UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

(Mark One)

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

                                    For the fiscal year ended September 30, 2005

[_]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

                              For the transition period from         to
                                                             -------    --------

                              Commission file number 000-22849

                           Onstream Media Corporation
                           --------------------------
                 (Name of small business issuer in its charter)

            Florida                                      65-0420146
---------------------------------           ------------------------------------
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)

  1291 SW 29 Avenue
  Pompano Beach, Florida                                    33069
  ----------------------                         ---------------------------
  (Address of principal executive offices)                (Zip Code)

Issuer's telephone number 954-917-6655
                          ------------

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

  Title of each class                  Name of each exchange on which registered

        None                                         not applicable
---------------------                  -----------------------------------------
(Title of each class)

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

    common stock
---------------------
  (Title of class)


Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act [_]

<PAGE>

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

      Check if there is no disclosure  of delinquent  filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained,  to the best of the  registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]

      Indicate  by check mark  whether  the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act) Yes [_] No [X]

      State  issuer's  revenues for its most recent fiscal year. $ 8,156,394 for
the 12 months ended September 30, 2005.

      State the  aggregate  market  value of the  voting and  non-voting  common
equity held by  non-affiliates  computed by  reference to the price at which the
common  equity was sold,  or the  average  bid and asked  prices of such  common
equity,  as of a specified  date within the past 60 days.  The aggregate  market
value of the common equity held by non-affiliates  computed at the closing price
of the  registrant's  common  stock on January 11, 2006 is  approximately  $10.3
million.

      State the number of shares  outstanding  of each of the issuer's  class of
common  equity,  as of the latest  practicable  date.  As of January  11,  2006,
12,891,716 shares of common stock are issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

      If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated:  (1) any annual report to security  holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) of the Securities Act of 1933 ("Securities Act"). Not Applicable.

      Transitional Small Business Disclosure Form (check one): Yes [_] No [X]

<PAGE>

      CERTAIN CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

      Certain  statements  in this annual  report on Form 10-KSB  contain or may
contain forward-looking  statements that are subject to known and unknown risks,
uncertainties  and other factors which may cause actual results,  performance or
achievements to be materially different from any future results,  performance or
achievements  expressed  or implied by such  forward-looking  statements.  These
forward-looking  statements  were  based on  various  factors  and were  derived
utilizing  numerous  assumptions  and other  factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
risks,  uncertainties  and other  factors  include,  but are not limited to, the
potential  rescission  rights of the  holders of the  Company's  8%  Convertible
Debentures,  Additional  8%  Convertible  Debentures  and Series A-10  Preferred
Stock, our ability to implement our strategic initiatives (including our ability
to  successfully  complete,  produce,  market  and/or  sell the DMSP  and/or our
ability to eliminate  cash flow  deficits by  increasing  our sales),  economic,
political  and market  conditions  and  fluctuations,  government  and  industry
regulation,  interest rate risk, U.S. and global competition,  and other factors
affecting the Company's  operations and the fluctuation of the Company's  common
stock price, and other factors  discussed  elsewhere in this report and in other
documents filed by the Company with the Securities and Exchange  Commission from
time to time.. Most of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk described in
connection with any forward-looking  statements that may be made herein. Readers
are cautioned not to place undue reliance on these  forward-looking  statements,
which speak only as of September 30, 2005.  Readers should carefully review this
Form  10-KSB  in its  entirety,  including  but  not  limited  to our  financial
statements  and  the  notes  thereto  and  the  risks   described  in  "Item  1.
Business--Risk Factors." Except for our ongoing obligations to disclose material
information  under the Federal  securities  laws,  we undertake no obligation to
release  publicly any  revisions to any  forward-looking  statements,  to report
events or to report the occurrence of unanticipated events. Actual results could
differ materially from the forward-looking  statements.  In light of these risks
and  uncertainties,   there  can  be  no  assurance  that  the   forward-looking
information   contained  in  this  report  will,   in  fact,   occur.   For  any
forward-looking statements contained in any document, we claim the protection of
the  safe  harbor  for  forward-looking  statements  contained  in  the  Private
Securities Litigation Reform Act of 1995.

      When used in this Annual Report, the terms "we", "our", and "us" refers to
Onstream Media Corporation, formerly known as Visual Data Corporation, a Florida
corporation, and its subsidiaries.

      All share and per share data contained herein gives proforma effect to the
one for 15 reverse stock split of our common stock effected on June 24, 2003.

<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS


Our Business, Products and Services

      We  are  an  online   service   provider  of  live  and  on-demand   media
communication, including webcasting,  webconferencing,  digital asset management
and web  publishing  services.  Our objective is to provide these services via a
fully  robust,   comprehensive  digital  media  services  platform  (DMSP)  that
virtually any company,  government  agency or other enterprise  having a need to
manage rich media  content will be able to utilize in an  affordable  and highly
secure environment.

      Our operations are organized in two main operating groups:

      o     Digital Asset Management Group

      o     Webcasting Group

      Products and services provided by each of the groups are:

      Digital Asset Management Group

      Our  Digital  Asset  Management  Group,   which  operates  primarily  from
facilities in San Francisco,  California,  provides digital asset management and
audio and video  networking  services that represented  approximately  54.9% and
52.2%  of our  revenues  for the  years  ended  September  30,  2005  and  2004,
respectively. These revenues are comprised primarily of network access and usage
fees,  the sale and rental of  communication  equipment,  and fees for encoding,
storage, search and retrieval and distribution of digital assets.

      Digital  asset  management  is  a  set  of  coordinated  technologies  and
processes that allow the quick and efficient  storage,  retrieval,  and reuse of
the digital  files that are  essential to most  businesses.  These digital files
include photos, videos, audio files, engineering specs, architectural plans, web
pages,  and many other pieces of business  collateral.  Digital asset management
provides the  business  rules and  processes  needed to acquire,  store,  index,
secure,  search,  export  and  transform  these  assets  and  their  descriptive
information.

      In addition, the Digital Asset Management Group services include,  through
its  operation   Entertainment  Digital  Network,   Inc.  ("EDNET"),   providing
connectivity  within the  entertainment  and  advertising  industries  through a
private wide-area network (WAN) managed by it, which encompasses  production and
post-production companies,  advertisers,  producers,  directors, and talent. The
network enables high-speed exchange of high quality audio,  compressed video and
multimedia data communications, utilizing long distance carriers, regional phone
companies, satellite operators, and major Internet service providers. EDNET also
provides  systems  integration  and engineering  services,  application-specific
technical advice, audio equipment,  proprietary and off-the-shelf  codecs, video
compression  and  transport  equipment,  teleconferencing  equipment,  and other
innovative  products to facilitate  our broadcast and  production  applications.
EDNET's global network, with approximately 500 active access locations in cities
throughout the United States,  Canada,  Mexico,  Europe, and the Pacific Rim, is
the  product  of  strategic  alliances  with long  distance  carriers,  regional
telephone   companies,   satellite   operators  and   independent   fiber  optic
telecommunication  providers,  which enables the collaborative  exchange of high
quality audio, or for compressed video and multimedia data communications.

<PAGE>

      In  December   2004  we  completed  our   acquisition   of  the  remaining
approximately 74% of Acquired Onstream not previously owned by us (the "Onstream
Merger"). Acquired Onstream was a development stage company founded in 2001 with
the business  objective of  developing a feature rich digital  asset  management
service and offering the service on an application  service provider (ASP) basis
to exploit the confluence of trends in broadband  access and the cost of digital
storage media. This product, the Digital Media Services Platform ("DMSP"),  will
allow  corporations  to better manage their digital rich media without the major
capital  expense for the hardware,  software and additional  staff  necessary to
build their own digital asset management solution.

      The DMSP  was  designed  and is  being  managed  by  Science  Applications
International  Corporation  ("SAIC") (one of the country's  foremost IT security
firms  providing  services to all branches of the federal  government as well as
leading  corporations)  and is actually  comprised of four separate  "products",
only two of  which  were  available  on an  individual  basis at the time of the
Onstream Merger. The four separate products are transcoding, storage, search and
retrieval and  distribution.  A limited  version of the DMSP,  with three of the
four  products  accessible  via  an  integrated  interface  using  North  Plains
technology  and  incorporating  important  security  and other  design  features
available  through SAIC, was first placed in service with third-party  customers
in November  2005. The fourth product will be available to our DMSP customers in
the near future.

      We believe  that the DMSP expands our product  offering by  providing  our
Fortune 1000 and media and  entertainment  customers a low cost monthly  service
for the storage, streaming, encoding,  collaboration and distribution of digital
rich media. The closing of the Onstream Merger brings new target markets for our
webcasting   services   that   include   government,    healthcare,   education,
telecommunications  and international  sectors.  We believe that these verticals
also have strong  requirements for digital asset management services and are the
primary  business sectors for SAIC. We also believe the availability of the DMSP
will expose our company to incremental  revenue  opportunities in our webcasting
and EDNET  businesses.  We believe  that being  able to offer our  clients  such
integrated  product and services is a critical  element to  differentiating  our
company from our competitors in the marketplace.

      Acquired Onstream entered into a Basic Ordering Agreement for Professional
Solutions  ("BOA") with SAIC,  with an original term expiring  December 31, 2006
which we may,  at our  option,  extend  for up to an  additional  48  months  by
executing up to four one-year renewal options.  Pursuant to the BOA, SAIC agreed
to design, host and manage the DMSP, including the addition and customization of
applications to fit the specific needs of customers. SAIC also agreed to provide
certain  hosting and back-office  services  directly to us and in support of our
customers.  The amount we have  expended  to complete  the  working  platform is
approximately $3.5 million which includes  approximately $1.8 million in cash or
ONSM  common  stock paid to SAIC to date plus the cost of  licensed  technology,
software,  custom  programming  and equipment from Virage,  Nine Systems,  North
Plains and other vendors, as discussed below.

      Upon payment of all amounts due SAIC for each software module described in
the BOA  (exclusive  of third party  software),  SAIC will grant us, as Acquired
Onstream's  successor,  a royalty-free,  worldwide,  perpetual  non-transferable
license to  operate  the  software  created  by SAIC for our  internal  business
purposes,  by our  customers  on an ASP  basis so long as  hosting  and  OSS/BSS
(operating  support  systems/business  support  systems)  services  are provided
exclusive by SAIC, and for back-up hosting and disaster  recovery  purposes.  In
addition,  upon payment to SAIC of 20% of the original total  development  costs
(excluding  third party  software) for any  particular  software  which SAIC has
developed under the BOA, SAIC will grant us, as Acquired Onstream's successor, a
royalty-free,  perpetual, world wide license to such software which includes the
right to distribute  the software on an ASP basis to our  customers,  to a third
party  hosting the software on behalf of us and our customers as end users on an
ASP  basis,  and to end users  under an  enterprise  license  for the end user's
internal  business  purposes  only.  In  addition,  we, as  Acquired  Onstream's
successor,  will have the right to create  extensions  and  enhancements  to the
software which will be owned by us, and we will grant SAIC a royalty free, world
wide, perpetual,  non-exclusive license,  sublicense and transferable license to
operate and modify the extensions and  enhancements  for itself and its clients.
In addition,  the agreement with SAIC restricts SAIC from offering an outsourced
solution  that  allows for the  management  and use of  digital  rich media with

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<PAGE>

flexible  applications such as collaboration and re-purposing to any third party
during the term of the agreement.

      In February 2004 we acquired  certain assets from Virage,  Inc. The assets
acquired  included the assignment of customer  contracts for the  performance of
digital asset  management  services as well as assistance in the  integration of
those activities into our operations.  Also in February 2004,  Acquired Onstream
entered  into a license  agreement  whereby it licensed  certain  software  from
Virage, Inc. This software is being integrated into the DMSP.

      In May 2004 Acquired  Onstream entered into a license  agreement with Nine
Systems, a software vendor of Internet  protocol-based  billing and provisioning
solutions. Under this agreement, we, as Acquired Onstream's successor,  licensed
on a  perpetual  basis  the  Nine  Systems  billing  and  provisioning  software
including systems integration support.

      In December  2004 North  Plains,  a software  developer  of digital  asset
management  repositories  and work flow engines,  entered into an agreement with
us, as Acquired  Onstream's  successor,  to provide its  software for use in our
digital asset management services platform.

      Webcasting Group

      The Webcasting Group provides corporate-oriented, web-based media services
including  live  audio  and  video  webcasting  and  on-demand  audio  and video
streaming and represented  approximately 45.1% and 47.8% of our revenues for the
years  ended  September  30, 2005 and 2004,  respectively.  These  revenues  are
comprised primarily of production and distribution fees.

      Our Webcasting Group,  which operates primarily from facilities in Pompano
Beach,  Florida and a sales office in New York City,  provides online webcasting
services,  a cost effective means for corporations to broadcast conference calls
live,  making them  available to the investing  public,  the media and to anyone
worldwide  with Internet  access.  We market the webcasting  services  through a
direct sales force and through channel partners,  also known as resellers.  Each
webcast can be heard  and/or  viewed live,  and then  archived for replay for an
additional  fee with an option for  accessing  the archived  material  through a
company's own web site. These webcasts primarily  communicate corporate earnings
and  other  financial   information;   product   launches  and  other  marketing
information; training, emergency or other information directed to employees; and
corporate or other special  events.  We provide our  webcasting  customers  with
vertically integrated streaming media solutions,  from onsite production through
delivery to end-users.  These solutions included original  production,  editing,
and digital  encoding of audio and video  content,  Internet  website design and
development, and Internet distribution and hosting.

