing
evaluations of its accounts receivable. Management believes that all remaining
receivables are fully collectable. Bad debt expense amounted to $0 and $0 for
the three and six months ended March 31, 2010 and 2009,
respectively.


- 10
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




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




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.





We have
adopted ASC 350 for the assessment of impairment of goodwill and indefinite life
intangibles on an annual basis. The potential impairment of finite life
intangibles is assessed whenever events or a change in circumstances indicate
the carrying value may not be recoverable. Factors we consider important which
could trigger an impairment review include the following:




·
              significant
      underperformance relative to historical or expected projected future
      operating results;
 ·
              significant
      changes in the manner of our use of the acquired assets or the strategy
      for our overall business;
 ·
              significant
      negative industry or economic
trends;
 ·
              significant
      decline in our stock price for a sustained period of
      time; and
 ·
              our
      market capitalization relative to net book
  value.


When we
determine that the carrying value of goodwill and indefinite life intangibles
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any potential impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model.





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.





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.


- 11
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




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




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
we 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
March 31, 2010, there were options and warrants to purchase 14,126,304 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




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.


- 12
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




NOTE
3 - PROPERTY AND EQUIPMENT




Property
and equipment, net, consists of the following:




Estimated
                      Life
                    
                    March 31, 2010
                    
                    
                    September
                      30, 2009Office
      equipment
                    
                    5
      years
                    
                    $
                    651,102
                    
                    
                    $
                    637,920Computer
      software
                    
                    3
      years
                    
                    
                    612,379
                    
                    
                    
                    607,278Furniture
      and fixtures
                    
                    5
      years
                    
                    
                    261,385
                    
                    
                    
                    261,385Leasehold
      improvements
                    
                    2 -
      5 years
                    
                    
                    1,026,471
                    
                    
                    
                    1,007,2502,551,337
                    
                    
                    
                    2,513,833Less:
      accumulated depreciation
                    
                    
                    
                    
                    (1,970,585
                    )
                    
                    
                    (1,761,671
                    )$
                    580,752
                    
                    
                    $
                    752,162




Depreciation
expense for the six months ended March 31, 2010 and 2009 was $208,854 and
$179,587 respectively.





NOTE
4 - INVENTORY




Inventory
consisted of the following:


March 31, 2010
                    
                    
                    September 30,
                      2009Raw
      materials
                    
                    $
                    129,098
                    
                    
                    $
                    78,966Work
      in progress
                    
                    
                    15,194
                    
                    
                    
                    14,862Finished
      goods
                    
                    
                    7,645
                    
                    
                    
                    57,533151,937
                    
                    
                    
                    151,361Less:
      reserve for obsolescence
                    
                    
                    -
                    
                    
                    
                    -$
                    151,937
                    
                    
                    $
                    151,361


- 13
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





NOTE
5 - ACQUISITION AND DISPOSITIONS




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




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




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


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




Intangible
assets acquired from Inline were assigned the following values:  value
of manufacturing GSA schedule with an assigned valued of $750,000 amortized
straight line over five years; value of customer relationships with an assigned
value of $465,450 amortized straight line over five years. Intangible assets
acquired from Inline had the following unamortized values at March 31, 2010:
value of manufacturing GSA schedule of $412,500; value of customer relationships
of $255,998.





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
                      )





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


- 14
-




ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010


NOTE 6 - NOTES
PAYABLE




Sand Hill Finance,
LLC




On
December 19, 2005, the Company entered into a Financing Agreement with Sand Hill
Finance, LLC pursuant to which, together with related amendments, the Company
may borrow up to 80% on the Company’s accounts receivable balances up to a
maximum of $1,800,000. In conjunction with the acquisition of Inline Corporation
in December, 2008, the lending limit on the credit facility was increased to
$2,750,000. In addition, the Company and Sand Hill Finance, LLC entered into a
36 month term note agreement in the amount of $1,000,000. Amounts borrowed under
the Financing Agreement are secured by a first security interest in
substantially all of the Company’s assets. At March 31, 2010, the principal
amount due under the Financing Agreement amounted to $1,759,410.




In
November, 2008, in connection with the term note the Company executed a
convertible debenture agreement with Sand Hill Finance, LLC in the amount of
$1,170,767. The debenture bears interest at 18% and will allow Sand Hill
Finance, LLC to convert the outstanding obligation into shares of IceWEB common
stock at a fixed floor conversion price of $0.30 per share. The principal amount
due under the convertible debenture amounted to $1,011,480 at March 31,
2010.





Interest
on the accounts receivable-based borrowings is payable 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. The Company also agreed to pay an
upfront commitment fee of 1% of the credit line upon signing the Financing
Agreement, half of which was due and paid upon signing (amounting to $9,000) and
half of which is due on the first anniversary of the Financing Agreement. In
addition, the Company is obligated to pay a commitment fee of 1% of the credit
limit annually, such amounts are payable on the anniversary of the
agreement.




In
connection with the Financing Agreement, the Company issued Sand Hill Finance,
LLC, a seven-year common stock purchase warrant to purchase 25,000 shares of our
common stock at an exercise price of $1.00 per share. The exercise price was
subsequently reduced to $0.50 per share pursuant to Warrant Amendment Agreement
which was executed in conjunction with the convertible debenture. The warrant
contains a cashless exercise provision which means that at the option of the
holder, the warrant is convertible into a number of shares of our common stock
as determined by dividing the aggregate fair market value of the Company’s
common stock minus the aggregate exercise price of the warrant by the fair
market value of one share of common stock. The number of shares issuable upon
the exercise of the warrant and the exercise price are subject to adjustment in
the event of stock dividends, stock splits and reclassifications. The fair value
of the warrant of $16,250 has been recorded as an addition to paid-in capital
and interest expense during the year ended September 30, 2008.




