---

---

UNITED
STATESSECURITIES
AND EXCHANGE COMMISSIONWashington,
D.C. 20549


FORM 10-KSB

|                                                           |                                                                                     
|---------------------------------------------------------- | ------------------------------------------------------------------------------------
|(Mark One)                                                
|x                                                          | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934    
|                                                           |                                                                                     
|For the fiscal year ended February 29, 2008               
|                                                           |                                                                                     
|o                                                          | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934
|                                                           |                                                                                     
|For the Transition Period from_____________to_____________
|                                                           |                                                                                     
|Commission File No. 333-108632                            

|                                                                                                         |  |                    
|-------------------------------------------------------------------------------------------------------- |  | -------------------
|                                                                                                        
|NARROWSTEP INC.(Name
  of small business issuer in its charter)                                         
|                                                                                                        
|Delaware                                                                                                 |  | 33-1010941         
|(State or other jurisdiction of                                                                          |  | (I.R.S. Employer   
|incorporation or organization)                                                                           |  | Identification No.)
|                                                                                                         |  |                    
|116 Village Boulevard, Suite 200
  Princeton, New Jersey 08540(Address
  of principal executive offices)
|                                                                                                        
|(609) 951-2221(Issuers
  telephone number)                                                             

Securities registered under Section 12(b) of the
Exchange Act: None

Securities registered under Section 12(g) of the
Exchange Act: None

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

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

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

Indicate by check mark
whether the issuer is a shell company (as defined under Rule 12b-2 of the
Exchange Act).Yes o   No x

Issuers revenues for the
year ended February 29, 2008: $5,845,733

The aggregate market value of
the Common Stock of the issuer held by non-affiliates of the issuer on June 9,
2008, based on the average of the closing bid and asked price of the issuers
Common Stock on such date as reported on the OTC Bulletin Board, was $0.06

At February 29, 2008,
137,561,227 shares of the issuers Common Stock, par value $0.000001 per share,
were outstanding.

Transitional Small Business
Disclosure Format:   Yes o   No x

1

---

---



NARROWSTEP INC.

Form 10-KSBFor the Fiscal Year Ended February
29, 2008

TABLE OF CONTENTS

|           |  |                                                                                                                                              |  |        | 
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | 
|           |  |                                                                                                                                              |  | Page #
|PART I     |  |                                                                                                                                              |  |       
|           |  |                                                                                                                                              |  |       
|Item 1.    |  | Description
  of Business                                                                                                                    |  | 4      | 
|Item 1A.   |  | Risk
  Factors                                                                                                                               |  | 12     | 
|Item 2.    |  | Properties                                                                                                                                   |  | 18     | 
|Item 3.    |  | Legal
  Proceedings                                                                                                                          |  | 18     | 
|Item 4.    |  | Submission
  of Matters to a Vote of Security Holders                                                                                        |  | 18     | 
|           |  |                                                                                                                                              |  |        | 
|PART II    |  |                                                                                                                                              |  |        | 
|           |  |                                                                                                                                              |  |        | 
|Item 5.    |  | Market for
  Common Equity and Related Stockholder Matters                                                                                   |  | 18     | 
|Item 6.    |  | Managements
  Discussion and Analysis or Plan of Operation                                                                                  |  | 19     | 
|Item 7.    |  | Financial
  Statements                                                                                                                       |  | 24     | 
|Item 8.    |  | Changes in
  and Disagreements with Accountants on Accounting and Financial Disclosure                                                       |  | 24     | 
|Item 8A    |  | Controls
  and Procedures                                                                                                                    |  | 24     | 
|Item 8A(T) |  | Managements
  Annual Report on Internal Control over Financial Reporting                                                                    |  | 24     | 
|Item 8B    |  | Other
  Information                                                                                                                          |  | 25     | 
|           |  |                                                                                                                                              |  |        | 
|PART III   |  |                                                                                                                                              |  |        | 
|           |  |                                                                                                                                              |  |        | 
|Item 9.    |  | Directors,
  Executives Officers, Promoter and Control Persons and Corporate Governance;
  Compliance with Section 16(a) of the Exchange Act |  | 26     | 
|Item 10.   |  | Executive
  Compensation                                                                                                                     |  | 28     | 
|Item 11.   |  | Security
  Ownership of Certain Beneficial Owners and Management and Related Stockholder
  Matters                                           |  | 32     | 
|Item 12.   |  | Certain
  Relationships and Related Transactions and Director Independence                                                                   |  | 34     | 
|Item 13.   |  | Exhibits                                                                                                                                     |  | 36     | 
|Item 14.   |  | Principal
  Accountant Fees and Services                                                                                                     |  | 38     | 

2

---



CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS

This report contains
forward-looking statements. Any and all statements contained in this report
that are not statements of historical fact may be deemed forward-looking statements.
Terms such as may, might, would, should, could, project,
estimate, pro forma, predict, potential, strategy, anticipate,
attempt, develop, plan, help, believe, continue,
intend,
expect, future, and similar terms and terms of similar import (including
the negative of any of the foregoing) may be intended to identify
forward-looking statements. However, not all forward-looking statements may
contain one or more of these identifying terms. Forward-looking statements in
this report may include, without limitation, statements regarding (i) a
projection of revenues, income (including income/loss), earnings (including
earnings/loss) per share, capital expenditures, dividends, capital structure,
or other financial items, (ii) the plans and objectives of management for
future operations, including plans or objectives relating to our products or
services, (iii) our future financial performance, including any such statement
contained in a discussion and analysis of financial condition by management or
in the results of operations included pursuant to the rules and regulations of
the Securities and Exchange Commission, and (iv) the assumptions underlying or
relating to any statement described in subparagraphs (i), (ii), or (iii).

The forward-looking
statements are not meant to predict or guarantee actual results, performance,
events, or circumstances and may not be realized because they are based upon
our current projections, plans, objectives, beliefs, expectations, estimates,
and assumptions and are subject to a number of risks and uncertainties and
other influences, many of which we have no control over. Actual results and the
timing of certain events and circumstances may differ materially from those
described by the forward-looking statements as a result of these risks and
uncertainties. Factors that may influence or contribute to the inaccuracy of
the forward-looking statements or cause actual results to differ materially
from expected or desired results may include, without limitation, inability to
obtain adequate financing, insufficient cash flows and resulting illiquidity,
dependence upon significant customers, inability to expand our business,
government regulations, increased competition, changing customer preferences,
stock illiquidity, failure to implement our business plans or strategies, and
ineffectiveness of our marketing program and our acquisition opportunities. A
description of some of the risks and uncertainties that could cause our actual
results to differ materially from those described by the forward-looking
statements in this report appears under the caption Managements Discussion
and Analysis or Plan of OperationRisk Factors and elsewhere in this report.

Because of the risks and
uncertainties related to these factors and the forward-looking statements,
readers of this report are cautioned not to place undue reliance on the
forward-looking statements. We disclaim any obligation to update these
forward-looking statements or to announce publicly the results of any revisions
to any of the forward-looking statements contained in this report to reflect
any new information or future events or circumstances or otherwise unless
required to do so under applicable federal securities laws.

Readers should read this report
and the following discussion and analysis in conjunction with the discussion
under the caption Item 1ARisk Factors in this report, our financial
statements and the related notes thereto in this report, and other documents we
file from time to time with the Securities and Exchange Commission.

3

---



PART I

Item 1. Description of Business

General

Our company is
a pioneer in the field of internet-based video content delivery. Our objective
is to provide world class tools to content owners, best of breed tools to the
internet television viewer, and to move video around the globe efficiently and
effectively utilizing our own content delivery network. Our proprietary
operating system, which we have termed the Television Operating System -
TelvOS, provides comprehensive delivery of video content and television-like
programming to mobile, wireless, internet, broadband and broadcast services.
Our system provides a platform to enable owners and users of video content to
reach specific audiences by narrowcasting  targeting delivery of specific
content to interested groups. Narrowcasting provides new business opportunities
for content providers to build commercial channels by creating a new model for
delivering content. In addition to enabling delivery of content, our companys
platform enables our clients to commercialize video-based content. This can be
achieved through directed advertising, sponsorship, pay-per-view, subscription,
and/or e-commerce.

Recent Developments

On May 29,
2008, we entered into an Agreement and Plan of Merger (the Merger Agreement)
with Onstream Media Corporation, a Florida corporation (Onstream), Onstream
Merger Corp., a newly formed Delaware corporation and a wholly owned subsidiary
of Onstream (Merger Sub) and W. Austin Lewis IV, as stockholder
representative for our stockholders. Pursuant to the terms and subject to the
conditions set forth in the Merger Agreement, Onstream will acquire our company
by means of a merger of Merger Sub with and into our company (the Merger),
with our company continuing as the surviving corporation and a wholly-owned
subsidiary of Onstream after the Merger (the Surviving Corporation).

Pursuant to
the Merger Agreement, at the effectiveness of the Merger (the Effective
Time), each outstanding share of our common stock, other than shares held by our
stockholders who have perfected their appraisal rights under Delaware law,
shares held by Onstream and shares held by any of our subsidiaries
(collectively, the Shares to be Converted), will be converted into (i) shares
of Onstream common stock, par value $0.0001 per share (Onstream Common Stock)
based on an exchange ratio determined as described below and (ii) one
contingent value right (a Contingent Value Right) having terms and conditions
described below. Onstream Common Stock and Contingent Value Rights issued in
respect of our common stock subject to certain restricted stock awards will be
subject to any vesting conditions contained in such awards.

The aggregate
number of shares of Onstream Common Stock issuable in the Merger in exchange
for the Shares to be Converted will be the greater of (i) the sum of (A) two
(2) times Annualized Company Revenue (as defined in the Merger Agreement) and
(B) the greater of (1) the amount of our cash and cash equivalents immediately
prior to the Effective Time and (2) 1,500,000 and (ii) 10,500,000. The exchange
ratio will be the amount determined as described in the prior sentence divided
by the Shares to be Converted (the Exchange Ratio).

The final
Exchange Ratio will be determined based on our consolidated revenues for the
quarter ended May 31, 2008 (as adjusted pursuant to the terms of the Merger
Agreement) and may not be known prior to the Effective Time. Accordingly, the
Merger Agreement provides that the Shares to be Converted will receive an
aggregate of 10,500,000 shares of Onstream Common Stock (the Minimum Exchange
Ratio) upon consummation of the Merger. In the event that the final Exchange
Ratio exceeds the Minimum Exchange Ratio, former holders of Shares to be
Converted will receive additional shares of Onstream Common Stock within 30
days after the final determination of the Exchange Ratio. No assurance can be
given that the Exchange Ratio will exceed the Minimum Exchange Ratio.

In the Merger,
outstanding shares of our Series A Preferred Stock will be converted into an
aggregate of 600,000 shares of Onstream Common Stock.

4

---



In connection
with the Merger, the Surviving Corporation will assume our obligations under
our outstanding warrants. From and after the Merger, except as summarized
below, holders of warrants will have the right to exercise their warrants for a
number of shares of Onstream Common Stock and at exercise prices appropriately
adjusted to give effect to the greater of the Exchange Ratio and the Minimum
Exchange Ratio. Holders of warrants to acquire an aggregate of 22,726,400
shares of our Common Stock issued by us in August 2007 (the 2007 Warrants)
will have the right to exercise their 2007 Warrants for cash only for an
aggregate of 1,000,000 shares of Onstream Common Stock at an exercise price of
$3.50 per share. In the event that any of the warrants are exercised prior to
the Final Exercise Date (as defined in the CVR Agreement referenced below), an
exercising holder will also be entitled to receive Contingent Value Rights in
an amount equal to the number of Contingent Value Rights such holder would have
received had its warrants been exercised immediately prior to the Effective
Time. In connection with the Merger Agreement, we have entered into an
Amendment and Waiver Agreement with holders of a majority of the 2007 Warrants
(the Amendment and Waiver Agreement) pursuant to which such holders, on
behalf of themselves and all other holders of the 2007 Warrants, agreed to
amend the terms of the 2007 Warrants as provided above and to waive certain
antidilution and other rights.

The Contingent
Value Rights will be issued pursuant to the terms of a Contingent Value Rights
Agreement to be entered into among Onstream, Mr. Lewis as the CVR
Representative and Interwest Transfer Co., as Rights Agent, in the form
attached to the Merger Agreement (the CVR Agreement). Pursuant to the terms
and subject to the conditions set forth in the CVR Agreement, the Contingent
Value Rights will be converted into shares of Onstream Common Stock in the event
that our company reaches certain revenue targets for the initial 12-month and
subsequent 6-month periods following the Merger; provided, however, that the
maximum number of shares of Onstream Common Stock issuable in the Merger,
including those pursuant to the Contingent Value Rights and the conversion of
our Series A Preferred Stock, will not exceed 20,000,000. The number of shares
of Onstream Common Stock issuable upon the conversion of each Contingent Value
Right will depend on a number of factors, including our business meeting the
revenue targets set forth in the CVR Agreement and the number of warrants, if
any, exercised prior to the final determination of the consideration, if any,
to be paid pursuant to the CVR Agreement. The conversion of Contingent Value
Rights into Onstream Common Stock will occur in two stages, shortly following
the final determination of whether the initial 12-month and subsequent 6-month
targets have been met.

The Contingent
Value Rights will not be transferable by the holders thereof except by
operation of law in limited circumstances. We do not expect a market to develop
for the Contingent Value Rights. No assurance can be given that the Contingent
Value Rights will result in the issuance of additional shares of Onstream Common
Stock.

The Merger
Agreement contains customary representations and warranties of our company,
Onstream and Merger Sub. The Merger Agreement also contains customary
covenants, including covenants regarding operation of our business and our
subsidiaries prior to the closing of the Merger.

In addition,
we have agreed to use our commercially reasonable efforts to operate our
business in accordance with a restructuring plan attached as an exhibit to the
Merger Agreement (the Restructuring Plan), which is designed to significantly
reduce or eliminate substantial costs related to our facility leases, selling,
general and administrative expenses, public company and headquarters costs, and
other professional fees and services. Specifically, the Restructuring Plan is a
transitional business plan that we will follow until the close of the Merger.
The Restructuring Plan includes a detailed four month cash operating budget for
our business beginning June 2008. The budget consists of a breakdown of our
cash proceeds from customer receivables, equipment sales and additional
investments and a breakdown of various cash operating expenses and other cash
payments paid out by us. The Restructuring Plan also lists certain of our
employees and contractors that will be terminated prior to the closing of the
Merger as well as certain employees that will enter into one-year employment
contracts with us effective upon the closing of the Merger. We are responsible
for the funding of all salaries and benefits for the terminated employees and
consultants, as well as the cost of any severance, termination penalties and
fees, from pre-closing cash. The Restructuring Plan further sets forth an
approval process that we will follow for travel, telephone, communication and
other various operating expense purchases. The Restructuring Plan also requires
that we send our weekly reports, such as accounts receivable, payroll and
accounts payable, to Onstream for review at least three days prior to payment.
Pursuant to the Restructuring Plan, we may not enter into any contracts, hire
any new employees or make any purchases greater than $1,000.00 without first
obtaining Onstreams approval. The Restructuring Plan also effects a
reorganization of management in that certain of our departments are required to
report to the senior manager of the equivalent department at Onstream. The
Restructuring Plan also requires that, at the closing of the Merger, our
current assets (excluding cash) will exceed our current liabilities, as
determined on a basis consistent with our previously issued financial
statements. Lastly, the Restructuring Plan states that proceeds from the sale
of our equipment (as set forth in the operating budget described above) will be
limited to equipment located at our California POP (Point of Presence) located
in our internal content delivery network (CDN), which was shut down during
April 2008.

5

---



In connection with the conditions to closing set forth in the Merger
Agreement, we have entered into subscription agreements (the Subscription
Agreements) with three of our major stockholders, including Mr. Lewis and
David C. McCourt, our Chairman and Interim Chief Executive Officer. Under the
Subscription Agreements, the three stockholders agreed to purchase immediately
prior to the Merger shares of a to-be-established Series A Preferred Stock at a
purchase price of $100,000 per stockholder. In connection therewith, each such
stockholder is expected to receive 10,000 shares of Series A Preferred Stock.
Holders of the Series A Preferred Stock will be entitled to such dividends, if
any, as may be declared by our Board of Directors out of funds legally
available therefore (no such dividends are expected to be paid under the terms
of the Restructuring Plan), will not have any voting rights (except to the
extent required by applicable law), will have no right to convert the Series A
Preferred Stock into shares of our common stock or any other of our securities
and will have no right to force our redemption or repurchase of the Series A
Preferred Stock. It is expected that we will file a certificate of designations
establishing the terms of the Series A Preferred Stock with the Secretary of
State of Delaware shortly prior to the closing of the Merger. The sale of the
Series A Preferred Stock pursuant to the Subscription Agreements is exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder.

The Merger is
subject to customary closing conditions, including obtaining the approval of
our and Onstreams stockholders. The Merger Agreement may be terminated under
certain specified events, including by either Onstream or us if the Effective
Time has not occurred on or prior to October 31, 2008. If the Merger Agreement
is terminated under certain circumstances specified in the Merger Agreement, we
may be required to pay a termination fee of $377,000 to Onstream. Both we and
Onstream have entered into voting agreements (Voting Agreements) pursuant to
which several significant stockholders have agreed to vote their shares in
favor of the adoption of the Merger Agreement. Pursuant to the Voting
Agreements, the holders of approximately 35% of our common stock presently
outstanding and approximately 42% of the Onstream Common Stock presently outstanding
have agreed to vote their shares in favor of the adoption of the Merger
Agreement.

Market Overview

We believe
that the market for viewing video content over the internet is rapidly
expanding. For example, when Oprah.com began hosting an online, interactive
class called A New Earth, more than 500,000 simultaneous viewers were tuned
in for the first 90-minute episode as reported on Oprah.com. Traditional print
sites such as CNNMoney.com have also added broadband video content. In
addition, large US networks currently put their most popular television shows
on websites for viewers who are unable to tune in at the scheduled time on
television. Popular shows, such as Lost or Desperate Housewives, can all be
seen on ABCs website.

At the same
time, rapid improvement has been made in video delivery. Content is now being
encoded at various bit rates up to and as high as 2MB in order to deliver an HD
like viewing experience. Video now can also be delivered on mobile and wireless
networks.

This transformation
has also resulted from the addition of community tools and various other
technological capabilities that take advantage of the internet and its
community based environment. Video delivery over the internet has created such
a unique user experience that it has surpassed traditional television. This has
also translated in how marketing and advertisers will spend their budgets.
According to Nielsen Online, January 2008 the Top 10 Online Video Brands where,
YouTube, Fox Interactive Media, Yahoo!, Nickelodeon, MSN/Windows Live, Disney
Online, Turner Entertainment, ESPN, Google and Veoh. YouTube had 2.6 Billion
streams with over 66 million unique viewers. Overall online video usage in
January 2008, produced 6.0 billion video streams averaging 51.3 streams per
viewer. Another interesting statistic is that the time spent viewing per viewer
was 124.4 minutes during the month. Not only are more and more users viewing
video content online, but we are also seeing a trend that viewers are spending
a longer period of time viewing content online. Instead of clicking through
page to page, viewers are watching a video clip that can be as short as five
minutes to as long as a full movie of 90 minutes. These viewing statistics are
very interesting facts for any advertiser and as a result, we are seeing
marketing dollars shifting from television to video distributed on the web.

Our company
was formed to provide content delivery solutions through an internet-based
delivery solution. Our platform allows content owners to manage their content
and publish it on the web. We host the video content on our servers and use our
internal content delivery network to distribute our customer video on the
internet. Our platform also has additional functionality that gives the content
owner the ability to monetize their content via subscription or with banner and
video advertisements. It is also flexible enough to integrate many of the
popular community tools that web sites have been incorporating today.

6

---



Since the
internet is available globally, unlike most traditional broadcasting mechanisms
which are generally limited to geographical regions, targeted audiences can
also be aggregated across the world providing a means of grouping a desired
audience in sufficient numbers to make directed content economically viable. We
believe that the provision of broadband content will be a fast-growth market in
media and technology. In addition, other network delivery systems such as
wireless and mobile will also provide considerable market opportunities beyond
the growth of broadband, providing longevity to our plans and business model.
The increasing availability of bandwidth, combined with the significantly
cheaper costs of internet transmission as compared with traditional satellite
and cable televisions, as well as the potential to reach a greater number of
viewers due to its global accessibility, are creating a market for
internet-based video content which we believe is attractive to content
providers, channel producers, and advertisers.

Products and Services

We provide a
range of products and services based on our core technology platform, TelvOS.
This is a comprehensive video and audio management and play-out system. It
facilitates making video and audio content available as a live stream, distributing
images of live events over the network, as highlights, or video on demand, as
searchable content from an archive, and as a 24 x 7 stream, like television. A
video stream is not downloaded to the viewers computer; rather it is made
available as a continuously playing service, similar to traditional broadcast
television. Additionally, video can be offered for download with integrated
digital rights management.

From the
TelvOS platform, content can be made available to the internet, broadband
services, cable and satellite, mobile networks, wireless systems, and to
digital signage, point of sale and point of information displays. All elements
can be controlled in real time from a web-based interface. The service can be
commercialized using pay-per-view, subscription, content syndication,
advertising, sponsorship and e-commerce functions, and can be controlled and
changed in real time. It also provides full real time monitoring and
statistical feedback to the channel operator.

The Narrowstep
family of products and services consists of the following:

TelvOS
- Core System

The TelvOS
Core System is a complete platform for the management and play-out of rich
media over the Internet and other IP networks. The TelvOS Core System includes
a content management system to manage, search, and publish rich media assets.
Content can be uploaded automatically or manually in any common computer audio,
video or streaming format and then managed with full metadata support. Metadata
provides detailed descriptions of the content and attaches details such as the
length, category and copyright owner. Channel owners can create video sequences
for play-out including advertising, station identifications and content
trailers, along with the programming content. The content can be made available
to viewers as a live, as it happens service, as video on demand, via an
archive and search function, and as scheduled programming streams in the
Narrowstep Player. The TelvOS Core System features control over in which
territories the content is made available provides full security and digital
rights management control and can include advertising and sponsorship support,
along with pay-per-view and subscription payment packages. Once prepared, the
content can be made available to mobile, wireless, broadband and broadcast
networks. This system enables customers to build and manage video channels over
multiple media outlets. The TelvOS Core System provides detailed statistics on
all elements of the systems performance, from the number of unique viewers to
the length of time the channel was watched and the number of advertisements
delivered.

TelvOS
provides clients with a complete suite of content management tools. Content can
be uploaded automatically or manually in any common computer audio, video or
streaming format and then managed with full metadata support. A statistics
function delivers real time intelligence on the number of viewers, data
transferred and even the proportion of the data viewed or listened to. In
addition, a detailed search engine supports the retrieval of content from the
archive. TelvOS also allows clients to determine how and when to make the
content available to viewers. Our technology enables clients to control where
the content is available, provides full security and digital rights management
control and can include advertising and sponsorship support, along with
pay-per-view, subscription and microcharging options. Clients can use TelvOS to
make video and audio content available as a live stream, to distribute live
event coverage, to play highlights, to provide video on demand, to enable
viewers to obtain searchable content from an archive, and to provide continuous
play video 24 hours per day, similar to broadcast and cable television.

Our system
enables clients to fully commercialize broadband video distribution by
providing complete control and management of advertising content. With TelvOS
AdServer or through our integration with 3rd party advertising
platform provider Atlas Ad Solutions, clients can upload, store and manage
advertisements, infomercials and sponsored programs. Advertising campaigns can
be constructed in real time by defining the required profile of the target
audience and selecting how many views of the advertisement - called ad
impressions - are desired by the advertiser.

7

---



The Narrowstep
Player provides the graphic user interface for viewers to access and control
content from TelvOS. During a viewers initial connection, the Narrowstep
Player automatically runs a bandwidth check to detect the viewers connection,
device and platform and then provides the content in a format and size, and at
a data rate most appropriate for the viewer. The Narrowstep Player then
provides the viewer with controls over the video content being displayed, including
the ability to select between live content, scheduled content, on demand
content and content in the video or audio archive. Where a pay-per-view or
subscription model is deployed the Narrowstep Player enables the viewer to pay
for the content. Narrowstep Players can be embedded into an existing website or
application, thus extending the reach of the channel through third party web
site syndication.

Player
2.7

Player 2.7 is
the newest version of the Narrowstep Player. Player 2.7 offers the benefit of
Microsofts Windows Media high-quality streaming and digital rights management
while providing play-out on various operating systems and browsers including
Mac, Safari, and Firefox using Microsofts Silverlight technology.
Additionally, Player 2.7 offers a rich, graphical user interface with community
tools for viewers including rating engines, send-to-a friend, and user
play-list and sharing capabilities. Any number of our monetization tools may be
easily integrated with Player 2.7 so that content owners are able to monetize
their content using video-on-demand, pay-per-view, subscription, advertising,
sponsorship and/or e-commerce models.