      Our Webcasting Group also includes our travel  production and distribution
operations.  These  operations  primarily  include the  production,  storage and
Internet  streaming of two to four minute multi-media videos for clients such as
hotel, resort, golf facility,  travel destination and time-shares.  We store and
make  available all such content on our website  www.travelago.com.  In May 2005
the Company agreed to sell its travel production and distribution operations and
the related  assets.  However,  in September 2005 the buyer filed a legal action
against the Company  alleging  that the Company did not deliver  these assets as
agreed.  The Company believes that the ultimate  resolution of this legal action
will not have a  material  impact  on its  financial  condition  or  results  of
operations  and,  pending such  resolution,  the Company  continues these travel
production and distribution operations.

Sales and marketing

      We use a variety of marketing methods,  including our internal sales force
and  channel  partners,  also known as  resellers,  to market our  products  and
services.  One key  element  of our  marketing  strategy  has been to enter into
distribution  agreements with recognized  leaders in each of the markets for our
products and services. By offering our products and services in conjunction with
the distributors'  products, we believe these distribution  agreements enable us

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<PAGE>

to take advantage of the particular  distributors'  existing marketing programs,
sales  forces and  business  relationships.  Contracts  with these  distributors
generally range from one to two years.

         We have expanded our marketing efforts during the past year through the
use of public relations and telemarketing firms. We intend to continue these
actions during the coming year, as well as the introduction of targeted
television and radio advertising, as well as direct mail. See Item 6 - Liquidity
and Capital Resources.

      In March 2004,  Thomson Financial Group completed the acquisition of CCBN.
As a  result,  we have  combined  revenues  from  both of  these  companies  for
disclosure  purposes.  For the years  ended  September  30,  2005 and  2004,  we
provided  webcasting  services to one significant  customer,  Thomson  Financial
Group,  under a  contract  that can be  terminated  upon a 30-day  notification.
Revenues  from  sales to this  customer  were  approximately  $1.4  million,  or
approximately  17%, and  approximately  $1.8 million,  or approximately  24%, of
total  consolidated  revenue  for the years ended  September  30, 2005 and 2004,
respectively. These revenues represented approximately 38% and 50% of Webcasting
Group revenues for the same periods.

      For the year ended September 30, 2005 the Company  provided  digital asset
management services to another significant customer, America Online, Inc., under
a contract  which can be terminated  upon a 30-day  notification.  Revenues from
sales to this customer were approximately $1.2 million, or approximately 15%, of
total consolidated revenue for the year ended September 30, 2005. These revenues
represented approximately 26% of Digital Asset Management Group revenues for the
same                                                                     period.

      Other than  these  agreements,  no other  agreement  with a  customer  has
represented more than 10% of our revenues during these periods. See Risk Factors
below.

Competition

      We operate in highly  competitive and rapidly changing business  segments.
We expect our competition to intensify. We compete with:

-     other web sites, Internet portals and Internet broadcasters to acquire and
      provide content to attract users;

-     video and audio  conferencing  companies  and  Internet  business  service
      broadcasters;

-     online services, other web site operators and advertising networks;

-     traditional media, such as television, radio and print; and

-     end-user software products.

      Our webcasting products and services fall into two competitive areas: live
or archived financial and  fair-disclosure  related  conferences,  and all other
live or archived webcast productions for the corporate,  financial,  educational
and  government  segments.  In the financial  conferences  area, we compete with
Akamai,  ON24, IVT, WILink,  Talkpoint,  Wall Street Transcripts,  Netbriefings,
PTEK Holdings,  Shareholder.com,  Thomson Financial Group,  Media Link Worldwide
and others that offer live webcasts of quarterly earnings  conference calls. For
other webcast  production,  we compete with other smaller  geographically  local
entities.  Our production services,  however, have been in demand by some of our
competitors, and from time to time we have provided services to these companies.
The  nature  of the  streaming  media  sector of the  Internet  market is highly
interdependent while being competitive.

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<PAGE>

      During fiscal 2005, our Webcasting Group experienced a revenue increase of
approximately 1.5%, or approximately 2.9% before considering a decline in travel
production and distribution  revenues.  Although the competitive  pressures that
reduced the number of  audio-only  webcasts in fiscal 2004  continued  in fiscal
2005,  this  declining  trend was offset during fiscal 2005 by sales growth from
higher priced video webcasts.

      Competition for the audio and video  networking  services  provided by the
EDNet division of our Digital Asset  Management  Group is based upon the ability
to provide systems  compatibility and proprietary  off-the-shelf  codecs. Due to
the  difficulty  and  expense of  developing  and  maintaining  private  digital
networks,  bridging services,  engineering  availability and service quality, we
believe  that the number of audio  networking  competitors  are, and will remain
small. Our primary video networking competitors are video appliance dealers that
source video transport  hardware.  This group's advantage is one that provides a
total solution including system design,  broadband sourcing, and custom software
connectivity   applications  that  include  a  comprehensive  digital  path  for
television commercial transport. However, companies that compete in some portion
of the  audio  and video  networking  services  market  targeted  by us  include
Telestream,  Globix,  Acceris,  Media Link,  Savvis, and Digital Generation (DG)
Systems.

      While there is competition  for the provision of digital asset  management
services by our Digital Asset Management Group, this is a relatively new product
with few established providers.  We believe that our approach of partnering with
established providers such as SAIC, Virage Application Services and North Plains
reduces the  competition in this area. We also believe that our ability to offer
integrated  webcasting,  networking and other services as part of "full service"
digital asset  management  limits direct  competition.  However,  companies that
compete in some portion of the digital asset  management  market  targeted by us
include MerlinOne, Clear Sky, eMotion, Aquant, Getty Images, Quebecor,  American
Color, Ascent Media, Wam!Net, Interchange Digital and Publicis.

Government Regulation

      Although there are currently few laws and regulations  directly applicable
to the Internet,  it is likely that new laws and regulations  will be adopted in
the United States and elsewhere  covering issues such as broadcast license fees,
copyrights,  privacy,  pricing,  sales taxes and  characteristics and quality of
Internet  services.  It is possible that governments will enact legislation that
may be applicable to us in areas such as content,  network security,  encryption
and  the  use  of  key   escrow,   data  and  privacy   protection,   electronic
authentication  or "digital"  signatures,  illegal and harmful  content,  access
charges  and  retransmission  activities.  Moreover,  the  applicability  to the
Internet of existing laws governing issues such as property ownership,  content,
taxation,  defamation  and personal  privacy is uncertain.  The majority of such
laws  were  adopted  before  the  widespread  use and  commercialization  of the
Internet and, as a result,  do not  contemplate  or address the unique issues of
the Internet and related  technologies.  Any such export or import restrictions,
new   legislation  or  regulation  or   governmental   enforcement  of  existing
regulations  may limit the growth of the  Internet,  increase  our cost of doing
business or increase  our legal  exposure,  which could have a material  adverse
effect on our business, financial condition and results of operations.

      By distributing content over the Internet, we face potential liability for
claims  based on the nature and  content of the  materials  that we  distribute,
including  claims for defamation,  negligence or copyright,  patent or trademark
infringement,  which  claims  have  been  brought,  and  sometimes  successfully
litigated,  against Internet companies. To protect our company from such claims,
we  maintain  general  liability  insurance  (including  umbrella  coverage)  of
approximately  $3.0 million.  The general liability  insurance may not cover all
potential  claims of this type or may not be  adequate to  indemnify  us for any
liability to which we may be exposed.  Any liability not covered by insurance or
in excess of  insurance  coverage  could have a material  adverse  effect on our
business, results of operations and financial condition.

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<PAGE>

      Our audio and video  networking  services  are  conducted  primarily  over
telephone  lines,  which are heavily  regulated by the various Federal and other
agencies.  However, we believe that the responsibility for compliance with those
regulations  primarily  falls on the local and long distance  telephone  service
providers and not the Company.

Intellectual Property

      Our success  depends in part on our  ability to protect  our  intellectual
property.  To protect our  proprietary  rights,  we rely generally on copyright,
trademark and trade secret laws,  confidentiality  agreements with employees and
third parties, and agreements with consultants,  vendors and customers, although
we have not signed such agreements in every case.  Despite such  protections,  a
third party could, without  authorization,  copy or otherwise obtain and use our
content.   We  can  give  no  assurance  that  our  agreements  with  employees,
consultants  and others who  participate in development  activities  will not be
breached,  or that we will have  adequate  remedies for any breach,  or that our
trade  secrets will not  otherwise  become known or  independently  developed by
competitors.

      We may pursue the  registration  of certain of our  trademarks and service
marks in the United States, although we have not secured registration of all our
marks.  In  addition,  the laws of some  foreign  countries  do not  protect our
proprietary  rights to the same extent as do the laws of the United States,  and
effective copyright,  trademark and trade secret protection may not be available
in such jurisdictions. In general, there can be no assurance that our efforts to
protect our intellectual property rights through copyright,  trademark and trade
secret laws will be effective to prevent  misappropriation  of our content.  Our
failure  or  inability  to  protect  our  proprietary  rights  could  materially
adversely affect our business, financial condition and results of operations.

Employees

      At  December  31,  2005 we had 61  full  time  employees,  of whom 30 were
design,  production  and  technical  personnel,  12  were  sales  and  marketing
personnel  and  19  were  general,   administrative  and  executive   management
personnel.  None  of  the  employees  are  covered  by a  collective  bargaining
agreement and our management considers relations with our employees to be good.

General

      We were  formed  under the laws of the State of Florida  in May 1993.  Our
executive  offices are located at 1291 SW 29th Avenue,  Pompano  Beach,  Florida
33069. Our telephone number at that location is (954) 917-6655.

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<PAGE>

                                  RISK FACTORS

      Before  you invest in our  securities,  you should be aware that there are
various risks.  Additional risks and  uncertainties not presently known to us or
that we  currently  believe  to be  immaterial  may also  adversely  affect  our
business. You should consider carefully these risk factors, together with all of
the  other  information  included  in or  incorporated  by  reference  into this
prospectus before you decide to purchase our securities. If any of the following
risks and  uncertainties  develop into actual  events,  our business,  financial
condition or results of operations could be materially adversely affected.

There is significant doubt about our ability to continue as a going concern.

Our financial  statements have been prepared assuming that we will continue as a
going  concern.  The  independent  auditor's  report  on our  current  financial
statements  states  that we have  suffered  significant  recurring  losses  from
operations  since  inception that raise  substantial  doubt about our ability to
continue as a going concern.  We continue to explore the  possibility of raising
funds through available sources, which include equity and debt markets, although
there is no assurance that we will be able to raise such funds.  In the event we
are unable to raise these funds,  we cannot be certain how long,  or if, we will
be able to maintain operations.

We have an  accumulated  deficit and we anticipate  continuing  losses that will
result  in  significant  liquidity  and cash  flow  problems  absent a  material
increase in our revenues.

      We have  incurred  losses  since our  inception,  and have an  accumulated
deficit of  approximately  $70.4 million as of September 30, 2005.  For the year
ended  September 30, 2005, we had a net loss of  approximately  $9.6 million and
cash used in operations was  approximately  $1.9 million.  We had  approximately
$4,000 of cash as of September 30, 2005. We have projected capital  expenditures
for the next twelve months of $900,000,  which includes the further  development
of the recently completed DMSP as well as an upgrade to the webcasting  software
and  hardware  infrastructure,  now in process.  We also  anticipate  additional
operating  expenses  in the  coming  year  related  to the  continuation  of our
marketing  program  expansion  that began in the year ended  September 30, 2005,
although we cannot guarantee that this expansion will be implemented or that our
marketing  efforts will be successful.  Although we may experience  increases in
our  operating  expenses  during  the next year  arising  from our  program  for
compliance  with  Section 404 of the  Sarbanes-Oxley  Act of 2002,  we may defer
these expenses based on the status of regulatory changes in this area.

      Our  operations  have  historically  been financed  primarily  through the
issuance of equity and debt. We cannot assure that our revenues will continue to
increase,  nor can we assure that they will not decrease.  We recently completed
the Digital Services Media Platform  ("DMSP") and it was first placed in service
with third-party customers in November 2005, but we cannot assure what the sales
activity will be. As long as our cash flow from operations remains  insufficient
to completely  fund  operations,  we will continue  depleting our cash and other
financial resources.  As a result of the uncertainty as to our available working
capital over the upcoming months,  we may be required to delay or cancel certain
of  the  projected   capital   expenditures,   some  of  the  planned  marketing
expenditures, or other planned expenses which could adversely affect our ability
to expand our business and operations during fiscal 2006.

                                       7
<PAGE>

The original  offer and sale of our 8%  Convertible  Debentures  and Series A-10
Preferred Stock may be deemed to be in violation of federal  securities laws and
as a result  the  investors  in those  securities  may have the right to rescind
their original purchase of those securities.

      On  December  23,  2004,  we  completed  a  private  placement  of  our 8%
Convertible  Debentures and Series A-10 Preferred  Stock.  In February and April
2005,  additional  investment  rights  granted  as  part  of the 8%  Convertible
Debentures were exercised.  Interest and dividends  accrued on these  securities
since their issuance have been paid with A-10  Preferred or common  shares.  The
gross proceeds from these  transactions  (the  "Financing  Transactions"),  plus
dividends  and  interest  paid  in  kind  through   September  30,  2005,   were
approximately $11.6 million.