In
connection with the term note, the Company issued Sand Hill Finance, LLC a
seven-year common stock purchase warrant to purchase 120,000 shares of our
common stock at an exercise prices $1.00 per share. The exercise price was
subsequently reduced to $0.50 per share pursuant to Warrant Amendment Agreement
which was executed in conjunction with the convertible debenture. The warrant
contains a cashless exercise provision which means that at the option of the
holder, the warrant is convertible into a number of shares of our common stock
as determined by dividing the aggregate fair market value of the Company’s
common stock minus the aggregate exercise price of the warrant by the fair
market value of one share of common stock. The number of shares issuable upon
the exercise of the warrant and the exercise price are subject to adjustment in
the event of stock dividends, stock splits and reclassifications. The fair value
of the warrant of $13,587 has been recorded as an addition to paid-in capital
and deferred finance costs during the year ended September 30,
2008.


- 15
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




NOTE
6 - NOTES PAYABLE (continued)




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




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




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




In
August, 2008, the Company borrowed $187,500 from an accredited investor. The
note bears interest at 16% and had a term of four months, and can be repaid in
either cash or IceWEB common stock. As of December 31, 2008 the Company had
repaid the full amount of the note through the sale of 2,226,101 shares of
Iceweb common stock.




NOTE
7 - EQUIPMENT FINANCING PAYABLE




On July
6, 2006, we entered into a sale and leaseback agreement with respect to certain
computer and office equipment. We received gross proceeds of $300,000 from the
sale of the equipment to a third party. As part of the same transaction, we
entered into an agreement to lease the equipment back from the third party for
36 monthly rent payments of $10,398 until August 2009. We are accounting for
this equipment financing arrangement as a capital lease. In connection with the
agreement, we made an initial security deposit of $30,000. The equipment had a
net book value of $37,846 on the date of the transaction. In connection with the
financing, we did not record any gain or loss. Imputed interest on this
financing is 20% per annum. This agreement terminated in August,
2009.  We are in default under this agreement, and the remaining
estimated amount owed under this agreement is included in accounts payable and
accrued liabilities on the accompanying balance sheet.




NOTE
8 - CONCENTRATION OF CREDIT RISK




Bank
Balances




The
Company maintains its cash bank deposits at various financial institutions
which, at times, may exceed federally insured limits. Accounts are guaranteed by
the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At March 31,
2010, the Company had no balances in excess of FDIC insured limits. The Company
has not experienced any losses in such accounts.


- 16
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




NOTE
9 - INVESTMENTS





(a)
Summary of Investments


The
following tables summarize the Company’s investments at March 31,
2010:




March
      31, 2010
              
              Cost
              
              
              Gross
                Unrealized
                Gains
              
              
              Gross
                Unrealized
                Losses
              
              
              Fair
                ValuePublicly
      traded equity securities
              
              $
              48,000
              
              
              $
              1,872,000
              
              
              $
              -
              
              
              $
              1,920,000Total
              
              $
              48,000
              
              
              $
              1,872,000
              
              
              $
              -
              
              
              $
              1,920,000





(b)
Gains and Losses on Investments


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





Three Months Ended
                    
                    
                    Six Months EndedMarch 31
                    
                    
                    March 312010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      gains on investments in publicly traded equity securities
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,872,000
                    
                    
                    $
                    -Net
      gains on investments
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,872,000
                    
                    
                    $
                    -





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. Our
policy is to liquidate the securities on a regular basis.  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 a are recognized on a quarterly basis 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, 2009 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 six months ended March 31, 2010 or for the six months ended March 31,
2009.





The
Company has evaluated its publicly traded equity securities as of March 31,
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.


- 17
-




ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





NOTE
10- 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 $1,872,000.





NOTE
11 – 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 30:2010
      (remaining six months)
                      
                      $
                      37,6112011
                      
                      
                      37,6112012
                      
                      
                      -2013
                      
                      
                      -2014
      and thereafter
                      
                      
                      -$
                      75,222





NOTE
12 - STOCKHOLDERS’ DEFICIT




During
the six months ended March 31, 2010, in connection with the exercise of
18,836,200 stock options, the Company issued 18,836,200 shares of common stock
for cash proceeds of $1,122,134.




During
the six months ended March 31, 2010, we issued 2,000,000 shares of common stock
at a per share price of $0.042, valued at $83,000 to an accredited investor. As
of March 31, 2010 the Company had not yet received the proceeds from the
investor and as a result the Company recorded the subscription receivable as a
contra equity account on its balance sheet. 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
the six months ended March 31, 2010, we sold 1,000,000 shares of common stock,
valued at $100,000 to a Director for $40,000, and recognized stock based
compensation expense of $90,000. 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
the six months ended March 31, 2010, 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
the six months ended March 31, 2010, we sold 3,000,000 shares of common stock at
a per share price of $0.10, valued at $300,000 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
the six months ended March 31, 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. 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
the six months ended March 31, 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 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.


- 18
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





NOTE
12 - STOCKHOLDERS’ DEFICIT (continued)





Common
Stock Warrants




A summary
of the status of the Company’s outstanding common stock warrants as of March 31,
2010 and changes during the period ending on that date is as
follows:




Number of
                    Warrants
                  
                  
                  Weighted Average
                    Exercise PriceCommon Stock WarrantsBalance
      at beginning of year
                  
                  
                  225,000
                  
                  
                  $
                  1.78Granted
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  75,000
                  
                  
                  
                  6.00Balance
      at end of period
                  
                  
                  150,000
                  
                  
                  $
                  0.55Warrants
      exercisable at end of period
                  
                  
                  150,000
                  
                  
                  $
                  0.55Weighted
      average fair value of warrants granted or re-priced during the
      period
                  
                  
                  
                  
                  
                  $
                  —




The
following table summarizes information about common stock warrants outstanding
at March 31, 2010:




Warrants Outstanding
                  
                  
                  Warrants ExercisableRange of
                    Exercise
                    Price
                  
                  
                  Number
                    Outstanding at
                    March 31,
                    2010
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Number
                    Exercisable at
                    March 31,
                    2010
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price0.50
                  
                  
                  
                  145,000
                  
                  4.55
      Years
                  
                  
                  0.50
                  
                  
                  
                  145,000
                  
                  
                  
                  0.502.00
                  
                  
                  
                  5,000
                  
                  1.31
      Years
                  
                  
                  2.00
                  
                  
                  
                  5,000
                  
                  
                  
                  2.00150,000
                  
                  
                  
                  $
                  0.55
                  
                  
                  
                  150,000
                  
                  
                  $
                  0.55





NOTE
13 - STOCK OPTION PLAN




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




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


- 19
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





NOTE
13 - STOCK OPTION PLAN (continued)





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




As
amended in April, 2008, the Plan permits the grant of options and shares for up
to 10,000,000 shares of the Company’s common stock. The Plan terminates 10 years
from the date of the Plan’s adoption by the Company’s stockholders.




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




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




March 31,2010
                            
                            2009Expected
      volatility
                            
                            135%
      - 325%
                            
                            87%
      - 198%Expected
      term
                            
                            0 -
      5 Years
                            
                            1 -
      5 YearsRisk-free
      interest rate
                            
                            0.03%
                            
                            2.34%
      - 2.45%Forfeiture
      Rate
                            
                            0%
      - 45%
                            
                            0%
      - 45%Expected
      dividend yield
                            
                            0%
                            
                            0%


- 20
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




NOTE
13 - STOCK OPTION PLAN (continued)




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




For the
three months ended March 31, 2010, total stock-based compensation charged to
operations for option-based arrangements amounted to $330,876. At March 31,
2010, there was approximately $643,511 of total unrecognized compensation
expense related to non-vested option-based compensation arrangements under the
Plan.




A summary
of the status of the Company’s outstanding stock options as of March 31, 2010
and changes during the period ending on that date is as follows:




Number of
                    Options
                  
                  
                  Weighted Average
                    Exercise PriceStock optionsBalance
      at beginning of period
                  
                  
                  10,944,483
                  
                  
                  $
                  0.27Granted
                  
                  
                  22,065,000
                  
                  
                  
                  0.07Exercised
                  
                  
                  (18,836,200
                  )
                  
                  
                  0.07Forfeited
                  
                  
                  (46,979
                  )
                  
                  
                  3.80Balance
      at end of period
                  
                  
                  14,126,304
                  
                  
                  $
                  0.23Options
      exercisable at end of period
                  
                  
                  12,001,729
                  
                  
                  $
                  0.26Weighted
      average fair value of options granted during the year
                  
                  
                  
                  
                  
                  $
                  0.07




The
following table summarizes information about employee stock options outstanding
at March 31, 2010:




Options Outstanding
                  
                  
                  Options ExercisableRange of
                    Exercise
                    Price
                  
                  
                  Number
                    Outstanding at
                    March 31,
                    2010
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Number
                    Exercisable at
                    March 31,
                    2010
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price$
                  0.001-0.25
                  
                  
                  
                  10,198,800
                  
                  1.49
      Years
                  
                  $
                  0.11
                  
                  
                  
                  8,222,633
                  
                  
                  $
                  0.110.30-0.48
                  
                  
                  
                  535,000
                  
                  2.06
      Years
                  
                  
                  0.45
                  
                  
                  
                  516,250
                  
                  
                  
                  0.450.54-0.60
                  
                  
                  
                  2,475,004
                  
                  2.40
      Years
                  
                  
                  0.58
                  
                  
                  
                  2,345,904
                  
                  
                  
                  0.590.61-0.80
                  
                  
                  
                  917,500
                  
                  1.41
      Years
                  
                  
                  0.72
                  
                  
                  
                  916,942
                  
                  
                  
                  0.7114,126,304
                  
                  
                  
                  $
                  0.24
                  
                  
                  
                  12,001,729
                  
                  
                  $
                  0.26


- 21
-





ICEWEB,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




NOTE
14 - 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 March 31, 2010
and 2009 all material assets and revenues of the Company were in the United
States.





NOTE
15 – SUBSEQUENT EVENTS





For
purposes of determining whether a post-balance sheet event should be evaluated
to determine whether it has an effect on the financial statements for the three
months ended March 31, 2010, subsequent events were evaluated by the Company as
of May 17, 2010, the date on which the unaudited consolidated financial
statements for the three months ended March 31, 2010, were available to be
issued.




Other
than the disclosures shown, we did not identify any events or transactions that
should be recognized or disclosed in the accompanying financial
statements.


- 22
-




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




The
following analysis of our consolidated financial condition and results of
operations for the three and six months ended March 31, 2010 and 2009 should be
read in conjunction with the consolidated financial statements, including
footnotes, appearing elsewhere in this quarterly report.




OVERVIEW




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
fiscal 2008, the Company acquired INLINE Corporation (now known as IceWEB
Storage Corporation), a data storage manufacturing company.




