**United
      States**


**Securities
      and Exchange Commission**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**








(Mark
      One)





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





For
      the
      period ended December 31, 2006





o
      TRANSITION 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 registrant as specified in its charter)








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








**205
      Van Buren Street, Suite 150**


**Herndon,
      VA 20170**


(Address
      of principal executive offices)





**(703)
      964-8000**


(Registrant's
      telephone number, including area code)











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





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


Yes
o
      No x





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: At February 14, 2007, there were
      9,777,909 outstanding shares of common stock, $.001 par value per share.





Transitional
      Small Business Disclosure Format (Check one): Yes o No x











**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.” W ith
      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.








**ICEWEB,
      INC. AND SUBSIDIARIES**


FORM
      10-QSB


QUARTERLY
      PERIOD ENDED December 31, 2006





INDEX





PagePART
                I - FINANCIAL INFORMATIONItem
                1 - Consolidated Financial StatementsConsolidated
                BalanceSheetDecember
                31, 2006 (Unaudited)..
            3Consolidated
                Statements of Operations (Unaudited)For
                the Three Months Ended December 31, 2006
            4Consolidated
                Statements of Cash Flows (Unaudited)For
                the Three Months Ended December 31, 2006
            5Notes
                to Unaudited Consolidated Financial Statements
            6-19Item
                2 - Management's Discussion and Analysis or Plan of
                Operation
            20-31Item
                3 - Controls and Procedures
            31PART
                II - OTHER INFORMATIONItem
                1 - Legal Proceedings
            32Item
                2 - Unregistered Sales of Equity Securities and Use of
                Proceeds..
            32Item
                3 - Default upon Senior Securities
            33Item
                4 - Submission of Matters to a Vote of Security Holders
            33Item
                5 - Other Information.
            ..
                33Item
                6 - Exhibits
            33Signatures
            33




-
          2
          -


**IceWEB,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2006**


**(Unaudited)**





CURRENT
                ASSETS:Cash
            
            $
            288,901Accounts
                receivable, net of allowance for bad debt of $9,000
            
            
            1,433,302Prepaid
                expenses
            
            
            7,287Total
                current assets
            
            
            1,729,490OTHER
                ASSETS:Property
                and equipment, net
            
            
            365,892Goodwill
            
            
            430,000Deposits
            
            
            53,956Intangible
                assets, net of accumulated amortization of $60,000
            
            
            35,000Deferred
                financing costs, net
            
            
            155,000Total
                Assets
            
            $
            2,769,338LIABILITIES
                AND STOCKHOLDERS' DEFICITCURRENT
                LIABILITIES:Notes
                payable
            
            $
            1,242,811Note
                payable - related party
            
            
            181,599Current
                portion of equipment financing payable
            
            
            75,765Accounts
                payable
            
            
            1,529,424Accrued
                expenses
            
            
            322,977Accrued
                interest payable
            
            
            258,865Advances
                from related party
            
            
            19,860Total
                current liabilities
            
            
            3,631,301LONG-TERM
                LIABILITIES:Equipment
                financing payable, net of current portion
            
            
            168,149Note
                payable - related party
            
            
            150,000Total
                long-term liabilities
            
            
            318,149Total
                Liabilities
            
            
            3,949,450STOCKHOLDERS'
                DEFICIT:Preferred
                stock ($.001 par value; 10,000,000 shares authorized)Series
                A convertible preferred stock ($.001 par value; 1,256,667
                sharesissued
                and outstanding)
            
            
            1,257Series
                B convertible preferred stock ($.001 par value; 1,833,334
                sharesissued
                and outstanding)
            
            
            1,833Common
                stock ($.001 par value; 1,000,000,000 shares authorized;9,777,909
                shares issued and 9,615,409 shares outstanding)
            
            
            9,779Additional
                paid-in capital
            
            
            10,558,462Accumulated
                deficit
            
            
            (11,461,108
            )Deferred
                compensation
            
            
            (277,335
            )Treasury
                stock, at cost, (162,500 shares)
            
            
            (13,000
            )Total
                Stockholders' Deficit
            
            
            (1,180,112
            )Total
                Liabilities and Stockholders' Deficit
            
            $
            2,769,338








See
      accompanying notes to unaudited consolidated financial statements





-
          3
          -





IceWEB,
      Inc. and Subsidiaries


CONSOLIDATED
      STATEMENTS OF OPERATIONS





For
                the Three Months EndedDecember
                31,2006
            
            2005(Unaudited)
            
            (Unaudited)Sales
            
            $
            2,581,777
            
            $
            1,491,216Cost
                of sales
            
            
            2,295,410
            
            
            1,241,409Gross
                profit
            
            
            286,367
            
            
            249,807Operating
                expenses:Marketing
                and selling
            
            
            60,216
            
            
            47,189Depreciation
                and amortization expense
            
            
            65,541
            
            
            19,371General
                and administrative
            
            
            760,366
            
            
            513,987Total
                operating expense
            
            
            886,123
            
            
            580,547Loss
                from operations
            
            
            (599,756
            )
            
            (330,740
            )Other
                income (expenses):Gain
                from sales of net assets
            
            
            138,586
            
            
            -Interest
                income
            
            
            1,309
            
            
            -Interest
                expense
            
            
            (130,205
            )
            
            (20,918
            )Total
                other income (expenses):
            
            
            9,690
            
            
            (20,918
            )Net
                loss
            
            
            (590,066
            )
            
            (351,658
            )Beneficial
                conversion feature -preferred stock
            
            
            -
            
            
            (500,000
            )Net
                loss attributable to common shareholders
            
            $
            (590,066
            )
            $
            (851,658
            )Net
                loss per common share available to common shareholders:Basic
                and diluted loss per share
            
            $
            (0.06
            )
            $
            (0.13
            )Weighted
                average common shares outstanding - basic and diluted
            
            
            9,423,344
            
            
            6,329,787








See
      accompanying notes to unaudited consolidated financial statements





-
          4
          -





IceWEB,
      Inc. and Subsidiaries


CONSOLIDATED
      STATEMENTS OF CASH FLOWS





For
                the Three Months EndedDecember
                31,2006
            
            2005(Unaudited)
            
            (Unaudited)CASH
                FLOWS FROM OPERATIONS:Net
                Loss
            
            $
            (590,066
            )
            $
            (351,658
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            65,541
            
            
            9,371Stock-based
                compensation
            
            
            158,635
            
            
            -Gain
                on sales of net assets
            
            
            (138,586
            )
            
            -Amortization
                of deferred finance costs
            
            
            4,999
            
            
            5,000Changes
                in operating assets and liabilities:(Increase)
                decrease in:Accounts
                receivable
            
            
            (223,846
            )
            
            (325,335
            )Prepaid
                expense
            
            
            2,384
            
            
            (50,271
            )Advances
            
            
            -
            
            
            (975
            )Deposits
            
            
            (860
            )
            
            (16,855
            )Increase
                (decrease) in:Accounts
                payable
            
            
            821,829
            
            
            238,734Accrued
                expense
            
            
            (456,567
            )
            
            53,441Accrued
                interest payable
            
            
            4,687
            
            
            4,687Deferred
                revenue
            
            
            (39,156
            )
            
            (1,075
            )NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (391,006
            )
            
            (434,936
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property and equipment
            
            
            (1,874
            )
            
            (79,218
            )Net
                cash received from sale of net assets
            
            
            138,000
            
            
            -Cash
                used in acquisitions, net
            
            
            (250,000
            )
            
            -Capitalized
                software
            
            
            -
            
            
            (160,773
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (113,874
            )
            
            (239,991
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Repayment
                of equipment financing
            
            
            (18,382
            )Proceeds
                from notes payable - related party
            
            
            30,000
            
            
            6,521Repayment
                of notes payable - related party
            
            
            (26,500
            )
            