      The resale registration statement of shares of common stock underlying the
8%  Convertible  Debentures,  the Series A-10  Preferred  Stock,  the additional
investment  rights and the warrants was  originally  filed by us on February 23,
2005.  This  original  registration  was  subsequently  withdrawn  and a  resale
registration  statement was filed on April 11, 2005.  Pursuant to the Securities
Act of 1933  and the  related  rules  and  regulations,  as  interpreted  by the
Securities and Exchange  Commission,  as a result of a portion of the additional
investment  rights  being  unexercised  at  the  time  the  resale  registration
statement was originally  filed,  the private  offerings have not been completed
and accordingly, the public and private offerings would be integrated and result
in a violation of Section 5 of the Securities  Act.  Accordingly,  the investors
who purchased  the private  placement  securities  may have a number of remedies
available  to them,  including  the  potential  right to rescind the purchase of
those  securities  plus,  potentially,  any amount  representing  damage to such
investors.

      As of September 30, 2005, and prior to giving effect to the accounting for
this  potential  rescission,  our balance  sheet  reflected a liability,  net of
discount,  of approximately $1.2 million  associated with these securities.  The
remainder of the proceeds arising from the 8% Convertible Debentures,  including
the portion of the additional investment rights exercised through that date, and
the Series A-10 Preferred Stock,  including dividends and interest paid in kind,
was  approximately  $10.4 million and was  classified  as part of  stockholders'
equity at that date.  After giving effect to the  accounting  for this potential
rescission,  approximately  $7.4 million of the $10.4  million was  reclassified
under the caption "Equity Securities Subject to Potential Rescission",  which is
located on the balance sheet directly above the  stockholders'  equity  section,
but not included in it and the remaining  approximately  $3.0 million related to
detachable  warrants  and  embedded  conversion  features  was  classifed  as  a
liability pursuant to EITF 00-19.

      We are unable to predict if the  investors  would attempt to exercise such
potential rescission rights. Each investor's decision would be based upon, among
other  things,  a decline  in the price of our common  stock and other  factors.
These potential  rescission rights would require us to refund at least the gross
proceeds of these private  offerings to the investors.  In order to satisfy such
potential  obligations,  we would be required to utilize our  available  capital
resources  and  obtain  alternate  sources  of  capital  for such  purposes.  We
presently do not have the capital  available to satisfy all potential claims for
rescission.  The inability to obtain alternative sources of capital would have a
material effect on our business, prospects,  financial condition and our results
of operations.

We are  ultimately  dependent  upon  an  increase  in our  revenues  to  provide
sufficient capital to fund our current operations. Even if revenues increase, we
anticipate the near-term need to raise additional capital. We cannot assure that
we will be successful in raising  additional working capital as may be necessary
for our continued operations.

      Our future working capital  requirements  depend  primarily on the rate at
which  we can  decrease  our use of cash to fund  operations,  which  is in turn
dependent  on an  increase in our  revenues.  Cash used for  operations  will be
affected by numerous known and unknown risks and  uncertainties  including,  but
not  limited  to, our ability to  successfully  sell the DMSP,  market our other
existing  products and services,  the degree to which  competitive  products and
services  are  introduced  to the market,  and our  ability to control  overhead
expenses as we grow. We are  constantly  evaluating  our cash needs and existing
burn rate, in order to make appropriate adjustments in operating expenses. Based
on our limited cash and other  resources,  we anticipate  the near-term  need to

                                       8
<PAGE>

raise additional  working  capital,  which we cannot assure will be successfully
raised.  Depending on the terms and amount of any additional  near-term capital,
absent a material increase in our revenues during fiscal 2006, of which there is
no  assurance,  it is  likely  we may need to raise  additional  debt or  equity
capital  within  the next 12  months  to  provide  funding  for  ongoing  future
operations,  or to refinance  existing  indebtedness.  The amount of  additional
working capital we may need to raise will be dependent,  in part, on our ongoing
evaluation  of cash  needs and  anticipated  capital  expenditures.  If we raise
additional  capital  through the issuance of debt, this will result in increased
interest expense. If we raise additional funds through the issuance of equity or
convertible  debt  securities,  the percentage  ownership of our company held by
existing  shareholders  will be reduced and those  shareholders  may  experience
significant  dilution.  No assurances can be given that we will be successful in
obtaining  additional  capital,  or that such capital will be available on terms
acceptable  to us.  If we are  unable to raise  additional  working  capital  as
needed, we may be required to curtail some of our operations.

Our primary assets serve as collateral under outstanding  convertible  notes. If
we were to default on these  agreements,  the  holders  could  foreclose  on our
assets.

      In December  2004,  we sold $4.35  million  principal  amount of 8% senior
secured convertible notes and in February and April 2005 we issued an additional
$2.175 million  principal  amount 8% senior secured  convertible  notes upon the
exercise of the additional investment rights. Following the conversion to common
shares by several note holders of principal amount 8% senior secured convertible
notes  totaling  $2,875,000,  the  current  principal  balance  of the 8% senior
secured  convertible notes is $3,650,000.  The interest of 8% is payable in cash
or  in-kind at our  option.  Beginning  in  September  2007,  any  remaining  8%
Convertible Debentures will be paid in nine equal quarterly installments. All or
part of  these  installments  may be paid in ONSM  common  shares  subject  to a
formula  based on trading  volume and share price and  provided  that the volume
weighted  average share price during the quarter prior to payment  exceeds $1.18
per share. The notes are  collateralized  by a blanket security  interest in our
assets and a pledge of the stock of our subsidiaries. If we should default under
the payment of interest  when due, the funding of  redemptions  as required,  or
other  provisions  of the notes,  the  holders  could seek to  foreclose  on our
primary assets.  If the holders were  successful,  we would be unable to conduct
our business as it is presently  conducted and our ability to generate  revenues
and fund our ongoing operations would be materially adversely affected.

      In addition to the above, certain recently purchased hardware and software
with an original cost of  approximately  $800,000 has been pledged as collateral
for short-term notes payable with a combined  outstanding  principal  balance of
$900,000.

We are dependent on contracts,  some of which are short term. If these contracts
are  terminated,  our  results  of  operations  would  be  materially  adversely
affected.

      We are dependent  upon  contracts  and  distribution  agreements  with our
strategic  partners  and  clients,  including  Thomson  Financial  Group and its
subsidiary  CCBN,  and  America  Online,  Inc.  Revenues  from  sales to Thomson
Financial Group were approximately $1.4 million,  or 17%, and approximately $1.8
million, or 24%, of total consolidated revenue for the years ended September 30,
2005 and 2004,  respectively.  These revenues represented  approximately 38% and
50% of Webcasting  Group  revenues for the same  periods.  During the year ended
September 30, 2005 we also provided digital asset management services to America
Online,   Inc.  under  a  contract  which  can  be  terminated   upon  a  30-day
notification.  Revenues from sales to America  Online,  Inc. were  approximately
$1.2 million,  or 15%, of our consolidated  revenue for the year ended September
30,  2005 and  represented  approximately  26% of the Digital  Asset  Management
Group's revenues for that period. Both of these contracts can be terminated upon
a 30-day  notification.  Because of the significant  nature of the revenues from

                                       9
<PAGE>

these contracts to our  consolidated  results of operations,  the termination of
either contract could have a material adverse effect on our financial  condition
and results of operations.

We may be  unable to  successfully  market or sell the  Digital  Media  Services
Platform ("DMSP").

      Our December 2004  purchase of Acquired  Onstream  included  approximately
$2.7 million  capitalized  by Acquired  Onstream prior to that date for licensed
software and development work by SAIC, Virage and other third parties related to
the partially completed Digital Media Services Platform ("DMSP").  Subsequent to
the acquisition,  we have spent approximately  $800,000 to complete the platform
in a  commercially  viable  form,  including  computer  equipment  used  in  its
development and initial operation. Although we believe there is a market for the
DMSP and as of November 2005 have placed a limited version of it in service with
some third-party  customers,  there have only been limited sales for the DMSP to
date and we do not know when,  if ever,  that we will  generate any  significant
revenues from this product.  In addition  there is no assurance  that we will be
able to sell the DMSP on a  profitable  basis.  Our  inability  to  successfully
market  and/or  sell  the DMSP  could  have a  material  adverse  effect  on our
financial condition and results of operations.

We expect to continue to  experience  volatility  in our stock price,  which has
recently been below $1.00 per share.

      Historically, there has been volatility in the market price for our common
stock. Our quarterly  operating  results,  changes in general  conditions in the
economy, the financial markets or the marketing industry,  or other developments
affecting  us or our  competitors,  could  cause the market  price of our common
stock  to  fluctuate   substantially.   We  expect  to  experience   significant
fluctuations  in our  future  quarterly  operating  results  due to a variety of
factors.  Factors that may  adversely  affect our  quarterly  operating  results
include:

      -     the  announcement or introduction of new services and products by us
            and our competitors;

      -     our  ability  to upgrade  and  develop  our  systems in a timely and
            effective manner;

      -     our ability to retain existing  clients and attract new clients at a
            steady rate, and maintain client satisfaction;

      -     the level of use of the Internet and online services and the rate of
            market  acceptance  of the Internet  and other  online  services for
            transacting business;

      -     technical difficulties, system downtime, or Internet brownouts;

      -     the amount and timing of  operating  costs and capital  expenditures
            relating to expansion of our business and operations;

      -     government regulation; and

      -     general economic  conditions and economic conditions specific to the
            Internet.

      As a  result  of  these  factors,  in one or  more  future  quarters,  our
operating  results may fall below the  expectations  of securities  analysts and
investors.  In this event,  the market price of our common stock would likely be
materially adversely affected. In addition,  the stock market in general and the
market prices for  Internet-related  companies in particular,  have  experienced
extreme volatility that often has been unrelated to the operating performance of

                                       10
<PAGE>

those  companies.  These broad market and industry  fluctuations  may  adversely
affect the price of our common stock, regardless of our operating performance.

      The price of our common stock closed below $1.00 per share for  thirty-two
of the trading days from  November 9, 2005 through  December 30, 2005,  with the
longest  consecutive period being twenty-four days. Thirty  consecutive  trading
days below $1.00 per share may result in a deficiency letter from NASDAQ,  which
then  allows  the  Company  180  calendar  days to  regain  compliance.  Lack of
compliance  by the  Company  would  result in the  inability  to list its common
shares on NASDAQ,  which would adversely affect the  marketability  and value of
the shares.

      In addition to the above, the 8% Convertible Debentures and the Additional
8% Convertible  Debentures provide cash penalties of 1% of the original purchase
price  per  month,  for  each  month  that the  common  stock  underlying  those
securities  and the  related  warrants  is not  listed on the  NASDAQ  Small Cap
Market.

If the selling  security  holders  all elect to sell their  shares of our common
stock at the same time, the market price of our shares may decrease.

      It is possible  that the selling  security  holders  will offer all of the
shares for sale.  Further,  because it is possible that a significant  number of
shares could be sold at the same time  hereunder,  the sales, or the possibility
thereof, may have a depressive effect on the market price of our common stock.

The exercise of options and  warrants,  the  conversion  of shares of our Series
A-10  Convertible  Preferred  Stock or the  conversion of our 8% senior  secured
convertible notes will be dilutive to our existing common shareholders.

      As of September  30, 2005 there were  outstanding  options and warrants to
purchase  a total of  15,114,093  shares of our  common  stock,  with an average
exercise price of $1.94 per share and the majority exercisable between $1.00 and
$1.65 per share. Of these outstanding  options and warrants,  there are warrants
to purchase an aggregate of 1,087,500  shares,  contingently  issuable  upon the
exercise  of  $1.00  warrants  issued  in  connection  with  the  Additional  8%
Convertible Debentures. In addition, as of September 30, 2005 there were 416,031
shares of our Series A-10  Convertible  Preferred  Stock  outstanding,  which is
convertible  into  4,160,310  shares of our common stock,  as well as $3,820,000
principal amount 8% senior secured  convertible notes which are convertible into
3,820,000 shares of our common stock.

A  substantial  portion  of our  assets  are  comprised  of  goodwill  and other
intangible  assets,  which may be  subject  to future  impairment  and result in
financial statement write-offs.

      Our prior  acquisitions of several businesses have resulted in significant
increases  in goodwill and other  intangible  assets.  Unamortized  goodwill and
other  intangible   assets,   which  includes   acquired  customer  lists,  were
approximately  $10.6 million at September 30, 2005,  representing  approximately
61% of our total assets and 348% of the book value of shareholder equity,  after
reduction for equity securities subject to potential rescission.

      If there is a material change in our business operations, the value of the
intangible assets we have acquired could decrease  significantly.  On an ongoing
basis,  we will evaluate,  partially  based on discounted  expected  future cash
flows,  whether the carrying  value of such  intangible  assets may no longer be
recoverable,  in which case an  additional  charge to earnings may be necessary.
Any future  determination  requiring the  write-off of a significant  portion of
unamortized  intangible  assets,  although not  requiring  any  additional  cash
outlay,  could have a material  adverse  effect on our  financial  condition and
results of operations.

                                       11
<PAGE>

We have issued debt and preferred shares containing  significant discounts which
will adversely, and possibly unpredictably, affect interest and dividend expense
in future years.

      We are required to record the fair value of warrants issued in conjunction
with  the  Financing  Transactions,  plus the  potential  value  arising  from a
beneficial  conversion  feature  included  in the terms of the  financing,  as a
discount  to the stated  financing  amount.  The  unamortized  portions of these
discounts  were  approximately  $2.1  million  for the Series  A-10  Convertible
Preferred and approximately  $2.6 million for the 8% senior secured  convertible
notes,  which were  reflected on our balance sheet at September 30, 2005.  These
non-cash  amounts will be  amortized  to dividend and interest  expense over the
four year financing terms,  although any unamortized portion will be immediately
expensed at the time of a conversion or redemption  occurring  before the end of
those terms. Accordingly,  conversions of approximately $170,000 occurring after
September  30, 2005 will  result in the  write-off  to expense of  approximately
$136,000  unamortized  debt discount during the three months ending December 31,
2005.