In March,
2009, the Company sold its wholly owned subsidiary, IceWEB Virginia, Inc. to an
unrelated 3 rd 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 2009, the Company has three key product
offerings:




•
            IceWEB Unified Network Storage
      Solutions


•
            Purpose Built Network/Data
      Appliances


•
            Cloud Computing
      Products/Services




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




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





•
            On December 22, 2007, we acquired
      100% of the outstanding stock of Inline Corporation for $2,412,731 in
      cash, plus 503,356 shares of IceWEB common stock valued at $276,846, the
      fair market value on the date of acquisition. The acquisition was
      accounted for using the purchase method of accounting. The results of
      operations are included in the financial statements from the date of
      acquisition. Inline is a leading provider of intelligent enterprise data
      storage solutions and services for the geospatial intelligence
      marketplace. Inline’s proprietary products include reliable, high
      performance Storage Area Network Solutions, Network Attached Storage, and
      Direct Attached Storage and the rapidly expanding OEM Storage Centric
      Appliances. Today, Inline has developed its fifth generation of advanced
      data storage solutions, marketed under the brandsTruEnterpriseandFileStorm. All Inline systems function in
      a heterogeneous operating system environment, including Windows, UNIX and
      Linux. The purchase of Inline Corporation included the acquisition of
      assets of $2,688,795, and liabilities of
  $614,668.





•
            On March 31, 2009, we sold our
      interest in IceWEB Virginia, Inc. (dba IceWEB Solutions Group, which
      included the assets acquired from True North Federal 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.




- 23
-





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




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


•
            Continued investment in product
      development and research
efforts


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


•
            Improving our internal financial
      reporting systems and
processes.




CRITICAL
ACCOUNTING POLICIES




The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.




A summary
of significant accounting policies is included in Note 1 to the audited
consolidated financial statements included for the year ended September 30, 2009
and notes thereto contained on Form 10-K of the Company as filed with the
Securities and Exchange Commission. Management believes that the application of
these policies on a consistent basis enables us to provide useful and reliable
financial information about the company’s operating results and financial
condition.




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




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




Accounting
for Stock Based Compensation - 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. ASC Topic 718 establishes the
financial accounting and reporting standards for stock-based compensation plans.
As required by ASC Topic 718, we recognize the cost resulting from all
stock-based payment transactions including shares issued under our stock option
plans in the financial statements. The adoption of ASC Topic 718 will have a
negative impact on our future results of operations.




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.




- 24
-





THREE
AND SIX MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE AND SIX MONTHS ENDED
MARCH 31, 2009




The
following table provides an overview of certain key factors of our results of
operations for the three and six months ended March 31, 2010 as compared to the
three and six months ended March 31, 2009:




Three months ended March 31,
                
                
                Six months ended March 31,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      Revenues
                
                $
                1,011,205
                
                
                $
                1,369,702
                
                
                $
                1,612,022
                
                
                $
                3,110,290Cost
      of sales
                
                
                456,094
                
                
                
                806,391
                
                
                
                729,718
                
                
                
                2,074,066Operating
      Expenses:Marketing
      and selling
                
                
                472,359
                
                
                
                195,825
                
                
                
                785,217
                
                
                
                422,877Depreciation
      and amortization
                
                
                162,926
                
                
                
                170,798
                
                
                
                330,399
                
                
                
                347,045Research
      and development
                
                
                105,745
                
                
                
                76,865
                
                
                
                185,311
                
                
                
                156,431General
      and administrative
                
                
                1,560,401
                
                
                
                681,699
                
                
                
                2,654,370
                
                
                
                1,135,050Total
      operating expenses
                
                
                2,301,431
                
                
                
                1,125,187
                
                
                
                3,955,297
                
                
                
                2,061,403Loss
      from operations
                
                
                (1,746,320
                )
                
                
                (561,876
                )
                
                
                (3,072,993
                )
                
                
                (1,025,179
                )Total
      other income (expense)
                
                
                (141,995
                )
                
                
                3,283,816
                
                
                
                (274,956
                )
                
                
                3,088,084Net
      income (loss)
                
                $
                (1,888,315
                )
                
                $
                2,721,940
                
                
                $
                (3,347,949
                )
                
                $
                2,062,905




Other Key
Indicators:




Three months ended
                  March 31,
                
                
                Six months ended
                  March 31,2010
                
                
                2009
                
                
                2010
                
                
                2009Cost
      of sales as a percentage of revenues
                
                
                45.1
                %
                
                
                58.9
                %
                
                
                45.3
                %
                
                
                66.7
                %Gross
      profit margin
                
                
                54.9
                %
                
                
                41.1
                %
                
                
                54.7
                %
                
                
                33.3
                %General
      and administrative expenses as a percentage of revenues
                
                
                154.3
                %
                
                
                49.8
                %
                
                
                164.7
                %
                
                
                36.5
                %Total
      operating expenses as a percentage of revenues
                
                
                227.6
                %
                
                
                82.1
                %
                
                
                245.4
                %
                
                
                66.3
                %





Six
Month Period ended March 31, 2010




Revenues




For the
six months ended March 31, 2010, we reported revenues of $1,612,022 as compared
to revenues of $3,110,290 for the six months ended March 31, 2009, a decrease of
$1,498,268 or approximately 48%. The decrease is primarily due to the Company’s
focus on our high margin data storage business unit and the related decrease in
our third party product sales through IceWEB Solutions Group. Storage revenue
accounted for approximately 95% of our revenue for the six month period ended
March 31, 2010 as compared to 43% in the year-ago period.


- 25
-




Cost
of Sales




Our cost
of sales consists primarily of component parts for the manufacture of our
storage products. For the six months ended March 31, 2010, cost of sales was
$729,718, or approximately 45% of revenues, compared to $2,074,066, or
approximately 66.6% of revenues, for the six months ended March 31, 2009. The
decrease in costs of sales as a percentage of revenue and the corresponding
increase in our gross profit margin for the six months ended March 31, 2010 as
compared to the six months ended March 31, 2009 was the result of improved mix
of higher margin storage products during the six months ended March 31, 2010 as
a percentage of total revenue. We anticipate that our gross profit margins will
continue to improve through the balance of fiscal 2010.