            -Net
                proceeds from related party advances
            
            
            11,737
            
            
            -Proceeds
                from bank financing
            
            
            -
            
            
            339,476Payment
                of placement fees and expenses
            
            
            -
            
            
            (46,398
            )Proceeds
                from notes payable
            
            
            242,041
            
            
            -Payments
                on notes payable
            
            
            (200,000
            )
            
            -Proceeds
                from exercise of common stock options
            
            
            35,000Proceeds
                from exercise of common stock warrants
            
            
            287,000
            
            
            -NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            360,896
            
            
            299,599NET
                DECREASE IN CASH
            
            
            (143,984
            )
            
            (375,328
            )CASH
                - beginning of year
            
            
            432,885
            
            
            557,175CASH
                - end of period
            
            $
            288,901
            
            $
            181,847Supplemental
                disclosure of cash flow information:Cash
                paid for :Interest
            
            $
            125,518
            
            $
            20,918Income
                taxes
            
            $
            -
            
            $
            -NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Acquisition
                details:Goodwill
            
            $
            430,000
            
            $
            -Liabilities
                assumed
            
            $
            180,000
            
            $
            -Cash
                paid
            
            $
            250,000
            
            $
            -








See
      accompanying notes to unaudited consolidated financial statements








-
          5
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)





**NOTE
      1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





**The
      Company**





IceWEB,
      Inc. (the “Company”) began trading publicly in April 2002. In June 2003, the
      Company added two subsidiaries, acquiring all of the outstanding stock of
      Interlan Communications Incorporated and The Seven Corporation. Interlan is
      a
      full service provider of computer equipment and integration services. The Seven
      Corporation provides network engineering services. On October 5, 2003, the
      Company acquired the software ownership rights and customers of Iplicity, Inc.
      of Virginia. Iplicity had developed a complete content management software
      platform based on open source architecture to run in any operating environment.
      Utilizing resources gained through acquisitions, the Company has developed
      two
      applications that are now available to the general public, IceWEB Vista which
      is
      a website portal development and management application, and IceMAIL which
      is a
      hosted Microsoft Exchange application service. In addition to the new
      application services, the Company also continues to provide customers with
      systems integration, network consulting, and customized software application
      services.





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





On
      October 31, 2006, the Company entered into an Asset Purchase Agreement (the
      "Agreement") with True North Solutions, Inc., a Delaware corporation (“True
      North”) whereby the Company acquired all or substantially all of True North’s
      assets used in its Government Business Company (see note 3).




**Basis
      of presentation**





The
      accompanying unaudited consolidated financial statements have been prepared
      pursuant to the rules and regulations of the Securities and Exchange Commission
      (“SEC”). The accompanying consolidated financial statements for the interim
      periods are unaudited and reflect all adjustments (consisting only of normal
      recurring adjustments) which are, in the opinion of management, necessary for
      a
      fair presentation of the financial position and operating results for the
      periods presented. The consolidated financial statements include the accounts
      of
      the Company and its wholly and partially owned subsidiaries. All significant
      intercompany accounts and transactions have been eliminated. These consolidated
      financial statements should be read in conjunction with the financial statements
      for the year ended September 30, 2006 and notes thereto contained on Form 10-KSB
      of the Company as filed with the Securities and Exchange Commission. The results
      of operations for the three months ended December 31, 2006 are not necessarily
      indicative of the results for the full fiscal year ending September 30,
      2007.





-
          6
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)





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





**Going
      Concern**





The
      Company’s auditors stated in their report on the consolidated financial
      statements of the Company for the years ended September 30, 2006 and 2005 that
      the Company is dependent on outside financing and has had losses since inception
      that raise doubt about its ability to continue as a going concern. For the
      three
      months ended December 31, 2006, the Company incurred a net loss of $590,066
      and
      used cash in operations of $391,006. 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 2007 and
      2006 include the allowance for doubtful accounts, the valuation of stock-based
      compensation, the useful life of 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 December 31, 2006. 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 months ended December 31, 2006 and 2005, respectively.





Intangible
      Assets





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





-
          7
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)





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





**Property
      and Equipment**





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





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





**Goodwill**





Goodwill
      is recorded on a business combination to the extent the cost of an acquired
      entity exceeds the fair value of the net assets acquired.





The
      Company does not amortize goodwill but tests goodwill impairment at least on
      an
      annual basis, or earlier when events or changes in circumstances suggest the
      carrying amount may not be fully recoverable. Such evaluation is performed
      by
      comparing the implied fair value of a reporting unit to its carrying value,
      including goodwill. An impairment loss is recognized in the current period
      if
      the carrying amount of an intangible asset is not recoverable and its carrying
      amount exceeds its fair value. The Company performed its latest annual
      impairment test with regard to the carrying value of goodwill as of December 31,
      2006. For the three months ended December 31, 2006, the Company did not record
      any impairment to goodwill.




**Long-lived
      Assets**





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





-
          8
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)


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





**Revenue
      Recognition**





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





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





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





**Earnings
      per Share**





The
      Company computes earnings per share in accordance with Statement of Accounting
      Standards No. 128, "Earnings per Share ("SFAS No. 128"). Under the provisions
      of
      SFAS No. 128, basic earnings per share is computed by dividing the net income
      (loss) for the period by the weighted average number of common shares
      outstanding during the period. Diluted earnings per share is computed by
      dividing the net income (loss) for the period by the weighted average number
      of
      common and potentially dilutive common shares outstanding during the period.
      Potentially dilutive common shares consist of the common shares issuable upon
      the exercise of stock options and warrants (using the treasury stock method)
      and
      upon the conversion of convertible preferred stock (using the if-converted
      method). Potentially dilutive common shares are excluded from the calculation
      if
      their effect is anti-dilutive. At December 31, 2006, there were options and
      warrants to purchase 7,759,032 shares of common stock and 3,090,001 shares
      issuable upon conversion of Series A and B preferred stock which could
      potentially dilute future earnings per share.





**Stock-Based
      Compensation**





Prior
      to
      October 1, 2006, the Company accounted for stock options issued under the Plan
      under the recognition and measurement provisions of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based*  *Compensation* (“SFAS
      No. 123”).





-
          9
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)


**NOTE
      1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)**





**Stock-based
      compensation (continued)**





Effective
      October 1, 2005, the Company adopted the fair value recognition provisions
      of
      FASB Statement No. 123(R), *Share-Based
      Payment* ,
      using
      the modified-prospective-transition method. Under that transition method,
      compensation cost recognized in the three months ended December 31, 2006
      includes: (a) compensation cost for all share-based payments granted prior
      to,
      but not yet vested as of December 31, 2006, 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).





**Recent
      Accounting Pronouncements**





In
      February 2006, the FASB issued SFAS 155, which applies to certain "hybrid
      financial instruments," which are instruments that contain embedded derivatives.
      The new standard establishes a requirement to evaluate beneficial interests
      in
      securitized financial assets to determine if the interests represent
      freestanding derivatives or are hybrid financial instruments containing embedded
      derivatives requiring bifurcation. This new standard also permits an election
      for fair value remeasurement of any hybrid financial instrument containing
      an
      embedded derivative that otherwise would require bifurcation under SFAS 133.
      The
      fair value election can be applied on an instrument-by-instrument basis to
      existing instruments at the date of adoption and can be applied to new
      instruments on a prospective basis. The adoption of SFAS No.155 did not have
      a
      material impact on the Company's financial position and results of
      operations.





In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities". This
      statement requires all separately recognized servicing assets and servicing
      liabilities be initially measured at fair value, if practicable, and permits
      for
      subsequent measurement using either fair value measurement with changes in
      fair
      value reflected in earnings or the amortization and impairment requirements
      of
      Statement No. 140. The subsequent measurement of separately recognized servicing
      assets and servicing liabilities at fair value eliminates the necessity for
      entities that manage the risks inherent in servicing assets and servicing
      liabilities with derivatives to qualify for hedge accounting treatment and
      eliminates the characterization of declines in fair value as impairments or
      direct write-downs. SFAS No. 156 is effective for an entity's first fiscal
      year
      beginning after September 15, 2006. The adoption of this statement is not
      expected to have a significant effect on the Company's future reported financial
      position or results of operations.