We may be exposed to  potential  risks  relating to our internal  controls  over
financial  reporting and our ability to have those  controls  attested to by our
independent auditors.

      As  directed  by  Section  404 of the  Sarbanes-Oxley  Act  of  2002,  the
Securities and Exchange  Commission  adopted rules requiring public companies to
include a report of management on the company's internal controls over financial
reporting in their annual  reports,  including  Form  10-KSB.  In addition,  the
independent  registered  public  accounting firm auditing a company's  financial
statements  must also  attest to and report on  management's  assessment  of the
effectiveness  of the company's  internal  controls over financial  reporting as
well as the operating  effectiveness of the company's internal controls. We were
not subject to these  requirements  for the fiscal year ended September 30, 2005
and do not expect to be subject to them for the fiscal year ended  September 30,
2006.  We are  evaluating  our  internal  control  systems in order to allow our
management to report on, and our independent  registered  public accounting firm
to attest to, our internal controls,  as a required part of our Annual Report on
Form 10-KSB  beginning  with our report for the fiscal year ended  September 30,
2007.

      While we expect to eventually expend  significant  resources in developing
the necessary  documentation and testing  procedures  required by Section 404 of
the Sarbanes-Oxley Act of 2002, there is a risk that we will not comply with all
of the requirements imposed thereby. At present, there is no precedent available
with which to measure compliance adequacy. Accordingly, there can be no positive
assurance  that we will  receive a  positive  attestation  from our  independent
auditors.

      In the event we identify  significant  deficiencies or material weaknesses
in our internal  controls that we cannot  remediate in a timely manner or we are
unable to receive a positive  attestation  from our  independent  auditors  with
respect to our internal  controls,  investors and others may lose  confidence in
the reliability of our financial  statements and our ability to obtain equity or
debt financing could suffer.

      In addition  to the above,  in the event that our  independent  registered
public  accounting firm is unable to rely on our internal controls in connection
with their audit of our financial statements, and in the further event that they
are unable to devise alternative procedures in order to satisfy themselves as to
the material accuracy of our financial statements and related disclosures, it is
possible  that we would  receive a qualified or adverse  audit  opinion on those
financial  statements.  In that event,  the quotation of our common stock on the
Nasdaq SmallCap Market could be adversely affected.  In addition,  investors and
others may lose  confidence in the  reliability of our financial  statements and
our ability to obtain equity or debt financing could suffer.

                                       12
<PAGE>

Provisions  of our articles of  incorporation  and bylaws may delay or prevent a
take-over which may not be in the best interests of our shareholders.

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

      In addition, our articles of incorporation authorize the issuance of up to
5,000,000  shares of preferred  stock with such rights and preferences as may be
determined from time to time by our board of directors,  of which 416,031 shares
of our Series A-10  Convertible  Preferred  Stock were issued and outstanding at
September 30, 2005. Our board of directors may,  without  shareholder  approval,
issue preferred stock with dividends,  liquidation,  conversion, voting or other
rights  that could  adversely  affect the  voting  power or other  rights of the
holders of our common stock.


ITEM 2. DESCRIPTION OF PROPERTY

      We lease a 25,000  square foot  facility at 1291 SW 29th Street in Pompano
Beach,  Florida,  which  serves as our  corporate  headquarters  and  houses the
majority of our webcasting  production,  marketing and distribution  activities.
Our lease ends in September  2007 and provides for a five-year  renewal  option.
The  monthly  base  rental  is  approximately  $17,000  (including  our share of
property  taxes and  common  area  expenses)  with  annual  three  percent  (3%)
increases.

      We also maintain  business  offices located at 440 Ninth Avenue,  New York
City, New York. This office,  including available common areas, is approximately
2,000  square  feet and serves as a sales  office and as a backup to Florida for
webcasting  operations.  We lease this space from an  unaffiliated  third  party
under a lease expiring on December 31, 2006 for a monthly rental of $6,000.

      In May 2004, we entered into a five-year  operating lease for office space
at 200 Vallejo Street in San Francisco.  This is an  approximately  8,500 square
foot  facility that operates as  administrative  headquarters  for Digital Asset
Management  Group,  including EDNet, and houses the centralized  network hub for
electronically bridging affiliate studios. In addition, the facility operates as
a backup to  Florida  for  webcasting  operations.  The lease  provides  for one
five-year renewal option at 95% of fair market value. The monthly base rental is
approximately $15,000 with annual increases up to five percent (5%).


ITEM 3. LEGAL PROCEEDINGS

      On May 18, 2005 the Company  agreed to sell its travel video  library,  as
well  as all  rights  associated  with  that  library,  including  the  customer
contracts and the related websites, for $455,000. The Company received a $50,000
non-refundable deposit at the time of the initial agreement,  with the remaining
balance due upon closing,  originally  anticipated to be no later than September
2005. As part of the sale, the buyer also agreed to pay the Company  $15,000 per
month for a three-year  period,  in exchange for hosting and streaming  services
for the travel  video  library and similar  content  obtained  elsewhere  by the
buyer.  On September 23, 2005 the buyer filed a legal action against the Company
in the District Court, 193rd Judicial District,  Dallas County,  Texas, alleging
that the Company did not deliver the assets as agreed and seeking  return of the
$50,000  deposit plus  reimbursement  of  unspecified  due  diligence  expenses,
attorney  fees and interest.  On December 4, 2005,  the Company filed a response
objecting to all claims by the buyer,  which it believes are without merit.  The

                                       13
<PAGE>

Company has not refunded the deposit,  which is included in deferred  revenue as
of September 30, 2005. The Company does not believe that the ultimate resolution
of this matter will have a material impact on its financial condition or results
of operations. Pending closing of this transaction, the Company had the right to
continue, and has continued,  its travel production and distribution operations.
The cost of the travel video  library is fully  depreciated  as of September 30,
2005  and the  associated  travel  production  and  distribution  revenues  were
$208,177 and $251,232,  respectively, for the years ended September 30, 2005 and
2004.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      On September 13, 2005 we held our 2005 annual meeting of shareholders,  at
which all matters submitted to a vote of the company's shareholders as described
in the proxy  statement  filed  with the SEC on  August  1, 2005 were  approved.
7,412,332 shares were present, all by valid proxy and including 4,244,842 shares
held in street names and thus only eligible to vote on certain of these matters.
At the 2005 Annual Meeting, our shareholders took the following actions:

Election of  Directors - Our  shareholders  elected  Randy S.  Selman,  Clifford
Friedland,  Alan M. Saperstein,  Benjamin Swirsky, Robert J. Wussler, Charles C.
Johnston and General Ronald W. Yates to serve as directors until the next annual
meeting of shareholders or until their successors are elected and qualified. The
number of votes cast for each of these individuals are set forth below:

                            Shares For    Shares Against   Share Abstentions

Randy S. Selman                7,362,500         19,670            30,162
Clifford Friedland             7,363,470         18,700            30,162
Alan M. Saperstein             7,337,475         44,695            30,162
Benjamin Swirsky               7,363,338         18,832            30,162
Robert J. Wussler              7,363,338         18,832            30,162
Charles C. Johnston            7,362,530         19,640            30,162
General Ronald W. Yates        7,363,272         18,898            30,162


Ratification  of  Accountants - Our  shareholders  ratified the  appointment  of
Goldstein  Lewin  &  Co.,  Certified  Public  Accountants,  as  our  independent
accountants. The vote totals were 7,401,238 shares for, 5,133 shares against and
5,961 share abstentions.

Financing - Our  shareholders  approved  the  possible  issuance of in excess of
19.99% of our presently issued and outstanding common stock upon the exercise of
common  stock  purchase  warrants.  The vote totals were  2,963,179  shares for,
194,096 shares against and 10,215 share abstentions.

Stock Options - Our shareholders  approved an amendment to our 1996 Stock Option
Plan increasing the number of shares  available for issuance under the plan. The
vote totals were 2,749,681  shares for,  402,460 shares against and 15,349 share
abstentions.  Our shareholders  also approved a proposal for the acceleration of
certain non-plan compensatory options previously granted to executives under the
terms of their employment agreements. The vote totals were 2,669,161 shares for,
454,206 shares against and 44,123 share abstentions.

                                       14
<PAGE>

                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


      Our common stock is quoted on the Nasdaq SmallCap  Market.  From July 1997
until  January  5, 2005 our common  stock  traded  under the  symbol  "VDAT." On
January 5, 2005  following  the change of our corporate  name to Onstream  Media
Corporation our trading symbol was changed to "ONSM."

      The  following  table sets forth the high and low closing  sale prices for
our common  stock as reported on the Nasdaq Stock Market and for the period from
October 1, 2003 through  December 31, 2005.  These prices do not include  retail
mark-ups,  markdowns or commissions,  and may not necessarily  represent  actual
transactions.

                           High    Low

      FISCAL YEAR 2004:

      First Quarter       $3.05   $1.81
      Second Quarter      $2.63   $1.96
      Third Quarter       $2.80   $1.91
      Fourth Quarter      $2.19   $1.18

      FISCAL YEAR 2005:

      First Quarter       $1.79   $1.06
      Second Quarter      $2.33   $1.35
      Third Quarter       $1.70   $1.07
      Fourth Quarter      $1.16   $0.95

      FISCAL YEAR 2006:

      First Quarter       $1.17   $0.65


      On January 11, 2006,  the last  reported sale price of the common stock on
the Nasdaq  SmallCap  Market was $0.92 per share.  As of January  11, 2006 there
were approximately 553 shareholders of record of the common stock.

      Dividend Policy

      We have never declared or paid any cash dividends on our common stock.  We
currently  expect to retain future  earnings,  if any, to finance the growth and
development  of our  business.  The approval of the holders of a majority of the
outstanding  principal  face  amount of the 8%  Convertible  Debentures  and the
Additional 8%  Convertible  Debentures  is required  prior to the payment of any
dividend on our common stock.  Dividends  related to the Series A-10 Convertible
Preferred  are  cumulative  and must be fully paid by us prior to the payment of
any dividend on our common stock.

      Recent Sales of Unregistered Securities

      During the three months ended  September 30, 2005, we issued 92,715 shares
of common  stock for  consulting,  financial  advisory and legal  services.  The
services are being provided over periods ranging up to one year, and will result

                                       15
<PAGE>

in a  professional  fees  expense of  approximately  $105,000  over the  service
period.   During   October  2005,  we  issued  45,000  ONSM  common  shares  for
professional services valued at approximately $45,000. None of these shares were
issued to Company directors or officers.

      On November 30, 2005, we issued  44,444 shares of common stock,  valued at
approximately  $36,000,  as  interest  on $300,000 we borrowed on that date from
Platinum Credit Group, LLC. We agreed to include these shares on the next S-3 or
other registration statement filed.

      On January 9, 2006, we issued  305,878  shares of common stock,  valued at
approximately $226,350, for equipment purchases from BTI Computers,  Inc. and we
issued  20,000  shares  of  common  stock for  professional  services  valued at
approximately $20,000.

      All of the above  securities  were issued in private  transactions  exempt
from  registration  under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act. The recipients  were either  accredited or
otherwise  sophisticated  investors and the  certificates  evidencing the shares
that were issued contained a legend  restricting  their  transferability  absent
registration  under  the  Securities  Act  of  1933  or the  availability  of an
applicable  exemption  therefrom.  The  purchasers  had access to  business  and
financial information concerning our company. Each purchaser represented that he
or she was acquiring the shares for  investment  purposes  only,  and not with a
view  towards  distribution  or resale  except  in  compliance  with  applicable
securities laws.


      Securities Authorized for Issuance Under Equity Compensation Plans

      The following  table sets forth  securities  authorized for issuance under
equity  compensation  plans,  including  our 1996 Stock Option Plan,  individual
compensation  arrangements and any other  compensation plans as of September 30,
2005.

<TABLE>
<CAPTION>
                                    Number of                  Weighted         Number of
                                    securities to be           average          securities remaining
                                    issued upon                exercise         available for future
                                    exercise of                price of         issuance under equity
                                    of outstanding             outstanding      compensation plans
                                    options, warrants          options,         (excluding securities
Plan category                       and rights                 warrants         reflected in column (a))
                                                               and rights

                                           (a)                     (b)                      (c)

<S>                                      <C>                     <C>                     <C>
1996 Stock Option Plan (1) (3)           2,940,895               $1.89                   3,532,346

Equity compensation plans
approved by shareholders (2)             2,431,390               $2.09                        none

Equity compensation plans
not approved by shareholders (3)             4,883              $13.27                        none
</TABLE>

                                       16
<PAGE>


(1)   Our  1996  Stock  Option  Plan  has   previously   been  approved  by  our
      shareholders,  and  reflects  the only such equity  compensation  plan for
      which we have sought shareholder approval. On April 11, 2002, an amendment
      to the Plan,  ratified  by the  shareholders,  reserved  an  aggregate  of
      733,334  plan  options  and added an  equity  compensation  component.  On
      December 15, 2004,  a majority of our  shareholders  voted to increase the
      number of shares  available for issuance  under the plan to 3,500,000.  On
      September 13, 2005, a majority of our  shareholders  voted to increase the
      number of shares available for issuance under the plan to 6,500,000.

(2)   On  December  15,  2004,  a majority  of our  shareholders  voted to issue
      1,631,390  Non Plan  options to certain  executives,  directors  and other
      management  in  connection  with the Onstream  Merger and 800,000 Non Plan
      options  to  certain   executives  in  connection  with  their  employment
      contracts.