AdServer
and Atlas Ad Solutions

We currently
run two ad-serving platforms to enable the commercialization of broadband video
distribution by providing complete control and management of advertising
content. Our legacy platform, AdServer, allows clients to upload, store and
manage advertisements, infomercials and sponsored programs. Advertising campaigns
can be constructed in real time by defining the required profile of the target
audience and selecting how many views of the advertisement, called ad
impressions, are desired by the advertiser as well as bidding terms.
Advertisements are then automatically played out matching the viewer profile to
the available campaigns while maximizing the advertising revenue for the
channel. Our newly integrated Atlas Ad Solutions provides an enterprise-class
advertising platform allowing for superior campaign management, including
features such as automated companion video/banner ad playout, advanced
configurations, and reporting capabilities which are industry renown and
verified. Our Atlas integrated platform is ideal not only for content owners
who leverage their own advertising sales force in conjunction with the
automated advertising inventory of a third-party ad network, it is also an easy
solution for those content providers who want to deliver banner and video
advertising using just a third-party ad network alone.

PayGate

PayGate is an
interface between the TelvOS platform and payment gateways, such as PayPal and
Cybersource. Any item on the platform, such as an on-demand video or a channel
can have a payment rule attached to it which requires the viewer to pay before
they can view or access the content. PayGate supports single and recurring
transactions for pay per view and subscription business models. All
transactions are captured and reported for each channel. Sensitive payment
details are not stored, but are forwarded to a payment service provider (PSP)
for processing.

NCoder

NCoder is an
encoding hardware solution that provides direct encoding capability for video
content and attaches to a clients edit machine or network. Video files are
placed in an upload file folder on the nCoder by the client and the files are
compressed into all the selected formats, sizes and data rates required and
then uploaded into the clients TelvOS account. The nCoder is offered in 2
tiers, nCoder and nCoder Pro. The nCoder Pro includes faster encoding up to
real time feeds in multiple data formats.

DownloadServer

DownloadServer
is a product integrated within TelvOS to offer secure downloads of any rich
media. Multiple files or file formats can be bundled into a download pack and
secured with Microsoft digital rights management (DRM). Channel owners can
configure the license terms of the DRM of the download pack and payment rules
such as pay per download and subscription access.

8

---



We also
provide a full range of services complementary to our technology platform,
including:

Channel and Player Set Up.
We use our core technology to establish internet channels and customized
players for clients according to their specifications which then operate under
a license arrangement. Player customization can be ongoing work through the life
of the channel, because an Internet TV channel, like any website, is constantly
being updated and improved.

Production Services.
We provide a full range of production services for our clients, focusing on
high quality content encoding, ingestion into TelvOS, metadata entry, support
for live streaming, and pre-production and production services.

Portal Development.
We offer custom website development to build video-optimized sites that are
designed to engage a viewer community and monetize video libraries and
streaming. Our video portal solution offers everything from the full-video
player solution to integrated media, enhanced monetization tools, search engine
optimization, RSS, and web community functionality including chat, discussion
boards, voting, viral marketing, upload, to a fully outsourced, managed portal
solution complete with business planning, marketing, and sponsorship
activities.

Customer Service & Support:
For our Internet TV channels, we provide 24x7 email and phone support as it
pertains to the TelvOS System.

Our Content Delivery Network (CDN)

Our platform
is generally deployed under an application service provider model. Clients and
partners are provided with logins and we control the applications and the
platform they run on. Our platform and all of our products are operated on our
servers; under certain circumstances, we will install a copy of the server
within a clients network. This is most likely to happen with internet service
providers and telecom partners.

Our technology
has been designed and engineered to be scalable and replicable. When a client
uploads a file to any Narrowstep server, this file is replicated to every
server on the network, unless otherwise configured. Our network is currently
capable of handling approximately 5,000 simultaneous users.

We operate our
core technology platform on top of our content delivery network or CDN, which
is hosted by some of the worlds leading internet service providers. We have
points of presence or POP locations with each of Teleglobe and Interoute in
London and Interoute in New York.

Sales and Marketing

To date, we
have sold and marketed our services largely through direct approaches to
potential clients. More recently, many sales leads have been generated by word
of mouth, via our web site and by attending and presenting at various industry
trade shows. As of February 29, 2008, we had six full-time sales and marketing
employees.

We have also
established partnering or reseller arrangements with third parties under which
we have agreed to pay our partners a portion of the revenues they generate in
reselling our products. Under these arrangements partners are entitled to
receive commissions of between 10% and 30% for work resulting from
introductions and are expected to continue to provide related supporting
services. We believe these arrangements will enable us to enter specialized and
more diverse geographical markets than we might otherwise be able to penetrate
using solely our own sales efforts. We intend to continue to update our support
arrangements, training and promotional materials to provide additional support
for our partners.

We plan to
concentrate primarily on the following marketing techniques in the coming year:

| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Direct sales
  - by our in-house sales team;                                                                                                               
| |   |                                                                                                                                                            
| |  | Channel
  sales - building a network of resellers for our products;                                                                                        
| |   |                                                                                                                                                            
| |  | Public
  relations - attracting increased media coverage for our business;                                                                                 
| |   |                                                                                                                                                            
| |  | Trade shows
  - exhibiting at key trade shows in Europe and the United States; and                                                                         
| |   |                                                                                                                                                            
| |  | Marketing
  materials - updating our literature, website and general marketing materials
  to more effectively promote our business, products and services.

9

---



Clients

Many of our
customers are producers, owners of content or have rights to content. Many of
these customers use our solutions to address a specific niche in the
marketplace. Some examples of these niche areas are faith based channels,
travel channels, and extreme sports. We also have customers that are cable
operators that have also launched channels on the web and are using our
services to broadcast and manage their content. In addition, we provide
production services for various content owners or companies that have rights to
film a sporting event.

Competition

The internet
video distribution market is highly competitive and subject to changing
technology and market dynamics. We believe the principal competitive factors in
our market include:

| |   |                                          
| | - | -----------------------------------------
| |  | ability to
  provide a complete solution;
| |   |                                          
| |  | content
  management capabilities;       
| |   |                                          
| |  | enabling
  clients to monetize content;  
| |   |                                          
| |  | quality of
  video stream; and           
| |   |                                          
| |  | service
  reliability.                   

We believe we
compete effectively in all of these areas. TelvOS enables us to provide clients
with a user friendly complete end-to-end content management and delivery system
whereas many of our competitors specialize on only one particular part of the
video delivery process. For example, certain of our competitors focus on player
design and build but do not provide tools for the direct control of content
delivery. Others focus on advertising and syndication without addressing
clients need to manage digital rights, content registration, and content
delivery. In addition to TelvOS, we provide a number of complementary services,
including channel and player set up and customization, production services and
consulting services. These service offerings allow us to offer complete
turn-key solutions to our clients.

We focus
primarily on providing clients with the ability to manage and stream long form
video content (longer than 30 minute streams) compared to many of our
competitors who provide short form streaming tools. Although existing
technology can be used to provide both long form and short form streaming
capability, the ability to provide high quality long form content depends primarily
on the reliability of the network used to stream the content and the
availability of sufficient bandwidth. Unlike many of our competitors, who
contract with third parties aggregators, such as Akamai, to carry their video
content through shared networks, we contract directly with network owners to
provide dedicated network availability for the channels we host. In addition,
to boost service reliability we have established a number of points of presence
(POPs) on the internet. These POPs enable us to route content more directly,
thereby enhancing the quality and reliability of our channels.

Many of our
competitors have significantly longer operating histories, significantly
greater financial, marketing and other resources, and significantly greater
name recognition than us. In addition, costs of entry are low and as a result
new entrants may enter the market in the future with a commercial advantage
that would undermine our business model. We do not own any patented technology
that precludes or inhibits others from entering our market. As a result, new
entrants pose a threat to our business and we may face further competition in
the future from companies who do not currently offer competitive services or
products.

Intellectual Property Rights

Our success is
dependent in part upon our proprietary TelvOS system. To date, we have not
filed for any patents or registered copyrights relating to any of our
intellectual property rights.

We currently
rely on a combination of trade secret, nondisclosure and other contractual
agreements, as well as existing copyright and trademark laws to protect our
intellectual property. We require all personnel and outside contractors to
execute agreements to keep secret and confidential our proprietary technology
and we have a policy of not providing third parties with any secret or
proprietary information regarding our technology. Since our technology is
centrally controlled by us, no third parties have access to the systems or
source code. We cannot assure stockholders, however, that these arrangements
will be adequate to deter misappropriation of our proprietary information or
that we will be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights.

10

---



Government Regulation

Few existing
laws or regulations specifically apply to the internet, other than laws and
regulations generally applicable to businesses. Certain U.S. export controls
and import controls of other countries may apply to our products. Many laws and
regulations, however, are pending and may be adopted in the United States,
individual states and local jurisdictions and other countries with respect to
the internet. These laws may relate to many areas that impact our business,
including content issues (such as obscenity, indecency and defamation),
copyright and other intellectual property rights, digital rights management,
encryption, caching of content by server products, personal privacy, taxation,
e-mail, sweepstakes, promotions, network and information security and the convergence
of traditional communication services with internet communications, including
the future availability of broadband transmission capability and wireless
networks. These types of regulations are likely to differ between countries and
other political and geographic divisions. It is likely that other countries and
political organizations will impose or favor more and different regulation than
that which has been proposed in the United States, thus furthering the
complexity of regulation. In addition, state and local governments may impose
regulations in addition to, inconsistent with, or stricter than federal
regulations. The adoption of such laws or regulations, and uncertainties
associated with their validity, interpretation, applicability and enforcement,
may affect the available distribution channels for and costs associated with
our services, and may affect the growth of the internet. Although we are able
to control the distribution of content on a territorial basis, such laws or
regulations may harm our business. Our services may also become subject to
investigation and regulation of foreign data protection and e-commerce
authorities, including those in the European Union. Such activities could
result in additional costs for us in order to comply with such regulation.

Many laws
governing issues such as property ownership, copyright, patent and other
intellectual property issues, digital rights management, taxation, gambling,
security, illegal or obscene content, retransmission of media, and personal
privacy and data protection apply to the internet. However, the vast majority
of such laws were adopted before the advent of the internet and related
technologies and their applicability to the internet continues to evolve.

In addition to
potential legislation from local, state, federal and foreign governments, labor
guild agreements and other laws and regulations that impose fees, royalties or
unanticipated payments regarding the distribution of media over the internet
may directly or indirectly affect our business. While we and our customers may
be directly affected by such agreements, we are not a party to such agreements
and have little ability to influence the degree such agreements favor or
disfavor internet distribution or our business models. Changes to or the
interpretation of these laws and the entry into such industry agreements could:

| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | limit the
  growth of the internet;                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                               
| |  | create
  uncertainty in the marketplace that could reduce demand for our services;                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                               
| |  | increase our
  cost of doing business;                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                               
| |  | expose us to
  increased litigation risk, substantial defense costs and significant
  liabilities associated with content available on our websites or distributed
  or accessed through our services, with our provision of services, and with the
  features or performance of our websites;
| |   |                                                                                                                                                                                                                                                                                               
| |  | lead to
  increased development costs or otherwise harm our business; or                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                               
| |  | decrease the
  rate of growth of our user base and limit our ability to effectively
  communicate with and market to our user base.                                                                                                                                                           

The U.S.
Digital Millennium Copyright Act (DMCA) includes statutory licenses for the
performance of sound recordings and for the making of recordings to facilitate
transmissions. Under these statutory licenses, we and third party channel
owners may be required to pay licensing fees for digital sound recordings we
deliver in original and archived programming and through retransmissions of
radio broadcasts. The DMCA does not specify the rate and terms of the licenses,
which are determined by arbitration proceedings, known as CARP proceedings,
supervised by the U.S. Copyright Office. Past CARP proceedings have resulted in
proposed rates for statutory webcasting that were significantly in excess of
rates requested by webcasters. CARP proceedings relating to music subscription
and non-subscription services offering music programming that qualify for
various licenses under U.S. copyright law are pending. We cannot predict the
outcome of these CARP proceedings and may elect instead to directly license
music content for our subscription and/or non-subscription services, either
alone or in concert with other affected companies. Such licenses may only apply
to music performed in the United States, and the availability of corresponding
licenses for international performances is unclear. Therefore, our ability to
find rights holders and negotiate appropriate licenses is uncertain. We and
third party channel owners may be affected by these rates, which may negatively
impact our revenues. Depending on the rates and terms adopted for the statutory
licenses, our business could be harmed both by increasing our own cost of doing
business, as well as by increasing the cost of doing business for third party
channel owners. We anticipate future CARPs relating to music subscription
delivery services, which may also adversely affect the online distribution of
music.

11

---



The Child
Online Protection Act and the Child Online Privacy Protection Act impose civil
and criminal penalties on persons distributing material harmful to minors
(e.g., obscene material) over the internet to persons under the age of 17, or
collecting personal information from children under the age of 13. We do not
knowingly distribute harmful materials to minors or collect personal
information from children under the age of 13. The manner in which these Acts
may be interpreted and enforced cannot be fully determined, and future
legislation similar to these Acts could subject us to potential liability if we
were deemed to be non-compliant with such rules and regulations, which in turn
could harm our business.

There are a
large number of legislative proposals before the United States Congress and
various state legislatures regarding intellectual property, digital rights
management, copy protection requirements, privacy, email marketing and security
issues related to our business. It is not possible to predict whether or when
such legislation may be adopted, and certain proposals, if adopted, could
materially and adversely affect our business.

Employees

As of February
29, 2008, we had a total of 45 employees of whom 18 were in operations, six in
sales & marketing, nine in administration, and 12 in research &
development. To date, we have been successful in recruiting and hiring
individuals with the desired skills and experience.

None of our
employees are represented by labor unions and we have never experienced a work
stoppage. We believe our employee relations are good.

Item 1A. Risk Factors

The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem
immaterial may also affect our business.

Risks Relating to Our
Business

We
have a brief operating history which makes it difficult to evaluate our
business and predict our success.

Our company
was incorporated as a start-up business on May 9, 2002. As a result, we have a
brief operating history upon which to evaluate our business and prospects. Our
historical results of operations are limited, so they may not give an accurate
indication of our future results of operations or prospects. We are in an early
stage of operations and we face risks and uncertainties relating to our ability
to successfully implement our business strategy. Our prospects must be
considered in light of these risks and the expenses and difficulties frequently
encountered in new and rapidly evolving businesses, such as internet-based
video content. These difficulties can include:

| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | commercializing
  new technology;                                   
| |   |                                                                     
| |  | educating
  the market;                                             
| |   |                                                                     
| |  | finding
  early adopters;                                           
| |   |                                                                     
| |  | getting
  large customers to try the product;                       
| |   |                                                                     
| |  | increasing
  system capacity;                                       
| |   |                                                                     
| |  | developing
  and enhancing software products with limited resources;

12

---



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | hiring and
 maintaining key employees with the correct skills; 
| |   |                                                                
| |  | the time and
 effort needed to market the company and products;
| |   |                                                                
| |  | building
 infrastructure to support future growth;             
| |   |                                                                
| |  | setting up
 and working effective channels of distribution; and
| |   |                                                                
| |  | capital
 raising to fund operations through to break even.     

We may not be
successful in meeting the challenges we face. If we are unable to do so, our
business will not be successful and the value of our common stock will decline.

The Merger Agreement
and related transactions, regardless of whether they are ultimately
consummated, have presented and will continue to present our company with
certain risks and uncertainties, and impose on us and our business and
operations certain restrictions and required actions. In addition, as we are
currently operating our business in accordance with the Restructuring Plan, in
the event the Merger Agreement is not consummated, we may not be able to
continue as a going concern.

Pursuant to
the Merger Agreement, we have agreed to operate our business in accordance with
the Restructuring Plan. The Restructuring Plan requires that we take certain
material actions prior to the effectiveness of the Merger, including
termination of a number of our employees including most members of senior
management, elimination of certain agreements and other arrangements and
significant curtailment of our operations and expenses both to eliminate
potential duplication with Onstream and in anticipation of becoming a subsidiary
of Onstream. Our compliance with the Restructuring Plan will effectively
eliminate our ability to operate as a stand-alone business. In the event that
the Merger is not consummated, it would be difficult, time-consuming and
capital intensive to create the infrastructure necessary to operate our
business on a stand-alone basis. In addition, as described in the below risk
factor, even if we comply with the Restructuring Plan, the Merger may not be
consummated. For a more complete discussion regarding the Merger and the
Restructuring Plan, see Item 1. Description of BusinessGeneral Recent
Developments.

We cannot assure you
that the Merger Agreement and related transactions will be consummated within
the expected timeframe or at all and if the Merger is not consummated it is
unlikely that our company will be able to continue as a going concern.

The
consummation of the Merger is subject to certain closing conditions, including:

| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the approval
 of our shareholders;                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                      
| |  | the approval
 of Onstreams shareholders,                                                                                                                                                                            
| |   |                                                                                                                                                                                                                      
| |  | the
 declaration by the Securities and Exchange Commission of the effectiveness of
 a registration statement registering the offer and sale of Onstream common
 stock to be issued to our shareholders in the Merger;
| |   |                                                                                                                                                                                                                      
| |  | the accuracy
 of our representations and warranties and our compliance with covenants, each
 as contained in the Merger Agreement, and                                                                               
| |   |                                                                                                                                                                                                                      
| |  | the failure
 of a material adverse effect with respect to our business to occur between
 the date of the Merger Agreement and the time of closing.                                                                 

We cannot
assure you that such closing conditions will be satisfied and that the Merger
will be consummated in a timely manner or at all. The failure to consummate the
Merger would likely have a material adverse effect on our business, results of
operation and financial condition. Moreover, in the event of such failure it is
unlikely that we would be able to continue as a going concern. We would need to
raise a significant amount of capital to attempt to operate on a stand-alone basis
and we can provide no assurances that we would be able to raise such capital on
terms acceptable to us or at all.

13

---



We have a history of
losses, are not currently profitable and anticipate future losses.

Our operating
losses have exceeded our revenue in each quarter since inception. We had an
accumulated deficit of approximately $34.2 million as of February 29, 2008 and
$19.5 million for the fiscal year ended February 28, 2007. Although our
revenues have grown significantly since 2002, this growth may not be
sustainable or indicative of future results of operations. Although we are now
operating our business pursuant to the Restructuring Plan, which is intended to
reduce costs and operating losses, we cannot be certain when we will operate
profitably, if ever. See Risk FactorsRisks Relating to Our Business The
Merger Agreement and related transactions, regardless of whether they are
ultimately consummated, have presented and will continue to present our company
with certain risks and uncertainties, and impose on us and our business and
operations certain restrictions and required actions. In addition, as we are
currently operating our business in accordance with the Restructuring Plan, in
the event the Merger Agreement is not consummated, we may not be able to
continue as a going concern.

In the event that
the Merger Agreement is terminated, we will need to obtain additional capital
in the future, and if we are unable to do so on acceptable terms, or at the
appropriate time, we may not be able to continue to develop and market our
products and services, or even to continue as a going concern.

We do not
currently generate revenues sufficient to operate our business and do not
believe we will do so in the foreseeable future. As a result, we must rely on
our ability to raise capital from outside sources in order to continue
operations in the long term. We will seek to raise additional capital through
various financing alternatives, including equity or possibly debt financings or
corporate partnering arrangements. However, we may not be able to raise
additional needed capital on terms that are acceptable to us, or at all. If we
do not receive an adequate amount of additional financing in the future, we may
not have sufficient funds to further develop and market our products and
services, or even to continue as a going concern.

We have received an
opinion from our independent registered public accounting firm expressing doubt
regarding our ability to continue as a going concern.

Our
independent registered public accounting firm noted in their report
accompanying our financial statements for the fiscal year ended February 29,
2008 that we have reported significant losses from operations and require
additional financing to fund future operations and stated that those conditions
raised substantial doubt about our ability to continue as a going concern. We
cannot assure you that our plans to address these matters will be successful.
This doubt about our ability to continue as a going concern could adversely affect
our ability to obtain additional financing at favorable terms, if at all, as
such an opinion may cause investors to lose faith in our long-term prospects.
If we cannot successfully continue as a going concern, our stockholders may
lose their entire investment in us.

If the
internet-based video content market does not grow, we will not be successful.

The market for
our products and services is new and rapidly evolving. As a company in the
internet-based video content delivery field, our business model is based on an
expectation that demand for internet-based video content will increase
significantly and compete with more traditional methods of television
broadcasting. There can be no assurance that there is a substantial market for
the services we offer. If this market does not grow, we will not be able to
achieve meaningful revenues and our business will fail.

If high-speed
internet access with video viewing capability is not successfully adopted
globally, there will be little demand for our products and services.

The success of
our business is dependent upon extensive use of the internet. The video content
we deliver is best viewed over a high-speed internet connection. We believe
increased internet use may depend on the availability of greater bandwidth or
data transmission speeds or on other technological improvements, and we are
largely dependent on third party companies to provide or facilitate these
improvements. If networks cannot offer high-speed services because of
congestion or other reasons, or if high-speed internet access fails to gain
wide market acceptance, we believe there will be little demand for our products
and services and our revenues may be insufficient to achieve and maintain
profitability. The deployment of corporate firewalls may also restrict the
growth and availability of streaming media services and adversely affect our
business model by limiting access to the content broadcast through our service.
Changes in content delivery methods and emergence of new internet access devices
such as TV set-top boxes could dramatically change the market for streaming
media products and services if new delivery methods or devices do not use
streaming media or if they provide a more efficient method for transferring
data than streaming media.

14

---



We face substantial
competition and if we are unable to compete effectively, the demand for, or the
prices of, our products and services may decline.

We face
numerous competitors both in the internet-based distribution market, and in the
more traditional broadcasting arena. Many of these companies have substantially
longer operating histories, significantly greater financial, marketing,
manufacturing and technical expertise, and greater resources and name
recognition than we do. If we fail to attain commercial acceptance of our
products and services and to be competitive with these companies, we may not
ever generate meaningful revenues. In addition, new companies may emerge at any
time with products or services that are superior, or that the marketplace
perceives are superior, to ours. There are relatively few barriers preventing
companies from competing with us. We do not own any patented technology that
precludes or inhibits others from entering our market. We may not be able to
compete effectively with any potential future competitors and the demand for,
and prices of, our products and services may decline.

If we are unable to
continue development of one or more of our products, our entire business
strategy may be unsuccessful.

Our overall
business strategy is dependent upon providing effective solutions to our
customers. We are continuing the development and improvement of the products
and services we believe will be necessary for our future growth. We anticipate
that enhancements to our existing products will continue to take the majority
of the time of our Chief Technology Officer and support from a number of
developers on an ongoing basis. Development of any product, however, can be
more expensive and time-consuming than originally planned, and face unexpected
delays or problems. Any delays in development could cause significant
additional expense, result in operating losses and lost corporate
opportunities, and create significant marketing opportunities for our
competition. Because we are continuing to develop and improve a number of
products, all of which are integral to our complete solution, the possibility
of a problem is much greater than if we were developing only one product.
Problems or delays in the continued development and deployment of any of our
products could defeat our business strategy and substantially harm our
prospects for future revenues.

If audio-video
player software is not readily available, our products will not gain
acceptance.

To view our
products, a viewer must have an audio-video player such as Microsoft Media
Player. If free distribution of player software does not continue or player
software becomes less accessible, the potential market for our products and
services will not grow, which in turn would have an adverse effect on our
revenues and ability to achieve and maintain profitability.

If we lose one or
more of our major clients, our revenues will decline substantially.

For the fiscal
year ended February 29, 2008, our four largest clients accounted for approximately
38% of our revenue. For the fiscal year ended February 28, 2007, our four
largest clients accounted for approximately 23% of our revenue. If we lose one
or more of these clients, our revenues will decline substantially.

If we are unable to
obtain and maintain sufficient bandwidth from third-party providers, our
business will suffer.

We depend on
network operators such as Teleglobe and Interoute to distribute video over the
internet. These network operators may choose to compete with us, to enter into
relationships with competitors, to change the terms on which they distribute
our channels, including to increase their prices, or not to do business with us
because of our size and lack of operating history. If we are unable to obtain
sufficient bandwidth on terms acceptable to us, the scalability and reliability
of our system would be adversely affected.

If content owners do
not adopt internet-based delivery as a means for distributing their content, we
may not be able to generate significant revenues.

The success of
our business model is highly dependent on video content being available for
distribution over the internet. Content owners may choose not to make their
content available over the internet. If sufficient content is not available we
may not generate sufficient revenues and our business may fail.

If we fail to
maintain an effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud. As a result, current
and potential stockholders could lose confidence in our financial reporting,
which would harm our business and the price of our stock.

Effective
internal controls are necessary for us to provide reliable financial reports
and effectively prevent fraud. If we cannot provide reliable financial reports
or prevent fraud, our business and operating results could be harmed.

15

---



If we lose the
services of our chief executive officer, our business may suffer.