In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation
      of
      FASB Statement No. 109." This interpretation provides guidance for recognizing
      and measuring uncertain tax positions, as defined in SFAS No. 109, "Accounting
      for Income Taxes." FIN No. 48 prescribes a threshold condition that a tax
      position must meet for any of the benefit of an uncertain tax position to be
      recognized in the financial statements. Guidance is also provided regarding
      de-recognition, classification, and disclosure of uncertain tax positions.
      FIN
      No. 48 is effective for fiscal years beginning after December 15, 2006. The
      Company does not expect that this interpretation will have a material impact
      on
      its financial position, results of operations, or cash flows.





-
          10
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)


**NOTE
      1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)**





**Recent
      Accounting Pronouncements (continued)**





In
      September 2006, the U.S. Securities and Exchange Commission (SEC) released
      Staff Accounting Bulletin No. 108, “Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements,” (SAB No. 108) which provides interpretive guidance
      on the SEC’s views regarding the process of quantifying materiality of financial
      statement misstatements. SAB No. 108 is effective for years ending
      after November 15, 2006, with early application for the first interim
      period ending after November 15, 2006. The Company does not believe that
      the application of SAB No. 108 will have a material effect on the
      Company’s results of operations or financial position.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, “Fair Value Measurements” (“FAS 157”). This Statement defines fair value as
      used in numerous accounting pronouncements, establishes a framework for
      measuring fair value in generally accepted accounting principles and expands
      disclosure related to the use of fair value measures in financial statements.
      The Statement is to be effective for the Company’s financial statements issued
      in 2008; however, earlier application is encouraged. The Company is currently
      evaluating the timing of adoption and the impact that adoption might have on
      its
      financial position or results of operations





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





**NOTE
      2 - PROPERTY AND EQUIPMENT**





At
      December 31, 2006, property and equipment consisted of the following:





Estimated
                LifeOffice
                equipment
            
            
            5
                years
            
            $
            176,840Computer
                software
            
            
            3
                years
            
            
            674,139Furniture
                and fixtures
            
            
            5
                years
            
            
            30,133Leasehold
                improvements
            
            
            3
                years
            
            
            4,553885,665Less:
                accumulated depreciation
            
            
            
            
            
            (519,773
            )$
            365,892





Depreciation
      expense for the three months ended December 31, 2006 and 2005 was $60,541 and
      $9,371 respectively.





-
          11
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)


**NOTE
      3 - ACQUISITION AND DISPOSITIONS**





On
      March
      22, 2006, the Company acquired certain assets and liabilities of PatriotNet,
      Inc. a professional Internet Service Provider (ISP) servicing over 3,500
      customers with T-1, DSL, dial up lines and email services. In consideration
      for
      the purchase of the net assets and liabilities including accounts receivable,
      equipment and intangibles for customer contracts, the Company paid to PatriotNet
      (a non-related party to the Company) (a) the payment of cash consideration
      to
      PatriotNet of $190,000 at Closing and (b) the issuance by the Company of 100,000
      (restricted under Rule 144) shares of its common stock at Closing, valued at
      $1.00 dollar per share of $100,000. The Company accounted for this acquisition
      using the purchase method of accounting in accordance with SFAS No. 141. On
      the
      date of acquisition, the purchase price exceeded the fair value of net assets
      by
      $390,600 which was applied to goodwill. In fiscal 2006, the Company recorded
      an
      impairment of goodwill of $180,000 which was charged to operations in fiscal
      2006. In November 2006, the Company sold PatriotNet to a third party for
      $150,000 in cash and the assumption of approximately $60,600 in liabilities
      by
      the purchaser. No gain or loss was recognized on the sale.





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 for the payment of cash to the third party of $12,000, the
      assignment to the purchaser of accounts receivable of $54,609, and assumption
      by
      the purchaser of approximately $205,200 in accounts payable. In connection
      with
      this sale, the Company recorded a gain of $138,586.





On
      October 31, 2006, the Company entered into an Asset Purchase Agreement (the
      "Agreement") with True North Solutions, Inc., a Delaware corporation (“True
      North”) whereby the Company acquired all or substantially all of True North’s
      assets used in its Government Business. Upon the terms and subject to the
      conditions of the Agreement, the Company agreed to purchase, accept, and acquire
      from True North all right, title, and interest of True North in and to the
      Government Business, which is hereby defined and limited to (i) certain vendor
      agreements and (ii) all of those rights and assets, tangible or intangible,
      exclusively used in the performance of day to day business operations, as owned
      or held True North such as certain tangible assets, websites, databases, GSA
      schedules and other government contracts, Federal client lists, and contracts
      in
      progress. The aggregate purchase price for these assets was $430,000 of which
      $250,000 was paid in cash at closing and the balance shall be evidenced by
      a
      promissory note secured by collateral pledge of the assets, payable immediately
      upon accomplishment of the novation of the GSA Schedule. Additionally the
      Company accrued $80,000 in finder’s fees payable in connection with this
      acquisition. The Company accounted for this acquisition using the purchase
      method of accounting in accordance with SFAS No. 141. On the date of
      acquisition, the purchase price exceeded the fair value of net assets by
      $430,000 which was applied to goodwill. The Company is currently analyzing
      this
      acquisition and may reclassify a portion of this goodwill to amortizable
      intangible assets.




-
          12
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)





**NOTE
      4 - RELATED PARTY TRANSACTIONS**





Note
      Payable - Related Party





During
      June to October 2006, a company that the Company’s chief executive officer is a
      shareholder in lent funds to the Company for working capital purposes. The
      loan
      was due no later than 30 days from that date of funding. As consideration for
      providing the funding, the Company agreed to issue 1.54 shares of common stock
      for each dollar lent under the loan. During the three months ended December
      31,
      2006, the Company borrowed $30,000 under this loan agreement and repaid
      approximately $26,500. At December 31, 2006, the Company owed this related
      party
      $181,599. Additionally, the related party is due 339,606 common shares under
      the
      loan agreement. In October 2006, the related party company waived any further
      common shares on funds received subsequent to September 30, 2006. At December
      31, 2006, in connection with the common shares due under this agreement, the
      Company has reflected an accrued interest payable of $169,803 on the
      accompanying consolidated balance sheet.





Note
      Payable - Related Party - Long-term





At
      December 31, 2006, the Company owed $150,000 of principal under a promissory
      note to a shareholder of the Company. The note bears interest at the rate of
      12.5% per annum and was due on demand. In May 2005, the Company issued to this
      stockholder 125,000 shares of common stock as consideration for the extension
      of
      the maturity date of the note by 10 years to
      September 30, 2014 which
      had
      been orally agreed to in fiscal 2004. The shares were valued at $200,000, the
      fair value at the date of issuance. The
      cost
      associated with these shares has been accounted for as deferred finance charges,
      and is being amortized over the life of the deferral period. For the three
      months ended December 31, 2006 and 2005, amortization of deferred financing
      costs amounted to $4,999 and $5,000, respectively, and is included in interest
      expense on the accompanying consolidated statements of operation. The
      note
      remains outstanding and at December 31, 2006, the Company owed the stockholder
      the $150,000 principal plus accrued interest of approximately
      $89,062.





Advances
      from Related Party





The
      Company’s Chief Executive Officer provides advances to the Company from
      time-to-time for operating expenses. These advances are short-term in nature
      and
      are non-interest bearing. At December 31, 2006, amounts due to this related
      party amounted to $19,860.