Total
Operating Expenses




Our total
operating expenses increased approximately 92% to $3,955,297 for the six months
ended March 31, 2010 as compared to $2,061,403 for the six months ended March
31, 2009. These changes include:




•         Sales and marketing
expense. Sales and marketing expense includes salaries, commission,
occupancy, telephone, travel, and entertainment expenses for direct sales
personnel.  For the six months ended March 31, 2010, sales and
marketing costs were $785,217 as compared to $422,877 for the six months ended
March 31, 2009, an increase of $362,340 or approximately 86%. The increase was
due primarily to hiring additional sales and marketing personnel to support our
channel distribution sales and marketing approach during the six months ended
March 31, 2010.




•         Depreciation and
amortization expense. For the six months ended March 31, 2010,
depreciation and amortization expense amounted to $330,399 as compared to
$347,045 for the six months ended March 31, 2009, a decrease of $16,646 or
5%.





•         Research and
Development. For the six months ended March 31, 2010, research and
development costs were $185,311 as compared to $156,431 for the six months ended
March 31, 2009, an increase of $28,880 or approximately 18%.




•         General and administrative
expense. For the six months ended March 31, 2010, general and
administrative expenses were $2,654,370 as compared to $1,135,049 for the six
months ended March 31, 2009, an increase of $1,519,320 or approximately 134%.
For the six months ended March 31, 2010 and 2009 general and administrative
expenses consisted of the following:




Fiscal Q2
                  
                  
                  Fiscal Q22010
                  
                  
                  2009Occupancy
                  
                  $
                  10,661
                  
                  
                  $
                  7,865Consulting
                  
                  
                  82,903
                  
                  
                  
                  60,142Employee
      compensation
                  
                  
                  2,364,708
                  
                  
                  
                  926,007Professional
      fees
                  
                  
                  54,550
                  
                  
                  
                  14,194Internet/Phone
                  
                  
                  5,148
                  
                  
                  
                  27,423Travel/Entertainment
                  
                  
                  517
                  
                  
                  
                  1,276Investor
      Relations
                  
                  
                  29,964
                  
                  
                  
                  19,778Insurance
                  
                  
                  23,953
                  
                  
                  
                  20,889Other
                  
                  
                  81,966
                  
                  
                  
                  57,476$
                  2,654,370
                  
                  
                  $
                  1,135,050




- 26
-





•
            For the six months ended March
      31, 2010, Occupancy expense increased to $10,661 as compared to $7,865.
      Occupancy expense is higher due to the Company’s relocation to its
      manufacturing facility in Sterling,
  Virginia.





•
            For the six months ended March
      31, 2010, Consulting expense increased to $82,903 as compared to $60,142.
      Consulting expense increased primarily as a result of recruiting costs
      incurred to hire engineering, sale and marketing
      personnel.





•
            For the six months ended March
      31, 2010, salaries and related expenses increased to $2,364,708 as
      compared to $926,007, an increase of $1,438,701. The increase is due
      primarily to an increase in non-cash compensation expense of
      $1,471,396.





•
            For the six months ended March
      31, 2010, Professional fees expense increased to $54,550 as compared to
      $14,194. Professional fees expense increased due to increased costs
      related to intellectual property patent applications and other legal
      fees.





•
            For the six months ended March
      31, 2010, travel and entertainment expense decreased to $517 as compared
      to $1,276.





•
            For the six months ended March
      31, 2010 Other expense amounted to $81,966 as compared to $57,476 for the
      six months ended March 31, 2009, an increase of
      $24,491.





•
            For the six months ended March
      31, 2010 Investor relations expense increased to $29,964 as compared to
      $19,778 for the six months ended March 31, 2009. The increase is due to
      increased investor relations
activity.





We
anticipate that general and administrative expenses will decline for the balance
of fiscal 2010, as we expect to incur lower of share-based
expenses.




LOSS
FROM OPERATIONS




We
reported a loss from operations of $3,072,993 for the six months ended March 31,
2010 as compared to a loss from operations of $1,025,179 for the six months
ended March 31, 2009, an increased loss of $2,047,814 or approximately
200%.




OTHER
INCOME (EXPENSES)




Gain from sale of
subsidiary. The gain on sale of subsidiary of $3,452,236 resulted from
the sale of IceWEB Virginia, Inc. in March, 2009.  We did not have a
similar transaction in the six month period ended March 31, 2010.




Interest Income. We
did not earn any interest income for the six months ended March 31, 2010, as
compared to interest income of $1,142 in the six month period ended March 31,
2009.  Interest income represented interest earned on interest bearing
cash accounts.


- 27
-





Interest
Expense.  For the six months ended March 31, 2010, interest
expense amounted to $274,956 as compared to $365,294 for the six months ended
March 31, 2009, a decrease of $90,338 or 25%. The decrease in interest expense
is primarily attributable to the decrease in borrowings and certain interest
bearing liabilities related to the our notes payable. Also, during the six
months ended March 31, 2010, we amortized deferred financing costs of $13,265,
as compared to $40,233 during the six months ended March 31, 2009.




NET
INCOME/ LOSS




Our net
loss was $3,347,949 for the six months ended March 31, 2010 compared to net
income of $2,062,905 for the six months ended March 31, 2009.





Three
Month Period ended March 31, 2010




Revenues




For the
three months ended March 31, 2010, we reported revenues of $1,011,205 as
compared to revenues of $1,369,702 for the three months ended March 31, 2009, a
decrease of $358,497 or approximately 26%. The decrease is primarily due to the
Company’s focus on our high margin data storage business unit and the related
decrease in our third party product sales through IceWEB Solutions Group. For
the three months ended March 31, 2010, storage revenue accounted for
approximately 95% of our revenue as compared to 66% of our revenue during the
three months ended March 31, 2009.