We are heavily
dependent upon the continued services of David C. McCourt, Chief Executive
Officer. The loss could seriously impede our success. We do not carry life
insurance on the life of our CEO. In the event that our CEO becomes unavailable
for any reason, our business may suffer.

As a start-up
business, we may be unable to attract and retain the qualified technical, sales
and support staff necessary for our growth and, in the event the Merger
Agreement is terminated, it be difficult for us rehire or hire replacements for
anyone whose employment with our company will be terminated pursuant to the
Restructuring Plan.

Our ability to
continue to develop and market our products and services is dependent upon our
ability to identify, recruit, retain and motivate qualified personnel. As a
start-up business, salaries for our employees are significantly below those of
competitors in our industry and most of our existing employees are stockholders
or are otherwise incentivized with periodic option grants. The low salaries and
lack of assurance of our ability to secure additional funding may affect our
efforts to recruit and retain additional personnel necessary to meet our growth
targets. In addition, if we continue to issue additional equity in order to
finance the business, future stock option grants may be less attractive to
potential new hires and may not provide adequate motivation for existing
personnel. If we are unable to hire and retain sufficient additional in-house
personnel, we will be unable to complete development of our products and
services, and our business will suffer. Pursuant to the Restructuring Plan,
many of our senior executives will be terminated prior to the closing of the
Merger and as such, if the Merger is not consummated, it will be difficult for
us to rehire any of these executives or to find a suitable replacement, either
temporary or permanent for the aforementioned reasons.

If we are unable to
protect our intellectual property or if our intellectual property is found to
infringe anothers intellectual property, we may be unable to generate revenues
based on our products.

None of our
intellectual property is covered by patents. We currently rely on a combination
of trade secret, nondisclosure and other contractual agreements, as well as
existing copyright and trademark laws to protect our confidential and
proprietary information, but this may not be sufficient to prevent third
parties from infringing upon or designing around our intellectual property to
develop a competing product. We cannot be sure that our technology will not
infringe any third partys intellectual property. In the event that a third
party either infringes upon our intellectual property or makes a claim that our
products infringe upon its proprietary rights, we may not have sufficient
financial or other resources to enforce our rights or to successfully defend
against any claim. Any infringement of or by our intellectual property could
restrict our ability to generate revenues from our products.

System failures
and/or security risks may impair our operations.

The core of
our network infrastructure could be vulnerable to unforeseen computer problems.
We may experience interruptions in service in the future as a result of the
accidental or intentional actions of internet users, current and former
employees or others. These risks are heightened by our reliance on a small
number of network providers. Unknown security risks may result in liability to
our company and also may deter new clients from using our products and
services. The security measures we implement may still be circumvented in the
future, which could impair our operations and have a material adverse effect on
our business.

As a third-party
distributor of proprietary video content, we are vulnerable to claims of breach
of content rights which may harm our business.

As a
third-party deliverer of proprietary video content, we rely on our clients to
have the appropriate rights to use and distribute this content. If the rights
of the content owners are contravened, knowingly or otherwise, or if a content
owner claims their rights are contravened, we could be subject to substantial
lawsuits which could be time-consuming and costly to defend and our reputation
may be harmed for having delivered the content.

Risks related to
conducting business outside of the United States may adversely impact our business.

We market and
sell our products and services in Europe, Asia, and the United States. As a
result, we are subject to the normal risks of doing business abroad. Risks
include unexpected changes in regulatory requirements, export and import
restrictions, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable, potential adverse
tax consequences, exchange rate fluctuations, increased risks of piracy, limits
on our ability to enforce our intellectual property rights, discontinuity of
our infrastructures, subsidized competition from local nationalized providers
and other legal and political risks. Such limitations and interruptions could
have a material adverse effect on our business.

16

---



The consummation of
the Merger, or any additional equity financing, will dilute the ownership
interest of our existing stockholders.

In the event
that the Merger Agreement is terminated, we will need to raise additional
capital in the future to continue development and marketing of our products and
services. We anticipate that we may raise capital in the future by selling
additional equity or financial instruments which are exchangeable or
convertible into equity. The Merger, any future equity, or equity-related
financings will dilute the ownership interest of our existing stockholders.

Because our assets
are located primarily in the United Kingdom, it may be difficult to proceed
with an action, or to enforce a judgment, against us.

Our primary
offices and assets are located exclusively in the United Kingdom. As a result,
it may be difficult for stockholders located in the United States to pursue an
action, or enforce a judgment against us, in the event of any litigation.

Risks Related to
Investing in Shares

If there is no
active trading market for our stock, you may be unable to sell the shares.

There can be
no assurance that an active trading market for our shares will ever develop in
the United States, or elsewhere. In the event that no active trading market for
the shares develops, it will be extremely difficult for stockholders to dispose
of the shares. In the event an active trading market develops, there can be no
assurance that the market will be strong enough to absorb all of the shares which
may be offered for sale by the stockholders.

Our stock price is
highly volatile and can fluctuate in response to many factors, some of which
are beyond our control.

The trading
price of our shares is highly volatile and could be subject to wide fluctuations
in response to factors such as actual or anticipated variations in quarterly
operating results, announcements of technological innovations, new sales
forecasts, or new products and services by us or our competitors, changes in
financial estimates by securities analysts, conditions or trends in internet
markets, changes in the market valuations of other business service providers
providing similar services or products, announcements by us or our competitors
of significant acquisitions, strategic partnerships, joint ventures, capital
commitments, additions or departures of key personnel, sales of shares and
other events or factors, many of which are beyond our control. Consequently,
future announcements concerning us or our competitors, litigation, or public
concerns as to the commercial value of one or more of our products or services
may cause the market price of our shares to fluctuate substantially for reasons
which may be unrelated to operating results. These fluctuations, as well as
general economic, political and market conditions, may have a material adverse
effect on the market price of our shares. In addition, because our common stock
is quoted on the OTC Bulletin Board, price quotations will reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not represent
actual transactions.

In addition,
the stock market in general has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the
operating performance of many companies. These broad market factors may
materially adversely affect the market price of the shares, regardless of our
operating performance.

Because we have a
limited offering qualification in California, sales of the shares are limited
in California.

The offering
of our shares in California was approved on the basis of a limited offering
qualification where offers/sales can only be made to proposed California
investors based on their meeting certain suitability standards. The California
Department of Corporations refers to and specified this standard as a super
suitability standard, which requires any California investor in our common
stock to have not less than (i) $250,000 in liquid net worth (a net worth
exclusive of home, home furnishings and automobile) plus $65,000 gross annual
income, (ii) $500,000 in liquid net worth, (iii) $1,000,000 in net worth
(inclusive), or (iv) $200,000 gross annual income.

17

---



Because the
offering was approved in California on the basis of a limited offering
qualification, we were not required to demonstrate compliance with some of the
merit regulations of the California Department of Corporations as found in
Title 10, California Code of Regulations, Rule 260.140 et seq. In addition, the
exemptions for secondary trading in California available under California
Corporations Code Section 25104(h) will not be available, although there may be
other exemptions to cover private sales in California of a bona fide owner of
our common stock for his own account without advertising and without being
effected by or through a broker dealer in a public offering. These restrictions
will make it more difficult to sell our shares in California.

Certain provisions
of our charter and by-laws could discourage potential acquisition proposals or a
change in control.

Certain
provisions of our Certificate of Incorporation, By-Laws and Delaware law could
discourage, delay or prevent a change in control of our company or an
acquisition of our company at a price which many stockholders may find attractive.
The existence of these provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. Our Board of
Directors, without further stockholder approval, may issue preferred stock with
voting, conversion and other rights and preferences that could adversely affect
the voting power or other rights of the holders of common stock.

Item 2. Properties

We currently
maintain offices in the United Kingdom and the United States. Our facility in
London holds our administrative, sales & marketing, customer service &
developers which we believe will be adequate to meet our office space needs for
the next several years as we currently utilize approximately 70% of the total
office space. Our lease for the London facility was signed in November 2007 and
is for approximately four years. Our office in New Jersey currently holds many of
our senior executives and most of our back office staff. Our lease for our New
Jersey facility is on a month-to-month renewable term, expiring July 31, 2008.

Item 3. Legal Proceedings

During the
fiscal year ended February 29, 2008, we were not involved in any legal
proceedings.

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

No matter was
submitted to a vote of security holders, through the solicitation of proxies or
otherwise, during the fourth quarter of our fiscal year ended February 29,
2008.

PART II

Item 5. Market for Common Equity and Related
Stockholder Matters

Market Information for Common Equity

Our Common
stock has traded on the OTC Bulletin Board under the symbol NRWS since August
4, 2005. Prior to that time, there was no public trading market for our common
stock. As of February 29, 2008, we had 174 holders of record.

18

---



The following
table sets for the period indicated, the high and low sales prices of our
common stock as reported by the OTC Bulletin Board, on the trading day during
the respective period:

|                                        |  |      |      |     |   |      | 
|--------------------------------------- |  | ---- | ---- | --- | - | ---- | 
|                                        |  |      |      |     |  
|Fiscal Year 2008                        |  | High |      | Low |  
|                                        |  |      |      |     |  
|Fourth Quarter ended
 February 29, 2008 |  | $    | 0.20 |     | $ | 0.08 | 
|Third Quarter ended
 November 30, 2007  |  | $    | 0.60 |     | $ | 0.02 | 
|Second Quarter ended August
 31, 2007   |  | $    | 0.60 |     | $ | 0.21 | 
|First
 Quarter ended May 31, 2007       |  | $    | 0.95 |     | $ | 0.53 | 
|                                        |  |      |      |     |   |      | 
|                                        |  |      |      |     |  
|Fiscal Year
 2007                       |  | High |      | Low |  
|                                        |  |      |      |     |  
|Fourth Quarter ended
 February 28, 2007 |  | $    | 1.29 |     | $ | 0.83 | 
|Third Quarter ended
 November 30, 2006  |  | $    | 1.04 |     | $ | 0.75 | 
|Second Quarter ended August
 31, 2006   |  | $    | 0.92 |     | $ | 0.61 | 
|First
 Quarter ended May 31, 2006       |  | $    | 0.68 |     | $ | 0.61 | 

|                                                                                                       
|-------------------------------------------------------------------------------------------------------
|* The OTC Bulletin Board
 first began publishing quotations for our common stock on September 13, 2005.

On June 9,
2008, the closing price of our common stock was $0.06 per share.

Dividend Policy

We paid no
cash dividends during the fiscal year ended February 29, 2008 and we expect to
continue our current policy of paying no cash dividends to holders of our
common stock for the foreseeable future.

Recent Sales of Unregistered Securities

Information
required by Item 701 of Regulation S-B has previously been included in a
Current Report on Form 8-K, as filed with the SEC on March 2, 2007 and August
8, 2007, respectively.

Item 6. Managements Discussion and Analysis
or Plan of Operations

You should read the following discussion and
analysis in conjunction with the consolidated financial statements and the
notes included elsewhere in this Annual Report and the section Risk Factors
in Item 1A, as well as other cautionary statements and risks described
elsewhere in this Report, before deciding to purchase, sell or hold our common
stock.

Overview

We provide our
customers with technology that allows them to transmit video content over the
internet to targeted audiences. Our services allow customers to format and
manage content, create programming, transmit programming to specific audiences
and create and manage subscription, pay-per-view and other revenue generation
models. In the past, we have also provided production services to our
customers. During the fiscal year ended February 29, 2008, we completed our
exit from the production service business. As a result, production services
have declined as a percentage of total revenues as our core narrowcasting
service grew.

We were
initially incorporated as a Delaware corporation in May 2002. Our headquarters
is in Princeton, New Jersey and we have offices in London. For the fiscal year
ended February 29, 2008, approximately 82% of our total revenues were generated
from customers in Europe, the Middle East and Africa, 15% was generated from
customers in the United States and the remaining 3% was generated from customers
in the Asia Pacific region. We expect our revenues from sources in the United
States to continue to increase as a percentage of total revenues as we begin to
focus more on revenue opportunities there.

19

---



How We Generate Revenue

We generate revenue
primarily from fees we charge for the use of our technology and related
services for narrowcasting and from the sale of production services. Revenues
from our narrowcasting activities include fees paid for the establishment and
maintenance of channels, encoding and uploading of content, as well as the
management of channels on behalf of clients. The fee charged for the
establishment of a channel depends on the level of service desired by the
customer and typically ranges from $5,000 to $200,000. We also charge a monthly
license fee which ranges from $1,000 to $30,000, depending upon the range of
features and capabilities being licensed, which covers the use of the TelvOS
system, cost of support, maintenance and upgrades. In addition, based on the
customers contract, we may obtain additional revenues from content hosting
(the storage of files on our network on a per gigabyte basis), content delivery
(the cost of bandwidth, on a per gigabyte basis, to deliver the content to the
end viewer), and, to a lesser extent, revenue sharing arrangements. These
revenue sharing arrangements come from monthly or annual subscription fees
charged to the viewer for the channel, pay per view events, and in some cases
from advertising campaigns that we have provided for the content owner. The
majority of our customers sign twelve month contracts which are the basis of
our billing arrangements.

Revenues for
narrowcasting are recognized in our financial statements as follows: any
consulting services or one-time setup fees for a customer channel are
recognized once the work is completed and accepted by the customer. The monthly
recurring revenue items are the monthly license fee, the monthly usage of
bandwidth, and the amount of storage at time of billing. We currently do not use
any estimates for recording revenue. The revenue recognized during the month is
based on a contractual rate or monthly fee which covers the month invoiced.

Revenues from
production services include fees paid for the production, filming, editing and
encoding of programs. We charge our clients on a time and expense basis for
these services, typically on a project-by-project basis, although occasionally
under longer term agreements. Revenues for production services are recognized
only when the project is completed and delivered to the customer.

We may receive
payments in advance for narrowcasting and production services. These payments
are deferred and recognized only when the revenue is earned as described above.

95% of our
revenues for the fiscal year ended February 29, 2008 came from narrowcasting
and other services and 5% came from production services. 73% of our revenues
for the fiscal year ended February 28, 2007 came from our narrowcasting
activities and 27% came from production services. As indicated above, we exited
the production services business during the fiscal year ended February 29,
2008.

Key Revenue Drivers

Currently we
have identified several key drivers that we believe significantly affect our
revenue and operations and are beginning to track these drivers. Below is a
description of the drivers we believe are important to track and monitor in
order to gauge the success and/or indicate any problems occurring in the
business.

Average Monthly Recurring Revenue (MRR)
is the total monthly recurring revenue divided by the number of customers. We
believe that an increase in our average monthly recurring revenue, which is the
largest component in our monthly billing for narrowcasting, indicates that our
customers are increasing their usage of our TelvOS capabilities. In February
2007, our average MRR was $4,800 per month as compared to $6,300 per month in
February 2008, a 31% increase. This increase is due to our change in focus on
customer type. Many of our recent customers tend to utilize many of the TelvOS
modules which then command a higher monthly recurring price.

Average Bandwidth Usage
is the total bandwidth usage divided by the total number of customers. An
increase in average bandwidth usage is an indicator of the popularity of our
customer channels as a group. We expect that such an increase would have a
positive effect on our related revenue streams, such as revenue sharing
arrangements which includes subscription or advertising. In February 2007, the
average bandwidth usage was 889 GB per month as compared to 2,018 GB per month
in February 2008. This increase was due to the increase in popularity for the
content of a select number of our customers.

Average Storage
is the total amount of content stored divided by the total number of
customers. We believe that an increase in average storage is an indicator of
new and fresh content which can also drive traffic and affect related revenue
streams. In February 2007, the average storage usage was 90 GB per month as
compared to 87 GB per month in February 2008. Storage remained relatively
constant due to efforts by our operations group to work with our customers to
remove older content that was not being viewed. Storage also remained constant
due to our change in customer focus from many smaller customers to a fewer
number of larger more established customers.

20

---



|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|--------------------------------------- |  | --------------------- | ----------- | --------------------- |  | ----------- | - | ------------- | ---------- | - |  | ---- | -
|Results of Operations                   | 
|                                        | 
|                                        |  |                       |            
|                                        |  | Year ended            |            
|                                        |  | February
 29, 
 2008$ |             | February
 28, 
 2007$ |  | Inc
 (Dec)$ |   | PercentChange |           
|                                        |  |                       |             |                       |  |             |   |               |           
|Revenue                                 |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|Narrowcasting and other                 |  |                       | 5,559,042   |                       |  | 4,369,117   |   |               | 1,189,925  |   |  | 27   | %
|Production services                     |  |                       | 286,691     |                       |  | 1,639,718   |   |               | (1,353,027 | ) |  | -83  | %
|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|Total revenue                           |  |                       | 5,845,733   |                       |  | 6,008,835   |   |               | (163,102   | ) |  | -3   | %
|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|Costs and
 Expenses                     |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|Operating                               |  |                       | 5,679,898   |                       |  | 2,655,395   |   |               | 3,024,503  |   |  | 114  | %
|Selling, general and
 administrative    |  |                       | 10,486,333  |                       |  | 8,206,223   |   |               | 2,280,110  |   |  | 28   | %
|Research & development                  |  |                       | 2,738,259   |                       |  | 1,088,723   |   |               | 1,649,536  |   |  | 152  | %
|Impairment charge on
 long-lived assets |  |                       | 861,858     |                       |  | 1,228,437   |   |               | (366,579   | ) |  | -30  | %
|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|Total operating expenses                |  |                       | 19,766,348  |                       |  | 13,178,778  |   |               | 6,587,570  |   |  | 50   | %
|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|Operating
 Loss                         |  |                       | (13,920,615 | )                     |  | (7,169,943  | ) |               | (6,750,672 | ) |  | 94   | %
|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|Interest income (expense),
 net         |  |                       | (697,385    | )                     |  | 118,814     |   |               | (816,199   | ) |  | -687 | %
|Currency exchange income
 (loss)        |  |                       | (22,942     | )                     |  | (10,345     | ) |               | (12,597    | ) |  | 122  | %
|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|Net Loss                                |  |                       | (14,640,942 | )                     |  | (7,061,474  | ) |               | (7,579,468 | ) |  | 107  | %
|                                        |  |                       |             |                       |  |             |   |               |            |   |  |      |  
|Headcount                               |  |                       | 45          |                       |  | 56          |   |               | (11        | ) |  |      |  

Consolidated revenuesdecreased
$163,000 or 3% over the prior year for fiscal year ended February 29, 2008 as
follows:

Narrowcasting and other revenuesfor
the fiscal year ended February 29, 2008 increased $1,190,000, or 27% over the
prior year. This increase in narrowcasting revenues resulted primarily from a
net increase in customers. Narrowcasting revenues also include one-time
implementation fees, which will continue to contribute to revenue as more
customers are added. The addition of the sales team in the United States has
begun making strides in that market. As a result, we have seen an increase of
revenue in the United States over the prior year of 15% (see geographical
distribution below).

Production services revenues
for the fiscal year ended February 29, 2008 decreased $1,353,000, or 83% over
the prior year. Per our business plan, we have exited this business segment.

Geographical
distribution of consolidated revenues:

|                                |  |                         |           |                         |  |                 |  |  |     |  
|------------------------------- |  | ----------------------- | --------- | ----------------------- |  | --------------- |  |  | --- | -
|                                |  |                         |          
|                                |  | Year
 Ended             |          
|                                |  | February
 29, 
 2008
 $ |           | February
 28, 
 2007
 $ |  | Percent
 Change | 
|                                |  |                         |           |                         |  |                 | 
|United States                   |  |                         | 872,216   |                         |  | 755,452         |  |  | 15  | %
|Europe, Middle-East and
 Africa |  |                         | 4,766,875 |                         |  | 4,794,144       |  |  | -1  | %
|Asia Pacific                    |  |                         | 184,656   |                         |  | 356,765         |  |  | -48 | %
|Internet Sales                  |  |                         | 21,986    |                         |  | 102,474         |  |  | -79 | %
|                                |  |                         |           |                         |  |                 |  |  |     |  
|Total                           |  |                         | 5,845,733 |                         |  | 6,008,835       |  |  | -3  | %
|                                |  |                         |           |                         |  |                 |  |  |     |  

21

---



Consolidated costs and expenses
for the fiscal year ended February 29, 2008 increased $6,588,000, or 50%, over
the prior year as follows:

Operating expenses
includes the cost of bandwidth, direct labor, sub-contracted labor, consulting
fees and depreciation. For the fiscal year ended February 29, 2008 these costs
were $5,680,000, a 114% increase over the prior year.

The increase
resulted primarily from increased headcount and the use of contractors to
assist in the build out of our internal CDN system. We also experienced an
increase in our operating costs for the CDN which includes bandwidth charges
and collocation fees. Bandwidth charges increased due to an increase in customer
traffic and collocation fees increased due to our expansion efforts. As traffic
increases, so will the cost of bandwidth.

Selling, general and administrative expenses
includes employee compensation and related costs for personnel engaged in marketing,
direct and reseller sales support functions, the executive team and backoffice
help. For the fiscal year ended February 29, 2008 these costs were $10,486,000,
a 28% increase over the prior year. This increase is due to an increase in
headcount primarily in direct sales and sales support and an increase in our
stock compensation expense. In the last quarter of the fiscal year we reduced
our headcount and consolidated our office space from three locations to two.
The effects of these cost reductions are expected to be realized beginning in
the quarter ending May 31, 2008.

Research & Development expenses
include employee compensation, stock-based compensation, depreciation and any
related costs for personnel primarily focused on research and development efforts.
For the fiscal year ended February 29, 2008 these costs were $2,738,000, a 152%
increase over the prior year. We have hired various contractors to add new and
enhanced products to the TelvOS system. Some of these items included adding
Microsoft Silverlight technology to our player which gave us cross browser and
cross platform compatibility as well as a richer end user experience. We also
integrated Atlas ad solutions which provide our customers with another ad
platform for video and banner playout. We have significantly reduced our use on
outside contractors as many of these enhancements and products are now
complete.

Impairment charge on long-lived assetsreflects
the write down of our equipment assets located in our California POP (Point of
Presence) located in our internal content delivery network (CDN), which was
shut down during April 2008.

The reason for
the impairment was due to several factors. During the build out of the
California POP, which had taken close to a year, our internal reports from our
CDN indicated that our London and NY POPs were sufficiently managing the
traffic of our existing and newly signed customers. During this time, many of
the projections related to customer bandwidth requirements had declined. One
reason for the decline came as a result of our shift in focus from smaller
content owners to larger enterprise customers. Making this change during the
year created a delay in signing up new customers since the sales cycle is
longer for enterprise customers. At the same time, many 3rd party
CDN providers had dropped their rates and improved the streaming capabilities.
In performing the cost analysis of keeping the California POP vs. utilizing our
existing London and NY POPs while interconnecting to a third party CDN, management
determined that it could operate sufficiently and save a substantial amount per
month vs. continuing to pay the high fixed monthly charges that the California
POP required. In an effort to conserve operating cash and still meet the
bandwidth demands of our customers, management made the decision to discontinue
the operation of the California POP. Therefore, the assets associated with the
POP were written down to market value. The market value was determined by
obtaining the cost to sell the majority of the equipment and then applying that
percent write down to the entire system.

During the
fiscal year ended February 28, 2007, we took an impairment charge on long-lived
assets, which reflected the write off of the goodwill and intangible assets of
Sportshows Television, Ltd., our production services business. The production
segment has not been profitable and we subsequently decided to exit the
production segment.

Trends in Our Business

During 2007,
we invested in the TelvOS platform by adding new enhancements and
functionality. We also invested in the CDN and made some critical decisions on
our sales strategy as we moved our focus away from smaller content owners to
larger Telcos and broadcasters. The pipeline although not large in numbers,
has increased substantial in the size of the contract and commitment level. We
have exited the production business as planned and have focused our efforts
completely on growing the narrowcasting business. We implemented many cost
reductions in the fourth quarter of our fiscal year ended February 29, 2008,
that we anticipate we will realize the benefits of in future quarters.

This change in
customer focus should lead to more opportunities and more stability in the
business.

22

---



Liquidity and Capital Resources

We had
$4,170,850 in cash and cash equivalents available at February 29, 2008 and
available bank overdraft facilities of $59,500. Cash was used to meet the needs
of the business including, but not limited to, payment of operating expenses,
funding capital expenditures and, working capital. We discuss many of these
factors in detail below.

We have
financed our operations from inception through private equity financing. From
inception through February 29, 2008, we sold an aggregate of 122,780,977 shares
of our common stock for gross proceeds of approximately $32.4 million. In
addition, we have granted options and issued shares in lieu of cash in payment
to third parties for services rendered. To a lesser extent, we have also used
capital leases to fund some of our equipment acquisitions. We have incurred
significant losses since our inception and, at February 29, 2008, had an
accumulated deficit of approximately $34.2 million.

Our current
ratio (current assets divided by current liabilities) relates to our ability to
pay our short-term debts as they become due. At February 29, 2008, our current
ratio was 3.2, compared to 0.9 at February 28, 2007. Our current ratio
fluctuates primarily as we use cash to develop our business and raise
additional funds from private equity financing from time to time.