-
          13
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)


**NOTE
      5 - NOTES PAYABLE**





Sand
      Hill Finance, LLC





On
      December 19, 2005, the Company entered into a Financing Agreement with Sand
      Hill
      Finance, LLC pursuant to which, together with related amendments, the Company
      may borrow up to 80% on the Company’s accounts receivable balances up to a
      maximum of $1,800,000. Amounts borrowed under the Financing Agreement are
      secured by a first security interest in substantially all of the Company’s
      assets. At December 31, 2006, the principal amount due under the Financing
      Agreement amounted to $1,242,811.





Interest
      is payable at a rate of 2% per month on the average balance outstanding during
      the year, equal to an annual interest of approximately 24% per year. The Company
      also agreed to pay an upfront commitment fee of 1% of the credit line upon
      signing of 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 amount payable on the anniversary
      of the agreement.





The
      Financing Agreement contains a number of positive and negative covenants,
      including a requirement for the Company to provide monthly unaudited financial
      statements within 20 days of each month-end and audited financial statements
      together with an accountant’s opinion within 90 days of the end of each fiscal
      year.





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





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




-
          14
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)


**NOTE
      5 - NOTES PAYABLE (Continued)**





Note
      Payable - Other





On
      September 29, 2006, the Company borrowed $200,000 from a shareholder. The note
      was payable on October 29, 2006 and bears interest at 12% per annum. The Company
      repaid this loan in October 2006.





**NOTE
      6 - EQUIPMENT FINANCING PAYABLE**





On
      July
      6, 2006, the Company entered into what is in essence a sale and leaseback
      agreement with respect to certain computer and office equipment. The Company
      received gross proceeds of $300,000 from the sale of the equipment to a third
      party. As part of the same transaction, the Company entered into an agreement
      to
      lease the equipment back from the third party for 36 monthly rent payments
      of
      $10,398 until August 2009. The Company accounted for this equipment financing
      arrangement as a capital lease. In connection with the agreement, the Company
      made an initial security deposit of $30,000 and is included in deposits in
      the
      balance sheet at December 31, 2006. The equipment had a net book value of
      $37,846 on the date of the transaction. In connection with the financing, the
      Company did not record any gain or loss. Imputed interest on this financing
      is
      20% per annum. At December 31, 2006, the principal amount due under this
      equipment financing arrangement amounted to $243,914.





**NOTE
      7 - CONCENTRATION OF CREDIT RISK**





Bank
      Balances





The
      Company maintains its cash bank deposits at various financial institutions
      which, at times, may exceed federally insured limits. Accounts are guaranteed
      by
      the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At December
      31,
      2006, the Company had approximately $135,000 in excess of FDIC insured limits.
      The Company has not experienced any losses in such accounts.





Major
      Customers





Sales
      to
      two customers represented approximately 21% of total sales for the three months
      ended December 31, 2006. As of December 31, 2006, approximately 42% of the
      Company's accounts receivable was due from these two customers.




**NOTE
      8 - STOCKHOLDERS’ DEFICIT**





**Common
      stock**





During
      November 2006, in connection with the exercise of 820,000 stock warrants, the
      Company issued 820,000 shares of common stock for cash proceeds of
      $287,000.





During
      November 2006, in connection with the exercise of 100,000 stock options, the
      Company issued 100,000 shares of common stock for cash proceeds of
      $35,000.





-
          15
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)




**NOTE
      8 - STOCKHOLDERS’ DEFICIT (continued)**





**Common
      Stock Warrants**





A
      summary
      of the status of the Company's outstanding common stock warrants as of December
      31, 2006 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
            
            
            7,055,000
            
            $
            4.88Granted
            
            
            -
            
            
            -Exercised
            
            
            (820,000
            )
            
            0.35Forfeited
            
            
            -
            
            
            -Balance
                at end of period
            
            
            6,235,000
            
            $
            5.45Warrants
                exercisable at end of period
            
            
            6,235,000
            
            $
            5.45Weighted
                average fair value of warrants granted or re-priced during the
                period
            
            
            
            
            $
            0.35





The
      following table summarizes information about common stock warrants outstanding
      at December 31, 2006:





Warrants
                Outstanding
            
            Warrants
                ExercisableRange
                of Exercise Price
            
            Number
                Outstanding at December 31, 2006
            
            Weighted
                Average Remaining Contractual Life
            
            Weighted
                Average Exercise Price
            
            Number
                Exercisable at December 31, 2006
            
            Weighted
                Average Exercise Price$
            0.70
            
            175,000
            
            3.25
                Years
            $
            0.70
            
            175,000
            $
            0.701.00
            
            50,000
            
            4.95
                Years
            
            1.00
            
            50,000
            
            1.002.00
            
            1,785,000
            
            3.75
                Years
            
            2.00
            
            1,785,000
            
            2.004.00
            
            187,500
            
            1.00
                Years
            
            4.00
            
            187,500
            
            4.004.80
            
            1,875,000
            
            3.50
                Years
            
            4.80
            
            1,875,000
            
            4.808.00
            
            287,500
            
            3.00
                Years
            
            8.00
            
            287,500
            
            8.009.60
            
            1,875,000
            
            3.50
                Years
            
            9.60
            
            1,875,000
            
            9.606,235,000
            
            
            $
            5.45
            
            6,235,000
            $
            5.45





-
          16
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)


**NOTE
      9 - STOCK OPTION PLAN**





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





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





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





As
      amended in fiscal 2006, the Plan permits the grant of options and shares for
      up
      to 2,500,000 shares of the Company’s common stock. The Plan terminates 10 years
      from the date of the Plan’s adoption by the Company’s stockholders.





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





-
          17
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)





**NOTE
      9 - STOCK OPTION PLAN (continued)**





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:





December
                31,2006
            
            2005Expected
                volatility
            
            116%
                - 135%
            
            111%Expected
                term
            
            5
                Years
            
            5
                yearsRisk-free
                interest rate
            
            4.39%
                - 4.56%
            
            4%Expected
                dividend yield
            
            0%
            
            0%





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





For
      the
      three months ended December 31, 2006, total stock-based compensation charged
      to
      operations for option-based arrangements amounted to $88,385. At December 31,
      2006, there was approximately $182,500 or total unrecognized compensation
      expense related to non-vested option-based compensation arrangements under
      the
      Plan.




A
      summary
      of the status of the Company's outstanding stock options as of December 31,
      2006
      and changes during the period ending on that date is as follows:




Number
                of Options
            
            Weighted
                Average Exercise PriceStock
                optionsBalance
                at beginning of year
            
            
            1,493,806
            
            $
            1.00Granted
            
            
            315,000
            
            
            0.42Exercised
            
            
            (100,000
            )
            
            0.35Forfeited
            
            
            (184,774
            )
            
            2.00Balance
                at end of period
            
            
            1,524,032
            
            $
            0.80Options
                exercisable at end of period
            
            
            893,920
            
            $
            .98Weighted
                average fair value of options granted during the year
            
            
            
            
            $
            0.42




-
          18
          -
 ICEWEB,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006
 (Unaudited)





**NOTE
      9 - STOCK OPTION PLAN (continued)**





The
      following table summarizes information about employee stock options outstanding
      at December 31, 2006:





Options
                Outstanding
            
            Options
                ExercisableRange
                of Exercise Price
            
            Number
                Outstanding at December 31, 2006
            
            Weighted
                Average Remaining Contractual Life
            
            Weighted
                Average Exercise Price
            
            Number
                Exercisable at December 31, 2006
            
            Weighted
                Average Exercise Price$
            0.47-0.54
            
            590,000
            
            4.62
                Years
            $
            0.47
            
            119,476
            $
            0.470.65-0.88
            
            769,375
            
            3.25
                Years
            
            0.73
            
            618,662
            
            0.731.20-1.60
            
            89,157
            
            1.17
                Years
            
            1.51
            
            80,282
            
            1.303.20-3.80
            
            75,500
            
            1.76
                Years
            
            3.21
            
            75,500
            
            3.201,524,032
            
            
            $
            0.80
            
            893,920
            $
            0.98





**NOTE
      11 - SEGMENT REPORTING**





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





IceWEB's
      chief operating decision-maker is considered to be the chief executive officer
      (CEO). The CEO reviews financial information presented on a consolidated basis
      for purposes of making operating decisions and assessing financial performance.
      The financial information reviewed by the CEO is identical to the information
      presented in the accompanying consolidated statements of operations. For the
      three months ended December 31, 2006 and 2005 all material assets and revenues
      of IceWEB were in the United States.