Cost
of Sales




Our cost
of sales consists of component parts for the manufacture of our storage
products. For the three months ended March 31, 2010, cost of sales was $456,094,
or approximately 45% of revenues, compared to $806,391, or approximately 59% of
revenues, for the three months ended March 31, 2009. The decrease in costs of
sales as a percentage of revenue and the corresponding increase in our gross
profit margin for the three months ended March 31, 2010 as compared to the three
months ended March 31, 2009 was the result of improved mix of higher margin
storage products during the three months ended March 31, 2010 as a percentage of
total revenue.




Total
Operating Expenses




Our total
operating expenses increased approximately 105% to $2,301,431 for the three
months ended March 31, 2010 as compared to $1,125,187 for the three months ended
March 31, 2009. These changes include:




•
          Sales and marketing
expense. For the three months ended March 31, 2010, sales and marketing
expenses were $472,359 as compared to $195,825 for the three months ended March
31, 2009, an increase of $276,534 or approximately 141%. The increase was due to
increased headcount and sales and marketing expense related to the roll-out of
our channel sales program during the three months ended March 31,
2010.




•
          Depreciation and
amortization expense. For the three months ended March 31, 2010,
depreciation and amortization expense amounted to $162,926 as compared to
$170,798 for the three months ended March 31, 2009, a decrease of $7,872 or
5%.


- 28
-





•
          General and administrative
expense. For the three months ended March 31, 2010, general and
administrative expenses were $1,560,401 as compared to $681,699 for the three
months ended March 31, 2009, an increase of $878,702 or approximately 129%. For
the three months ended March 31, 2010 and 2009 general and administrative
expenses consisted of the following:




Fiscal Q2
                  
                  
                  Fiscal Q22010
                  
                  
                  2009Occupancy
                  
                  $
                  3,175
                  
                  
                  $
                  2,095Consulting
                  
                  
                  53,130
                  
                  
                  
                  41,659Employee
      compensation
                  
                  
                  1,396,515
                  
                  
                  
                  573,293Professional
      fees
                  
                  
                  22,500
                  
                  
                  
                  2,747Internet/Phone
                  
                  
                  1,397
                  
                  
                  
                  10,397Travel/Entertainment
                  
                  
                  363
                  
                  
                  
                  744Investor
      Relations
                  
                  
                  17,870
                  
                  
                  
                  16,620Insurance
                  
                  
                  10,737
                  
                  
                  
                  6,400Other
                  
                  
                  54,714
                  
                  
                  
                  27,744$
                  1,560,401
                  
                  
                  $
                  681,699




•
            For the three months ended March
      31, 2010, Occupancy expense increased to $3,175 as compared to
      $2,095.





•
            For the three months ended March
      31, 2010, Consulting expense increased to $53,130 as compared to $41,659,
      an increase of $11,471 or 27.5%. Consulting expense increased as a result
      of increased support costs for internal accounting
      systems.





•
            For the three months ended March
      31, 2010, salaries and related expenses increased to $1,396,515 as
      compared to $573,293, an increase of $823,222. The increase is due
      primarily to an increase in non-cash compensation expense of $818,175,
      which is comprised of increased stock-based compensation expense of
      $636,879, and increased amortization of deferred compensation related to
      employee stock options of
$181,296.





•
            For the three months ended March
      31, 2010, Professional fees expense increased to $22,500 as compared to
      $2,747.  Professional fees expense increased primarily as a
      result of legal fees incurred related to business development and on-going
      litigation activities.





•
            For the three months ended March
      31, 2010, travel and entertainment expense decreased to $363 as compared
      to $744. Travel and entertainment expense decreased as a result of limited
      travel by sales and marketing and general cost-cutting measures put in
      place by the Company.





•
            For the three months ended March
      31, 2010 Other expense amounted to $54,714 as compared to $27,744 for the
      three months ended March 31, 2009, an increase of 26,970.  The
      increase was due primarily to increase hosting fees and other headcount
      related expenses, as we have added resources to support our channel sales
      strategy.





•
            For the three months ended March
      31, 2010 Investor relations expense increased to $17,870 as compared to
      $16,620 for the three months ended March 31,
  2009.




- 29
-





LOSS
FROM OPERATIONS




We
reported a loss from operations of $1,746,320 for the three months ended March
31, 2010 as compared to a loss from operations of $561,876 for the three months
ended March 31, 2009, an increase of $1,184,445 or approximately
211%.




OTHER
INCOME (EXPENSES)




Gain from sale of
subsidiary. The gain on sale of subsidiary of $3,452,236 resulted from
the sale of IceWEB Virginia, Inc. in March, 2009.  We did not have a
similar transaction in the three month period ended March 31, 2010.




Interest Income.
Interest income for the three months ended March 31, 2009 amounted to $660 and
represented interest earned on interest bearing cash accounts. We did not have a
similar interest bearing balances in the three month period ended March 31,
2010.




Interest Expense. For
the three months ended March 31, 2010, interest expense amounted to $141,995 as
compared to $169,080 for the three months ended March 31, 2009, a decrease of
$27,085 or 16%. The decrease in interest expense is primarily attributable to
the decrease in borrowings and certain interest bearing liabilities related to
the acquisition of Inline Corporation. Also, during the three months ended March
31, 2010, we amortized deferred financing costs of $6,875, as compared to $7,968
during the three months ended March 31, 2009.




NET
INCOME/ LOSS




Our net
loss was $1,888,315 for the three months ended March 31, 2010 compared to net
income of $2,721,940 for the three months ended March 31, 2009.