On May 29,
2008, we entered into a definitive merger agreement pursuant to which our
company will be acquired by Onstream Media Corporation. For a more complete
discussion regarding the Merger, see Item 1. Description of BusinessGeneral
Recent Developments.

We will have
sufficient working capital to fund our operations for the next five to six
months. In the event that the Merger Agreement is terminated, we will need to
raise further funds to continue operations thereafter.

Net cash used in operating activities
was approximately $9,600,000 for the fiscal year ended February 29, 2008 and
approximately $4,500,000 for the fiscal year ended February 28, 2007. The
increase in cash used in operations was due primarily to an increase in our net
loss. This increase was primarily due to an increase in headcount as we sought
to build our narrowcasting customer base and an increase in the operations and
development to enhance the TelvOS system capabilities.

Net cash provided by (used in) investing
activities was approximately ($3,300,000) for the
fiscal year ended February 29, 2008 and approximately $1,300,000 for the fiscal
year ended February 28, 2007. The increase over the prior year primarily
resulted from the purchase of capital equipment for our network.

Net cash provided by financing activities
was approximately $16,600,000 for the fiscal year ended February 29, 2008 and
approximately $1,400,000 for the fiscal year ended February 28, 2007. The
increase resulted primarily from the debt and equity financings completed
during the fiscal year ended February 29, 2008.

As of February
29, 2008, our principal capital commitments consisted of obligations
outstanding under capital leases as shown in the table below:

|                                                  |  |                       |  
|------------------------------------------------- |  | --------------------- | -
|                                                  |  |                       |  
|                                                  |  | Year ended           
|                                                  |  | February 29,
 2008
 $
|                                                  |  |                       |  
|                                                  |  |                       |  
|Amounts payable:                                  |  |                       |  
|                                                  |  |                       |  
|Within 12 months                                  |  | 175,469               |  
|                                                  |  |                       |  
|Between one and two years                         |  | 121,252               |  
|                                                  |  |                       |  
|Between two and three years                       |  | 31,521                |  
|                                                  |  |                       |  
|                                                  |  |                       |  
|Total future commitment                           |  | 328,242               |  
|Less: finance charges allocated to future periods |  | (31,512               | )
|                                                  |  |                       |  
|                                                  |  |                       |  
|Present Value                                     |  | 296,730               |  
|                                                  |  |                       |  

23

---



An overdraft
facility is a line of credit arrangement, negotiated with a bank and usually
reviewable on an annual basis, whereby the banks customer is permitted to take
its checking account into a debit balance on a pre-agreed interest basis up to
an agreed amount. Amounts utilized under overdraft facilities are payable on
demand. At February 29, 2008 and February 28, 2007, the overdraft facilities
consisted of approximately $19,800 and $19,600, respectively, with Barclays
Bank PLC and $39,700 and $39,000, respectively, with National Westminster Bank
PLC (NatWest). Neither facility was utilized on February 29, 2008 or February
28, 2007. The interest rate on the Barclays facility is 5.75% above Barclays
variable base rate (which base rate was 5.0% per annum as of February 29,
2008). The interest rate on the NatWest facility is 5.75% above NatWests
variable base rate (which base rate was 5.25% per annum as of February 29, 2008).
The Barclays overdraft facility was renewed on March 20, 2008. The NatWest
overdraft facility was renewed on October 10, 2007 which will expire in one
year.

Foreign Exchange Risks

We are a
Delaware corporation and since our inception we have been raising funds in US
dollars. However, we have significant operations in London, and a substantial
portion of our business is conducted in sterling. This currency difference
between our fundraising and business operations represents a risk related to
the rate of exchange from US dollars to sterling. We hold surplus funds mainly
in US dollars. A larger currency exchange risk results from our primary assets
being denominated almost entirely in sterling. The dollar value of our assets,
and thus our stockholders equity, increases when the dollar weakens relative
to the pound and vice versa. In the future, we expect to generate a greater
percentage of our revenues from operations in the United States which would be
received in US dollars and which should help mitigate the exchange risk.

Critical Accounting Policies and Estimates

The
preparation of our consolidated financial statements 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 consolidated financial statements and the reported amount of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Refer to Footnote 2 to the consolidated financial statements for the
listing of the companys critical accounting policies.

Off Balance Sheet Arrangements

We have no
off-balance sheet arrangements that have had or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.

Item 7. Financial Statements

The
information required by this item is incorporated herein by reference to the
financial statements beginning on page 40.

Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.

None.

Item 8A. Controls and Procedures.

As of the end
of the period covered by this report, the Companys management, under the
supervision of and with the participation of the Companys chief executive
officer and chief financial officer, evaluated the effectiveness of the
Companys disclosure controls and procedures (as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)). Based on such evaluation, our chief executive officer and chief
financial officer have concluded that our disclosure controls and procedures
were effective as of February 29, 2008, for the reasons discussed below.

Item 8A(T) Managements Annual Report on
Internal Control over Financial Reporting

Management is
responsible for establishing and maintaining adequate control over financing
reporting. Disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports filed or submitted under
the Exchange Act is recorded, process, summarized and reported, within the time
period specified in the SECs rules and forms. Disclosure controls and
procedures, include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the reported filed under
the Exchange Act is accumulated and communicated to management, including Mr.
McCourt, the Companys Interim Chief Executive Officer, as appropriate, to
allow timely decisions regarding required disclosure.

24

---



On May 24,
2007, in connection with its audit of our consolidated financial statements for
the year ended February 28, 2007, Rothstein, Kass & Company, P.C., our
independent registered public accounting firm, informed us and our audit
committee of certain deficiencies in our internal controls over financial
reporting that they considered to be a material weakness and significant
deficiencies. The material weakness was as follows:

| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We did not
 record the stock-based compensation expense on certain stock options, issued
 to one of our directors, on a timely basis. As a result of this, our third
 quarter interim financial statements were misstated.

The significant
deficiencies were as follows:

| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We did not
 record a sufficient allowance for bad debts related to a customers accounts
 receivable balance that was in question.                                                                                                  
| |   |                                                                                                                                                                                                                                     
| |  | We were
 recording invoices billed to certain customers in such a manner that the
 result was to recognize revenues on a cash basis, which is not in accordance
 with accounting principals generally accepted in the United States.

Inferior
internal controls could harm our operating results or cause us to fail to meet
our reporting obligations and could also cause our current and potential
stockholders to lose confidence in our reported financial information, which
could have a negative effect on the price of our stock. We are exposed to
increased costs associated with complying with these requirements as we have
not yet conducted any testing of our internal controls and we will be spending
management time and resources to document and test our internal controls. In
addition, we cannot assure you that we will not in the future identify material
weaknesses or significant deficiencies in our internal controls over financial
reporting that we have not discovered to date.

We have
addressed and corrected the material weakness identified by Rothstein, Kass
& Company, P.C. as described above, with the implementation of a company policy
that mandates the timeframe in which certain documents, such as board minutes,
must be received. We have also taken steps to correct these deficiencies in our
internal controls identified by Rothstein, Kass & Company, P.C., such as
documenting various policies and procedures and retaining Protiviti, an
international provider of internal auditing and risk consulting services.
Because the remedial actions may require certain modifications and
rectifications of our internal controls over financial reporting and may
require significant time and resources of management, we may not be able to
conclude that these material weaknesses have been remedied until these controls
have been successfully operational for some period of time.
Through these steps, we believe that we are addressing the deficiencies that
affected our internal control over financial reporting.

All internal
control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.

This annual
report does not include an attestation report of the Companys independent
registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by the Companys
independent registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Company to provide only
the Companys report in this annual report.

Item 8B. Other Information

None.

25

---



PART III

Item 9. Directors, Executive Officers,
Promoters and Control Persons and Corporate Governance; Compliance with Section
16(a) of the Exchange Act

The following
table and subsequent discussion sets forth information about our directors and
executive officers as of February 29, 2008.

| |                       |  |     |  |                                                                      
| | --------------------- |  | --- |  | ---------------------------------------------------------------------
| | Name                  |  | Age |  | Positions                                                            
| |                       |  |     |  |                                                                      
| | David C.
 McCourt     |  | 51  |  | Chairman of
 the Board, Interim Chief Executive Officer, and Director
| | Lisa
 VanPatten       |  | 44  |  | Chief
 Financial Officer                                             
| | Louis Holder          |  | 36  |  | Chief
 Technology Officer                                            
| | Barak
 Bar-Cohen      |  | 37  |  | President
 & Chief Operating Officer                                 
| | Jon
 Harrington       |  | 52  |  | Director                                                             
| | Roger L.
 Werner, Jr. |  | 58  |  | Director                                                             
| | John Whyte            |  | 68  |  | Director                                                             

David C. McCourt,
our Chairman of the Board, Interim Chief Executive Officer, and Director, has
been a member of our Board of Directors since June 2006. Mr. McCourt became the
Chairman of the Board and Interim Chief Executive Officer in December 2006. Mr.
McCourt became Chief Executive Officer and Chief Operating Officer in June
2007. Mr. McCourt is the Founder and Chief Executive Officer of Granahan
McCourt Capital, LLC, a private investment firm focused in the
telecommunications and media industries, a position he has held since January
2005. Mr. McCourt has over 25 years of experience in the telecommunications and
media industries, founding or acquiring over ten companies in four countries in
North America and Europe. Mr. McCourt served as the Chairman and Chief
Executive Officer of RCN Corporation (a cable television operator) from October
1997 until December 2004. In 2005, Mr. McCourt received an Emmy Award for his
role as Executive Producer of the award-winning childrens show Reading
Rainbow. Mr. McCourt serves on the National Advisory Board of JPMorgan Chase
Bank, the North American Advisory Board of the Michael Smurfit Graduate School
of Business at University College in Dublin, Ireland, the Board of Overseers of
the Robert Wood Johnson Medicine and Dentistry of New Jersey.

Lisa VanPatten has
been our Chief Financial Officer since December 2006. From 2004 until joining
Narrowstep, Ms. VanPatten served as Controller and VP of Finance at NYSE-listed
Vonage where she managed such companys financial, accounting and treasury
function during its recent period of explosive growth. Ms. VanPatten was also
responsible for the consolidation of eight international companies and was a
key member of the Sarbanes-Oxley compliance team where she helped identify and
document all internal control and procedure gaps. From 2003 through 2004, Ms.
VanPatten served as VP of Finance for Princeton Lightwave Inc, a start-up where
she assisted in the development of the new business plan, including the implementation
of a new accounting system. From 2000 through 2003, Ms. VanPatten served as the
Director of Financial Planning and Analysis at NASDAQ-listed RCN Inc, one of
the first bundled telecommunications services providers. While at RCN, Ms.
VanPatten was instrumental in implementing the processes, financial systems,
and reporting mechanisms necessary to scale a rapidly growing company. Mrs.
VanPatten holds a Bachelor of Science in Management, graduating Cum Laude, from
Rider University; she is also an accredited CPA in the state of New Jersey.

26

---



Louis Holder
has been our Chief Technology Officer since April 2007 and is responsible for
our technical operations, including our network and internal IT. From April
2005 through April 2007, Mr. Holder was President of Novega Venture Partners, a
wholly-owned subsidiary of Vonage Holdings Corp, where he was focused on the
development of new business and product offerings. Mr. Holder is one of the
original co-founders of Vonage, where, from January 2001 through April 2005, he
led the companys technology infrastructure, products and support services,
including systems development and web application development. Mr. Holder holds
a bachelors degree in electrical engineering with a minor in computer science
from Polytechnic University, New York.

Barak Bar-Cohen, our
President and Chief Operating Officer, joined our company in August 2007 and is
responsible for our operations in London. Mr. Bar-Cohen also serves as an
officer of Granahan McCourt Acquisition Corporation, a publicly traded
acquisition vehicle focused on the video over IP space. In addition, Mr.
Bar-Cohen is also Vice-President of Granahan McCourt Capital, LLC, a private
investment firm focused on making investments and advising companies in the
telecommunications and media industries. From April 1999 through December 2004,
Mr. Bar-Cohen served in several Senior Management roles at RCN Corporation, a
provider of bundled communication services to residential customers across the
United States. Mr. Bar-Cohen holds a B.A. in Economics from Brandeis University
as well as an M.B.A. from the Tuck School of Business at Dartmouth College.

JonHarrington
has been a director of our company since January 22, 2008. Mr. Harrington is a
former managing partner of Accenture. He holds dual B.S. degrees in Mathematics
and Industrial Distribution from Clarkson University. He is currently a
Venture Partner with Omni Capital.

Roger L. Werner, Jr.
has been a director of our company since March 28, 2006. Mr. Werner is a graduate of Trinity College in
Hartford, CT, and holds a Masters in Business Administration from the
University of Virginia. Mr. Werner is President and CEO of Outdoor Channel
Holdings, a cable television network programming company.

John Whyte has been
a director of our company since June 27, 2006. Mr. Whyte has been the Managing
Director of Whyte WorldWide Professional Corporate Executives and related
entities (Whyte WorldWide PCE) (a management consulting firm), since July 1986.
Mr. Whyte has been a director of other private and public companies such as
Commonwealth Telephone Enterprises, Incorporated since January, 1997.

Corporate Governance and Board Composition

Our common
stock is quoted on the OTC Bulletin Board inter-dealer quotation system, which
does not have director independence requirements. Under NASDAQ Rule
4200(a)(15), our board of directors is comprised of at least 50% independent
directors. Our board of directors believes that it is useful and appropriate to
have our Chief Executive Officer also serve as the chairman of our board of
directors.

Board of Directors and Board Committees

The number of
directors constituting the Board of Directors is currently fixed at nine.
Narrowsteps amended and restated certificate of incorporation divides the
Board of Directors into three classes. The members of each class of directors
serve for staggered three-year terms. The Board of Directors is composed of (i)
one Class I director (Mr. Whyte), whose term expires upon the election and
qualification of directors at the annual meeting of stockholders to be held in
2009, (ii) two Class II directors (Mr. Werner), whose terms expire upon the
election and qualification of directors at the annual meeting of stockholders
to be held in 2009, and (iii) two Class III directors (Messrs. Harrington and
McCourt), whose terms expire upon the election and qualification of directors
at the annual meeting of stockholders to be held in 2010.

Our executive
officers are elected by and serve at the discretion of the Board of Directors.
We have a standing audit committee of the Board of Directors. The members of
the audit committee consist of Messrs. Whyte and Harrington. Mr. Whyte qualifies
as an audit committee financial expert within the meaning of the SEC
regulations. The audit committee oversees the retention, performance and
compensation of our independent auditors, and oversees and establishes
procedures concerning systems of internal accounting and control, as well as
participates in other financial activities.

27

---



We have a
standing compensation and corporate governance committee of the Board of
Directors. The members of the compensation and corporate governance committee
consist of Messrs. Whyte and Werner. The compensation and corporate governance
committees duties are to review and evaluate the salaries and incentive compensation
of our management and employees and administer our 2004 Stock Plan as well as
oversight and governance of our operations.

Code of Ethics

We have
adopted a code of ethics that is applicable to our officers, directors and
employees, including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions.

Indemnity Agreements

Narrowstep has
entered into an indemnity agreement with each of its directors and certain of
its executive officers containing provisions that may require Narrowstep, among
other things, to indemnify to the fullest extent permitted by law its executive
officers and directors against liabilities that may arise by reason of their
status or service as executive officers or directors and to advance expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.

Item 10. Executive
Compensation

Summary of Cash and Certain Other
Compensation

The following
table sets forth, for the fiscal year ended February 29, 2008, a summary of the
compensation earned by each person who served as our principal executive
officer during the fiscal year, the two additional most highly compensated
executives who were serving as such at the end of the fiscal year and two
additional executives who would have been the most highly compensated
executives had they been serving as executive officers as of the end of the
fiscal year. In this document, we refer to these executive officers as the
Named Officers.

SUMMARY COMPENSATION TABLE

|                                                                          |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 
|------------------------------------------------------------------------- |  | ---------- |  | ------------ |  | ----------- |  | --------------------- |  | ------------------ |  | ----------------------- |  | --------- | 
|Name
 and 
 Principal Position                                            |  | FiscalYear |  | Salary(1)($) |  | Bonus(1)($) |  | OptionAwards 
 (2)($) |  | RestrictedStock($) |  | AllOtherCompensation($) |  | Total($)  | 
|                                                                          |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 
|David C. McCourt                                                          |  | 2008       |  |             |  |            |  |                      |  | 1,840,000          |  | 687,500                 |  | 2,527,500 | 
|Chairman, Interim Chief Executive Officer and Chief Operating
 Officer(3) |  | 2007       |  |             |  |            |  | 80,820                |  |                   |  |                        |  | 80,820    | 
|                                                                          |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 
|Iolo Jones                                                                |  | 2008       |  | 262,815      |  |            |  |                      |  |                   |  |                        |  | 262,815   | 
|Founder and Chief Strategy Officer (4)                                    |  | 2007       |  | 187,248      |  |            |  |                      |  |                   |  |                        |  | 187,248   | 
|                                                                          |  | 2006       |  | 143,988      |  |            |  | 478,025               |  |                   |  |                        |  | 622,013   | 
|                                                                          |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 
|Jason Jack                                                                |  | 2008       |  | 251,308      |  |            |  |                      |  |                   |  |                        |  | 251,308   | 
|Chief System Architect (5)                                                |  | 2007       |  | 180,336      |  | 10,000      |  | 132,182               |  |                   |  |                        |  | 322,518   | 
|                                                                          |  | 2006       |  | 103,847      |  |            |  | 205,422               |  |                   |  |                        |  | 309,269   | 
|                                                                          |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 
|Lisa VanPatten                                                            |  | 2008       |  | 160,000      |  |            |  | 26,573                |  | 50,000             |  |                        |  | 236,573   | 
|Chief Financial Officer                                                   |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 
|                                                                          |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 
|Lou Holder                                                                |  | 2008       |  | 183,853      |  |            |  |                      |  | 75,000             |  |                        |  | 258,853   | 
|Chief Technology Officer                                                  |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 
|                                                                          |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 
|Barak Bar-Cohen                                                           |  | 2008       |  | 158,484      |  |            |  |                      |  | 100,000            |  |                        |  | 258,484   | 
|President and Chief Operating Officer                                     |  |            |  |              |  |             |  |                       |  |                    |  |                         |  |           | 

28

---



(1) Amounts
paid to Messrs. Beaumont, Jones and Webb were paid in British pounds and are
converted to dollars at a conversion rate of $0.5137 per pound for fiscal year
2008 and $0.5341 per pound for fiscal year 2007 and $0.5556 per pound for
fiscal year 2006.

(2) The value
of option awards granted to the Named Officer has been estimated pursuant to
SFAS 123(R) using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life: 2.0 years; volatility: 75%; risk
free interest rate: 4.72% to 5.12%; and dividend yield: none. See Note 6 to
Notes to the Consolidated Financial Statements. In certain instances, option
award values reflect, in part, the vesting of options granted in prior periods.

(3) Mr.
McCourt became Chairman in December 2006 and Interim Chief Executive Officer
and Chief Operating Officer in June 2007. Mr. McCourt received Restricted Stock
Units which is listed in all other compensation.

(4) Mr. Jones
ceased to be our Chief Strategy Officer in November 2007.

(5) Mr. Jack
ceased to be our Chief System Architect in February 2008.

We did not pay
any non-equity incentive plan compensation or non-qualified deferred
compensation earnings to any of the Named Officers in respect of the periods
covered by the Summary Compensation Table.

Other than as
described in the Summary Compensation Table, we did not pay any other compensation
or provide any perquisites to any of the Named Officers during the periods
covered by the Summary Compensation Table persons.

2004 Stock Plan

The
Narrowstep, Inc. 2004 Stock Plan (the Plan) was adopted by vote of our Board
of Directors on December 15, 2003and
became effective on January 1, 2004. The Plan was amended by vote of the Board
of Directors in July, 2004, and the Plan, as amended, was approved by
stockholders in July, 2004. The Plan is designed to attract, retain and reward
our employees, directors and consultants by allowing them to participate in
Narrowsteps growth through the acquisition of shares of our common stock or
other performance awards. 27,000,000 shares are reserved for issuance under the
Plan. No more than 5,000,000 shares may be the subject of awards to any
participant during any calendar year. The
term of the Plan is 10 years, and options granted under the Plan can have a
term of no more than 10 years.

Under the
Plan, participants may be awarded stock options, stock appreciation rights,
restricted stock, restricted stock units, performance units, performance shares
and other stock based awards. Options awarded under the Plan may be either
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended or non-qualified options. The Plan is administered by our Board of
Directors or by a committee appointed by the Board. The Board (or such
committee) has authority to, among other things, determine when awards will be
granted, the award recipients, the size and type of each award, vesting and
forfeiture terms and all other terms and conditions of awards. The Board may
also amend, suspend or terminate the Plan at any time, but without stockholder
approval, no amendment may increase the number of shares available for issuance
under the Plan, materially change eligibility terms or extend the term of the
Plan.

None of the
Named Officers exercised any stock options during the fiscal year ended
February 29, 2008.

The following
table sets forth, for each of the Named Officers, information regarding stock
options outstanding at February 29, 2008 for each of the Named Officers. Each
of the stock option grants referred to in the table below were granted pursuant
to our 2004 Stock Plan. The vesting dates applicable to each stock award are
set forth in footnotes that follow the columnar explanations below the table.

29

---



OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

|                 |  |                                                                         |  |                                                                       |  |                        |  |                        | 
|---------------- |  | ----------------------------------------------------------------------- |  | --------------------------------------------------------------------- |  | ---------------------- |  | ---------------------- | 
|Name             |  | Number of 
 Securities
 Underlying
 Unexercised
 Options (#)Exercisable |  | Number of Securities
 Underlying
 Unexercised Options(#)Unexercisable |  | OptionExercisePrice($) |  | Option Expiration Date | 
|                 |  |                                                                         |  |                                                                       |  |                        |  |                        | 
|David C. McCourt |  | 300,000                                                                 |  |                                                                      |  | 0.67                   |  | 6/27/2011              | 
|                 |  |                                                                         |  |                                                                       |  |                        |  |                        | 
|Iolo Jones       |  | 942,664                                                                 |  |                                                                      |  | 1.20                   |  | 3/1/2008               | 
|                 |  |                                                                         |  |                                                                       |  |                        |  |                        | 
|Jason Jack       |  | 777,252                                                                 |  |                                                                      |  | 0.20                   |  | 2/28/2009              | 
|                 |  | 249,999                                                                 |  | 83,333(1)                                                             |  | 1.20                   |  | 5/31/2008              | 
|                 |  | 500,001                                                                 |  | 166,667(1)                                                            |  | 1.20                   |  | 5/31/2008              | 
|                 |  |                                                                         |  |                                                                       |  |                        |  |                        | 
|Lisa VanPatten   |  | 66,667                                                                  |  | 133,333(2)                                                            |  | 0.92                   |  | 2/8/2012               | 
|                 |  |                                                                         |  |                                                                       |  |                        |  |                        | 
|Lou Holder       |  | 0                                                                       |  | 250,000(3)                                                            |  | 0.68                   |  | 4/30/2012              | 
|                 |  |                                                                         |  |                                                                       |  |                        |  |                        | 

(1) These
options will no longer vest.(2) Options
covering 66,667 shares which vest on February 8, 2009 and options covering 66,666
shares which vest on February 8, 2010.(3) Options
covering 83,333 shares which vest on April 30, 2008 and options covering 83,333
shares which vest on April 30, 2009.

30

---



Employment Agreements

David C. McCourt.
Our interim Chief Executive Officer, is a party to an employment agreement with
our company dated June 8, 2007. His employment agreement shall continue until
November 30, 2009, Thereafter, the term shall automatically renew for
additional one (1) year periods beginning on December 1 of each year thereafter
unless we or Mr. McCourt provides the other with written notice of non-renewal
not less than 90 days prior to the commencement of any such new one (1) year
period. We are not initially obligated to pay compensation for his services in
the form of cash.

Pursuant to
the terms of the employment agreement, we granted Mr. McCourt 1,250,000
restricted stock units that follow a certain vesting schedule which became
fully vested on November 30, 2007. Mr. McCourt is to receive one share of our
Class A Common Stock on a date that is two years after its applicable vesting
date.

We also
granted Mr. McCourt 2,500,000 restricted shares which vest based on meeting
certain performance events.

Mr. McCourts
employment agreement also states that the compensation committee from time to
time but not less than annually may grant Mr. McCourt future equity and
equity-based compensation, as well as any cash compensation. The Agreement also
contains a clause in the agreement in the event there is a change of control of
our company all unvested restricted stock units and unvested restricted shares
to fully vest. The Agreement also a non-complete provision prohibiting Mr.
McCourt following six months after the termination date, not to compete with
our company and prohibits solicitation of employees for a period of six months
after the termination date. There is also a non-solicitation of customers and
suppliers for a period of twelve months after the termination date. Under his
employment agreement, Mr. McCourt is also bound to keep certain information
confidential by him during and following the term of his employment.