-
          19
          -


**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 months ended December 31, 2006 and 2005, should be
      read
      in conjunction with the consolidated financial statements, including footnotes,
      and other information presented in our Form 10-KSB for the year ended September
      30, 2006 as filed with the Securities and Exchange Commission.





**OVERVIEW**





We
      provide hosted web-based collaboration solutions that enable organizations
      to
      establish Internet, Intranet, and email/collaboration services immediately
      and
      with little or no up-front capital investment. Our portal and IceMAIL
      collaboration software services are available on a monthly or annual
      subscription basis to small and medium-sized businesses and non-profit and
      government organizations. We also provide consulting services to our larger
      enterprise and government customers including network infrastructure, enterprise
      email/collaboration, and Internet/Intranet portal implementation and support
      services. We offer pre-packaged and custom services, using proven best practices
      to help organizations define their online business objectives and quickly deploy
      their Internet, Intranet, and email/collaboration systems. Although most of
      our
      small to medium-sized business customers purchase and activate our solutions
      online, our professional services teams work closely with our government,
      non-profit and larger customers to deploy customized solutions. We also market
      an array of information technology services and third party computer hardware
      and software.





Our
      history and acquisition strategy has been key in our growth as a company. We
      began as a full service provider of computer systems and professional services
      to private sector corporations and to the federal government under a General
      Services Administration (GSA) schedule contract for computer systems and
      peripherals. Beginning in 2001, we began a series of strategic acquisitions
      which have resulted in our current business and operations,
      including:





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





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





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




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





-
          20
          -


**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





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





·
            In
                March 2006, the Company, through its wholly-owned subsidiary, IceWEB
                Online, Inc., completed the acquisition of substantially all of the
                assets
                and some liabilities of PatriotNet, Inc. This brought over 3000 customers
                with recurring subscription-based services into IceWEB. IceWEB has
                consolidated customer service and technical personnel to improve
                overall
                operational efficiencies within the company. In November 2006, we
                sold our
                interest in PatriotNet.





·
            In
                October 2006, we entered into an Asset Purchase Agreement (the
                "Agreement") with True North Solutions, Inc., a Delaware corporation
                (“True North”) whereby we acquired all or substantially all of True
                North’s assets used in its Government Business. Upon the terms and subject
                to the conditions of the Agreement, we agreed to purchase, accept,
                and
                acquire from True North all right, title, and interest of True North
                in
                and to the Government Business, which is hereby defined and limited
                to (i)
                certain vendor agreements and (ii) all of those rights and assets,
                tangible or intangible, exclusively used in the performance of day
                to day
                business operations, as owned or held True North such as certain
                tangible
                assets, websites, databases, GSA schedules and other government contracts,
                Federal client lists, and contracts in progress. We are currently
                integrating the operations of True North into our operations. To
                date, we
                have generated minimal revenue from this
                acquisition.





We
      generate revenues from sales of software licenses and provision of software
      application services, application development and network management services
      and integrated technology, infrastructure solutions and third party hardware
      sales. We anticipate that both revenues and expenses will to increase in future
      periods.





We
      believe that the key factors to our continued growth and profitability include
      the following:





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





l
            Further
                marketing of IceMAIL, a packaged service that provides a network-hosted
                groupware, email, calendaring, and collaboration solution utilizing
                Microsoft Exchange, the most widely used enterprise system available.
                Customers are able to leverage the full capabilities of Microsoft
                Exchange
                2003 and Outlook without the initial implementation and maintenance
                costs
                associated with such an advanced system.




-
          21
          -





l
            Continued
                focus on developing strategic partnerships with key retail and small
                business solution providers such as CompUSA, Simply Wireless, and
                Intelligent Office--all of which entered into sales and marketing
                agreements with IceWEB during fiscal
                2006.





l
            Continued
                growth in network security sales to existing Federal customers of
                the
                former True North Federal solutions.





l
            Raising
                approximately $4 million of additional working capital through the
                sale of
                warrants to expand our marketing, research and development, and refined
                our debt.





l
            Hiring
                additional qualified, technical employees,
                and





l
            Improving
                our internal financial reporting systems and
                processes.





We
      face
      continuing difficulties in locating sufficient qualified technical personnel.
      Our company is located in the "Tech Corridor" of Northern Virginia and we
      compete with a number of companies for employees, many of which have been in
      business longer than we have and which are more attractive to prospective
      employees. Our inability to accomplish one or more of these key goals may limit
      our growth in future periods.




**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, 2006 and notes thereto contained on Form 10-KSB 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.








-
          22
          -





**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





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


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





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





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





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





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





Amounts
      billed in advance of services being provided are recorded as deferred revenues
      and recognized in the consolidated statement of operations as services are
      provided.




-
          23
          -


**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





**RESULTS
      OF OPERATIONS**





**THREE
      MONTHS ENDED DECEMBER 31, 2006 COMPARED THE THREE MONTHS ENDED DECEMBER 31,
      2005**





The
      following table provides an overview of certain key factors of our results
      of
      operations for the three months ended December 31, 2006 as compared to the
      three
      months ended December 31, 2005:





2006
            
            2005
            
            $
                Change
            
            %
                ChangeNet
                Revenues
            
            $
            2,581,777
            
            $
            1,491,216
            
            $
            1,090,561
            
            
            73
            %Cost
                of sales
            
            
            2,295,410
            
            
            1,241,409
            
            
            1,054,001
            
            
            85
            %Operating
                Expenses:Marketing
                and selling
            
            
            60,216
            
            
            47,189
            
            
            13,027
            
            
            28
            %Depreciation
                and amortization
            
            
            65,541
            
            
            19,371
            
            
            46,170
            
            
            238
            %General
                and administrative
            
            
            760,366
            
            
            513,987
            
            
            246,379
            
            
            48
            %Total
                operating expenses
            
            
            886,123
            
            
            580,547
            
            
            305,576
            
            
            53
            %Loss
                from operation
            
            
            (599,756
            )
            
            (330,740
            )
            
            269,016
            
            
            81
            %Total
                other income (expense)
            
            
            9,690
            
            
            (20,918
            )
            
            30,608
            
            
            146
            %Net
                loss
            
            
            (590,066
            )
            
            (351,658
            )
            
            238,408
            
            
            68
            %Beneficial
                conversion feature- Preferred Stock
            
            
            -
            
            
            (500,000
            )
            
            500,000
            
            
            (100
            )%Net
                loss attributable to common Shareholders
            
            $
            (590,066
            )
            $
            (851,658
            )
            $
            (261,592
            )
            
            (31
            )%





***Revenues***





For
      the
      three months ended December 31, 2006, we reported revenues of $2,581,777 as
      compared to revenues of $1,491,216 for the prior three months ended December
      31,
      2005, an increase of $1,090,561 or approximately 73%. The increase is primarily
      due to an increase in sales of our third party product sales which accounted
      for
      approximately 49% of our revenue and service income from primarily our custom
      development services which accounted for 51% of our revenue.





***Cost
      of Sales***





Our
      cost
      of sales consists of products purchased for resale, salaries of technical
      personnel, and third party contractors. For the three months ended December
      31,
      2006, cost of sales was $2,295,410, or approximately 89% of revenues, compared
      to $1,241,409, or approximately 83.2% of revenues, for the three months ended
      December 31, 2005. The increase in costs of sales as a percentage of revenue
      and
      the corresponding decrease in our gross profit margin for the three months
      ended
      December 31, 2006 as compared to the three months ended December 31, 2005 was
      the result of an increase during the three months ended December 31, 2006 in
      infrastructure and hardware revenues as a percentage of total revenue compared
      to infrastructure and hardware revenue in the previous period.