LIQUIDITY
AND CAPITAL RESOURCES




Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
The following table provides an overview of certain selected balance sheet
comparisons between March 31, 2010 and September 30, 2009:




March 31,
                    
                    
                    September 30,
                    
                    
                    $
                    
                    
                    
                    %2010
                    
                    
                    2009
                    
                    
                    Change
                    
                    
                    
                    ChangeWorking
      Capital
                    
                    
                    (2,469,593
                    )
                    
                    
                    (3,158,232
                    )
                    
                    
                    688,639
                    
                    
                    
                    (21.8
                    )%Cash
                    
                    
                    147,300
                    
                    
                    
                    63,310
                    
                    
                    
                    83,990
                    
                    
                    
                    132.7
                    %Accounts
      receivable, net
                    
                    
                    891,382
                    
                    
                    
                    424,919
                    
                    
                    
                    466,463
                    
                    
                    
                    109.8
                    %Inventory
                    
                    
                    151,937
                    
                    
                    
                    151,361
                    
                    
                    
                    576
                    
                    
                    
                    0.4
                    %Total
      current assets
                    
                    
                    1,244,640
                    
                    
                    
                    671,160
                    
                    
                    
                    573,480
                    
                    
                    
                    85.4
                    %Property
      and equipment, net
                    
                    
                    580,752
                    
                    
                    
                    752,162
                    
                    
                    
                    (171,410
                    )
                    
                    
                    (22.8
                    )%Marketable
      securities held for sale
                    
                    
                    1,920,000
                    
                    
                    
                    -
                    
                    
                    
                    1,920,000
                    
                    
                    
                    100.0
                    %Intangibles,
      net
                    
                    
                    668,496
                    
                    
                    
                    790,043
                    
                    
                    
                    (121,547
                    )
                    
                    
                    (15.4
                    )%Total
      assets
                    
                    
                    4,427,208
                    
                    
                    
                    2,226,684
                    
                    
                    
                    2,200,524
                    
                    
                    
                    98.8
                    %Accounts
      payable and accrued liabilities
                    
                    
                    1,933,104
                    
                    
                    
                    1,971,376
                    
                    
                    
                    (38,272
                    )
                    
                    
                    (1.9
                    )%Notes
      payable-current
                    
                    
                    1,759,410
                    
                    
                    
                    1,847,755
                    
                    
                    
                    (88,345
                    )
                    
                    
                    4.8
                    %Deferred
      revenue
                    
                    
                    21,719
                    
                    
                    
                    10,261
                    
                    
                    
                    (11,458
                    )
                    
                    
                    (111.7
                    )%Total
      current liabilities
                    
                    
                    3,714,233
                    
                    
                    
                    3,829,392
                    
                    
                    
                    (115,159
                    )
                    
                    
                    (3.0
                    )%Notes
      payable-long term
                    
                    
                    1,011,480
                    
                    
                    
                    934,756
                    
                    
                    
                    76,725
                    
                    
                    
                    8.2
                    %Total
      liabilities
                    
                    
                    4,725,713
                    
                    
                    
                    4,764,148
                    
                    
                    
                    (38,435
                    )
                    
                    
                    (0.8
                    )%Accumulated
      deficit
                    
                    
                    (26,006,507
                    )
                    
                    
                    (22,658,559
                    )
                    
                    
                    (3,347,948
                    )
                    
                    
                    14.6
                    %Accumulated
      other comprehensive income
                    
                    
                    1,872,000
                    
                    
                    
                    -
                    
                    
                    
                    1,872,000
                    
                    
                    
                    100.0
                    %Stockholders’
      deficit
                    
                    
                    (298,505
                    )
                    
                    
                    (2,537,464
                    )
                    
                    
                    2,238,959
                    
                    
                    
                    88.2
                    %




- 30
-





Net cash
used in operating activities was $1,431,078 for the six months ended March 31,
2010 as compared to net cash used in operating activities of $591,196 for the
six months ended March 31, 2009, an increase of $839,882.  For the six
months ended March 31, 2010, we had a loss of $3,347,949 offset by non-cash
items such as depreciation and amortization expense of $330,399, share-based
compensation expense of $2,102,775, amortization of deferred finance costs of
$13,265, and decreases from changes in assets and liabilities of $579,568.
During the six months ended March 31, 2010 we experienced an increase in
accounts receivable of $466,464, and a decrease in accounts payable during the
period of $38,272.  For the six months ended March 31, 2009, we had
net income of $2,062,905 and non-cash items such as depreciation and
amortization expense of $347,045, share-based compensation expense of $631,379,
amortization of deferred finance costs of $34,920, offset by the gain on sale of
our IceWEB Virginia subsidiary in the amount of $3,452,235, and decreases from
changes in assets and liabilities of $223,526. During the six months ended March
31, 2009 we experienced a decrease in accounts receivable of $2,253,828, which
was offset by a decrease in accounts payable during the period of
$6,518,451.




Net cash
used in investing activities for the six months ended March 31, 2010 was $85,444
as compared to net cash used in investing activities of $15,118 for the six
months ended March 31, 2009. During the six months ended March 31, 2010, we used
cash of $37,444 for property and equipment purchases and $48,000 to acquire
160,000,000 shares of VOIS Inc. common stock.  During the six months
ended March 31, 2009, we used cash of $15,118 for property and equipment
purchases.




Net cash
provided by financing activities for the six months ended March 31, 2010 was
$1,600,512 as compared to net cash provided of $609,892 for the six months ended
March 31, 2009.  For the six months ended March 31, 2010, net cash
provided by financing activities related to proceeds received from notes payable
of $799,460 which were advances under our factoring line with Sand Hill Finance
LLC, proceeds from the exercise of common stock options of $1,122,134, and
proceeds from the sale or restricted stock of $490,000, offset by repayments on
notes payable of $811,082 which were to pay down the balance on the Sand Hill
Finance LLC factoring line.  For the six months ended March 31, 2009,
net cash provided by financing activities related to proceeds received from
notes payable of $6,175,684 which were advances under our factoring line with
Sand Hill Finance LLC, and proceeds from the exercise of common stock options of
$163,800, offset by repayments on notes payable of $5,684,478 which were to pay
down the balance on the Sand Hill Finance LLC factoring line, and repayments of
equipment financing of $45,114.