Iolo Jones. Iolo
Jones, a former member of our Board of Directors and our former Chief Strategy
Officer, had entered into an employment agreement with Narrowstep Ltd., our
wholly-owned subsidiary, dated March 28, 2006. On November 30, 2007, we entered
into a termination agreement with Mr. Jones, pursuant to which we have agreed
to pay Mr. Jones salary up to and including November 30, 2007 and to pay Mr.
Jones an additional £50,000 in lieu of continuing to pay Mr. Jones salary for
the six-month notice period specified his employment agreement. We also agreed
to pay Mr. Jones up to an additional £11,500 for certain costs and expenses. In
the termination agreement, Mr. Jones agreed to resign, effective immediately,
from all positions he held with our company and its subsidiaries. Mr. Jones
also has agreed to release our company from certain potential claims and to
certain non-competition covenants, including covenants that he will not
directly or indirectly, for a period of twelve months following the date of the
agreement, compete with our company, act as a consultant, officer or employee
with a competing business of our company, solicit any key employee of our
company or supply any of our companys goods or services to a competing
company. In addition, Mr. Jones has agreed to continue to be bound by the
confidentiality and intellectual property provisions in his employment
agreement indefinitely. By Current Report on Form 8-K, filed with the
Securities and Exchange Commission on November 16, 2007, we previously
disclosed that on November 12, 2007, we had notified Mr. Jones that we were
terminating his position as our Chief Strategy Officer.

Jason Jack. Jason
Jack, our Chief System Architect, entered into an employment agreement with
Narrowstep Ltd., our wholly-owned subsidiary, dated October 1, 2002. With Mr.
Jacks consent, we assumed this employment agreement and Mr. Jack became an
employee of the company. On February 5, 2008, we entered into a separation
agreement with Mr. Jack pursuant to which we agreed to pay Mr. Jack a one time
payment of $34,000 and 27.5 days for vacation/comp time. We also gave Mr. Jones
$9,000 worth of computer hardware and software and extended the exercise of his
vested stock options to purchase 777,252 shares of common stock to February 28,
2009. Mr. Jack also received $5,000 for payment of his legal fees. Pursant to
the terms of his employment agreement, Mr. Jack is prohibited from soliciting,
in a manner that directly or indirectly competes with us or any of our
employees, customers, or suppliers with whom he had personal dealings in the
normal course of his employment for a period of twelve months after the
termination of his employment.

31

---



Director Compensation

Our directors
are eligible to receive options to purchase shares of our common stock. There
is no set formula for these grants and they may vary from director to director
and from month to month. Each director is also reimbursed for reasonable travel
and other out-of-pocket expenses incurred in attending meetings of the Board of
Directors.

The following
table sets forth certain information regarding the compensation we paid to our
non-employee directors during the fiscal year ended February 29, 2008.

|                                             |                                   |                            |                             |         
|-------------------------------------------- | --------------------------------- | -------------------------- | --------------------------- | --------
|Name                                         | FeesEarned or
 Paid in
 Cash
 ($) | Restricted 
 Stock
 ($)(1) | AllOther
 Compensation
 ($) | Total($)
|                                             |                                   |                            |                             |         
|Jon
 Harrington  Transferred to Omni Capital |                                  | 30,000                     |                            | 30,000  
|                                             |                                   |                            |                             |         
|Roger L.
 Werner, Jr.                        |                                  | 30,000                     |                            | 30,000  
|                                             |                                   |                            |                             |         
|Jack Whyte                                   |                                  | 50,000                     |                            | 50,000  

(1) The value
of restricted shares granted to the non-employee directors is determined by the
closing price at the date of grant.

Certain of our
directors, or entities that they control, are parties to consulting and other
arrangements with our company. For a description of these arrangements, see
Item 13. Certain Relationships and Related Transactions  Transactions with
companies in which certain persons hold an interest.

Item 11. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters

The following
table sets forth information about the beneficial ownership of our common stock
for (i) each person known by us to own beneficially more than five percent of
our outstanding common stock, (ii) each director and named executive officer,
and (iii) all directors and executive officers as a group Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
Commission. Except as indicated by footnote and subject to community property
laws where applicable, to our knowledge, the persons named below have sole
voting and investment power with respect to the shares of common stock shown as
beneficially owned by them. The numbers in the table reflect shared held as of
February 29, 2008 and are based upon 137,561,227 shares being outstanding: In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
or warrants held by that person that are exercisable as of February 29, 2008,
or will become exercisable within 60 days thereafter are deemed outstanding,
while such shares are not deemed outstanding for purposes of computing
percentage ownership of any other person.

32

---



|                                                             |                                           |     |                 
|------------------------------------------------------------ | ----------------------------------------- | --- | ----------------
|Name and
 Address of Beneficial Owner                        | Number of 
 Shares 
 Beneficially 
 owned |     | Percent of Class
|                                                             |                                           |     |                 
|                                                            
|Renaissance Capital                                          | 27,000,000                                | (1) | 16.5%           
|8080 N. Central Expressway,
 Suite 210-LB 59                 |                                           |     |                 
|Dallas, TX 75206-1857                                        |                                           |     |                 
|                                                            
|Austin Lewis                                                 | 14,276,667                                | (2) | 8.7%            
|45 Rockefeller Plaza, Ste
 2570                              |                                           |     |                 
|New York, NY 10111                                           |                                           |     |                 
|                                                            
|David C. McCourt                                             | 21,591,639                                | (3) | 13.2%           
|Granahan & McCourt, LLC                                      |                                           |     |                 
|PO Box AQ                                                    |                                           |     |                 
|Princeton, NJ 08542                                          |                                           |     |                 
|                                                            
|Oded Aboodi and Stanley
 Mauss                               | 12,072,224                                | (4) | 7.4%            
|Sano Ventures XII LLC                                        |                                           |     |                 
|c/o Stanley Mauss                                            |                                           |     |                 
|1700 Broadway, 17th Floor                                    |                                           |     |                 
|New York, NY 10019                                           |                                           |     |                 
|                                                            
|Roger L. Werner, Jr.                                         | 2,451,667                                 | (5) | 1.5%            
|10 Barnstable Lane                                           |                                           |     |                 
|Greenwich, CT 08630                                          |                                           |     |                 
|                                                            
|Lisa VanPatten                                               | 66,667                                    | (6) | *               
|116 Village Boulevard,
 Suite 200                            |                                           |     |                 
|Princeton, NJ 08540                                          |                                           |     |                 
|                                                            
|Louis Holder                                                 |                                          |     | *               
|116 Village Boulevard,
 Suite 200                            |                                           |     |                 
|Princeton, NJ 08540                                          |                                           |     |                 
|                                                            
|John Whyte                                                   | 800,000                                   | (7) | *               
|35 Crescent Street, Unit
 617                                |                                           |     |                 
|Waltham, MA 02453                                            |                                           |     |                 
|                                                            
|Barak Bar-Cohen                                              |                                          |     | 0.0%            
|116 Village Boulevard,
 Suite 200                            |                                           |     |                 
|Princeton, NJ 08540                                          |                                           |     |                 
|                                                            
|All Directors and Executive
 Officers as a group (6 persons) | 24,909,973                                | (8) | 15.3%           
|                                                            

* Less than 1%
of the outstanding shares.

(1) Includes
(i) 12,000,000 shares and 6,000,000 shares issuable upon the exercise of
warrants which are exercisable within 60 days of February 29, 2008 held by The
Frost National Bank FBO (ii) 4,000,000 shares and 2,000,000 shares issuable
upon the exercise of warrants which are exercisable within 60 days of February
29, 2008 held by The Frost National Bank FBO US (iii) 2,000,000 shares and
1,000,000 shares issuable upon the exercise of warrants which are exercisable
within 60 days of February 29, 2008 held by Booth & Co c/o Premier RENN US.
Renaissance Capital is responsible for the voting, selection, acquisition and
disposition of the shares held by The Frost National Bank FBO and The Frost
National Bank FBO US and Booth & Co c/o Premier RENN US and thus may
be deemed to be the beneficial owners of such shares.

33

---



(2) Includes
(i) 9,478,667 shares and 2,203,500 shares issuable upon the exercise of
warrants which are exercisable within 60 days of February 29, 2008 held by LAM
Opportunity Fund LP (ii) 2,028,000 shares and 566,500 shares issuable upon the
exercise of warrants which are exercisable within 60 days of February 29, 2008
held by LAM Opportunity Fund LTD. Austin Lewis is responsible for the voting,
selection, acquisition and disposition of the shares held by LAM Opportunity Fund LP and LAM
Opportunity FUND LTD and thus may be deemed to be the beneficial owners
of such shares.

(3) Includes
(i) 7,488,889 shares held by Granahan McCourt Capital LLC, (ii) 5,256,000
shares issuable upon the exercise of warrants owned by Granahan McCourt Capital
LLC which are exercisable within 60 days of February 29, 2008, (iii) 100,000
shares held by Granahan McCourt Advisors, LLC, and (iv) 6,446,750 shares and
2,000,000 shares issuable upon the exercise of warrants and 300,000 shares
issuable upon the exercise of options granted to David C. McCourt which are
exercisable within 60 days of February 29, 2008. Mr. McCourt is responsible for
the voting, selection, acquisition and disposition of the shares held by
Granahan McCourt Capital, LLC and Granahan McCourt Advisors, LLC, and thus may
be deemed to be the beneficial owner of such shares. Mr. McCourt is a director
of the Company.

(4) Consists
of (i) 8,155,556 shares owned by Sano Ventures XII LLC and (ii) 3,916,668
shares issuable upon the exercise of warrants owned by Sano Ventures XII LLC which are
exercisable within 60 days of February 29, 2008. Obed Aboodi and Stanley Mauss
are responsible for the voting, selection, acquisition and disposition of the
shares held by Sano Ventures
XII LLC and thus may be deemed to be the beneficial owners of such
shares.

(5) Includes
1,546,667 shares and 905,000 shares issuable upon the exercise of options and
warrants held by Mr. Werner which are exercisable within 60 days of February
29, 2008.

(6) includes
66,667 shares issuable upon the exercise of options held by Mrs. VanPatten
which are exercisable within 60 days of February 29,2008.

(7) Consists
of 500,000 shares and 300,000 shares issuable upon the exercise of options held
by Mr. Whyte which are exercisable within 60 days of February 29, 2008.

(8) Includes
8,827,667 shares issuable upon the exercise of options and warrants held by the
directors and executive officers, or entities related to them, which are
exercisable within 60 days of February 29, 2008.

Item 12. Certain Relationships and Related
Transactions, and Director Independence

Options granted to current directors.
We have granted to Roger L. Werner, Jr., a member of our Board of Directors,
options to purchase 300,000 shares at an exercise price of $1.18 on March 28,
2006 which are exercisable until March 28, 2016. We have granted to both David
C. McCourt and Jack Whyte, members of our Board of Directors, options to
purchase 300,000 shares at an exercise price of $0.67 per share on June 7, 2006
which are exercisable until June 27, 2011. All of the foregoing option grants
fully vested on the date granted.

On December 2,
2005, we entered into a consultancy agreement with Roger L. Werner Jr. Pursuant
to this agreement, on May 23, 2006, we granted Mr. Werner options to purchase
30,000 shares of common stock at an exercise price of $0.75 per share, for
consultancy services for the year ended February 28, 2007.

On January 10,
2008, we Jon Harrington, a member of our Board of Directors, 300,000 of shares
of restricted stock which he subsequently transferred to Omni Capital. We also
granted 300,000 shares of restricted stock to Roger L. Werner, Jr. and 500,000
to Jack Whyte. All of the restricted shares granted on January 10, 2008 have
the following vesting schedule: 25% vested upon grant, the remaining vest in
equal installments on the first of every month beginning February 1, 2008 with
the last vesting date to be September 1, 2008.

Options granted to current officers.
On February 8, 2007, we granted options to purchase 200,000 shares of common
stock to Lisa VanPatten, our Chief Financial Officer, at an exercise price of
$0.92 per share. These options vest over a three-year period and expire on
February 8, 2017. On April 30, 2007, we granted options to purchase 250,000 shares
to Lou Holder, our Chief Technology Officer, at an exercise price of $0.68 per
share. These options vest over a three-year period and expire on April 30,
2017.

34

---



On June 8,
2007, pursuant to or employment agreement with David C. McCourt, we granted Mr.
McCourt 1,250,000 restricted stock units which vest monthly until November 30,
2007 and 2,500,000 shares of restricted stock which vest based on meeting
certain performance milestones. All of the restricted stock granted to Mr.
McCourt has fully vested as of November 30, 2007, as determined by our
Compensation Committee. Mr. McCourt elected to issue back to us 336,000 shares
of restricted stock with an approximate value of $177,000 to cover the taxes
due on the vested restricted stock that we paid for on behalf of Mr. McCourt.
On December 18, 2007, we granted Mr. McCourt 1,250,000 restricted shares which
immediately vested in full. Mr. McCourt elected to issue back to us 992,000
shares of restricted stock with an approximate value of $140,000 to cover the
taxes due on the vested restricted stock that we paid for on behalf of Mr.
McCourt. On January 10, 2008, the Company granted David C. McCourt 2,500,000
restricted shares which vest upon meeting certain targets as established by our
compensation committee.

On January 10,
2008, we granted Lisa VanPatten 500,000 shares of restricted stock, Lou Holder
750,000 shares of restricted, Barak Bar-Cohen 1,000,000 shares of restricted
stock and David C. McCourt 900,000 restricted shares which vest upon
termination of employment in connection with a change of control of our
company, or upon $4M EBITDA attainment. None of these shares of restricted
stock have vested to date.

Options granted to former officers.
We have granted options to purchase 1,000,000 shares of common stock to Steven
Crowther, our former Senior Vice President and Chief Financial Officer, at an
exercise price of $1.20 per share. 500,000 of these options were granted and
vested on March 1, 2005 and are exercisable until February 28, 2015. 500,000 of
these options were granted on August 11, 2005, 100,000 of which vested
immediately and the remaining 400,000 vested on July 1, 2006. These options are
exercisable until August 11, 2015. On January 17, 2006, we granted Steven
Crowther additional options to purchase 100,000 shares of common stock, at an
exercise price of $0.90 per share. 50,000 of these options vested immediately
on January 17, 2006. The options granted to Mr. Crowther have since expired.

We have
granted options to purchase a total of 900,000 shares of common stock to
Stephen Beaumont, our former President and Chief Executive Officer. 200,000 of
these options were granted on November 15, 2005 at an exercise price of $1.50,
100,000 vested immediately and the remainder vested on February 1, 2006. The
remaining options were granted on February 28, 2006, 250,000 at an exercise
price of $1.00 per share, which vested immediately, and 450,000 at an exercise
price of $1.50 per share, 225,000 of which vested on June 30, 2006 and 225,000
of which vested on December 31, 2006.

Transactions with companies in which certain
persons hold an interest. Narrowstep Ltd. has
developed a channel for LTR Consultancy. John Goedegebuure, a founder and
shareholder of our company, is the Managing Director and a shareholder of LTR
Consultancy. Total revenue and total receivables from LTR Consultancy for
fiscal year ending February 28, 2007, was $185,480 and $53,614 respectively.
Total revenue and total receivables from LTR Consultancy for fiscal year ending
February 29, 2008, was $42,236 and $87,224 respectively. The total amount in
receivables remained unpaid and we wrote off the amount. Pursuant to an
Investor Relations Agreement with us, LTR Consultancy earned fees for investor
relations services of $33,705, for fiscal year ended February 28, 2007. Of
these fees, $6,211 was unpaid and netted against the amount owed which was
written off before the end of the fiscal year.

Outdoor
Channel, one of our customers, began utilizing our services in May 2007. The
Chief Executive Officer and President of Outdoor Channel is Roger L. Werner
Jr., a member of our Board of Directors. We billed Outdoor Channel, $67,705 for
the fiscal year ended February 29, 2008 and the balance in accounts receivable
at February 29, 2008 is $6,459.

On May 30,
2006, we entered into an advisory agreement with Granahan McCourt Advisors,
LLC. David C McCourt, Chairman of our Board of Directors, our Interim Chief
Executive Officer and our Interim Chief Operating Officer, is the beneficial
owner of Granahan McCourt Advisors, LLC and Granahan McCourt Capital, LLC, one
of our shareholders Pursuant to this agreement, Granahan McCourt Advisors, LLC
was issued 100,000 shares of common stock on May 30, 2006 and received warrants
to purchase 6,000 shares, with an exercise price equal to $0.95 per share. Mr.
McCourt became a member of our Board of Directors on June 27, 2006, was named
as Chairman of the Board and Interim Chief Executive Officer in December 2006
and was named interim Chief Operating Officer in June 2007. We paid Granahan
McCourt Advisors, LLC $80,000 for consulting services and $9,000 to cover out
of pocket expenses for fiscal year ending February 28, 2007. Mr. McCourt
voluntarily terminated the advisory agreement once he became interim Chief
Executive Officer and forfeited the remaining balance in the contract.

35

---



In connection
with our August 2007 financing, Mr. McCourt purchased 4,000,000 shares of
common stock and warrants to purchase 2,000,000 shares of common stock for a
total purchase price of $1,000,000. In addition, Mr. McCourt entered into a
lock up agreement pursuant to which he and certain entities controlled by him
agreed for a period of nine months from August 8, 2007 not to sell, dispose or
otherwise transfer any shares of common stock owned by them, subject to certain
exceptions.

On May 29,
2008, we entered into a definitive merger agreement pursuant to which our
company will be acquired by Onstream Media Corporation. In connection with the
conditions to closing set forth in the Merger Agreement, we have entered into
subscription agreements (the Subscription Agreements) with three of our major
stockholders, including Mr. Lewis and David C. McCourt, our Chairman and
Interim Chief Executive Officer. For a more complete discussion regarding the subscription
agreements, see Item 1. Description of BusinessGeneral Recent Developments.

Independent Directors

Our common
stock is quoted on the OTC Bulletin Board inter-dealer quotation system, which
does not have director independence requirements. Under NASDAQ Rule
4200(a)(15), we have four directors, namely Dennis Edmonds, Roger L. Werner,
Jr., John Whyte and Rajan Chopra, who qualify as an independent director. In
addition, our board of directors has made a subjective determination as to each
independent director that no relationships exist which, in the opinion of our
board of directors, would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director. In making these
determinations, our directors reviewed and discussed information provided by
the directors and by our management with regard to each directors business and
personal activities as they may relate to us and our management. Our board of
directors has established an audit committee and a compensation committee, both
of which are made up exclusively of independent directors.

Item 13. Exhibits

The following exhibits are filed as part of
this report:

|            |                                                                                                                                                              
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. | Description                                                                                                                                                  
|            |                                                                                                                                                              
|2.1         | Agreement and Plan of Merger, among
 Onstream Media Corporation, Onstream Merger Corp., Narrowstep Inc. and W.
 Austin Lewis IV, dated as of May 29, 2008 (1)
|            |                                                                                                                                                              
|3.1         | Amended and Restated Certificate of
 Incorporation (2)                                                                                                       
|            |                                                                                                                                                              
|3.2         | Amended and Restated By-laws (3)                                                                                                                             
|            |                                                                                                                                                              
|4.1         | Specimen Common Stock Certificate (4)                                                                                                                        
|            |                                                                                                                                                              
|5.1         | Opinion of Lowenstein Sandler PC*                                                                                                                            
|            |                                                                                                                                                              
|10.1        | Agreement by and between Narrowstep Ltd.
 and Jason Jack, dated October 1, 2002 (5)                                                                          
|            |                                                                                                                                                              
|10.2        | Server Hosting Agreements between
 Narrowstep and Teleglobe Ltd., dated October 23, 2003 (6)                                                                 
|            |                                                                                                                                                              
|10.3       | Agency Agreement between Narrowstep Inc.
 and Global Sportnet, dated February 4, 2004 (7)                                                                    
|            |                                                                                                                                                              
|10.4        | Narrowstep Inc. 2004 Restated Stock Plan
 (8)                                                                                                                
|            |                                                                                                                                                              
|10.5        | Agreement by and between Narrowstep Inc.
 and Mobestar Ltd., dated February 9, 2004 (9)                                                                      
|            |                                                                                                                                                              
|10.6        | Letter Agreement by and between Narrowstep
 Inc. and Allard de Stoppelaar, dated May 11, 2005 (10)                                                           
|            |                                                                                                                                                              
|10.7        | Purchase Agreement by and among Narrowstep
 Inc. and the Investors set forth on the signature pages dated February 22,
 2006 (11)                            
|            |                                                                                                                                                              
|10.8        | Registration Rights Agreement by and among
 Narrowstep Inc. and the Investors named in the Purchase Agreement dated as of
 February 22, 2006 (12)            
|            |                                                                                                                                                              
|10.9        | Form of Warrant to Purchase Shares of
 Narrowstep Common Stock at the Warrant Price of $0.60 per Share (13)                                                  
|            |                                                                                                                                                              
|10.10       | Form of Warrant to Purchase Shares of
 Narrowstep Common Stock at the Warrant Price of $1.20 per Share (14)                                                  
|            |                                                                                                                                                              
|10.11       | Agreement dated May 30, 2006 by and between
 Narrowstep Inc. and Granahan McCourt Advisors LLC. (15)                                                         
|            |                                                                                                                                                              
|10.12       | Purchase Agreement by and among Narrowstep
 Inc. and the Investors set forth on the signature pages dated March 2, 2007
 (16)                                
|            |                                                                                                                                                              
|10.13       | Form of Warrant to Purchase Shares of
 Narrowstep Common Stock at the Warrant Price of $0.60 per Share, dated as of
 March 2, 2007 (17)                      
|            |                                                                                                                                                              
|10.14       | Form of 12% Mandatorily Convertible Note,
 dated as of March 2, 2007 (18)                                                                                    
|            |                                                                                                                                                              
|10.15       | Employment Agreement between Narrowstep
 Inc. and David C. McCourt, dated June 8, 2007. (19)                                                                 
|            |                                                                                                                                                              
|10.16       | Amended and Restated 2004 Stock Plan. (20)                                                                                                                   
|            |                                                                                                                                                              
|10.17       | Amendment and Waiver Agreement, dated as of
 May 29, 2008, among Narrowstep Inc. and the investors party thereto (21)                                        
|            |                                                                                                                                                              
|10.18       | Form of Narrowstep Voting Agreement, dated
 as of May 29, 2008 (22)                                                                                          
|            |                                                                                                                                                              
|10.19       | Form of Subscription Agreement, dated as of
 May 29, 2008, by and between Narrowstep Inc. and the investors party thereto
 (23)                              
|            |                                                                                                                                                              
|16.1        | Letter on change in certifying accountants
 (24)                                                                                                             
|            |                                                                                                                                                              
|22.1        | Subsidiaries of the registrant (25)                                                                                                                          
|            |                                                                                                                                                              
|23.1        | Consent of Lowenstein Sandler PC*                                                                                                                            
|            |                                                                                                                                                              
|23.2        | Consent of Rothstein, Kass & Company,
 P.C.                                                                                                                  
|            |                                                                                                                                                              
|31.1        | Certification of Chief Executive Officer
 Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934                                               
|            |                                                                                                                                                              
|31.2        | Certification of Chief Executive Officer
 Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934                                               
|            |                                                                                                                                                              
|32.1        | Certification of Chief Executive Officer
 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 Sarbanes Oxley Act of 2002          
|            |                                                                                                                                                              
|32.2        | Certification of Chief Financial Officer
 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 Sarbanes Oxley Act of 2002          

36

---



* Previously filed.

(1) Previously filed as exhibit 2.1 to the
Companys Form 8-K (Registration No. 333-108632) which was filed on June 30,
2008 and is incorporated herein by reference.

(2) Previously filed as exhibit 3.4 to the
Companys Amendment No. 2 to Form SB-2 (Registration No. 333-108632) which was
filed on December 6, 2004 and incorporated herein by reference.

(3) Previously filed as exhibit 3.5 to the
Companys Amendment No. 2 to Form SB-2 (Registration No. 333-108632) which was
filed on December 6, 2004 and incorporated herein by reference.

(4) Previously filed as exhibit 4.1 to the
Companys Form SB-2 (Registration No. 333-108632) which was filed on September
9, 2003 and is incorporated herein by reference.

(5) Previously filed as exhibit
10.4.1 to the Companys Amendment No. 2 to Form SB-2 (Registration No.
333-108632) which was filed on December 6, 2004 and incorporated herein by
reference.

(6) Previously filed as exhibit 10.9 to the
Companys Amendment No. 1 to Form SB-2 (Registration No. 333-108632) which was
filed on July 12, 2004 and incorporated herein by reference.

(7)
Previously filed as exhibit 10.12 to the Companys Amendment No. 4 to Form SB-2
(Registration No. 333-108632) which was filed on March 4, 2005 and incorporated
herein by reference.

(8) Previously filed as exhibit 16.1 to the
Companys Amendment No. 1 to Form SB-2 (Registration No. 333-108632) which was
filed on July 12, 2004 and incorporated herein by reference.