-
          24
          -


**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





***Total
      Operating Expenses***





Our
      total
      operating expenses increased approximately 53% to $886,123 for the three months
      ended December 31, 2006 as compared to $580,547 for the three months ended
      December 31, 2005. These increases include:





Marketing
      and Selling. For the three months ended December 31, 2006, marketing and selling
      costs were $60,216 as compared to $47,189 for the three months ended December
      31, 2005, an increase of $13,027 or approximately 28%. The increases were the
      result of an increase in online web marketing, advertising and print advertising
      during the three months ended December 31, 2006.





Depreciation
      and amortization expense. For the three months ended December 31, 2006,
      depreciation and amortization expense amounted to $65,541 as compared to $19,371
      for the three months ended December 31, 2005, an increase of $46,170 or 238%.
      Depreciation expense is provided by use of the straight-line method over the
      estimated useful lives of the assets. The increase in depreciation was
      attributable to the amortization of capitalized software development costs. Amortization
      expense is related to a software library which are intangible assets that we
      acquired through our previous acquisitions. The decrease in amortization expense
      of $5,000, or approximately 50 %, for the three months ended December 31, 2006
      as compared to the three months ended December 31, 2005 reflects previous
      amortizations of this intangible asset.





General
      and administrative expense. For the three months ended December 31, 2006,
      general and administrative expenses were $760,366 as compared to $513,987 for
      the three months ended December 31, 2005, an increase of $246,379 or
      approximately 48%. For the three months ended December 31, 2006 and 2005,
      general and administrative expenses consisted of the following:





2006
            
            2005Salaries
                and related taxes
            
            $
            492,635
            
            $
            250,029Professional
                fees
            
            
            62,692
            
            
            37,020Rent
            
            
            61,108
            
            
            60,735Consulting
                fees
            
            
            13,058
            
            
            3,579Insurance
            
            
            13,779
            
            
            52,347Other
                operating expenses
            
            
            117,094
            
            
            110,277Total
            
            $
            760,366
            
            $
            513,987








·
            For
                the three months ended December 31, 2006, salaries and related taxes
                increased to $492,635 as compared to $250,029 for the three months
                ended
                December 31, 2005, an increase of $242,606 or 97%. The increase was
                attributable to an increase in executive and office salaries for
                the three
                months ended December 31, 2006 and the granting of stock options
                duringthe three months ended December 31,2006 to employees which were valued using FASB 123R and resulted
                in
                stock-based compensation of $88,385.





-
          25
          -


**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





·
            For
                the three months ended December 31, 2006, professional fees amounted
                to
                $62,692 as compared to $37,020 for the three months ended December
                31,
                2005, an increase of $25,672 or 69%. The increase was primarily
                attributable to an increase in legal fees incurred of $16,232 and
                accounting fees $9,440.


·
            For
                the three months ended December 31, 2006, rent expense amounted to
                $61,108
                as compared to $60,735 for the three months ended December 31, 2005,
                an
                increase of $373 or 1%.


·
            For
                the three months ended December 31, 2006, consulting expense amounted
                to
                $13,058 as compared to $3,579 for the three months ended December
                31,
                2005, an increase of $9,479. The increase was attributable to an
                increase
                in business development initiates and an increase in investor relations
                expense during the three months ended December 31,
                2006.


·
            For
                the three months ended December 31, 2006, insurance expense amounted
                to
                $13,779 as compared to $52,347 for the three months ended December
                31,
                2005, a decrease of $38,568. The decrease was attributable to a decrease
                in health insurance expense resulting from the reduction of our staff
                by
                approximately nine employees.


·
            For
                the three months ended December 31, 2006, other operating expenses
                amounted to $117,094 as compared to $110,277 for the three months
                ended
                December 31, 2005, an increase of $6,817 or 6%. The increase was
                primarily
                attributable to an increase in
                operations.





***LOSS
      FROM OPERATIONS***





We
      reported a loss from operations of $599,756 for the three months ended December
      31, 2006 as compared to a loss from operations of $330,740 for the three months
      ended December 31, 2005, an increase of $269,016 or approximately
      81%.





***OTHER
      INCOME (EXPENSES)***





Gain
      from
      sales of net assets. For
      the
      three months ended December 31, 2006, we sold our interest in one of our
      subsidiaries (Integrated Power Solutions, Inc. or IPS) to a shareholder and
      related party for the payment of cash to the third party of $12,000, the
      assignment to the purchaser of accounts receivable of $54,609, and assumption
      by
      the purchaser of approximately $205,200 in accounts payable. In connection
      with
      this sale, we recorded a gain of $138,586.





Interest
      Expense. For the three months ended December 31, 2006, interest expense amounted
      to $130,205 as compared to $20,918 for the three months ended December 31,
      2005,
      an increase of $109,287 or 522%. The increase in interest expense is
      attributable to the following: (i) In December 2005, we entered a financing
      agreement with Sand Hill Finance LLC for the financing of our accounts
      receivable balances with an annual interest rate of 24% and incurred interest
      expense for the three months ended December 31, 2006 of approximately $98,707;
      (ii) In July 2006, we entered into a sale-leaseback equipment financing
      arrangement whereby we borrowed $300,000 and (iii) During three months ended
      December 31, 2006, we amortized deferred financing costs of $4,999.





***NET
      LOSS***





Our
      net
      loss was $590,066 for the three months ended December 31, 2006 compared to
      $351,658 for the three months ended December 31, 2005.


-
          26
          -


**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





***DEEMED
      PREFERRED STOCK DIVIDEND***





During
      the three months ended December 31, 2006 and 2005, we recorded a deemed
      preferred stock dividend of $0 and $500,000, respectively, which relates to
      our
      Series A and B Convertible Preferred Stock. This non-cash expense related to
      the
      beneficial conversion features of those securities and is recorded with a
      corresponding credit to paid-in capital.





***NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS***





We
      reported a net loss attributable to common shareholders of $590,066 for the
      three months ended December 31, 2006 as compared to a net loss attributable
      to
      common shareholders of $851,658 during the three months ended December 31,
      2005.
      This translates to an overall per-share loss available to shareholders of $.06
      for the three months ended December 31, 2006 compared to per-share loss of
      $.13
      for the three months ended December 31, 2005.





***LIQUIDITY
      AND CAPITAL RESOURCES***





Liquidity
      is the ability of a company to generate funds to support its current and future
      operations, satisfy its obligations and otherwise operate on an ongoing basis. The
      following table provides an overview of certain
      selected balance sheet comparisons between
      December 31, 2006 and September 30, 2006:




December
                31, 2006
            
            September
                30, 2006
            
            $
                Change
            
            %
                ChangeWorking
                Capital
            
            $
            1,901,811
            
            $
            1,626,966
            
            $
            274,845
            
            
            16.9
            %Cash
            
            
            288,901
            
            
            432,885
            
            
            (143,984
            )
            
            -33.3
            %Accounts
                receivable, net
            
            
            1,433,302
            
            
            1,264,065
            
            
            169,237
            
            
            13.39
            %Total
                current assets
            
            
            1,729,490
            
            
            1,706,621
            
            
            22,869
            
            
            1.34
            %Property
                and equipment, net
            
            
            365,892
            
            
            424,559
            
            
            (58,667
            )
            
            -13.8
            %Goodwill
            
            
            430,000
            
            
            211,600
            
            
            218,400
            
            
            103.21
            %Intangibles,
                net
            
            
            35,000
            
            
            40,000
            
            
            (5,000
            )
            