At March
31, 2010 we had a working capital deficit of $2,469,593 and an accumulated
deficit of $26,006,507.  The report from our independent registered
public accounting firm on our audited financial statements for the fiscal year
ended September 30, 2009 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. While our sales decreased significantly during the six months ended
March 31, 2010, our gross profit margin was approximately 55% and our sales were
not sufficient to pay our operating expenses. We reported a net loss of
$3,347,949 for the six months ended March 31, 2010.  There are no
assurances that we will report income from operations in any future
periods.




Historically,
our revenues have not been sufficient to fund our operations and we have relied
on capital provided through the sale of equity securities, and various financing
arrangements and loans from related parties. At March 31, 2010 we had cash on
hand of $147,300.  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 $3.0 million. At March 31, 2010
we owed Sand Hill Finance, LLC $1,759,410 under this accounts receivable
line.


- 31
-





We do not
have any commitments for capital expenditures. In connection with our annual
report for our fiscal year ending September 30, 2010 our management will be
required to provide an assessment of the effectiveness of our internal control
over financial reporting, including a statement as to whether or not internal
control over financial reporting is effective. In order to comply with this
requirement we will need to engage a consulting firm to undertake an analysis of
our internal controls. We have yet to engage such a consulting firm and are
unable at this time to predict the costs associated with our compliance with
Section 404 of Sarbanes-Oxley Act of 2002. We do not presently have any external
sources of working capital other than what may be available under the factoring
agreement with Sand Hill Finance and loans from related parties. Our working
capital needs in future periods are dependent primarily on the rate at which we
can increase our revenues while controlling our expenses and decreasing the use
of cash to fund operations. Additional capital may be needed to fund
acquisitions of additional companies or assets, although we are not a party to
any pending agreements at this time and, accordingly, cannot estimate the amount
of capital which may be necessary, if any, for acquisitions.




As long
as our cash flow from operations remains insufficient to completely fund
operations, we will continue depleting our financial resources and seeking
additional capital through equity and/or debt financing. 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 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 continue growth
strategy could suffer if we are unable to raise the additional funds on
acceptable terms which will have the effect of adversely affecting our ongoing
operations and limiting our ability to increase our revenues and maintain
profitable operations in the future. If we are unable to secure the necessary
additional working capital as needed, we may be forced to curtail some or all of
our operations.




Recent
Accounting Pronouncements




None.




Item
3.    Quantitative and Qualitative
Disclosures About Market Risk




None.




Item
4.    Controls and
Procedures




Evaluation of disclosure controls
and procedures. Our Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”) have evaluated the effectiveness of our disclosure controls and
procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by the Quarterly Report (the “evaluation date’).
They have concluded that, as of the evaluation date, these disclosure controls
and procedures were effective to ensure that material information relating to us
and our consolidated subsidiaries would be made known to them by others within
those entities and would be disclosed on a timely basis.




Changes in internal control over
financial reporting. There were no changes to internal controls over
financial reporting that occurred during the three months ended March 31, 2010,
that have materially affected, or are reasonably likely to materially impact,
our internal controls over financial reporting.


- 32
-


PART
II - OTHER INFORMATION




Item
1.         Legal Proceedings




At March
31, 2010 we are the subject of, or party to, four known, pending or threatened,
legal actions.  As of the date of this report on Form 10-Q, none 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 Avnet, Inc. (the
plaintiff) in the United States District Court for the Eastern District of
Virginia, Alexandria Division.  The plaintiff asserts that the Company
breached purchase orders to which the plaintiff was a party involving the
purchase of goods and services from plaintiff.





2.   We
were named as the defendant in a legal proceeding brought by Vencore Solutions,
LLC (the plaintiff) in the Circuit Court of the State of Oregon for the County
of Multnomah.  The plaintiff asserts that Iceweb failed to make
certain lease payments.




3.   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.




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.




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
1A.      Risk Factors




In
addition to the other information set forth in this report, you should carefully
consider the factors discussed under the heading “Risk Factors” in our Annual
Report on Form 10-K filed on December 29, 2009, which could materially affect
our business operations, financial condition or future results. Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business operations and/or
financial condition. There have been no material changes to our risk factors
since the filing of our Form 10-K.




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




During
the six months ended March 31, 2010, we issued 2,000,000 shares of common stock
at a per share price of $0.042, valued at $83,000 to an accredited investor. As
of March 31, 2010 the Company had not yet received the proceeds from the
investor and as a result the Company recorded the subscription receivable as a
contra equity account on its balance sheet. 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
the six months ended March 31, 2010, we sold 1,000,000 shares of common stock,
valued at $100,000 to a Director for $40,000, and recognized stock based
compensation expense of $90,000. 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.




- 33
-




During
the six months ended March 31, 2010, 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
the six months ended March 31, 2010, we sold 3,000,000 shares of common stock at
a per share price of $0.10, valued at $300,000 to an accredited investor, and
the issuance was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.





In March,
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 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.





During
the six months ended March 31, 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
consulting services.  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.




Item
3.         Defaults Upon Senior
Securities




None.




Item
4.         Submission of Matters to a Vote of
Security Holders




None.




Item
5.         Other Information




None.




Item
6.         Exhibits




Exhibit
                        Number
                      
                      Description31.1
                      
                      Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 *31.2
                      
                      Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 *32.1
                      
                      Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 *32.2
                      
                      Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
*




* Filed
herein


- 34
-




SIGNATURES




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




ICEWEB,
      INC.By:
                  /s/ John R. SignorelloMay
      17, 2010
                  John
      R. Signorello,Chief
      Executive Officer, principal executive officerBy:
                  /s/ Mark B. LuckyMay
      17, 2010
                  Mark
      B. LuckyChief
      Financial Officer, principal financial and
                    accounting
      officer




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-