(3)   On December 15, 2004 a majority of our  shareholders  voted to approve the
      cancellation  of stock option  grants to  directors,  executive  officers,
      senior management and employees  covering 292,992 shares (227,776 of which
      were  issued  under the 1996 Stock  Option  plan) with a  weighted-average
      exercise price of $22.93, with such options to be re-issued six months and
      one day from the date of cancellation  with an exercise price equal to the
      fair market value on the date of the reissue.  This  cancellation  has not
      yet been  implemented  and 181,438 of the  options  (121,105 of which were
      issued under the 1996 Stock  Option plan) had expired as of September  30,
      2005.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion should be read together with the information  contained
in the  Consolidated  Financial  Statements  and related  Notes  included in the
annual report.

Overview

We are an online  service  provider of live and on-demand  media  communication,
including  webcasting,   webconferencing,   digital  asset  management  and  web
publishing  services.  Our  objective is to provide  these  services via a fully
robust,  comprehensive digital media services platform (DMSP) that virtually any
company,  government  agency or other  enterprise  having a need to manage  rich
media  content  will be able to  utilize  in an  affordable  and  highly  secure
environment.

We had 61 full time  employees  as of December  30,  2005.  Our  operations  are
organized in two main operating groups:

      o     Digital Asset Management Group

      o     Webcasting Group

Our Digital Asset Management Group,  which operates primarily from facilities in
San Francisco,  California,  provides digital asset management services. Digital
asset  management is a set of coordinated  technologies and processes that allow
the quick and efficient storage,  retrieval, and reuse of the digital files that
are essential to all  businesses.  These digital files include  photos,  videos,
audio files,  engineering specs,  architectural plans, web pages, and many other
pieces of business collateral.  In addition,  the Digital Asset Management Group
services include providing connectivity within the entertainment and advertising
industries  through  its  private  network,  which  encompasses  production  and
post-production companies, advertisers, producers, directors, and talent.

                                       17
<PAGE>

The Webcasting  Group provides an array of  corporate-oriented,  web-based media
services to the corporate  market  including live audio and video Webcasting and
on-demand audio and video streaming for any business,  government or educational
entity.   Our  Webcasting   Group  also  includes  our  travel   production  and
distribution  operations,  which produces  Internet-based  multi-media streaming
videos  related to hotels,  resorts,  time-shares,  golf  facilities,  and other
travel destinations.

For segment  information  related to the revenue and  operating  income of these
groups, see Note 7 to the Consolidated Financial Statements.

Revenue Recognition

      Revenues  from  recurring  service  are  recognized  when  (i)  persuasive
evidence of an arrangement exists between us and the customer,  (ii) the good or
service has been  provided to the  customer,  (iii) the price to the customer is
fixed or determinable and (iv)  collectibility of the sales prices is reasonably
assured.

      Our  Digital  Asset  Management   Group   recognizes   revenues  from  the
acquisition,  editing,  transcoding,  indexing,  storage and distribution of its
customers'  digital  media.  A  customer's  charges are  generally  based on the
activity or volume of such media,  expressed in megabytes or similar terms,  and
are  recognized at the time the service is performed.  Fees charged to customers
for customized  applications or set-up are recognized as revenue at the time the
application or set-up is completed.  Network usage and bridging revenue based on
the timing of the customer's  usage of those services.  Revenue from the sale of
equipment is recognized when the equipment is installed.  Leases of equipment to
customers are generally  short-term and cancellable and therefore  accounted for
as operating  leases and the rental  revenue from leases is  recognized  ratably
over the life of the lease.

      Our Webcasting group recognizes revenue from live and on-demand webcasting
at the time an event is  accessible  for  streaming  over the  Internet.  Travel
production  revenue is recognized at the time of completion of the related video
or website.  Travel  distribution  revenue is recognized.  when a user watches a
video on the  Internet,  if charged on a per hit basis,  or over the term of the
contract, if charged as a fixed monthly fee.


Results of Operations

      Our  consolidated  net loss  for the year  ended  September  30,  2005 was
approximately  $9.6  million  ($1.17  loss per share) as  compared  to a loss of
approximately  $4.0  million  ($0.92  loss per  share)  for the prior  year,  an
increase of approximately  $5.6 million (143%).  The additional net loss for the
year ended September 30, 2005, as compared to the prior year,  related primarily
to  increases  in  non-cash  interest  expense  arising  from (i) the  Financing
Transactions, including the write-off of unamortized discount arising from early
debt repayments with those proceeds as well as subsequent conversions and (ii) a
penalty related to  unregistered  shares from a previous  financing,  as well as
increases  in  operating  expenses,  primarily  compensation  arising  from  the
Onstream  Merger and the  Virage  acquisition  (Digital  Asset  Management)  and
expenses for marketing and financial consulting services, including amounts paid
under severance  agreements,  paid for primarily with common shares and options.
Although the net loss  increased by  approximately  143%,  it only  increased by
approximately 27% on a per share basis, due to the approximately 3.9 million, or
approximately  90%,  increase in the weighted  average  number of common  shares
outstanding in the 2005 period as compared to the 2004 period.

                                       18
<PAGE>

      The following table shows,  for the periods  presented,  the percentage of
revenue represented by items on our consolidated statements of operations.


                                             PERCENTAGE OF REVENUE
                                            Year Ended September 30,
                                               2005           2004
                                            ----------     ----------
Revenue:

    Digital asset management                      24.1%          15.3%
    Network usage and services                    25.1           28.2
    Network equipment sales and rentals            5.6            8.7
    Webcasting                                    42.6           44.5
    Travel production and distribution             2.6            3.3
                                            ----------     ----------
Total revenue                                    100.0%         100.0%
                                            ----------     ----------

Cost of revenue:

    Digital asset management                       7.8            4.1
    Network usage and services                    14.6           14.4
    Network equipment sales and rentals            2.4            5.2
    Webcasting and related equipment              12.3           12.6
    Travel production and distribution             0.9            0.4
                                            ----------     ----------
Total costs of revenue                            38.0%          36.7%
                                            ----------     ----------

Operating expenses:
    General administrative:
       Compensation                               58.6           52.2
       Professional fees                          34.6           14.6
       Other                                      19.4           19.8
    Impairment loss on goodwill                    4.0            6.2
   Depreciation and amortization                  14.1           18.1
                                            ----------     ----------
Total operating expenses                         130.7%         110.9%
                                            ----------     ----------

Loss from operations                             (68.7)%        (47.6)%
                                            ----------     ----------

Other income (expense):
   Interest income                                 0.1            0.1
   Interest expense                              (49.2)          (7.9)
   Other income (expense), net                    (0.3)           3.0
                                            ----------     ----------
Total other expense, net                         (49.4)          (4.8)
                                            ----------     ----------

Net loss                                        (118.1)%        (52.4)%
                                            ==========     ==========

                                       19
<PAGE>

      The following table is presented to illustrate our discussion and analysis
of our results of operations and financial condition.  This table should be read
in conjunction with the consolidated financial statements and the notes therein.

<TABLE>
<CAPTION>
                                          For the year ended
                                              September 30,                Increase (Decrease)
                                      ----------------------------    ----------------------------
                                          2005            2004           Amount         Percent
                                      ------------    ------------    ------------    ------------

<S>                                   <C>             <C>             <C>                      <C>
Total revenue                         $  8,156,394    $  7,578,888    $    577,506             7.6%
Total costs of revenue                   3,102,860       2,783,147         319,713            11.5%
                                      ------------    ------------    ------------    ------------
   Gross margin                          5,053,534       4,795,741         257,793             5.4%
                                      ------------    ------------    ------------    ------------

General and administrative expenses      9,178,309       6,559,025       2,619,284            39.9%
Impairment loss on goodwill                330,000         470,000        (140,000)          (29.8)%
Depreciation and amortization            1,152,633       1,373,587        (220,954)          (16.1)%
                                      ------------    ------------    ------------    ------------
   Total operating expenses             10,660,942       8,402,612       2,258,330            26.9%
                                      ------------    ------------    ------------    ------------

   Loss from operations                 (5,607,408)     (3,606,871)      2,000,537            55.5%

   Other expense                        (4,030,480)       (365,795)      3,664,685         1,001.8%
                                      ------------    ------------    ------------    ------------

   Net loss                           $ (9,637,888)   $ (3,972,666)   $  5,665,222           142.6%
                                      ============    ============    ============    ============
</TABLE>

Revenues and Gross Margin

      Consolidated  operating revenue increased  approximately $578,000 (8%), as
compared to the prior year,  to  approximately  $8.2  million for the year ended
September  30, 2005.  This increase was primarily due to revenues of the Digital
Asset Management Group. We recorded  approximately $2.0 million of revenues from
digital asset  management  services during the year ended September 30, 2005, as
compared  to  approximately  $1.2  million in the prior year.  These  operations
commenced  in  February  2004  and  therefore  had  no  related  revenues  for a
significant  portion of the same period of the prior year.  Revenue from network
equipment sales and rentals,  also part of the Digital Asset  Management  Group,
decreased  approximately  $202,000  (31%),  as compared  to the prior  year,  to
approximately  $458,000.  We have  reduced our sales focus on this lower  margin
area and are currently  evaluating our future  involvement in this activity,  as
part of the reorganization of our sales function discussed below.  Revenues from
network usage and services,  also part of the Digital  Asset  Management  Group,
decreased  approximately  $88,000  (4%),  as  compared  to the  prior  year,  to
approximately  $2,049,000,  due to  variations in customer  usage.  Although the
decrease in the fourth quarter of fiscal 2005 over the corresponding  period was
more than the total  decrease for the first three  quarters,  this was due to an
unusually  strong  fourth  quarter in fiscal 2004 and we expect  future  network
usage  and  services  revenues  to  continue  to be  approximately  equal to the
revenues  in the  corresponding  period of the prior year,  until such  revenues
begin to  increase  as a result of the  marketing  and sales of the DMSP to this
customer base, although such increase cannot be assured.

      We expect the revenues of the Digital Asset  Management  Group to continue
to exceed the corresponding  prior year to date amounts in fiscal 2006, although
such  increase  cannot be  assured.  This is because we expect to see  increased
sales in this group,  including network usage and services revenues as discussed
above,  arising  from the  marketing of the DMSP and related  products.  We also
anticipate  increased digital asset management  services revenues in fiscal 2006
arising from the signing of new customers for customized  application and set-up

                                       20
<PAGE>

work, as well as ongoing processing, although such increase cannot be assured.

      Webcasting revenues increased  approximately  $97,000 (3%), as compared to
the prior year, to  approximately  $3.5 million for the year ended September 30,
2005,  primarily  due to  continuing  growth  in sales of  higher  priced  video
webcasts.  Although the number of webcasts  produced  decreased to approximately
4,800 webcasts for the year ended  September 30, 2005 compared to  approximately
6,400  webcasts  for the prior  year,  the average  revenue  per  webcast  event
increased to approximately $701 for fiscal 2005 period compared to approximately
$525 for the comparable 2004 period.

      We expect the revenues of the  Webcasting  Group to continue to exceed the
corresponding  prior year to date  amounts in fiscal  year 2006,  although  such
increase  cannot be assured.  This is as a result of our focus on building sales
in  the  higher  per-event  priced  product  segment  that  capitalizes  on  our
proprietary  feature set,  including slides,  chat,  polling and streaming video
solutions.  In addition,  we are continuously  upgrading our webcasting software
and hardware infrastructure, allowing us to introduce new features to the market
on an ongoing basis. We are also currently developing the next generation of our
Webcasting  platform,  which we expect to  introduce  by the end of fiscal  year
2006. See Liquidity and Capital Resources below.

      Consolidated  gross  margin  increased  approximately  $258,000  (5%),  as
compared to the prior year,  to  approximately  $5.1  million for the year ended
September  30, 2005.  This increase was primarily due to the gross margin on the
revenues from digital asset  management  services,  which  commenced in February
2004.  Based on our  expectations of increasing sales discussed above, we expect
gross margin to also continue increasing, as compared to the corresponding prior
year amounts, for fiscal year 2006, although such increase cannot be assured.

      We began a  reorganization  of our sales  function  in April  2005,  which
included  changes in personnel and changes in compensation  amounts and methods.
Our CEO will directly  supervise the sales function until the  reorganization is
satisfactorily completed, which we expect to result in better sales results from
better targeting of receptive markets for our products and services and from the
implementation  and/or improved  execution of the methods and techniques used by
our sales force.

Operating Expenses

      Consolidated  operating  expenses  for the year ended  September  30, 2005
increased  approximately  $2.3 million (27%),  as compared to the prior year, to
approximately   $10.7  million   primarily  from  increased   compensation   and
professional  fees  expense,  offset by reduced  expenses for  depreciation  and
impairment loss on goodwill.

      Compensation  expense  for the year ended  September  30,  2005  increased
approximately  $826,000 (21%), as compared to the prior year,  resulting from an
increase in headcount  necessary to service  increased  business  primarily as a
result  of the  Onstream  Merger  and  the  Virage  acquisition  (Digital  Asset
Management),  as well as to build our sales and  management  infrastructure  for
planned future growth, although we cannot assure that such growth will occur. At
September  30,  2005 we had 61 full time  employees  as compared to 58 full time
employees at September 30, 2004. Although the total net headcount did not change
significantly from the beginning to the end of fiscal 2005, the addition of five
executives during that period accounted for an increase in compensation  expense
of approximately  $500,000.  Another approximately $100,000 was related to wages
and  severance  paid to our prior CFO while we were also  paying our new CFO. We
expect that during  fiscal 2006 that this  expense  will  continue to exceed the
corresponding  prior year period as a result of the growth in our webcasting and
digital asset management operations.