            -12.5
            %Deferred
                financing cost
            
            
            155,000
            
            
            159,999
            
            
            (4,999
            )
            
            -3.12
            %Total
                assets
            
            
            2,769,338
            
            
            2,595,875
            
            
            173,463
            
            
            6.68
            %Notes
                payable-related and non-related
            
            
            1,424,410
            
            
            1,378,869
            
            
            45,541
            
            
            3.3
            %Equipment
                financing payable -current
            
            
            75,765
            
            
            79,327
            
            
            (3,562
            )
            
            -4.49
            %Accounts
                payable
            
            
            1,529,424
            
            
            894,390
            
            
            635,034
            
            
            71
            %Accrued
                expenses
            
            
            581,842
            
            
            933,722
            
            
            (351,880
            )
            
            -37.7
            %Advances
                from related party
            
            
            19,860
            
            
            8,123
            
            
            11,737
            
            
            144.5
            %Total
                current liabilities
            
            
            3,631,301
            
            
            3,333,587
            
            
            297,714
            
            
            8.93
            %Notes
                payable - related party
            
            
            150,000
            
            
            150,000
            
            
            -
            
            
            -Equipment
                financing payable-non current
            
            
            168,149
            
            
            182,969
            
            
            (14,820
            )
            
            -8.09
            %Total
                liabilities
            
            
            3,949,450
            
            
            3,666,556
            
            
            282,894
            
            
            7.7
            %Accumulated
                deficit
            
            
            (11,461,108
            )
            
            (10,871,042
            )
            
            (590,066
            )
            
            5.4
            %Stockholder’s
                deficit
            
            $
            (1,180,112
            )
            
            (1,070,681
            )
            
            (109,431
            )
            
            10.22
            %




-
          27
          -





**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





Net
      cash
      used in operating activities was $391,006 for the three months ended December
      31, 2006 as compared to net cash used in operating activities of $434,936 for
      the three months ended December 31, 2005, a decrease of $43,930. For
      the
      three months ended December 31, 2006, we used cash to fund our net loss of
      $590,066 offset by non-cash items such as stock-based compensation of $158,635,
      depreciation expense of $65,541, amortization of deferred financing cost of
      $4,999, and a gain on sale of net assets of $138,586, and as well as changes
      in
      assets and liabilities of $108,471. For the three months ended December 31,
      2005, we used cash to fund our net loss of $351,658 offset by non-cash items
      such as depreciation expenses of $9,371, amortization of deferred financing
      cost
      of $5,000 and as well as add back of other non-cash items such as changes in
      assets and liabilities of $97,649.





Net
      cash
      used in investing activities for the three months ended December 31, 2006 was
      $113,874 as compared to net cash used in investing activities of $239,991 for
      the three months ended December 31, 2005. During the three months ended December
      31, 2006, we had an asset purchase and in connection therewith used cash of
      $250,000. Additionally, we used cash of $1,874 for property and equipment
      purchases and received net cash from the sale of net assets of one of our
      subsidiaries of $138,000 during the three months ended December 31, 2006. During
      the three months ended December 31, 2005, we purchased equipment and software
      amounting to $239,991 which represented the cash used in investing activities.
      We did not have any company acquisitions or similar transactions during the
      three months ended December 31, 2005.





Net
      cash
      provided by financing activities for the three months ended December 31, 2006
      was $360,896 as compared to $299,599 for the three months ended December 31,
      2005, an increase of $61,297. For the three months ended December 31, 2006, net
      cash
      provided by financing activities related to proceeds received from the exercise
      of stock options and warrants of $322,000, proceeds received from notes payable
      of $242,041, proceeds received from related party notes and advances of $41,737
      offset by repayments on notes payable of $200,000, payments on related party
      advances of $26,500 and repayments of equipment financing of $18,382. For the
      three months ended December 31, 2005, net cash provided by financing activities
      related to proceeds from bank financing of $339,476 offset by payment of
      placement fees of $46,398, and proceeds received from related party note payable
      of $6,521.





At
      December 31, 2006 we had an accumulated deficit of $11,461,108 and the report
      from our independent registered public accounting firm on our audited financial
      statements at September 30, 2006 contained an explanatory paragraph regarding
      doubt as to our ability to continue as a going concern as a result of our net
      losses in operations. We reported a net loss of $590,066 for the three months
      ended December 31, 2006 and there are no assurances that we will report net
      income 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 December 31, 2006 we had cash
      on
      hand of $288,901. In fiscal 2006, we entered into a receivable factoring
      agreement with Sand Hill Finance, LLC under which we can sell certain accounts
      receivable to the lender on a full recourse basis at 80% of the face amount
      of
      the receivable up to an aggregate of $1.8 million. We agreed to pay Sand Hill
      Finance, LLC an annual commitment fee of $10,000 and a monthly finance fee
      of 2%
      of the average daily balance under the line. We granted Sand Hill Finance,
      LLC a
      blanket security interest in our assets and agreed to refrain from certain
      actions while the line is outstanding.




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**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





While
      we
      do not have any working capital commitments, we do not presently have any
      external sources of working capital other than what may be available under
      the
      factoring agreement and loans from related parties. Our working capital needs
      in
      future periods primarily relies on the rate at which we can increase our
      revenues while controlling our expenses and decreasing the use of cash to fund
      operations. Additional capital may be needed to fund acquisitions of additional
      companies or assets, although we are not a party to any pending agreements
      at
      this time and, accordingly, cannot estimate the amount of capital which may
      be
      necessary, if any, for acquisitions.





As
      long
      as our cash flow from operations remains insufficient to completely fund
      operations, we will continue depleting our financial resources and seeking
      additional capital through equity and/or debt financing. In March 2005 we sold
      shares of our Series A Convertible Preferred Stock and in December 2005 we
      sold
      shares of our Series B Convertible Preferred Stock to the same purchaser. The
      designations of these shares included a restriction that so long as the shares
      are outstanding, we cannot sell or issue any common stock, rights to subscribe
      for shares of common stock or securities which are convertible or exercisable
      into shares of common stock at an effective purchase price of less than the
      then
      conversion value which is presently $0.60 per share for the Series A Convertible
      Preferred Stock and $0.2727 for the Series B Convertible Preferred Stock. Under
      the terms of the Series B Convertible Preferred Stock transaction, we also
      agreed not to issue any convertible debt or preferred stock. Finally, 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
      FINANCING TRANSACTION***




In
      February 2006, we reduced the exercise price of common stock purchase warrants
      to purchase 4,500,000 shares of common stock, all of which are held by Barron
      Partners LP, to $1.00 per share through December 31, 2006. On March 17, 2006,
      we
      further reduced the exercise price of 500,000 warrants to purchase 500,000
      shares of common stock to $.80 during the period from March 17, 2006 through
      March 31, 2006. On October 20, 2006, the Company further reduced the exercise
      price of warrants to purchase 1,000,000 shares of common stock to $.35 during
      the period from October 17, 2006 through November 10, 2006. To the extent that
      those warrants were not exercised by 5:30 PM, Eastern time, on November 10,
      2006, the exercise price of those warrants reverted to $1.00 per share through
      December 31, 2006 and at that time the warrants reverted back to the original
      exercise price. During the three months ended December 31, 2006, the warrant
      holder exercised 500,000 warrants at an exercise price of $.80 for net proceeds
      of $400,000. Additionally, during November 2006, in connection with the exercise
      of 720,000 stock warrants, we issued 720,000 shares of common stock for cash
      proceeds of $252,000.





In
      May
      and June 2006, in connection with the exercise of 47,500 stock options, we
      issued 47,500 shares of common stock for cash proceeds of $32,000.