(9) Previously filed as exhibit 10.19 to the
Companys Amendment No. 2 to Form SB-2 (Registration No. 333-108632) which was
filed on December 6, 2004 and incorporated herein by reference.

(10) Previously filed as exhibit 10.23 to the
Companys Post Effective Amendment No. 2 to Form SB-2 (Registration No.
333-108632) which was filed on August 8, 2005 and incorporated herein by
reference.

(11) Previously filed as exhibit 10.1 to Form
8-K which was filed on February 22, 2006 and incorporated herein by reference.

(12) Previously filed as exhibit 10.2 to Form
8-K which was filed on February 22, 2006 and incorporated herein by reference.

(13) Previously filed as exhibit 10.3 to Form
8-K which was filed on February 22, 2006 and incorporated herein by reference.

(14) Previously filed as exhibit 10.4 to Form
8-K which was filed on February 22, 2006 and incorporated herein by reference.

(15) Previously filed as
exhibit 10.23 to Post-Effective Amendment No. 1 to the Companys Form SB-2
(Registration No. 333-134023) which was filed on September 12, 2006 and
incorporated herein by reference.

(16) Previously filed as exhibit 10.1 to Form
8-K which was filed on March 6, 2007 and incorporated herein by reference.

(17) Previously filed as exhibit 10.2 to Form
8-K which was filed on March 6, 2007 and incorporated herein by reference.

(18) Previously filed as exhibit 10.3 to Form
8-K which was filed on March 6, 2007 and incorporated herein by reference.

(19) Previously filed as exhibit 10.1 to Form
8-K which was filed on June 14, 2007 and incorporated herein by reference.

(20) Previously filed as exhibit 10.1 to Form
10KSB/A which was filed on June 20, 2007 and incorporated herein by reference.

(21) Previously filed as exhibit 10.1 to the
Companys Form 8-K (Registration No. 333-108632) which was filed on June 30,
2008 and is incorporated herein by reference.

(22) Previously filed as exhibit 10.2 to the
Companys Form 8-K (Registration No. 333-108632) which was filed on June 30,
2008 and is incorporated herein by reference.

(23) Previously filed as exhibit 10.3 to the
Companys Form 8-K (Registration No. 333-108632) which was filed on June 30,
2008 and is incorporated herein by reference.

(24) Previously filed as
exhibit 16.1 to Form 8-K/A which was filed on December 20, 2005 and
incorporated herein by reference.

(25) Previously filed as exhibit 22.1 to the
Companys Amendment No. 1 to Form SB-2 (Registration No. 333-108632) which was
filed on July 12, 2004 and incorporated herein by reference.

 Confidential portions of this agreement
have been omitted and filed separately with the Securities and Exchange
Commission pursuant to an application for confidential treatment.

37

---



Item 14. Principal Accountant Fees and
Services.

Audit Fees

The aggregate
audit fees billed by Rothstein, Kass & Company for each of the last fiscal
years for professional services rendered by it for the audit of our annual
financial statements and review of financial statements included in quarterly
SEC reports were $215,711 and $106,180 for the fiscal years ended February 28,
2007 and February 29, 2008, respectively.

Audit-Related Fees

The aggregate
fee billed by Ernst & Young LLP for assurance and related services that are
reasonably related to the performance of the audit or review of our financial
statements was $72,650 for the fiscal year ended February 28, 2007. The aggregate
fee billed by Rothstein, Kass & Company for assurance and related services
that are reasonably related to the performance of the audit or review of our
financial statements that are not included under Audit Fees above was $61,820
for the fiscal year ended February 29, 2008.

Tax Fees

The aggregate
fees billed by Rothstein, Kass & Company for each of the last two fiscal
years for professional services rendered by it for tax compliance, tax advice
and tax planning were nominal for the fiscal years ending February 28, 2007 and
February 29, 2008, respectively.

All Other Fees

The aggregate
fees billed by Rothstein, Kass & Company for products or services
other than the services reported above were nominal for the fiscal years ending
February 28, 2007 and February 29, 2008, respectively.

38

---



SIGNATURES

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

| |                                 
| | --------------------------------
| | NARROWSTEP INC.                 
| |                                 
| | /s/ David C. McCourt            
| |                                 
| | David C.
 McCourt               
| | Interim
 Chief Executive Officer

In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities
indicated, on June 13, 2008.

|                         |  |                                     |  |              
|------------------------ |  | ----------------------------------- |  | -------------
|Signature                |  | Title                               |  | Date         
|                         |  |                                     |  |              
|                         |  | Chairman of the Board of Directors, |  |              
|/s/ David C. McCourt     |  | Interim Chief Executive Officer     |  | June 13, 2008
|                         |  |                                     |  |              
|David C. McCourt         |  |                                     |  |              
|                         |  |                                     |  |              
|/s/ Lisa VanPatten       |  | Chief Financial Officer             |  | June 13, 2008
|                         |  |                                     |  |              
|Lisa VanPatten           |  |                                     |  |              
|                         |  |                                     |  |              
|/s/ Jon Harrington       |  | Director                            |  | June 13, 2008
|                         |  |                                     |  |              
|Jon Harrington           |  |                                     |  |              
|                         |  |                                     |  |              
|/s/ Roger L. Werner, Jr. |  | Director                            |  | June 13, 2008
|                         |  |                                     |  |              
|Roger L. Werner, Jr.     |  |                                     |  |              
|                         |  |                                     |  |              
|/s/ John Whyte           |  | Director                            |  | June 13, 2008
|                         |  |                                     |  |              
|John Whyte               |  |                                     |  |              

39

---



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                             |     
|------------------------------------------------------------ | ----
|                                                             | Page
|                                                             |     
|Report of independent registered public accounting firm      | 41  
|                                                             |     
|Consolidated balance sheet                                   | 42  
|                                                             |     
|Consolidated statements of operations and comprehensive loss | 43  
|                                                             |     
|Consolidated statements of changes in stockholders equity   | 44  
|                                                             |     
|Consolidated statements of cash flows                        | 45  
|                                                             |     
|Notes to consolidated financial statements                   | 46  

40

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the board
of directors and Stockholders of Narrowstep Inc.

We have
audited the accompanying consolidated balance sheet of Narrowstep Inc. and Subsidiaries (collectively, the Company) as
of February 29, 2008, and the
related consolidated statements of operations and comprehensive loss, changes
in stockholders equity, and cash flows for each of the years in the two year
period ended February 29, 2008. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of February 29, 2008, and
the results of its consolidated operations and its consolidated cash flows for
each of the years in the two year period ended February 29, 2008, in conformity with accounting principles generally
accepted in the United States.

The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has reported significant losses
from operations, had an accumulated deficit, utilized a significant amount of
cash from operations, and requires additional financing to fund future
operations. These conditions raise substantial doubt about the Companys
ability to continue as a going concern. Managements plans regarding those
matters also are described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

Roseland, New
Jersey
June 12, 2008

41

---



|                                                                                                      |  |                       |             |  
|----------------------------------------------------------------------------------------------------- |  | --------------------- | ----------- | -
|PART 1 -
  FINANCIAL INFORMATION
  Item 1 - Financial Statements                                     
|                                                                                                      |  |                       |             |  
|NARROWSTEP
  INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEET                                          |  |                       |             |  
|                                                                                                     
|                                                                                                      |  |                       |             |  
|                                                                                                      |  | February 29, 2008
  $ |            
|                                                                                                      |  |                       |            
|Assets                                                                                                |  |                       |             |  
|Current assets:                                                                                       |  |                       |             |  
|Cash and cash equivalents                                                                             |  |                       | 4,170,850   |  
|Accounts receivable, net of allowance for doubtful
accounts of
  $767,470                             |  |                       | 923,850     |  
|Prepaid expenses and other current assets                                                             |  |                       | 411,110     |  
|                                                                                                      |  |                       |             |  
|Total current assets                                                                                  |  |                       | 5,505,810   |  
|                                                                                                      |  |                       |             |  
|Property and equipment, net                                                                           |  |                       | 1,995,504   |  
|Software development costs, net                                                                       |  |                       | 682,060     |  
|Other assets                                                                                          |  |                       | 281,790     |  
|                                                                                                      |  |                       |             |  
|Total Assets                                                                                          |  |                       | 8,465,164   |  
|                                                                                                      |  |                       |             |  
|                                                                                                      |  |                       |             |  
|Liabilities and Stockholders Equity                                                                  |  |                       |             |  
|Liabilities                                                                                           |  |                       |             |  
|Current liabilities:                                                                                  |  |                       |             |  
|Unearned revenue                                                                                      |  |                       | 31,536      |  
|Accounts payable                                                                                      |  |                       | 735,776     |  
|Net obligations under capital leases,
current                                                         |  |                       | 153,322     |  
|Accrued expenses and other current
liabilities                                                        |  |                       | 814,214     |  
|                                                                                                      |  |                       |             |  
|Total current liabilities                                                                             |  |                       | 1,734,848   |  
|Net obligations under capital leases,
long-term                                                       |  |                       | 143,408     |  
|                                                                                                      |  |                       |             |  
|Total Liabilities                                                                                     |  |                       | 1,878,256   |  
|                                                                                                      |  |                       |             |  
|Commitments and Contingencies                                                                         |  |                       |             |  
|                                                                                                      |  |                       |             |  
|Stockholders Equity                                                                                  |  |                       |             |  
|Common stock, $0.000001 par value 450,000,000
shares authorized,
  137,561,227 issued and outstanding |  |                       | 137         |  
|Additional paid-in capital                                                                            |  |                       | 40,745,085  |  
|Accumulated deficit                                                                                   |  |                       | (34,196,475 | )
|Accumulated other comprehensive income                                                                |  |                       | 38,161      |  
|                                                                                                      |  |                       |             |  
|Total Stockholders Equity                                                                            |  |                       | 6,586,908   |  
|                                                                                                      |  |                       |             |  
|Total Liabilities and Stockholders Equity                                                            |  |                       | 8,465,164   |  
|                                                                                                      |  |                       |             |  

See Notes to Consolidated Financial
Statements.

42

---



|                                                                                               |  |                         |             |                         |  |            |  
|---------------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | ----------------------- |  | ---------- | -
|NARROWSTEP
  INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|                                                                                              
|                                                                                               |  |                         |             |                         |  |            |  
|                                                                                               |  | Year ended              |            
|                                                                                               |  | February
  29, 
  2008$ |             | February
  28, 
  2007$ | 
|                                                                                               |  |                         |             |                         | 
|Revenue                                                                                        |  |                         |             |                         |  |            |  
|Narrowcasting and other                                                                        |  |                         | 5,559,042   |                         |  | 4,369,117  |  
|Production services                                                                            |  |                         | 286,691     |                         |  | 1,639,718  |  
|                                                                                               |  |                         |             |                         |  |            |  
|Total revenue                                                                                  |  |                         | 5,845,733   |                         |  | 6,008,835  |  
|                                                                                               |  |                         |             |                         |  |            |  
|                                                                                               |  |                         |             |                         |  |            |  
|Costs and Expenses                                                                             |  |                         |             |                         |  |            |  
|Operating                                                                                      |  |                         | 5,679,898   |                         |  | 2,655,395  |  
|Selling, general and administrative                                                            |  |                         | 10,486,333  |                         |  | 8,206,223  |  
|Research & development                                                                         |  |                         | 2,738,259   |                         |  | 1,088,723  |  
|Impairment charge on long-lived assets                                                         |  |                         | 861,858     |                         |  | 1,228,437  |  
|                                                                                               |  |                         |             |                         |  |            |  
|Total operating expenses                                                                       |  |                         | 19,766,348  |                         |  | 13,178,778 |  
|                                                                                               |  |                         |             |                         |  |            |  
|Operating Loss                                                                                 |  |                         | (13,920,615 | )                       |  | (7,169,943 | )
|                                                                                               |  |                         |             |                         |  |            |  
|                                                                                              
|Interest income                                                                                |  |                         | 185,646     |                         |  | 132,042    |  
|Interest expense                                                                               |  |                         | (883,031    | )                       |  | (13,228    | )
|Currency exchange income (loss)                                                                |  |                         | (22,942     | )                       |  | (10,345    | )
|                                                                                               |  |                         |             |                         |  |            |  
|Net Loss                                                                                       |  |                         | (14,640,942 | )                       |  | (7,061,474 | )
|                                                                                               |  |                         |             |                         |  |            |  
|                                                                                               |  |                         |             |                         |  |            |  
|Foreign currency translation adjustment                                                        |  |                         | (13,714     | )                       |  | 74,135     |  
|                                                                                               |  |                         |             |                         |  |            |  
|Comprehensive Loss                                                                             |  |                         | (14,654,656 | )                       |  | (6,987,339 | )
|                                                                                               |  |                         |             |                         |  |            |  
|                                                                                               |  |                         |             |                         |  |            |  
|Net Loss per Common Share - Basic and Diluted                                                  |  |                         | (0.16       | )                       |  | (0.16      | )
|Weighted-Average Number of Common Shares Outstanding, Basic and
  Diluted                      |  |                         | 92,399,098  |                         |  | 45,240,652 |  

See Notes to Consolidated
Financial Statements.

43

---



NARROWSTEP INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

|                                                          |  |                 |   |                    |   |                                    |   |                                       |   |                           |   |                                                         |   |                                    |  
|--------------------------------------------------------- |  | --------------- | - | ------------------ | - | ---------------------------------- | - | ------------------------------------- | - | ------------------------- | - | ------------------------------------------------------- | - | ---------------------------------- | -
|                                                          |  | Common
  Shares |   | Common
  Stock
  $ |   | Additional
  Paid-In
  Capital
  $ |   | Stock
  Subscription
  Receivable
  $ |   | Accumulated
  Deficit
  $ |   | Accumulated
  Other
  Comprehensive
  Income/(Loss)
  $ |   | Total
  Stockholders
  Equity
  $ |  
|                                                          |  |                 |   |                    |   |                                    |   |                                       |   |                           |   |                                                         |   |                                    |  
|Balances
  - March 1, 2006                                |  | 45,136,474      |   | 45                 |   | 19,711,371                         |   | (1,410,000                            | ) | (12,494,059               | ) | (22,260                                                 | ) | 5,785,097                          |  
|                                                          |  |                 |   |                    |   |                                    |   |                                       |   |                           |   |                                                         |   |                                    |  
|Issuance of
  common stock subscribed, net of commissions |  |                 |   |                    |   |                                    |   | 1,410,000                             |   |                           |   |                                                         |   | 1,410,000                          |  
|Payment for
  services in kind to related parties         |  | 100,000         |   |                    |   | 68,000                             |   |                                       |   |                           |   |                                                         |   | 68,000                             |  
|Warrants
  exercised                                      |  | 100,000         |   |                    |   | 1,000                              |   |                                       |   |                           |   |                                                         |   | 1,000                              |  
|Stock options
  exercised                                 |  | 12,500          |   |                    |   | 6,250                              |   |                                       |   |                           |   |                                                         |   | 6,250                              |  
|Placement legal
  fees                                    |  |                 |   |                    |   | (46,668                            | ) |                                       |   |                           |   |                                                         |   | (46,668                            | )
|Net loss                                                  |  |                 |   |                    |   |                                    |   |                                       |   | (7,061,474                | ) |                                                         |   | (7,061,474                         | )
|Foreign currency
  translation gain                       |  |                 |   |                    |   |                                    |   |                                       |   |                           |   | 74,135                                                  |   | 74,135                             |  
|Stock based
  compensation charge                         |  |                 |   |                    |   | 803,735                            |   |                                       |   |                           |   |                                                         |   | 803,735                            |  
|                                                          |  |                 |   |                    |   |                                    |   |                                       |   |                           |   |                                                         |   |                                    |  
|Balances  - February 28, 2007                             |  | 45,348,974      |   | 45                 |   | 20,543,688                         |   |                                      |   | (19,555,533               | ) | 51,875                                                  |   | 1,040,075                          |  
|                                                          |  |                 |   |                    |   |                                    |   |                                       |   |                           |   |                                                         |   |                                    |  
|Issuance of
  restricted stock, net of retirement         |  | 16,108,500      |   | 16                 |   | 2,400,337                          |   |                                       |   |                           |   |                                                         |   | 2,400,353                          |  
|Repurchase and
  cancellation of restricted shares        |  | (1,328,250      | ) | (1                 | ) | (317,185                           | ) |                                       |   |                           |   |                                                         |   | (317,186                           | )
|Convertible debt
  financing, net of expenses             |  | 35,392,003      |   | 35                 |   | 7,803,330                          |   |                                       |   |                           |   |                                                         |   | 7,803,365                          |  
|Common stock sold
  in private placement, net of expenses |  | 42,040,000      |   | 42                 |   | 10,094,843                         |   |                                       |   |                           |   |                                                         |   | 10,094,885                         |  
|Warrants issued
  as payments for services in kind        |  |                 |   |                    |   | 19,625                             |   |                                       |   |                           |   |                                                         |   | 19,625                             |  
|Net loss                                                  |  |                 |   |                    |   |                                    |   |                                       |   | (14,640,942               | ) |                                                         |   | (14,640,942                        | )
|Foreign currency
  translation loss                       |  |                 |   |                    |   |                                    |   |                                       |   |                           |   | (13,714                                                 | ) | (13,714                            | )
|Stock based
  compensation charge                         |  |                 |   |                    |   | 200,447                            |   |                                       |   |                           |   |                                                         |   | 200,447                            |  
|                                                          |  |                 |   |                    |   |                                    |   |                                       |   |                           |   |                                                         |   |                                    |  
|Balances  - February 29, 2008                             |  | 137,561,227     |   | 137                |   | 40,745,085                         |   |                                      |   | (34,196,475               | ) | 38,161                                                  |   | 6,586,908                          |  
|                                                          |  |                 |   |                    |   |                                    |   |                                       |   |                           |   |                                                         |   |                                    |  

See Notes to Consolidated
Financial Statements.

44

---



NARROWSTEP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                   |  |                         |             |                         |  |            |  
|---------------------------------------------------------------------------------- |  | ----------------------- | ----------- | ----------------------- |  | ---------- | -
|                                                                                   |  |                         |            
|                                                                                   |  | Years Ended             |            
|                                                                                   |  | February 29,
  2008
  $ |             | February 28,
  2007
  $ | 
|                                                                                   |  |                         |             |                         | 
|Cash Flows from Operating Activities                                               |  |                         |             |                         |  |            |  
|Net loss                                                                           |  |                         | (14,640,942 | )                       |  | (7,061,474 | )
|Adjustments to reconcile net loss to net cash used in operating
  activities:      |  |                         |             |                         |  |            |  
|Allowance for doubtful accounts                                                    |  |                         | (173,064    | )                       |  | 738,821    |  
|Depreciation and amortization                                                      |  |                         | 952,768     |                         |  | 573,934    |  
|Loss on disposal of property and equipment                                         |  |                         | 47,180      |                         |  |           |  
|Stock-based compensation expense                                                   |  |                         | 2,600,800   |                         |  | 803,735    |  
|Interest on short-term investment                                                  |  |                         |            |                         |  | (57,609    | )
|Impairment charge on long - lived assets                                           |  |                         | 861,858     |                         |  | 1,228,437  |  
|Warrants issued to third party suppliers for services in
kind                      |  |                         | 19,625      |                         |  |           |  
|Interest on debt issuance                                                          |  |                         | 853,200     |                         |  |           |  
|Changes in net cash attributable to changes in operating assets and
  liabilities: |  |                         |             |                         |  |            |  
|Accounts receivable                                                                |  |                         | 652,993     |                         |  | (1,724,206 | )
|Prepaid expenses and other current assets                                          |  |                         | (78,918     | )                       |  | (196,650   | )
|Unearned revenue                                                                   |  |                         | (352,759    | )                       |  | 207,667    |  
|Accounts payable, accrued expenses and other current
liabilities                   |  |                         | (388,538    | )                       |  | 1,009,503  |  
|                                                                                   |  |                         |             |                         |  |            |  
|Net Cash Used in Operating Activities                                              |  |                         | (9,645,797  | )                       |  | (4,477,842 | )
|                                                                                   |  |                         |             |                         |  |            |  
|Cash Flows from Investing Activities                                               |  |                         |             |                         |  |            |  
|Purchases of property and equipment                                                |  |                         | (2,321,940  | )                       |  | (1,132,945 | )
|Payment for security deposit                                                       |  |                         | (281,790    | )                       |  |           |  
|Payments for software development costs                                            |  |                         | (669,104    | )                       |  | (120,136   | )
|Proceeds from short-term investments                                               |  |                         |            |                         |  | 2,557,609  |  
|                                                                                   |  |                         |             |                         |  |            |  
|Net Cash Provided by (Used in) Investing Activities                                |  |                         | (3,272,834  | )                       |  | 1,304,528  |  
|                                                                                   |  |                         |             |                         |  |            |  
|Cash Flows from Financing Activities                                               |  |                         |             |                         |  |            |  
|Net proceeds from issuance of common stock                                         |  |                         | 10,094,885  |                         |  | 1,431,333  |  
|Net proceeds from issuance of debt instruments                                     |  |                         | 6,989,891   |                         |  |           |  
|Proceeds from exercise of stock options and warrants                               |  |                         |            |                         |  | 7,250      |  
|Retirement of Narrowstep shares                                                    |  |                         | (317,186    | )                       |  |           |  
|Payments on capital leases                                                         |  |                         | (123,552    | )                       |  | (75,298    | )
|                                                                                   |  |                         |             |                         |  |            |  
|Net Cash Provided by Financing Activities                                          |  |                         | 16,644,038  |                         |  | 1,363,285  |  
|                                                                                   |  |                         |             |                         |  |            |  
|Net Increase (Decrease) in Cash and Cash
Equivalents                               |  |                         | 3,725,407   |                         |  | (1,810,029 | )
|Effect of exchange rates on change in cash                                         |  |                         | (21,427     | )                       |  | 44,045     |  
|Cash and cash equivalents at the beginning of period                               |  |                         | 466,870     |                         |  | 2,232,854  |  
|                                                                                   |  |                         |             |                         |  |            |  
|Cash and Cash Equivalents at the End of the Period                                 |  |                         | 4,170,850   |                         |  | 466,870    |  
|                                                                                   |  |                         |             |                         |  |            |  
|                                                                                   |  |                         |             |                         |  |            |  
|Supplemental
  schedule of non-cash investing activities:                          |  |                         |             |                         |  |            |  
|Property and equipment acquired under capital leases                               |  |                         | 196,702     |                         |  | 196,769    |  
|Supplemental schedule of non-cash financing
  activities:                          |  |                         |             |                         |  |            |  
|Debt converted to equity                                                           |  |                         | 6,989,891   |                         |  |           |  
|Interest on debt issuance paid out with common shares                              |  |                         | 853,200     |                         |  |           |  
|Common Stock issued pursuant to consulting agreement                               |  |                         |             |                         |  | 68,000     |  

See Notes to Consolidated Financial
Statements.

45

---



NARROWSTEP INC. AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization and Basis of Presentation

Organization and Going Concern

Narrowstep Inc. was
incorporated in Delaware on May 9, 2002 and adopted a fiscal year-end of February
28th (or 29th). The accompanying consolidated financial
statements include the accounts of Narrowstep Inc. and its wholly-owned
subsidiaries Narrowstep Ltd. and Sportshows Television Ltd. (STV),
(collectively, the Company).

Narrowstep Inc. is in the
business of developing, producing, transmitting and managing, via the Internet,
television-like channels of streaming video broadcasts which are tailored for,
and targeted to, specific audiences. Narrowstep Ltd. also offers a
comprehensive range of related services which facilitate channel development,
including consulting, channel design, maintenance, operation and content
production. STV provided production services which the Company no longer
offers.

The accompanying
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The Company has
incurred cumulative losses of approximately $34,200,000 since inception. The
Company has a working capital surplus of approximately $3,771,000 and has
utilized cash from operations over the past two fiscal years of approximately
$14,124,000. These factors among others, raise substantial doubt about the
companys ability to continue as a going concern.

On May 29, 2008, Narrowstep
signed a definitive merger agreement with Onstream Media Corporation. Further
details are described in Note 13 in the notes to the consolidated financial
statements.

There are currently no
commitments in place for additional financing, nor can assurances be given that
such financing will be available.

Basis of presentation

The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries and are expressed in US dollars. All inter-company accounts and
transactions have been eliminated in consolidation.

2. Summary of Significant Accounting
Policies

Use of Estimates

The preparation of the
consolidated financial statements 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 consolidated
financial statements and the reported amount of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Companys two primary
sources of revenue are production services (which ceased in June 2007) and
Internet TV channel building or narrowcasting.