      Professional fees increased approximately $1.7 million (155%), as compared

                                       21
<PAGE>

to the prior  year,  primarily  due to  expenses  for  marketing  and  financial
consulting  services,  including amounts paid under certain executive  severance
agreements,  primarily  paid for by the issuance of our common stock and options
to buy our common stock. This non-cash portion  increased by approximately  $1.2
million to  approximately  $1.8 million the year ended  September 30, 2005, from
approximately  $646,000  in the  comparable  period  of the  previous  year.  In
addition,  accounting and legal costs  increased by $191,000,  to  approximately
$392,000 for the year ended September 30, 2005, from  approximately  $201,000 in
the  comparable  period  of  the  previous  year,  primarily  related  to  costs
associated  with  several  SEC  filings,  including  a  proxy  statement  and  a
registration statement as well as increased audit and quarterly review costs.

      We have entered into several  consulting  contracts  that have resulted or
will  result in the  issuance of common  shares and  options to purchase  common
shares,  in addition to cash payments.  Including  contracts  entered into after
September  30, 2005,  these  contracts  will result in future  professional  fee
expenses of approximately $1.6 million recognized during fiscal year 2006. Based
on  this,  as  well  as  expected   increased   expenditures   associated   with
Sarbanes-Oxley  compliance and marketing programs, we expect continued increases
in  professional   fee  expenses  for  fiscal  year  2006  as  compared  to  the
corresponding prior year amounts.

      The impairment  loss on goodwill was $330,000 for the year ended September
30, 2005, as compared to a $470,000 loss for the prior year. The expense in both
years was  necessary  to adjust  the  carrying  value of the  intangible  assets
arising  from  the  2001  acquisition  of  EDNet  to fair  value,  based  on our
evaluation of projected  cash flows from the EDNet  operations as well as market
values of independent  comparable companies.  We were assisted by an independent
third party appraiser in calculating  this  adjustment,  based on SFAS 142. As a
result of the  decline in EDNet's  sales for fiscal  2005 as  compared to fiscal
2004,  the  valuation  assigned to EDNet's  goodwill  declined from the adjusted
fiscal 2004 value and a second  write-down  was  considered  necessary in fiscal
2005. We also  evaluated the September 30, 2005 carrying value of the intangible
assets  arising  from  the  2002  acquisition  of MOD  and  determined  that  no
adjustment was necessary. A similar evaluation as of September 30, 2004 resulted
in no adjustment to that amount.

      Depreciation and amortization  decreased  approximately $221,000 (16%) for
the year ended  September 30, 2005, as compared to the prior year, due to assets
in service becoming fully depreciated. We will experience a significant increase
in  depreciation  expense in fiscal 2006 as a result of the DMSP being placed in
service.

Other Expense

      Other expense  increased to approximately  $4.0 million for the year ended
September 30, 2005,  as compared to  approximately  $366,000 for the  comparable
period of the previous year, an increase of approximately  $3.7 million (1002%).
This  increase  is  primarily  due  to  an  increase  in  interest   expense  of
approximately $3.4 million.

      The  approximately  $3.4 million increase in interest expense for the year
ended  September  30, 2005,  as compared to the prior year,  is primarily due to
approximately  $2.1  million  representing  discount  amortization  and interest
expense on the 8%  Convertible  Debentures  and the  Additional  8%  Convertible
Debentures,  including the effect of conversions;  approximately  $944,000 for a
non-cash  penalty  (payable in common shares) we incurred as a result of a delay
in registering shares issued in a previous financing and approximately  $494,000
from the write-off of unamortized discount due to early debt repayments.

      As a result of the sale of 8% Convertible  Debentures in December 2004 and
the sale of the Additional 8% Convertible Debentures in February and April 2005,
and after giving effect to  conversions  through June 30, 2005, we have recorded
unamortized  debt discounts of  approximately  $2.6 million on our September 30,
2005 balance  sheet.  In the event of  redemption or conversion of the remaining
outstanding  balance of these debts before the end of their  four-year  term, we
would write off the unamortized portion of the related debt discount to interest

                                       22
<PAGE>

expense  at  that  time.  Accordingly,  conversions  of  approximately  $170,000
occurring  after  September  30, 2005 will result in the write-off to expense of
approximately  $136,000 unamortized debt discount during the three months ending
December  31,  2005.  As of result of  registering  the  shares  from a previous
financing  on June 29,  2005,  we will not  incur  additional  penalty  interest
expense  after  that  date.  As a result of the  Onstream  Merger,  we no longer
recognize  a portion of the results of  Acquired  Onstream  on an equity  basis.
However,  as a  result  of  the  Onstream  Merger,  we are  incurring  increased
operating expenses of approximately  $200,000 per quarter,  primarily contracted
salaries and related  employee  expenses,  which began in the three months ended
March 31, 2005.

Liquidity and Capital Resources

The independent auditor's report on our current financial statements states that
we have suffered  significant  recurring  losses from operations since inception
that raise  substantial  doubt about our ability to continue as a going concern.
At September 30, 2005 we had a working  capital  deficit of  approximately  $2.8
million, which reflects the Financing Transactions and the Onstream Merger. This
working capital deficit balance includes $605,000 of prepaid expenses, primarily
consulting  fees paid with equity and which will be  expensed in future  periods
over the remaining lives of the applicable consulting  agreements.  This working
capital deficit balance also includes $151,000 of accounts payable for equipment
purchases that was settled with the issuance of our common stock in January 2006
and a liability of approximately $2.3 million related to detachable warrants and
embedded conversion features that we do not currently  anticipate paying and may
never be paid, although there is no assurance of this.

On December 23, 2004, we received gross financing  proceeds of $6.5 million from
the sale of  Series  A-10 and 8%  Convertible  Debentures,  out of which we paid
approximately $700,000 in related fees and expenses. In addition, all promissory
notes and convertible preferred shares outstanding as of September 30, 2004 (and
as of the  date  of the new  financing)  were  satisfied  by  cash  payments  of
approximately  $2.9 million,  plus issuance of 239,650 shares of Series A-10 and
warrants to purchase 500,000 of our common shares for $1.50 per share.  Also, we
paid  approximately  $1.3  million to satisfy  certain  obligations  of Acquired
Onstream,  which included the balance due on their note to Virage  guaranteed by
us. After these payments, approximately $1.5 million of cash remained, which was
used to satisfy existing deferred accounts payable of approximately $600,000 and
to fund certain capital expenditures and operating losses.

In  February  and April  2005,  additional  investment  rights  were  exercised,
resulting  in the  issuance  of  Additional  8%  Convertible  Debentures,  which
included common stock purchase  warrants,  for gross proceeds of $2,175,000.  In
connection with the exercise of these additional  investment rights, our ability
to borrow  additional  funds  senior or equal in priority to the 8%  Convertible
Debentures  was  limited to $1.5  million  incurred  solely for the  purchase of
equipment  or software  used in our  business  and  collateralized  only by that
equipment or software.  The funds from the exercise of these rights were used to
fund certain capital expenditures and operating losses.

During  August  and  September  2005  we  borrowed  $600,000  collateralized  by
previously purchased hardware and software. During October and November 2005, we
borrowed an additional $450,000  collateralized by previously purchased hardware
and software.  We have an unfulfilled  commitment  from one of these lenders for
additional financing of $300,000 collateralized by previously purchased hardware
and software.  Out of this total  financing of  $1,350,000,  $750,000 is payable
over  five  years and may be  repaid  at our  option in the form of Series  A-10
Preferred Stock, with the consent of required security holders. Of the remaining
$600,000  financing,  repayment of $300,000 is due by March 1, 2006 and $300,000
by August 19, 2006.  There is no assurance that we will have the funds available
to make these payments as scheduled.

The holders of the 8%  Convertible  Debentures,  the  Additional 8%  Convertible
Debentures  and the  Series  A-10  Preferred  Stock may be  entitled  to certain
rescission rights. The resale  registration  statement of shares of common stock
underlying these securities and the related warrants was originally filed by the
Company on February 23,  2005.  Pursuant to the  Securities  Act of 1933 and the
related rules and  regulations,  as  interpreted  by the Securities and Exchange

                                       23
<PAGE>

Commission, as a result of a portion of the additional investment rights granted
with the 8%  Convertible  Debentures,  which  were the  basis of the sale of the
Additional 8% Convertible  Debentures,  being unexercised at the time the resale
registration statement was originally filed, the private offerings have not been
completed and accordingly,  the public and private offerings would be integrated
and result in a violation of Section 5 of the Securities Act.  Accordingly,  the
investors who purchased the private  placement  securities  may have a number of
remedies  available  to them,  including  the  potential  right to  rescind  the
purchase of those securities plus,  potentially,  any amount representing damage
to such investors.

The Company is unable to predict if the investors would attempt to exercise such
potential rescission rights. Each investor's decision would be based upon, among
other  things,  a decline in the price of the  Company's  common stock and other
factors.  These potential  rescission rights would require the Company to refund
at least the gross  proceeds of these  private  offerings to the  investors.  In
order to satisfy such  potential  obligations,  the Company would be required to
utilize our available  capital resources and obtain alternate sources of capital
for such purposes.  The Company presently does not have the capital available to
satisfy all potential claims for rescission. The inability to obtain alternative
sources of  capital  would have a  material  effect on the  Company's  financial
condition and results of operations.

For purposes of accounting for this  contingency in accordance with Statement of
Financial Accounting Standards 5, "Accounting for Contingencies",  the Company's
management has evaluated the above factors and has determined  that the ultimate
liability to the company from the potential assertion by investors of rescission
rights is not  probable,  although it is possible.  This  conclusion is based on
management's  determination  that  the  factors  and/or  conditions  that  would
encourage an attempt to assert such rights are  significantly  outweighed by the
factors  and/or  conditions  that would  discourage  an  attempt to assert  such
rights.

As of September 30, 2005,  and prior to giving effect to the accounting for this
potential rescission,  our balance sheet reflected a liability, net of discount,
of approximately $1.2 million associated with the 8% Convertible  Debentures and
the Additional 8% Convertible Debentures.  The remainder of the proceeds arising
from these securities, including the portion of the additional investment rights
exercised  through that date,  and the Series A-10  Preferred  Stock,  including
dividends and interest  paid in kind,  was  approximately  $10.4 million and was
classified as part of  stockholders'  equity at that date. In order to recognize
this  potential  rescission on our balance  sheet as of September 30, 2005,  the
approximately   $10.4  million  was  reclassified   under  the  caption  "Equity
Securities Subject to Potential Rescission", which is located directly above the
stockholders' equity section, but not included in it.

As  of  December  31,  2005,  fifteen  individual  investors  had  converted  8%
Convertible  Debentures of $2,875,000 and 61,969 shares of Series A-10 Preferred
Stock to ONSM common shares.  This  represents  approximately  $3,565,000 of the
amounts included in "equity  securities  subject to potential  rescission" as of
September 30, 2005. An additional  approximately $1,375,000 of the September 30,
2005 balance of "equity securities subject to potential  rescission"  represents
the securities  owned but not converted by these fifteen  individual  investors.
The  Company  has not yet  determined  the  effect of these  conversions  on the
potential rescission rights.

As of September 30, 2004, we owned  preferred  shares of Curaspan,  Inc. with an
original cost of approximately $108,000,  which was fully reserved since 2002 as
a result of  Curaspan's  continuing  operating  losses  and  negative  financial
condition. However, on August 5, 2005 we sold those preferred shares to Curaspan
for $50,000 cash and a $150,000 note from  Curaspan,  payable over 2 years at 6%
interest.  The note is  collateralized  by Curaspan's  assets,  subordinate to a
lending bank's interest in certain of those assets.  In addition,  the preferred
shares  are being  held in  escrow  and will be  returned  to us in the event of
Curaspan's uncured default under the note. All scheduled payments have been made
through January 4, 2006.

                                       24
<PAGE>

We have  incurred  losses  since  our  inception  and our  operations  have been
financed  primarily  through the  issuance of equity and debt.  Our  accumulated
deficit was  approximately  $70.4  million at  September  30,  2005.  Our future
working  capital  requirements  depend  primarily  on the  rate at  which we can
decrease our use of cash to fund  operations,  which is in turn  dependent on an
increase in our revenues.  Cash used for operations will be affected by numerous
known and unknown  risks and  uncertainties  including,  but not limited to, our
ability  to  successfully  market and sell the DMSP,  market our other  existing
products and services, the degree to which competitive products and services are
introduced  to the market,  and our ability to control  overhead  expenses as we
grow.

As a result of the Onstream Merger, we have increased our operating  expenses by
approximately  $200,000  per  quarter,  starting in the quarter  ended March 31,
2005,  which are  primarily  attributable  to  contracted  salaries  and related
employee  expenses.  In addition,  as part of expanded  marketing  and financial
management  programs,  neither of which is guaranteed to be successful,  we have
entered into several  consulting  contracts  that will result in the issuance of
common  shares and  options to  purchase  common  shares,  in  addition  to cash
payments.  Including  contracts  entered into after  September  30, 2005,  these
contracts will result in future cash payments of approximately $249,000 over the
next twelve  months,  not  including  amounts  payable  with  common  shares and
options. We also expect increases in our operating expenses during the next year
arising  from a  Sarbanes-Oxley  404  compliance  program,  although  we  cannot
guarantee that this program will be successful and we may be able to defer these
expenses  based on the  status  of  regulatory  changes  in this  area.  We also
anticipate  additional  operating  expenses  in the coming  year  related to the
continuation  of our marketing  program  expansion  that began in the year ended
September 30, 2005,  although we cannot  guarantee  that this  expansion will be
implemented or that our marketing efforts will be successful.