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**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





During
      June to October 2006, a company that the Company’s chief executive officer is a
      shareholder in lent funds to the Company for working capital purposes. The
      loan
      was due no later than 30 days from that date of funding. As consideration for
      providing the funding, we agreed to issue 1.54 shares of common stock for each
      dollar lent under the loan. During the three months ended December 31, 2006,
      we
      borrowed $30,000 under this loan agreement and repaid approximately $26,500.
      At
      December 31, 2006, the Company owed this related party $181,599. Additionally,
      the related party is due 339,606 common shares under the loan agreement. In
      October 2006, the related party company waived any further common shares on
      funds received subsequent to September 30, 2006. At December 31, 2006, in
      connection with the common shares due under this agreement, the Company has
      reflected an accrued interest payable of $169,803 on the accompanying
      consolidated balance sheet.





On
      July
      6, 2006, we entered into what is in essence a sale and leaseback agreement
      with
      respect to certain computer and office equipment. We received gross proceeds
      of
      $300,000 from the sale of the equipment to a third party. As part of the same
      transaction, we entered into an agreement to lease the equipment back from
      the
      third party for 36 monthly rent payment of $10,398 until August 2009. We
      accounted for this equipment financing arrangement as a capital lease. In
      connection with the agreement, we made an initial security deposit of $30,000
      which is included in deposits in the balance sheet at December 31, 2006. The
      equipment had a net book value of $37,846 on the date of the transaction. At
      December 31, 2006, amount due under this equipment financing arrangement
      amounted to $243,914.





On
      September 29, 2006, we borrowed $200,000 from a shareholder. The note was
      payable on October 29, 2006 and bears interest at 12% per annum. At September
      30, 2006, principal amount due under this note amounted to $200,000. The Company
      repaid this loan in October 2006.





During
      November 2006, in connection with the exercise of 100,000 stock options, we
      issued 100,000 shares of common stock for cash proceeds of $35,000.





***RECENT
      ACCOUNTING PRONOUNCEMENTS***





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





In
      February 2006, the FASB issued SFAS 155, which applies to certain "hybrid
      financial instruments," which are instruments that contain embedded derivatives.
      The new standard establishes a requirement to evaluate beneficial interests
      in
      securitized financial assets to determine if the interests represent
      freestanding derivatives or are hybrid financial instruments containing embedded
      derivatives requiring bifurcation. This new standard also permits an election
      for fair value re-measurement of any hybrid financial instrument containing
      an
      embedded derivative that otherwise would require bifurcation under SFAS 133.
      The
      fair value election can be applied on an instrument-by-instrument basis to
      existing instruments at the date of adoption and can be applied to new
      instruments on a prospective basis. The adoption of SFAS No.155 did not have
      a
      material impact on the Company's financial position and results of
      operations.




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**ITEM
      2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      (continued)**





In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities". This
      statement requires all separately recognized servicing assets and servicing
      liabilities be initially measured at fair value, if practicable, and permits
      for
      subsequent measurement using either fair value measurement with changes in
      fair
      value reflected in earnings or the amortization and impairment requirements
      of
      Statement No. 140. The subsequent measurement of separately recognized servicing
      assets and servicing liabilities at fair value eliminates the necessity for
      entities that manage the risks inherent in servicing assets and servicing
      liabilities with derivatives to qualify for hedge accounting treatment and
      eliminates the characterization of declines in fair value as impairments or
      direct write-downs. SFAS No. 156 is effective for an entity's first fiscal
      year
      beginning after September 15, 2006. The adoption of this statement is not
      expected to have a significant effect on the Company's future reported financial
      position or results of operations.





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation
      of
      FASB Statement No. 109." This interpretation provides guidance for recognizing
      and measuring uncertain tax positions, as defined in SFAS No. 109, "Accounting
      for Income Taxes." FIN No. 48 prescribes a threshold condition that a tax
      position must meet for any of the benefit of an uncertain tax position to be
      recognized in the financial statements. Guidance is also provided regarding
      de-recognition, classification, and disclosure of uncertain tax positions.
      FIN
      No. 48 is effective for fiscal years beginning after December 15, 2006. The
      Company does not expect that this interpretation will have a material impact
      on
      its financial position, results of operations, or cash flows.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, "Fair Value Measurements" ("FAS 157"). This Statement defines fair value
      as
      used in numerous accounting pronouncements, establishes a framework for
      measuring fair value in generally accepted accounting principles and expands
      disclosure related to the use of fair value measures in financial statements.
      The Statement is to be effective for the Company's financial statements issued
      in 2008; however, earlier application is encouraged. The Company is currently
      evaluating the timing of adoption and the impact that adoption might have on
      its
      financial position or results of operations





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





**ITEM
      3. CONTROLS AND PROCEDURES**





As
      required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
      September 30, 2006, the end of the period covered by this report, our management
      concluded its evaluation of the effectiveness of the design and operation of
      our
      disclosure controls and procedures. Disclosure controls and procedures are
      controls and procedures designed to reasonably assure that information required
      to be disclosed in our reports filed under the Securities Exchange Act of 1934,
      such as this report, is recorded, processed, summarized and reported within
      the
      time periods prescribed by SEC rules and regulations, and to reasonably assure
      that such information is accumulated and communicated to our management,
      including our Chief Executive Officer who is also our principal financial and
      accounting officer, to allow timely decisions regarding required
      disclosure.


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          31
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Our
      management does not expect that our disclosure controls and procedures will
      prevent all error and all fraud. A control system, no matter how well designed
      and operated, can provide only reasonable, not absolute, assurance that the
      control system’s objectives will be met. Further, the design of a control system
      must reflect the fact that there are resource constraints, and the benefits
      of
      controls must be considered relative to their costs. Because of the inherent
      limitations in all control systems, no evaluation of controls can provide
      absolute assurance that all control issues and instances of fraud, if any,
      have
      been detected. These inherent limitations include the realities that judgments
      in decision-making can be faulty, and that breakdowns can occur because of
      simple error or mistake. The design of any system of controls is based in part
      upon certain assumptions about the likelihood of future events, and there can
      be
      no assurance that any design will succeed in achieving its stated goals under
      all potential future conditions.





As
      of the
      evaluation date, our Chief Executive Officer concluded that we do not maintain
      disclosure controls and procedures that are effective in providing reasonable
      assurance that information required to be disclosed in our reports under the
      Securities Exchange Act of 1934 is recorded, processed, summarized and reported
      within the time periods prescribed by SEC rules and regulations, and that such
      information is accumulated and communicated to our management, including our
      Chief Executive Officer, to allow timely decisions regarding required
      disclosure. In August 2006 our then Chief Financial Officer terminated his
      employment with us. During the course of our 2006 audit, we determined that
      we
      experienced certain material weaknesses of our internal controls during fiscal
      2006 related to our failure to timely reconcile the sub-detail reports of our
      general ledger, including cash, accounts payable and accounts receivable, and
      in
      the recordation of equity transactions. We do not presently have a full time
      Chief Financial Officer or an accounting staff which is sufficiently experienced
      in the proper application of generally accepted accounting principles. Our
      Chief
      Executive Officer who is not an accounting professional is presently serving
      as
      our principal financial and accounting officer, our accounting staff is
      comprised of one person and are currently relying upon the services of an
      outside consultant to augment our accounting department. Until we expand our
      staff to include a senior financial officer who has the requisite experience
      necessary, as well as supplement the staff of our accounting department to
      include a sufficient number of properly trained employees, it is possible that
      we will have material weaknesses in our disclosure controls in future
      periods.





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








**Part
      II - OTHER INFORMATION**





Item
      1.
      Legal Proceedings




The
      company is involved with normal day to day legal issues. There is a pending
      lawsuit with two former employees. The company believes the suit is without
      merit.





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





None





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          32
          -





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
            Description


31.1
            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 Certification pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002 *


32.2
            Certification
                of Chief Financial Officer Certification pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002 *





*
      Filed
      herein











SIGNATURES





In
      accorance 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. SignorelloFebruary
                14, 2007
            John
                R. SignorelloPrincipal
                executive officerand
                Principal accounting Officer





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