46

---



Internet TV channel building
service revenue includes the following: (i) consulting fees charged to
assist customers in the design and development of the customers channel,
(ii) consulting fees related to recording and encoding of specific
customer content, and (iii) monthly license fees charged for ongoing
maintenance, support, upgrades and content hosting activity. The minimum
license period is 12 months unless it is an evaluation license. Revenues for
the consulting fees are only recognized once the design and development of the
channel is completed and accepted by the customer. Recording and encoding fees
are due on delivery of the tapes or on completion of the upload of the encoded
material onto the Companys servers. Monthly license fees are recognized month-by-month
starting with the month when the channel starts narrowcasting. Any up-front
fees are deferred until the revenue is earned by either completion of the
consulting activity or month-by-month hosting activity.

Production services revenues
include the following: (i) preparation, scripting and filming of a single or
multiple series of events, (ii) live editing and encoding of such events, (iii)
editing of footage and final production into programs in the Companys editing
suites, and (iv) copying and delivery of the programs. Revenues are recognized
once delivery of a program, in the form of edited tape, takes place. If it is a
series then payments are staged and revenues recognized on completion of each
discrete program. Any up-front fees are deferred and only recognized once the
program, editing and production are complete. Until the revenues are earned and
recognized any cash received up-front is treated as unearned revenue and any
costs incurred in connection with services that have not been completed are
capitalized as prepaid expenses.

The Companys revenue recognition policy
complies with the
Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB
101), Revenue Recognition, amended by SAB 104. Revenue is recognized when all of the following criteria
are met:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Persuasive evidence of an arrangement
 exists  A
 non-cancelable signed agreement between the Company and the customer is
 considered to be evidence of an arrangement.                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Delivery has occurred or services have been
 rendered  Although deposits or prepayments are common with orders, revenues
 are recognized only on the delivery of content or channel or service. Revenue
 from resellers is recognized upon sell-through to the end customer.                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The sellers price to the buyer is fixed or
 determinable 
 All the Companys customers sign a written contract that states the price the
 customer will pay for the monthly license fee and for the bandwidth and
 storage usage. The Companys contracts terms are typically 12 months. If the
 customer decides to cancel a channel, all of the development work, content
 production, initial license and monthly license fees to-date remain due and
 non-cancelable.                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Collectibility is reasonably assured  The
 Company runs normal business credit checks on unknown new customers to
 minimize the risk of a customer avoiding payment. Collection is deemed
 probable if the Company expects that the customer will be able to pay amounts
 under the arrangement as payments become due. If the Company determines that
 collection is not probable, the revenue is deferred and recognized upon cash
 collection. The Company also seeks a deposit wherever possible before
 commencing work on a new contract.

Fair Value of Financial Instruments

The fair value
of the Companys assets and liabilities, which qualify as financial instruments
under Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosures About Fair Value of Financial Instruments, approximates the
carrying amounts presented in the consolidated balance sheet.

Cash and Cash Equivalents

For the purposes of the
consolidated statements of cash flows, the Company considers all highly-liquid
debt instruments purchased with maturities of three months or less to be cash
equivalents. At February 29, 2008 cash and cash equivalents consisted of
checking and money market accounts aggregating $4,170,850. As of February 29,
2008 and at various times during the year, balances of cash at financial
institutions exceeded the federally insured limit. The Company has not experienced
any losses in such accounts and believes it is not subject to any significant
credit risk on cash and cash equivalents.

47

---



Accounts Receivable and Allowance
for Doubtful Accounts

Accounts receivable
represent uncollateralized customer obligations due under normal trade terms
generally requiring payment within 30 days from the invoice date. Follow-up
calls and correspondence is made if unpaid accounts receivable go beyond the
invoice due date. Payments of accounts receivable are allocated to the specific
invoices identified on the customers remittance advice.

Accounts receivable are
stated at the amount management expects to collect from outstanding balances.
The carrying amounts of accounts receivable is reduced by a valuation allowance
that reflects managements best estimate of the amounts that will not be
collected. Management individually reviews all accounts receivable balances
that exceed the due date and estimates the portion, if any, of the balance that
will not be collected. Management provides for probable uncollectible amounts
through a charge to earnings and a credit to a valuation allowance based on its
assessment of the current status of individual accounts. Balances that are
still outstanding after management has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to
accounts receivable.

Property and Equipment

Property and equipment are stated at cost net
of accumulated depreciation and amortization. Costs of additions and substantial
improvements to property and equipment are also capitalized. Maintenance and repairs are charged to operations,
while betterments and improvements are capitalized. The Company computes depreciation and amortization for all property and
equipment using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows: Computer &
Other Equipment are three years, Furniture and Fixtures are four years, Motor
Vehicles are four years and Leasehold Improvements are over the term of the
lease.

Loss Per Share

The Company
complies with SFAS No. 128 Earnings per Share, which requires basic loss per
common share to be computed by dividing net loss by the weighted average number
of common shares outstanding during the period. Diluted loss per common share
incorporates the dilutive effect of common stock equivalents on an average
basis during the period. The calculation of diluted net loss per share excludes
potential common shares if the effect is anti-dilutive. Therefore, basic and
diluted loss per share were the same for the years ended February 29, 2008 and
February 28, 2007.

Impairment of Long-Lived Assets

The Company adheres to SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and
periodically assesses the recoverability of the carrying amounts of long-lived
assets, including intangible assets. A loss is recognized when expected
undiscounted future cash flows are less than the carrying amount of the asset.
The impairment loss is the difference by which the carrying amount of the asset
exceeds its fair value.

Software Development Costs

The
Company accounts for its internal use software under SOP 98-1, Accounting for
the Costs of Computer Software Developed for or Obtained for Internal Use,
which requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. Capitalized software
development costs consist primarily of programmers compensation and benefits,
where applicable. These
costs are amortized over a period not to exceed three years beginning when the
asset is substantially ready for use. Costs incurred during the preliminary
project stage, as well as maintenance and training costs are charged to
research and development expense as incurred in accordance with SFAS No. 2
Research and Development Costs.

48

---



During
the years ended February 29, 2008 and 2007, the Company capitalized $669,104
and $120,136 respectively, and recorded amortization expense of $117,967 and
$128,491, respectively.

Foreign Currency Translation

The Company complies with
the accounting and disclosure requirements of SFAS No. 52 Foreign Currency
Translation. For operations outside the United States that prepare financial
statements in currencies other than the U.S. dollar, statement of
operations amounts are translated at an average exchange rate for the year.
Assets and liabilities are translated at period end exchange rates. Translation
adjustments are presented as a component of accumulated other comprehensive
income (loss) within stockholders equity. Gains and losses from foreign
currency transactions are included in the consolidated statements of
operations.

Advertising and Promotional Costs

Advertising
and promotional costs are expensed as incurred. Such costs are included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations. Advertising and promotional costs charged to
operations were $258,946 and $457,051 for the years ended February 29, 2008 and
February 28, 2007, respectively.

Comprehensive Income

The Company complies with
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes rules
for the reporting and display of comprehensive income (loss) and its components.
SFAS No. 130 requires the Companys change in the foreign currency translation
adjustments to be included in other comprehensive income (loss).

Income Taxes

Narrowstep
Inc., the parent company, is a United States corporation and files corporate income
tax returns in the United States. Narrowstep Ltd. and STV are companies
incorporated in England and Wales and, as such, file their own corporate income
tax returns in the United Kingdom. The provision for
income taxes is based on reported income before income taxes. Deferred income
taxes are provided in accordance with SFAS No. 109 Accounting for Income
Taxes, for the effect of temporary differences between the amounts of assets
and liabilities recognized for financial reporting purposes and the amounts
recognized for income tax purposes. Deferred tax assets and liabilities are
measured using currently enacted tax laws and the effects of any changes in
income tax laws are included in the provision for income taxes in the period of
enactment. Valuation allowances are recognized to reduce deferred tax assets
when it is more likely than not that the asset will not be realized. In
assessing the likelihood of realization, the Company considers estimates of
future taxable income, the character of income needed to realize future
benefits and all available evidence.

The Company also complies with Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which
provides criteria for the recognition, measurement, presentation, and
disclosure of uncertain tax positions. A tax benefit from an uncertain position
may be recognized only if it is more likely than not that the position is
sustainable based on its technical merits.

49

---



Stock-Based Compensation

The Company
complies with the accounting and disclosure requirements of SFAS No. 123(R),
Accounting for Stock-Based Compensation (Revised). SFAS No. 123(R) supersedes
APB No. 25 and its related implementation guidance. SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entitys equity instruments or that may be
settled by the issuance of those equity instruments. SFAS No. 123(R) focuses
primarily on accounting for transactions in which an entity obtains employee services
in share-based payment transactions. SFAS No. 123(R) requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with
limited exceptions). That cost will be recognized over the period during which
an employee is required to provide service in exchange for the award the
requisite service period (usually the vesting period). No compensation costs
are recognized for equity instruments for which employees do not render the
requisite service. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments (unless observable market prices
for the same or similar instruments are available). If an equity award is modified after the grant date,
incremental compensation cost will be recognized in an amount equal to the
excess of the fair value of the modified award over the fair value of the
original award immediately before the modification.

Impacts of Recent Accounting
Pronouncements

On March 19, 2008, the FASB
issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS 161), to improve financial reporting of
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entitys financial
position, financial performance, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, which will require the Company to adopt these
provisions for business combinations occurring in fiscal 2010 and thereafter.
Management is currently evaluating the effect that SFAS 161 may have on
the Companys financial statement disclosures.

In December 2007, the
FASB issued SFAS No. 141R, Business Combinations (SFAS 141R). SFAS
141R replaces SFAS 141 and establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. Acquisition costs associated with the
business combination will generally be expensed as incurred. SFAS 141R is
effective for business combinations occurring in the fiscal years beginning on
or after December 15, 2008, which will require the Company to adopt
these provisions for business combinations occurring in fiscal 2010 and
thereafter.

In December 2007, FASB
issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51, (SFAS 160), which changes
the accounting and reporting for minority interests. Minority interests will be
recharacterized as noncontrolling interests and will be reported as a component
of equity separate from the parents equity, and purchases or sales of equity
interests that do not result in a change in control will be accounted for as
equity transactions. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement and, upon a loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for financial statements issued
for fiscal years beginning on or after December 15, 2008 and will apply
prospectively, except for the presentation and disclosure requirements, which
will apply retroactively. The adoption of SFAS 160 is not expected to have
a significant impact on the Companys financial position, results of operations
or cash flows occurring in fiscal 2010 and thereafter.

In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company does
not expect the adoption of SFAS 159 to have a material impact on its consolidated
financial position, results of operations or cash flows.

50

---



In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements. (SFAS 157) The objective of SFAS
157 is to increase consistency and comparability in fair value measurements and
to expand disclosures about fair value measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or permit
fair value measurements and does not require any new fair value measurements.
The provisions of SFAS 157 are effective for fair value measurements made
in fiscal years beginning after November 15, 2007, which will require the
Company to adopt these provisions for business combinations occurring in fiscal
2009 and thereafter. Management is currently evaluating the effect that
SFAS 157 may have on the Companys financial statement disclosures.

3. Pension, Post-Retirement and Other
Employee Benefit Plans

Certain employees of STV are covered by a non-contributory defined
contribution pension plan. Pension
costs charged to operations were $697 and $12,330 for the years ended February
29, 2008 and 2007, respectively.

4.
Borrowings

An overdraft facility is a
line of credit arrangement, negotiated with a bank and usually reviewable on an
annual basis, whereby the banks customer is permitted to take its checking
account into a debit balance on a pre-agreed interest basis up to an agreed
amount. Amounts utilized under overdraft facilities are payable on demand. At
February 29, 2008 and February 28, 2007, the Companys overdraft facilities
consisted of approximately $19,800 and $19,600, respectively, with Barclays
Bank PLC and $39,700 and $39,000, respectively, with National Westminster Bank
PLC (NatWest). Neither facility was utilized on February 29, 2008 or February
28, 2007. The interest rate on the Barclays facility is 5.75% above Barclays
variable base rate (which base rate was 5.0% per annum as of February 29,
2008). The interest rate on the NatWest facility is 5.75% above NatWests
variable base rate (which base rate was 5.50% per annum as of February 29,
2008). The Company renewed the Barclays overdraft facility on March 20, 2008.
The Company also renewed the NatWest overdraft facility on October 10, 2007
which will expire in one year from such date.

5.
Impairment of Long-Lived Assets

Impairment charge on
long-lived assets reflects the write down of the Companys equipment assets
located in the Companys California POP (Point of Presence) located in the
Companys internal content delivery network (CDN), which was shut down during
April 2008.

The reason for the
impairment was due to several factors. During the build out of the California
POP, which had taken close to a year, the Companys internal reports from the
Companys CDN indicated that the Companys London and NY POPs were
sufficiently managing the traffic of the Companys existing and newly signed
customers. During this time, many of the projections related to customer
bandwidth requirements had declined. One reason for the decline came as a
result of the Companys shift in focus from smaller content owners to larger
enterprise customers. Making this change during the year, created a delay in
signing up new customers since the sales cycle is longer for enterprise
customers. At the same time, many third party CDN providers had dropped their
rates and improved the streaming capabilities. In performing the cost analysis
of keeping the California POP vs. utilizing the Companys existing London and
NY POPs while interconnecting to a third party CDN, management determined that
it could operate sufficiently and save a substantial amount per month vs.
continuing to pay the high fixed monthly charges that the California POP
required. In an effort to conserve operating cash and still meet the bandwidth
demands of the Companys customers, management made the decision to discontinue
the operation of the California POP. Therefore, the assets associated with the
POP were written down to market value. The market value was determined by
obtaining the cost to sell the majority of the equipment and then applying that
percent write down to the entire system.

During the fiscal year ended
February 28, 2007, the Company took an impairment charge on long-lived assets,
which reflected the write off of the goodwill and intangible assets of
Sportshows Television, Ltd., the Companys production services business. The
production segment has not been profitable and the Company subsequently decided
to exit the production segment.

51

---



6.
Property and Equipment

Property and equipment
consists of the following at February 29, 2008:

|                                                 |  |                                |  
|------------------------------------------------ |  | ------------------------------ | -
|                                                 |  |                                |  
|                                                 |  | Year Ended
 February 29,
 2008 |  
|                                                 |  | $                              |  
|                                                 |  |                                |  
|                                                
|Leasehold improvements                           |  | 220,200                        |  
|                                                
|Furniture and fixtures                           |  | 103,179                        |  
|                                                
|Computer & other
 equipment                      |  | 3,234,113                      |  
|                                                
|Motor vehicles                                   |  | 25,793                         |  
|Less: Accumulated
 depreciation and amortization |  | (1,587,781                     | )
|                                                 |  |                                |  
|                                                
|Net Book Value                                   |  | 1,995,504                      |  
|                                                 |  |                                |  

The Company leases certain
equipment under capital lease arrangements. Depreciation for assets recorded
under capital lease agreements is included within depreciation in the
consolidated statements of operations. Assets recorded under capital lease
agreements included in computer and other equipment consisted of equipment with
a cost of $693,204, with an associated balance of accumulated depreciation of
$464,001, as of February 29, 2008.

7. Accrued Expenses and Other Current
Liabilities

Accrued expenses and other
current liabilities consists of the following at February 29, 2008:

|                          |  |                                | 
|------------------------- |  | ------------------------------ | 
|                          |  |                                | 
|                          |  | Year Ended
 February 29,
 2008 | 
|                          |  | $                              | 
|                          |  |                                | 
|                         
|Compensation accrual      |  | 300,532                        | 
|                         
|Professional fees accrued |  | 280,986                        | 
|                         
|Bandwidth providers       |  | 152,780                        | 
|                         
|Other                     |  | 79,916                         | 
|                          |  |                                | 
|                         
|Total                     |  | 814,214                        | 
|                          |  |                                | 

On March 2, 2007, the
Company entered into a Purchase Agreement (the Purchase Agreement) with a
number of accredited investors (the Investors) for the sale of its 12% Mandatorily
Convertible Notes (the Notes) and Warrants (the Warrants) for a total
purchase price of $7,110,000. The Notes, which mature on March 2, 2009, bear
interest at 12% per annum, payable at maturity. The Notes will mandatorily
convert at a 10% discount into the securities issued by the Company in any
subsequent private placement that results in gross proceeds to the Company of
at least $3,000,000 or, in the event of a sale of the Company prior thereto,
shares of common stock valued at a discount of 10% to the per share price to be
paid in the Company sale. The Warrants are exercisable at any time on or prior
to March 2, 2012 for an aggregate of 3,555,000 shares of common stock at an
exercise price of $0.60 per share, subject to adjustment. The Company has the
right to force the cash exercise of the Warrants if the common stock trades at
or above $1.80 per share for at least 20 consecutive trading days. Both the
Notes and the Warrants contain customary anti-dilution provisions in the event
of any stock split, reverse stock split, reclassification or recapitalization
of the Company. In connection with the August 8, 2007 financing, the full
amount of the Notes were automatically converted into an aggregate of
35,392,003 shares of common stock at a conversion price of $0.225 per share.

52

---



8. Stock Option Plan

In December
2003, the board of directors adopted the Narrowstep Inc. 2004 Stock Option Plan
(the Plan). The purpose of the Plan is to allow the Company to provide a
means by which eligible employees, Board members and certain non-employees may
be given an opportunity to benefit from increases in value of its common
shares. The Plan is administered by the board of directors. The Board is
empowered to determine from time-to-time which of the persons eligible under
the Plan shall be granted awards; when and how each award shall be granted;
what type or combination of types of awards shall be granted; the provisions of
each award granted, including the time or times when a person shall be permitted
to receive common shares pursuant to an award; and the number of common shares
with respect to which an award shall be granted to each person; to construe and
interpret the Plan and awards granted under it, and to establish, amend and
revoke rules and regulations for its administration.

The Board, at
any time, and from time to time, may amend the Plan.

The following
table summarizes activity of the Plan for the years ended February 29, 2008 and
February 28, 2007:

|                                  |  |                   |   |                                  | 
|--------------------------------- |  | ----------------- | - | -------------------------------- | 
|                                  |  |                   |   |                                  | 
|                                  |  | Number of
 Shares |   | Weighted-
 Avg
 Exercise
 Price$ | 
|                                  |  |                   |   |                                  | 
|Outstanding at February 28,
 2006 |  | 10,122,213        |   | 0.95                             | 
|Granted                           |  | 2,666,500         |   | 0.89                             | 
|Exercised                         |  | (12,500           | ) | 0.50                             | 
|Forfeited                         |  | (504,106          | ) | 0.85                             | 
|                                  |  |                   |   |                                  | 
|Outstanding at February 28,
 2007 |  | 12,272,107        |   | 0.94                             | 
|Granted                           |  | 2,497,267         |   | 0.56                             | 
|Exercised                         |  | 0                 |   | 0.00                             | 
|Forfeited                         |  | (5,285,739        | ) | 1.22                             | 
|                                  |  |                   |   |                                  | 
|Outstanding at February 29,
 2008 |  | 9,483,635         |   | 0.77                             | 

The following
table contains information concerning outstanding stock options and restricted
stock units as of February 29, 2008:

|                    |      |                    |   |                    |  |          |           |                                                 |      |                                    |   |          |  |                                                 |           |                                    |      |  |   |      | 
|------------------- | ---- | ------------------ | - | ------------------ |  | -------- | --------- | ----------------------------------------------- | ---- | ---------------------------------- | - | -------- |  | ----------------------------------------------- | --------- | ---------------------------------- | ---- |  | - | ---- | 
|Exercise PriceRange |      | Awards Outstanding |   | Awards Exercisable | 
|                    |      |                    |   |                    | 
|                    |      |                    |   |                    |  | Quantity |           | Weighted
 Average
 Remaining
 Contractual
 Life |      | Weighted
 Average
 Exercise
 Price |   | Quantity |  | Weighted
 Average
 Remaining
 Contractual
 Life |           | Weighted
 Average
 Exercise
 Price |     
|                    |      |                    |   |                    |  |          |           |                                                 |      |                                    |   |          |  |                                                 |           |                                    |     
|$                   | 0.00 |                    | $ | 0.30               |  |          | 1,467,252 |                                                 | 0.78 |                                    | $ | 0.20     |  |                                                 | 1,467,252 |                                    | 0.78 |  | $ | 0.20 | 
|$                   | 0.31 |                    | $ | 0.45               |  |          | 1,020,000 |                                                 | 0.84 |                                    | $ | 0.40     |  |                                                 | 1,010,000 |                                    | 0.84 |  | $ | 0.40 | 
|$                   | 0.46 |                    | $ | 0.60               |  |          | 1,842,928 | *                                               | 6.98 |                                    | $ | 0.53     |  |                                                 | 1,450,000 |                                    | 2.47 |  | $ | 0.50 | 
|$                   | 0.61 |                    | $ | 0.75               |  |          | 891,000   |                                                 | 6.82 |                                    | $ | 0.68     |  |                                                 | 641,000   |                                    | 5.90 |  | $ | 0.68 | 
|$                   | 0.76 |                    | $ | 0.90               |  |          | 30,000    |                                                 | 7.88 |                                    | $ | 0.90     |  |                                                 | 30,000    |                                    | 7.88 |  | $ | 0.90 | 
|$                   | 0.91 |                    | $ | 1.05               |  |          | 1,353,334 |                                                 | 5.95 |                                    | $ | 0.95     |  |                                                 | 786,672   |                                    | 3.79 |  | $ | 0.97 | 
|$                   | 1.06 |                    | $ | 1.20               |  |          | 2,002,664 |                                                 | 4.06 |                                    | $ | 1.20     |  |                                                 | 2,002,664 |                                    | 4.06 |  | $ | 1.20 | 
|$                   | 1.21 |                    | $ | 1.35               |  |          | 98,500    |                                                 | 7.64 |                                    | $ | 1.25     |  |                                                 | 98,500    |                                    | 7.64 |  | $ | 1.25 | 
|$                   | 1.36 |                    | $ | 1.50               |  |          | 777,957   |                                                 | 3.58 |                                    | $ | 1.50     |  |                                                 | 777,957   |                                    | 3.58 |  | $ | 1.50 | 
|                    |      |                    |   |                    |  |          |           |                                                 |      |                                    |   |          |  |                                                 |           |                                    |      |  |   |      | 
|                    |      |                    |   |                    |  |          | 9,483,635 |                                                 | 3.91 |                                    | $ | 0.77     |  |                                                 | 8,264,045 |                                    | 3.02 |  | $ | 0.81 | 
|                    |      |                    |   |                    |  |          |           |                                                 |      |                                    |   |          |  |                                                 |           |                                    |      |  |   |      | 

* Balance
includes 1,250,000 restricted stock units.

53

---



The following
table contains information concerning outstanding warrants as of February 29,
2008:

|                  |  |                  |  |                       | 
|----------------- |  | ---------------- |  | --------------------- | 
|                  |  |                  |  |                       | 
|Grant Date        |  | Exercise
 Price$ |  | Warrant
 SharesIssued | 
|                  |  |                  |  |                       | 
|February 22, 2006 |  | 0.37             |  | 6,183,332             | 
|February 22, 2006 |  | 0.60             |  | 6,183,332             | 
|March 2, 2007     |  | 0.60             |  | 3,555,000             | 
|March 8, 2007     |  | 0.60             |  | 75,875                | 
|March 8, 2007     |  | 0.91             |  | 50,000                | 
|August 8, 2007    |  | 0.50             |  | 22,726,400            | 
|October 16, 2006  |  | 0.95             |  | 6,000                 | 
|May 3, 2006       |  | 1.01             |  | 40,000                | 
|August 31, 2005   |  | 1.20             |  | 630,000               | 
|                  |  |                  |  |                       | 
|Total outstanding |  |                  |  | 39,449,939            | 
|                  |  |                  |  |                       | 

All the
warrants outstanding expire five years from the grant date.

The fair value
of options and warrants granted during the years ended February 29, 2008 and
February 28, 2007 were estimated using the Black-Scholes option pricing model
with the following weighted average assumptions:

|                        |          
|----------------------- | ---------
|Expected life in years  | 2        
|Risk-free interest rate | 2%
 to 5%
|                       
|Volatility              | 75%      
|                       
|Dividend Yield          | Nil      

On August 8, 2007, the
Company closed a private financing with a number of accredited investors for
the sale of common stock and warrants for a total purchase price of
$10,510,000. Pursuant to the financing, the Company sold a total of 42,040,000
shares of common stock at a purchase price of $0.25 per share. The Company also
issued warrants to purchase an aggregate of 21,020,000 shares of common stock
at an exercise price of $0.50 per share, subject to adjustment. The warrants
are exercisable at any time on or prior to August 8, 2012. The warrants contain
customary anti-dilution provisions in the event of any stock split, reverse
stock split, reclassification or recapitalization of the Company. In addition,
the exercise price and the number of shares issuable upon the exercise of the
warrants are subject to adjustment on a full-ratchet basis in the event that
the Company issues or are deemed to have issued shares of common stock at an
effective purchase price of less than $0.50 per share, subject to certain
exceptions. In the financing, the Company issued to the placement agents
warrants to purchase an aggregate of 1,706,400 shares of common stock. Those
warrants have the same terms as the warrants issued in the financing, except
that the warrants issued to the placement agents have a cashless exercise
right.