We have  spent  $2.2  million  for  capital  expenditures  during the year ended
September 30, 2005,  including  approximately  $400,000 for capital expenditures
incurred  by Acquired  Onstream  but paid for by us after the  Onstream  Merger.
Projected capital expenditures for the next twelve months total $900,000,  which
includes  the further  development  of the  recently  completed  DMSP as well as
completion   of  the   upgrade  to  the   webcasting   software   and   hardware
infrastructure,  now in process.  We have recently  hired several  professionals
that were  previously  employed  with  SAIC,  including  a new Chief  Technology
Officer,  and  accordingly  expect  an  increasing   percentage  of  our  future
development costs to be capitalized  employee  salaries and benefits,  which are
included in the anticipated capital expenditure amounts noted above.

Other  than  working  capital  which may  become  available  to us  through  the
fulfillment of the  outstanding  equipment  financing  commitment or through the
payments on the  Curaspan  note,  as  discussed  above,  and/or the  exercise of
outstanding  options  and  warrants,  we do not  presently  have any  additional
sources of working  capital other than cash on hand and cash, if any,  generated
from  operations.  There  are no  assurances  whatsoever  that  the  outstanding
equipment  financing  commitment  will be  fulfilled,  that we will  collect any
further  payments due from Curaspan under the note, that any options or warrants
will be exercised,  or that we will increase our revenues to a level  sufficient
to provide positive cash flow.

Although our revenues for fiscal 2005 exceeded  revenues for the previous fiscal
year, we cannot  assure that our revenues will continue to increase,  nor can we
assure that they will not decrease. We recently completed the DMSP and placed it
in initial  service with  third-party  customers in November 2005, but we cannot
assure what the sales activity will be. As long as our cash flow from operations
remains  insufficient to completely fund operations,  we will continue depleting
our cash and other financial resources. As a result of the uncertainty as to our
available working capital over the upcoming months,  including the effect if any
of the potential  rescission rights discussed above, we may be required to delay
or cancel  certain of the projected  capital  expenditures,  some of the planned
marketing  expenditures,  or other planned expenses. In addition, it is possible
that we will  need  to  seek  additional  capital  through  equity  and/or  debt
financing.  If we raise  additional  capital  through the issuance of debt, this

                                       25
<PAGE>

will result in increased interest expense.  If we raise additional funds through
the issuance of equity or convertible debt securities,  the percentage ownership
of our  company  held  by  existing  shareholders  will  be  reduced  and  those
shareholders may experience significant dilution.

There  can be no  assurance  that  acceptable  financing,  if needed to fund our
ongoing operations, can be obtained on suitable terms, if at all. Our ability to
continue our  existing  operations  and/or to continue to  implement  our growth
strategy could suffer if we are unable to raise  additional  funds on acceptable
terms, which will have an adverse impact on our financial  condition and results
of operations.

Cash used in operating  activities was  approximately  $1.9 million for the year
ended September 30, 2005, as compared to approximately $1.1 million for the same
period last year. The $1.9 million reflects our net loss of  approximately  $9.6
million,  reduced by approximately $7.3 million of non-cash expenses included in
that loss and  approximately  $459,000  arising  from a net decrease in non-cash
working capital items during the period.  The primary non-cash expenses included
in our loss for the year  ended  September  30,  2005  were  approximately  $2.6
million of amortization  of discount on debentures and notes payable,  including
amounts  arising  from  early  debt  repayment,  approximately  $1.8  million of
amortization of deferred  professional fee expenses,  including severance,  paid
for by issuing stock and options, approximately $1.2 million of depreciation and
amortization,  approximately  $944,000 for a non-cash  financing penalty paid in
common shares,  approximately  $453,000 for interest  expense paid in common and
preferred  shares,  $330,000 for impairment  loss on goodwill and  approximately
$100,000  representing our loss on an equity basis from Acquired  Onstream.  The
primary sources of cash inflows from operations are from  receivables  collected
from sales to  customers.  Future  cash  inflows  from sales are  subject to our
pricing and ability to procure business at existing market conditions.

Net cash used in investing  activities  was  approximately  $3.8 million for the
year ended September 30, 2005 as compared to approximately  $1.4 million for the
same period last year. The $3.8 million includes  approximately $1.5 million for
advances to Acquired  Onstream,  primarily  payments (i) to Virage for principal
and interest due on a promissory note of Acquired Onstream and guaranteed by the
Company and (ii) to certain selling  management of Acquired Onstream for accrued
salaries and related  employer taxes,  as well as cash payments  associated with
the Onstream Merger of approximately  $664,000,  including subsequent payment of
accounts  payable assumed at the time of the Onstream  Merger.  In addition,  we
spent  approximately  $1.7 million to acquire property and equipment,  including
amounts paid toward the ultimate  completion of the DMSP and  equipment  used to
support those operations.

Cash flows provided by financing  activities was approximately  $5.7 million for
the year ended September 30, 2005 as compared to approximately  $2.4 million for
the same period last year.  This $5.7  million  primarily  reflects the proceeds
from the Financing  Transactions of approximately  $8.1 million (net of fees and
other direct  costs),  offset by  approximately  $3.2 million for the repayment,
primarily  from those  proceeds,  of all other  outstanding  debt and  preferred
shares. This amount also includes  approximately $750,000 of proceeds from other
financings and $200,000  released from restricted  cash, which was used to repay
debt.

Critical Accounting Policies and Estimates

Our  consolidated  financial  statements  have been prepared in accordance  with
United  States  generally  accepted  accounting   principles  ("GAAP")  and  our
significant accounting policies are described in Note 1 to those statements. The
preparation  of financial  statements in  accordance  with GAAP requires that we
make  estimates  and  assumptions  that  affect  the  amounts  reported  in  the
consolidated  financial statements and accompanying  footnotes.  Our assumptions
are based on  historical  experiences  and changes in the business  environment.
However,  actual results may differ from estimates under  different  conditions,
sometimes materially.  Critical accounting policies and estimates are defined as

                                       26
<PAGE>

those  that  are  both  most  important  to  the  management's  most  subjective
judgments.  The Company's  most critical  accounting  policies and estimates are
described as follows.

Our prior  acquisitions of several  businesses,  including the Onstream  Merger,
have resulted in significant  increases in goodwill and other intangible assets.
Unamortized  goodwill  and other  intangible  assets,  which  includes  acquired
customer  lists,  were  approximately  $10.6  million  at  September  30,  2005,
representing approximately 61% of our total assets and 348% of the book value of
shareholder  equity (after reduction for equity securities  subject to potential
rescission).  In  addition,  property and  equipment  as of  September  30, 2005
includes approximately $3.5 million related to the DMSP.

In  accordance  with GAAP,  the  Company  periodically  tests  these  assets for
potential  impairment.  As part  of our  testing,  we  rely  on both  historical
operating performance as well as anticipated future operating performance of the
entities that have  generated  these  intangibles.  Factors that could  indicate
potential impairment include a significant change in projected operating results
and cash flow, a new technology developed and other external market factors that
may affect our customer base. We will continue to monitor our intangible  assets
and our overall business environment.

If there is a  material  change  in our  business  operations,  the value of our
intangible  assets,  including the DMSP,  could decrease  significantly.  In the
event that it is  determined  that we will be unable to  successfully  market or
sell the DMSP, an impairment charge to our statement of operations could result.
Any future  determination  requiring the  write-off of a significant  portion of
unamortized  intangible  assets,  although not  requiring  any  additional  cash
outlay,  could have a material  adverse  effect on our  financial  condition and
results of operations.

We have  estimated  the fair value of warrants  issued in  conjunction  with the
Financing  Transactions,  plus the  potential  value  arising  from a beneficial
conversion feature included in the terms of those financings,  and recorded this
estimate,  along with the direct  costs  associated  with that  financing,  as a
discount to the face amount of the financing.  The  unamortized  portion of this
discount as of September 30, 2005 is  approximately  $2.1 million for the Series
A-10 and  approximately  $2.6 million for the 8% Convertible  Debentures and the
Additional 8% Convertible Debentures.

These  non-cash  amounts will be amortized as dividends and as interest  expense
over the balance of the  four-year  financing  terms,  although any  unamortized
portion will be  immediately  expensed at the time of a conversion or redemption
occurring   before  the  end  of  those  terms.   Accordingly,   conversions  of
approximately  $170,000  occurring  after  September 30, 2005 will result in the
write-off to expense of approximately  $136,000 unamortized debt discount during
the three months ending December 31, 2005.

ITEM 7. FINANCIAL STATEMENTS

      Our financial  statements  are contained in pages F-1 through F-42,  which
appear at the end of this annual report.

                                       27
<PAGE>

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

None.

ITEM 8A. CONTROLS AND PROCEDURES

      As required by Rule 13a-15 under the  Securities  Exchange Act of 1934, as
of the end of the period covered by the annual report, being September 30, 2005,
we have  carried  out an  evaluation  of the  effectiveness  of the  design  and
operation of our company's  disclosure controls and procedures.  This evaluation
was  carried  out  under  the  supervision  and  with the  participation  of our
company's management, including our company's President along with our company's
Chief Financial  Officer.  Based upon that evaluation,  our company's  President
along with our company's  Chief Financial  Officer  concluded that our company's
disclosure controls and procedures are effective. Based upon that evaluation, no
change in our company's internal controls over financial  reporting has occurred
during the quarter then ended, which has materially  affected,  or is reasonably
likely to materially affect, our internal control over financial reporting.

      Disclosure  controls and procedures and other procedures that are designed
to ensure that  information  required to be  disclosed  in our reports  filed or
submitted  under the  Securities  Exchange Act of 1934 is  recorded,  processed,
summarized and reported,  within the time period specified in the Securities and
Exchange  Commission's  rules and  forms.  Disclosure  controls  and  procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information  required to be disclosed in our reports filed under the  Securities
Exchange Act of 1934 is accumulated and communicated to management including our
President and Chief Financial Officer as appropriate,  to allow timely decisions
regarding required disclosure.

ITEM 8B. OTHER INFORMATION

None.

                                       28
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

Executive Officers and Directors

      Our executive officers and directors, and their ages are as follows:

         Name                         Age   Position
         ----                         ---   --------
Randy S. Selman                       49    Chairman of the Board, President and
                                            Chief Executive Officer
Clifford Friedland                    54    Vice Chairman of the Board,  Senior
                                            Vice  President  Business
                                            Development
Alan M. Saperstein                    46    Director, Chief Operating Officer
                                            and Treasurer
David Glassman                        54    Senior Vice President and Chief
                                            Marketing Officer
Robert E. Tomlinson                   48    Senior Vice President and Chief
                                            Financial Officer
Benjamin Swirsky       (1)(2)(3)(4)   64    Director
Robert J. Wussler      (1)(2)(3)(4)   69    Director
Charles C. Johnston    (1)(3)         70    Director
General Ronald W. Yates(1)(2)(3)(4)   67    Director

(1)   Member of the Compensation Committee.

(2)   Member of the Audit Committee.

(3)   Member of the Governance and Nominating Committee.

(4)   Member of the Finance Committee.

      Randy S. Selman. Since our inception in May 1993, Mr. Selman has served as
our Chief Executive Officer,  President,  and a director and from September 1996
through  June 1999 and from August 1 through  December  15,  2004,  as our Chief
Financial Officer.  From March 1985 through May 1993, Mr. Selman was Chairman of
the Board, President and Chief Executive Officer of SK Technologies  Corporation
(Nasdaq:SKTC), a publicly-traded software development company. SKTC develops and
markets software for  point-of-sale  with complete back office functions such as
inventory,  sales analysis and  communications.  Mr. Selman founded SKTC in 1985
and was  involved  in  their  initial  public  offering  in 1989.  Mr.  Selman's
responsibilities  included  management of SKTC,  public and investor  relations,
finance, high level sales and general overall administration.

      Alan M.  Saperstein.  Mr.  Saperstein  has  served as our  Executive  Vice
President,  Treasurer and a director  since our  inception in May 1993,  and has
been our Chief Operating Officer since December 2004. Mr. Saperstein also serves
as an alternate member of the Compensation  Committee of the board of directors.
From March 1989 until May 1993,  Mr.  Saperstein  was a  free-lance  producer of
video film  projects.  Mr.  Saperstein  has  provided  consulting  services  for
corporations  that have set up their own sales and training  video  departments.
From 1983 through 1989, Mr. Saperstein was the Executive  Director/Entertainment
Division of NFL Films where he was  responsible for supervision of all projects,
budgets, screenings and staffing.

      Clifford  Friedland.  Mr. Friedland was appointed as a member of our board
of directors in December 2004.  From June 2001 until the closing of the Onstream
Merger  in  December  2004 he had  served as  Chairman,  CEO and  co-founder  of
privately held Onstream Media  Corporation.  Mr. Friedland was Vice President of
Business Development and co-founder of TelePlace, Inc., a developer and owner of

                                       29
<PAGE>

internet data centers and central  offices from  December 1999 to May 2001.  Mr.
Friedland was  co-founder,  Chairman and co-CEO of Long Distance  International,
Inc., one of the first competitive European telephone operators from May 1993 to
December  1999.  Mr.  Friedland  was  President  of Clifford  Friedland  Inc., a
technology consulting firm, from January 1991 to April 1993. Mr. Friedland was a
Director and  co-founder  of Action  Pay-Per-View,  a pay per view cable channel
from January 1988 to December 1990.  Mr.  Friedland was President and co-founder
of Long Distance America,  one of the first competitive long distance  operators
after the breakup of AT&T from June 1984 to December  1987.  Mr.  Friedland  was
Vice President and co-founder of United States Satellite  Systems,  Inc., an FCC
licensed builder and operator of geosynchronous  communications  satellites from
April 1981 until  December  1983.  Mr.  Friedland was Director and co-founder of
United  Satellite   Communications,   Inc.,  the  world's  first  direct-to-home
satellite  network  from  April 1981 until May 1984.  Mr.  Friedland  received a
B.B.A. cum laude, from City University of New York.