54

---



9. Income Taxes

The Company did not incur taxes
due to the net losses in the fiscal years ended February 28, 2007 and 2006. The
components of net loss before income taxes are as follows:

|              |  |                                 |   |                                 |  
|------------- |  | ------------------------------- | - | ------------------------------- | -
|              |  |                                 |   |                                 |  
|              |  | Year Ended
 February 29, 2008 $ |   | Year Ended
 February 28, 2007 $ |  
|              |  |                                 |   |                                 |  
|United States |  | (11,122,747                     | ) | (5,399,827                      | )
|             
|Foreign       |  | (3,518,195                      | ) | (1,661,647                      | )
|              |  |                                 |   |                                 |  
|              |  |                                 |   |                                 |  
|Net Loss      |  | (14,640,942                     | ) | (7,061,474                      | )
|              |  |                                 |   |                                 |  

The provision for income taxes
differs from the amount computed by applying the statutory federal income tax
rate as follows:

|                                                 |  |                                 |   |                                 |  
|------------------------------------------------ |  | ------------------------------- | - | ------------------------------- | -
|                                                 |  |                                 |   |                                 |  
|                                                 |  | Year Ended
 February 29, 2008 $ |   | Year Ended
 February 28, 2007 $ |  
|                                                 |  |                                 |   |                                 |  
|Income tax at the federal
 statutory rate of 35% |  | (5,124,330                      | ) | (2,471,516                      | )
|                                                 |  |                                 |   |                                 |  
|Non-deductible costs                             |  | 922,280                         |   | (732,512                        | )
|Change in valuation
 allowances                  |  | 4,010,116                       |   | 1,659,081                       |  
|                                                 |  |                                 |   |                                 |  
|Foreign tax rate
 differences                    |  | 175,910                         |   | 83,082                          |  
|Other                                            |  | 16,024                          |   | (3,159                          | )
|                                                 |  |                                 |   |                                 |  
|                                                 |  |                                 |   |                                 |  
|Net Book Value                                   |  | 0                               |   | 0                               |  
|                                                 |  |                                 |   |                                 |  

Deferred income taxes reflect
the tax effects of temporary differences between the carrying amounts of assets
for financial reporting purposes and the amounts used for income tax purposes.
The components of deferred income tax assets are as follows:

|                                  |  |                      |  
|--------------------------------- |  | -------------------- | -
|                                  |  |                      |  
|                                  |  | February 29, 2008
 $ |  
|                                  |  |                      |  
|                                  |  |                      |  
|Net operating loss
 carryforwards |  | 7,146,951            |  
|                                  |  |                      |  
|Allowance for bad debt            |  | 51,715               |  
|                                  |  |                      |  
|Property and equipment            |  | 512,887              |  
|                                  |  |                      |  
|Gross deferred tax assets         |  | 7,711,553            |  
|Less valuation allowance          |  | (7,711,553           | )
|                                  |  |                      |  
|                                  |  |                      |  
|Net deferred tax asset            |  | 0                    |  
|                                  |  |                      |  

55

---



Management
regularly assesses the ability to realize deferred tax assets based upon the
weight of available evidence, including such factors as the recent earnings
history and expected future taxable income. The methodology used by management
to determine the amount of deferred tax assets that are likely to be realized
is based upon the Companys recent earnings and estimated future taxable income
in applicable tax jurisdictions.

The Company
has not generated any taxable income to date, and therefore has not had to pay
any income tax since its inception. The Company has provided a full valuation
allowance against the deferred tax asset since it is more likely than not that
the asset will not be recovered. For the fiscal year ended February 29, 2008,
the Companys net operating loss carryforward, at the expected tax rates for
its operations, is approximately $3,049,000 which is deductible against future
taxable income generated in the United Kingdom, which will remain in place
until utilized and approximately $4,053,000 which is deductible against future
taxable income generated in the United States, which will remain available
until utilized or begin to expire through February 28, 2025.

Under the Tax
Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards and credits may be impaired or limited in certain circumstances.
Events which cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50%, as defined, over a three year
period. In connection with the proposed Merger Agreement (see Note 13),
management believes that such an ownership change will occur, however, the
amount of any limitation on the use of the loss carryforwards can not be
determined at this time.

10. Related Party Transactions

Options granted to current directors. The Company has granted to Roger L. Werner,
Jr., a member of the board of directors, options to purchase 300,000 shares at
an exercise price of $1.18 on March 28, 2006 which are exercisable until March
28, 2016. The Company has granted to each of David C. McCourt and Jack Whyte,
members of the board of directors, options to purchase 300,000 shares at an
exercise price of $0.67 per share on June 7, 2006 which are exercisable until
June 27, 2011. All of the foregoing options granted to Messrs. Werner, McCourt
and Whyte were fully vested on the date granted.

On December 2,
2005, the Company entered into a consultancy agreement with Roger L. Werner, Jr.
Pursuant to this agreement, on May 23, 2006, Mr. Werner was granted options to
purchase 30,000 shares at an exercise price of $0.75 per share, for consultancy
services for the year ended February 28, 2007.

On January 10,
2008, the Company granted Jon Harrington, a member of the board of directors,
300,000 restricted shares which he transferred to Omni Capital. The Company
also granted 300,000 restricted shares to Roger L. Werner, Jr. and 500,000 to
Jack Whyte. All the shares granted on January 10, 2008 have the following
vesting schedule: 25% vested upon grant, the remaining vest in equal
installments on the first of every month beginning February 1, 2008 with the
last vesting date to be September 1, 2008.

Options granted to current officers.
On February 8, 2007, the Company granted options to purchase 200,000 shares to Lisa
VanPatten, the Companys Chief Financial Officer, at an exercise price of $0.92
per share. These options vest over a three-year period and expire on February
8, 2017. On April 30, 2007, the Company granted options to purchase 250,000
shares to Lou Holder, the Companys Chief Technology Officer, at an exercise
price of $0.68 per share. These options vest over a three-year period and
expire on April 30, 2017.

56

---



On June 8,
2007, the Company entered into an employment agreement with David C. McCourt
pursuant to which the Company granted Mr. McCourt 1,250,000 shares of
restricted stock units which vested monthly until November 30, 2007 and
2,500,000 shares of restricted stock which vested based on the Companys
meeting certain performance milestones. All of the restricted stock units and
shares of restricted stock granted to Mr. McCourt pursuant to his employment
agreement have fully vested as of November 30, 2007, as determined by the
Companys Compensation Committee. Mr. McCourt elected to issue back to the Company
336,000 shares of restricted stock with an approximate value of $177,000 to
cover the taxes due on the vested restricted stock that the Company paid for on
behalf of Mr. McCourt. On December 18, 2007, the Company granted Mr. McCourt
1,250,000 restricted shares which fully vested. Mr. McCourt elected to issue
back to the Company 992,000 shares of restricted stock with an approximate
value of $140,000 to cover the taxes due on the vested restricted stock that
the Company paid for on behalf of Mr. McCourt. On January 10, 2008, the Company
granted David C. McCourt 2,500,000 restricted shares which are subject to
vesting upon the Companys meeting certain targets established by the Companys
Compensation Committee.

On January 10,
2008, the Company granted Lisa VanPatten 500,000 shares of restricted stock,
Lou Holder 750,000 shares of restricted stock, Barak Bar-Cohen 1,000,000 shares
of restricted stock and David C. McCourt 900,000 shares of restricted stock
which vest upon termination of employment in connection with a change of
control of the Company, or upon $4M EBITDA attainment. None of these shares of
restricted stock have vested to date.

Options granted to former officers.
The Company has granted options to purchase 1,000,000 shares of common stock to
Steven Crowther, the Companys former Senior Vice President and Chief Financial
Officer, at an exercise price of $1.20 per share. 500,000 of these options were
granted and vested on March 1, 2005 and are exercisable until February 28,
2015. 500,000 of these options were granted on August 11, 2005, 100,000 of
which vested immediately and the remaining 400,000 vested on July 1, 2006.
These options are exercisable until August 11, 2015. On January 17, 2006, the
Company granted Mr. Crowther additional options to purchase 100,000 shares
of common stock, at an exercise price of $0.90 per share. 50,000 of these
options vested immediately on January 17, 2006. In connection with the
Separation and General Release Agreement between the Company and Mr. Crowther, the
period during which Mr. Crowther may exercise his vested options was extended
from September 29, 2006 until June 29, 2007. These options have since expired.

The Company
has granted options to purchase a total of 900,000 shares of common stock to
Stephen Beaumont, the Companys former President and Chief Executive Officer.
200,000 of these options were granted on November 15, 2005 at an exercise price
of $1.50, 100,000 vested immediately and the remainder vested on February 1,
2006. The remaining options were granted on February 28, 2006, 250,000 at an
exercise price of $1.00 per share, which vested immediately, and 450,000 at an
exercise price of $1.50 per share, 225,000 of which vested on June 30, 2006 and
225,000 of which vested on December 31, 2006. In connection with the Separation
and General Release Agreement between the Company and Mr. Beaumont, the period
during which Mr. Beaumont may exercise his vested options was extended until
December 31, 2007. These options have since expired.

Transactions with companies in which certain persons hold an
interest. Narrowstep
Ltd. has developed a channel for LTR Consultancy. John Goedegebuure, a founder
and shareholder of the Company, is the managing director and a shareholder of
LTR Consultancy. Total revenue and total receivables from LTR Consultancy for
fiscal year ending February 28, 2007, was $185,480 and $53,614 respectively.
Total revenue and total receivables from LTR Consultancy for fiscal year ending
February 29, 2008, was $42,236 and $87,224 respectively. The total amount in
receivables remained unpaid and the Company wrote off the amount. Pursuant to
an Investor Relations Agreement with the Company, LTR Consultancy earned fees
for investor relations services of $33,705 for fiscal year ended February 28,
2007. Of these fees, $6,211 was unpaid and netted against the amount owed which
was written off before the end of the fiscal year.

57

---



Outdoor
Channel, a customer of the Company, began utilizing the Companys services in
May 2007. The Chief Executive Officer and President of Outdoor Channel is Roger
L. Werner Jr., a member of the Companys board of directors. The Company billed
Outdoor Channel, $67,705 for the fiscal year ended February 29, 2008 and the
balance in accounts receivable at February 29, 2008 is $6,459.

On May 30,
2006, the Company entered into an advisory agreement with Granahan McCourt
Advisors, LLC. David C McCourt, Chairman of the board of directors, Interim
Chief Executive Officer and Interim Chief Operating Officer, is the beneficial
owner of Granahan McCourt Advisors, LLC and Granahan McCourt Capital, LLC, a
shareholder in the Company. Pursuant to this agreement, Granahan McCourt
Advisors, LLC was issued 100,000 shares of common stock on May 30, 2006 and
received warrants to purchase 6,000 shares, with an exercise price equal to
$0.95 per share. Mr. McCourt became a director of the Company on June 27, 2006,
was named as Chairman of the Board and interim Chief Executive Officer in
December 2006 and was named interim Chief Operating Officer in June 2007. The
Company paid Granahan McCourt Advisors, LLC $80,000 for consulting services and
$9,000 to cover out of pocket expenses for fiscal year ending February 28,
2007. Mr. McCourt voluntarily terminated the advisory agreement once he became
interim Chief Executive Officer and forfeited the remaining balance in the
contract.

In connection
with the Companys August 2007 financing, Mr. McCourt purchased 4,000,000
shares of common stock and warrants to purchase 2,000,000 shares of common
stock for a total purchase price of $1,000,000. In addition, Mr. McCourt
entered into a lock up agreement pursuant to which he and certain entities
controlled by him agreed for a period of nine months from August 8, 2007 not to
sell, dispose or otherwise transfer any shares of common stock owned by them,
subject to certain exceptions.

On May 29, 2008, we entered
into a definitive merger agreement pursuant to which our Company will be
acquired by Onstream Media Corporation. In connection with the conditions to
closing set forth in the Merger Agreement, we have entered into subscription agreements (the Subscription
Agreements) with three of our major stockholders, including Mr. Lewis and
David C. McCourt, our Chairman and Interim Chief Executive Officer. For
a more complete discussion regarding the Merger, see Note 13.

11. Concentrations

The Companys largest four
customers in the aggregate accounted for approximately $2,200,000, or 38% of
the Companys revenues fiscal year ended February 29, 2008 and approximately
$1,400,000, or 23% of the Companys revenues for fiscal year ended February 28,
2007. The accounts receivable balance for the largest four customers was
$520,557 as of February 29, 2008.

12. Commitments

When a lease
is classified as an operating lease, the risks and rewards remain with the
lessor and the lease expenses are treated as operating expense.

The Company
has non-cancelable operating leases to occupy the following properties: Princeton
NJ, which terminates on July 31, 2008. The Companys lease for its London
facility was signed in November 2007 for a term of approximately four years.
Below are the minimum lease payments due under the operating leases:

|                  |  |         | 
|----------------- |  | ------- | 
|                  |  | $       | 
|                  | 
|February 28, 2009 |  | 182,784 | 
|February 28, 2010 |  | 193,899 | 
|February 28, 2011 |  | 204,812 | 
|February 29, 2012 |  | 51,885  | 
|                  |  |         | 
|                 
|Total             |  | 633,380 | 
|                  |  |         | 

Rent expense for the years
ended February 28, 2007 and February 29, 2008 was approximately $387,000 and
$483,000, respectively

58

---



When a lease
is classified as a capital lease, the present value of the lease expenses is
treated as debt. Assets held under capital leases are capitalized in the
balance sheet and are depreciated over their estimated useful lives. The
interest element of the rental obligation is charged to the Statements of
Operations over the period of the lease and represents a constant proportion of
the balance of capital repayment outstanding.

As of February 29, 2008, the Companys
principal capital commitments consisted of obligations outstanding under
capital leases as shown in the table below:

|                                                    |  |                                      |         |  
|--------------------------------------------------- |  | ------------------------------------ | ------- | -
|                                                    |  |                                      |         |  
|                                                    |  | Year
  ended
  February 29, 
  2008$ |        
|                                                    |  |                                      |        
|                                                    |  |                                      |         |  
|Amounts payable:                                    |  |                                      |         |  
|                                                    |  |                                      |         |  
|Within 12 months                                    |  |                                      | 175,469 |  
|                                                    |  |                                      |         |  
|Between one and two years                           |  |                                      | 121,252 |  
|                                                    |  |                                      |         |  
|Between two and three years                         |  |                                      | 31,521  |  
|                                                    |  |                                      |         |  
|                                                    |  |                                      |         |  
|Total future commitment                             |  |                                      | 328,242 |  
|Less: finance charges
  allocated to future periods |  |                                      | (31,512 | )
|                                                    |  |                                      |         |  
|                                                    |  |                                      |         |  
|Present Value                                       |  |                                      | 296,730 |  
|                                                    |  |                                      |         |  

At February
29, 2008 the Company had one employment agreement outstanding with David C.
McCourt, Interim Chief Executive Officer. This agreement stays in effect for
two years or until employment is terminated (See Item 10. Executive
Compensation for further details). For fiscal year ending February 29, 2008,
Mr. McCourt was not paid a salary.

13.
Subsequent Events

Merger Agreement

On May 29, 2008, the Company
entered into an Agreement and Plan of Merger (the Merger Agreement) with
Onstream Media Corporation, a Florida corporation (Onstream), Onstream Merger
Corp., a newly formed Delaware corporation and a wholly owned subsidiary of
Onstream (Merger Sub) and W. Austin Lewis IV, as stockholder representative
for the Companys stockholders. Pursuant to the terms and subject to the
conditions set forth in the Merger Agreement, Onstream will acquire the Company
by means of a merger of Merger Sub with and into the Company (the Merger),
with the Company continuing as the surviving corporation and a wholly-owned
subsidiary of Onstream after the Merger (the Surviving Corporation).

Pursuant to the Merger
Agreement, at the effectiveness of the Merger (the Effective Time), each
outstanding share of the Companys common stock, other than shares held by
stockholders who have perfected their appraisal rights under Delaware law,
shares held by Onstream and shares held by any subsidiary of the Company
(collectively, the Shares to be Converted), will be converted into (i) shares
of Onstream common stock, par value $0.0001 per share (Onstream Common Stock)
based on an exchange ratio determined as described below and (ii) one
contingent value right (a Contingent Value Right) having terms and conditions
described below. Onstream Common Stock and Contingent Value Rights issued in
respect of the Companys common stock subject to certain restricted stock
awards will be subject to any vesting conditions contained in such awards.

The aggregate number of
shares of Onstream Common Stock issuable in the Merger in exchange for the
Shares to be Converted will be the greater of (i) the sum of (A) two (2) times
Annualized Company Revenue (as defined in the Merger Agreement) and (B) the
greater of (1) the amount of the Companys cash and cash equivalents
immediately prior to the Effective Time and (2) 1,500,000 and (ii) 10,500,000.
The exchange ratio will be the amount determined as described in the prior
sentence divided by the Shares to be Converted (the Exchange Ratio).

59

---



The final Exchange Ratio
will be determined based on the Companys consolidated revenues for the quarter
ended May 31, 2008 (as adjusted pursuant to the terms of the Merger Agreement)
and may not be known prior to the Effective Time. Accordingly, the Merger
Agreement provides that the Shares to be Converted will receive an aggregate of
10,500,000 shares of Onstream Common Stock (the Minimum Exchange Ratio) upon
consummation of the Merger. In the event that the final Exchange Ratio exceeds
the Minimum Exchange Ratio, former holders of Shares to be Converted will
receive additional shares of Onstream Common Stock within 30 days after the
final determination of the Exchange Ratio. No assurance can be given that the
Exchange Ratio will exceed the Minimum Exchange Ratio.

In the Merger, outstanding
shares of the Companys Series A Preferred Stock will be converted into an
aggregate of 600,000 shares of Onstream Common Stock.

In connection with the
Merger, the Surviving Corporation will assume the Companys obligations under
its outstanding warrants. From and after the Merger, except as summarized
below, holders of warrants will have the right to exercise their warrants for a
number of shares of Onstream Common Stock and at exercise prices appropriately
adjusted to give effect to the greater of the Exchange Ratio and the Minimum
Exchange Ratio. Holders of warrants to acquire an aggregate of 22,726,400
shares of Company Common Stock issued by the Company in August 2007 (the 2007
Warrants) will have the right to exercise their 2007 Warrants for cash only
for an aggregate of 1,000,000 shares of Onstream Common Stock at an exercise
price of $3.50 per share. In the event that any of the warrants are exercised
prior to the Final Exercise Date (as defined in the CVR Agreement referenced
below), an exercising holder will also be entitled to receive Contingent Value
Rights in an amount equal to the number of Contingent Value Rights such holder
would have received had its warrants been exercised immediately prior to the
Effective Time. In connection with the Merger Agreement, holders of a majority
of the 2007 Warrants have entered into an Amendment and Waiver Agreement with
the Company (the Amendment and Waiver Agreement) pursuant to which such
holders, on behalf of themselves and all other holders of the 2007 Warrants,
agreed to amend the terms of the 2007 Warrants as provided above and to waive
certain antidilution and other rights.

The Contingent Value Rights
will be issued pursuant to the terms of a Contingent Value Rights Agreement to
be entered into among Onstream, Mr. Lewis as the CVR Representative and
Interwest Transfer Co., as Rights Agent, in the form attached to the Merger
Agreement (the CVR Agreement). Pursuant to the terms and subject to the
conditions set forth in the CVR Agreement, the Contingent Value Rights will be
converted into shares of Onstream Common Stock in the event that the Company
reaches certain revenue targets for the initial 12-month and subsequent 6-month
periods following the Merger; provided, however, that the maximum number of
shares of Onstream Common Stock issuable in the Merger, including those
pursuant to the Contingent Value Rights and the conversion of the Companys
Series A Preferred Stock, will not exceed 20,000,000. The number of shares of
Onstream Common Stock issuable upon the conversion of each Contingent Value
Right will depend on a number of factors, including the Companys business
meeting the revenue targets set forth in the CVR Agreement and the number of
warrants, if any, exercised prior to the final determination of the
consideration, if any, to be paid pursuant to the CVR Agreement. The conversion
of Contingent Value Rights into Onstream Common Stock will occur in two stages,
shortly following the final determination of whether the initial 12-month and
subsequent 6-month targets have been met.

The Contingent Value Rights
will not be transferable by the holders thereof except by operation of law in
limited circumstances. The Company does not expect a market to develop for the
Contingent Value Rights. No assurance can be given that the Contingent Value
Rights will result in the issuance of additional shares of Onstream Common
Stock.

The Merger Agreement
contains customary representations and warranties of the Company, Onstream and
Merger Sub. The Merger Agreement also contains customary covenants, including
covenants regarding operation of the business of the Company and its
subsidiaries prior to the closing of the Merger.

60

---



In addition, the Company has
agreed to use its commercially reasonable efforts to operate its business in
accordance with a restructuring plan attached as an exhibit to the Merger
Agreement (the Restructuring Plan), which is designed to significantly reduce
or eliminate substantial costs related to Companys facility leases, selling,
general and administrative expenses, public company and headquarters costs, and
other professional fees and services. Specifically, the Restructuring Plan is a
transitional business plan that the Company will follow until the close of the
Merger. The Restructuring Plan includes a detailed four month cash operating
budget for the Company beginning June 2008. The budget consists of a breakdown
of cash proceeds to the Company from customer receivables, equipment sales and
additional investments and a breakdown of various cash operating expenses and
other cash payments out from the Company. The Restructuring Plan also lists
certain employees and contractors that will be terminated prior to the closing
of the Merger as well as certain employees that will enter into one-year
employment contracts with the Company. The Company is responsible for the
funding of all salaries and benefits for the terminated employees and
consultants, as well as the cost of any severance, from pre-closing cash. The
Restructuring Plan further sets forth an approval process that the Company will
follow for travel, telephone, communication and other various operating expense
purchases. The Restructuring Plan also requires that the Company send its
weekly reports, such as accounts receivable, payroll and accounts payable, to
Onstream for review at least three days prior to payment. Pursuant to the
Restructuring Plan, the Company may not enter into any contracts, hire any new
employees or make any purchases greater than $1000.00 without first obtaining
Onstreams approval. The Restructuring Plan also effects a reorganization of
management in that certain of the Companys departments are required to report
to the senior manager of the equivalent department at Onstream. The
Restructuring Plan also requires that, at the closing of the Merger, the
Companys current assets (excluding cash) will exceed the Companys current
liabilities, as determined on a basis consistent with the Companys previously
issued financial statements. Lastly, the Restructuring Plan states that
proceeds from the sale of equipment (as set forth in the operating budget
described above) will be limited to equipment located at the Companys
California POP (Point of Presence) located in the Companys internal content
delivery network (CDN), which was shut down during April 2008.

In
connection with the conditions to closing set forth in the Merger Agreement,
the Company has entered into subscription agreements (the Subscription
Agreements) with three of its major stockholders, including Mr. Lewis and
David C. McCourt, our Chairman and Interim Chief Executive Officer. Under the
Subscription Agreements, the three stockholders agreed to purchase immediately
prior to the Merger shares of a to-be-established Series A Preferred Stock at a
purchase price of $100,000 per stockholder. In connection therewith, each such
stockholder is expected to receive 10,000 shares of Series A Preferred Stock.
Holders of the Series A Preferred Stock will be entitled to such dividends, if
any, as may be declared by our Board of Directors out of funds legally
available therefore (no such dividends are expected to be paid under the terms
of the Restructuring Plan), will not have any voting rights (except to the
extent required by applicable law), will have no right to convert the Series A
Preferred Stock into shares of our common stock or any other of our securities
and will have no right to force our redemption or repurchase of the Series A
Preferred Stock. It is expected that the Company will file a certificate of
designations establishing the terms of the Series A Preferred Stock with the
Secretary of State of Delaware shortly prior to the closing of the Merger. The
sale of the Series A Preferred Stock pursuant to the Subscription Agreements is
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated thereunder.

The Merger is
subject to customary closing conditions, including obtaining the approval of
the Companys and Onstreams stockholders. The Merger Agreement may be
terminated under certain specified events, including by either Onstream or the
Company if the Effective Time has not occurred on or prior to October 31, 2008.
If the Merger Agreement is terminated under certain circumstances specified in
the Merger Agreement, the Company may be required to pay a termination fee of
$377,000 to Onstream. Both the Company and Onstream have entered into voting
agreements (Voting Agreements) pursuant to which several significant
stockholders have agreed to vote their shares in favor of the adoption of the
Merger Agreement. Pursuant to the Voting Agreements, the holders of
approximately 35% of the Companys common stock presently outstanding and
approximately 42% of the Onstream Common Stock presently outstanding have
agreed to vote their shares in favor of the adoption of the Merger Agreement.

Compensation Award

On March 25, 2008, the Company
granted Mr. McCourt 1,250,000 restricted Stock Units pursuant to his employment
agreement which vest monthly up until November 1, 2008.

61

---