      David Glassman.  Mr.  Glassman has served as our Chief  Marketing  Officer
since  December  2004.  As  described  below,  at  such  time  as an  additional
independent  director is added to our board, Mr. Glassman will join our board of
directors.  He served as Vice  Chairman,  President  and  co-founder of Acquired
Onstream  from June 2001  until  joining  our  company.  Mr.  Glassman  was Vice
President of Marketing and co-founder of TelePlace,  Inc., a developer and owner
of internet data centers and central offices from December 1999 to May 2001. Mr.
Glassman  was   co-founder,   Vice   chairman   and  Co-CEO  of  Long   Distance
International,  Inc., one of the first competitive  European telephone operators
from May 1993 to December  1999.  Mr.  Glassman  was an  independent  technology
consultant  from January  1988 to April 1993.  Clients  included  Action Pay Per
View. Mr. Glassman was President and co-founder of Long Distance America, one of
the first  competitive  long distance  operators  after the breakup of AT&T from
January 1984 to December 1987. Mr. Glassman was a communications consultant from
January  1981 to January  1984  providing  services to United  States  Satellite
Systems  Inc.  and  United  Satellite   Communications  Inc.  Mr.  Glassman  was
co-founder  and director of All  American  Hero,  Inc.,  from January 1981 until
December 1986. Mr. Glassman received a B.S. in Business  Management from Florida
International University.

      Robert E. Tomlinson.  On December 15, 2004 Mr. Tomlinson was appointed our
Chief Financial Officer.  Mr. Tomlinson joined us as Vice  President-Finance  in
September  2004. Mr.  Tomlinson  started his financial and accounting  career in
1977 with the international accounting firm of Price Waterhouse. In 1982 he left
that firm to join Embraer, an international  aircraft  manufacturing and support
firm, at their U.S. subsidiary in Fort Lauderdale, Florida, where he managed all
financial functions and eventually was named Senior Vice President-Finance and a
member of the U.S. firm's Board of Directors. Mr. Tomlinson left Embraer in 1994
and joined staffing and human resource firm OutSource International,  serving as
its Chief Financial  Officer and helping to take the company public in 1997. Mr.
Tomlinson's  areas  of  responsibility  at  OutSource   International   included
corporate accounting,  treasury and risk management. From when he left OutSource
International in February 2000 until 2002 he worked as an independent  certified
public accountant, focusing on accounting and tax services to corporations. From
2002 until joining us, Mr. Tomlinson served as CFO for Total Travel and Tickets,
a Fort  Lauderdale  based  ticket  broker.  Mr.  Tomlinson  has  held an  active
Certified Public Accountant license since 1978.

      Benjamin Swirsky.  Mr. Swirsky has been a member of our board of directors
since July 1997 and serves on our Audit (as Chairman), Compensation,  Governance
and  Nominating  and  Finance  Committees.  Mr.  Swirsky  is the owner of Beswir
Properties  Inc., an investment  capital  company.  From June 1993 until January
1998,  Mr.  Swirsky was President and Chief  Executive  Officer of Slater Steel,
Inc., a  publicly-traded  company listed on the (Toronto Stock Exchange ("TSE"):
SSI) with investments in the steel, steel service,  forging,  pole-line hardware
and trucking  industries.  Mr.  Swirsky was Chairman of P.C.Docs  International,
Inc.,  a  Canadian  publicly-traded  company  (Nasdaq:  DOCSF,  TSE:  DXX)  from
1997-1999.  Mr.  Swirsky  is also a member  of the  board of  directors  of Four
Seasons Hotel Inc.  (NYSE:FS),  which owns a chain of first class hotels located

                                       30
<PAGE>

throughout  the  world,  and serves on the Audit,  Compensation  and  Governance
committees  of its Board.  Mr.  Swirsky also sits on the board of directors of a
number  of  other   companies,   including   (i)   CamVec   Corp.,   a  Canadian
publicly-traded company (CAT.CV), (ii) Commercial Alcohols, Inc., in which he is
also a principal  shareholder,  (iii) Amica Mature  Lifestyles,  Inc., a Toronto
Stock  Exchange  company,   and  (iv)  Alliance  Financial,   Inc.,  a  Canadian
publicly-traded company where he serves as Chairman.

      Robert J. Wussler. Mr. Wussler has been a member of our board of directors
since July 1999 and serves on our Audit, Compensation, Governance and Nominating
and Finance  Committees.  Mr.  Wussler is currently  the President of Ted Turner
Pictures  LLC  and  is  Chairman  of the  Board  of  Directors  of  Team  Sports
Entertainment, Inc., a publicly-traded company (OTC Bulletin Board:TSPT) that is
in the closed-wheel auto racing business.  Prior to that, he served as Chairman,
Chief Executive  Officer and President of U.S. Digital  Communications,  Inc., a
global  satellite  communications  firm. From June 1995 to May 1998, Mr. Wussler
was  President and Chief  Executive  Officer of Affiliate  Enterprises,  Inc., a
company   formed  by  ABC   Television   affiliates   to  pursue  new   business
opportunities.  From 1989 to 1992, he was President and Chief Executive  Officer
of COMSAT Video Enterprises. From 1980 to 1990, he was Senior Vice President and
Chief  Operating  Officer of Turner  Broadcasting  System.  Mr. Wussler spent 21
years at CBS in various  capacities,  starting  in the  mailroom,  and served as
President of CBS Television and Sports from 1975 to 1978.

      Charles  C.  Johnston.  Mr.  Johnston  has been a member  of our  board of
directors  since  April  2003 and  serves on our  Compensation,  Governance  and
Nominating and Finance Committees.  Mr. Johnston has been the Chairman of Ventex
Technology,  Inc., a privately-held neon light transformer  company,  since July
1993.  Mr.  Johnston  has also  served as Chairman  of Inshore  Technologies,  a
private company,  since 1994 and J&C Resources,  a private company,  since 1987.
Mr.  Johnston  is a member of the board of  directors  of  AuthentiDate  Holding
Company (Nasdaq National Market:  ADAT),  Internet Commerce  Corporation (Nasdaq
National Market:  ICCA) and McData Corporation  (Nasdaq National Market:  MCDT).
Mr. Johnston serves as a Trustee of Worcester  Polytechnic  Institute and earned
his B.S. degree from WPI in 1957.

      General  Ronald W. Yates  (Ret.).  General  Yates,  who was appointed as a
member of our board of  directors in December  2004,  was  commander,  Air Force
Materiel Command,  Wright-Patterson Air Force Base, Ohio. The Air Force Materiel
Command  researches,  develops,  tests,  acquires and provides logistics support
necessary to keep Air Force units and weapons  systems in a state of  readiness,
and to sustain  their  operations  in peace and war. The command  manages  these
systems from  inception on the drawing board through their  retirement  from the
inventory. The Air Force Material Command has 18 specialized centers and 116,000
military and civilian  employees  around the world.  The general entered the Air
Force in 1960 upon graduation from the U.S. Air Force Academy.  He has served as
a test pilot,  program manager for a variety of weapons systems,  commander of a
test wing and as commander of Air Force Systems Command.

      There is no family relationship  between any of the executive officers and
directors.  Each director is elected at our annual meeting of  shareholders  and
holds  office  until  the next  annual  meeting  of  shareholders,  or until his
successor is elected and qualified.  At present, our bylaws provide for not less
than two directors. The bylaws permit the board of directors to fill any vacancy
and such  director may serve until the next annual  meeting of  shareholders  or
until his  successor is elected and  qualified.  The board of  directors  elects
officers  annually and their terms of office are at the discretion of the Board.
Our officers devote full time to our business.

Expansion of our board of directors

      Rule  4350(c)  of the  Nasdaq  Marketplace  Rules to which we are  subject
requires  that a  majority  of  the  members  of  our  board  of  directors  are
independent as defined in Rule 4200 of the Nasdaq  Marketplace  Rules. Under the
terms of the  purchase  and  sale  agreement  for our  Series  A-10  Convertible

                                       31
<PAGE>

Preferred  Stock the  purchasers  have the right to designate one  individual to
join our board of  directors.  As of the date  hereof,  no  individual  has been
designated.  At such time as such  individual is  designated  and elected to our
board, and providing that the individual is an independent  director, as defined
in Rule 4200 of the Nasdaq  Marketplace Rules, Mr. David Glassman will also join
our board of directors.

Directors' Compensation

      Directors  who  are not our  employees  received  $3,750  per  quarter  as
compensation for serving on the board of directors,  as well as reimbursement of
reasonable  out-of-pocket  expenses incurred in connection with their attendance
at board of directors'  meetings.  As of January 7, 2006, we had accrued but not
yet paid board fees for past services of approximately $30,000.

      From time to time we issue the members of our board of  directors  options
to purchase  shares of our common stock as  compensation  for their  services as
directors.  At  September  30,  2005  members  of our  board of  directors  held
outstanding  options to purchase an aggregate of 3,542,482  shares of our common
stock at prices  ranging from $1.12 to $22.50 per share.  On December 15, 2004 a
majority of our shareholders  voted to approve the cancellation  (subject to the
option holder's approval) of these stock option grants,  with such options to be
re-issued six months and one day from the date of cancellation  with an exercise
price equal to the fair market value on the date of the reissue.

      On  December  15,  2004 a majority of our  shareholders  voted  additional
compensation  to  our  directors  for  the  closing  of  the  Onstream   Merger.
Accordingly,  each of the  directors  listed  below  have  received  immediately
exercisable  five-year  options to purchase  shares of our common  stock with an
exercise price of $1.57 per share (fair market value on the date of issuance) in
the amounts set forth below. These options were issued outside of our 1996 Stock
Option Plan:

                        Name                 No. of Shares (1)
                        ----                -----------------

                   Randy S. Selman (1)                450,000
                   Alan M. Saperstein (1)             450,000
                   Benjamin Swirsky                   100,000
                   Robert J. Wussler                  100,000
                   Charles C. Johnston                100,000
                                            -----------------
                                                    1,200,000
                                            =================

      (1)   Excludes  non-Plan  options to purchase 400,000 shares of our common
            stock with an exercise  price of $2.50 per share  (above fair market
            value  on the date of  issuance)  that  were  issued  as  additional
            compensation  under the new  employment  agreements  each of Messrs.
            Selman and Saperstein executed following the closing of the Onstream
            Merger.

      In December 2004, we issued immediately exercisable four-year Plan options
to purchase  50,000  shares of our common stock with an exercise  price of $1.57
per share (fair market value on the date of issuance)  granted to General Ronald
W. Yates upon his initial appointment to our board of directors.

                                       32
<PAGE>

      In July 2005 we issued immediately  exercisable  five-year Plan options to
purchase  1,300,000  shares of our common stock with an exercise  price of $1.12
per share (fair market value on the date of issuance), allocated as follows:

                        Name                   No. of Shares
                        ----                   -------------

                    Randy S. Selman                  450,000
                    Alan M. Saperstein               450,000
                    Benjamin Swirsky                 100,000
                    Robert J. Wussler                100,000
                    Charles C. Johnston              100,000
                    Ronald W. Yates                  100,000
                                               -------------
                                                   1,300,000
                                               =============

Audit Committee

      The Audit  Committee  of the Board of  Directors  is  responsible  for the
engagement of our independent public accountants,  approves services rendered by
our  accountants,  reviews the  activities and  recommendations  of our internal
audit department,  and reviews and evaluates our accounting  systems,  financial
controls and financial personnel. The Board has previously adopted a charter for
the Audit Committee. Pursuant to the requirements of the Securities and Exchange
Commission  which requires that we provide our  shareholders  with a copy of the
Audit  Charter at least once every three years,  we have  included a copy of the
Audit  Charter  as  Appendix  C to our  proxy  statement  filed  with the SEC on
November 14, 2004.

      The Audit Committee is presently composed of Messrs. Swirsky,  Wussler and
General Yates.  Mr. Swirsky is Chairman of the Audit  Committee.  Each member of
the Audit Committee is independent,  as independence for audit committee members
is defined in the listing  standards of The Nasdaq Stock Market,  Inc., and each
of Messrs.  Swirsky and Wussler is an "audit committee  financial expert" within
the  meaning  of the  applicable  regulations  of the  Securities  and  Exchange
Commission promulgated pursuant to the Sarbanes-Oxley Act of 2002.

Compensation Committee

      The  Compensation  Committee  establishes  and  administers  our executive
compensation  practices and policies,  reviews the individual  elements of total
compensation for elected officers and recommends salary adjustments to the board
of directors. In addition, the Compensation Committee administers our 1996 Stock
Option Plan and  determines  the number of  performance  shares and other equity
incentives  awarded to elected  officers and the terms and  conditions  of which
they are granted, amends compensation plans within the scope of the Compensation
Committee's  authority and  recommends  plans and plan  amendments to the board,
sets  company  policy  for  employee  benefit  programs  and plans and  oversees
administration  of employee  retirement plans and various other benefit plans as
we may  establish  from time to time.  The  Compensation  Committee  consists of
Messrs. Swirsky, Wussler, Johnston and Yates.

Finance Committee

      The Finance Committee reviews and makes recommendations concerning:

      *proposed dividend actions, stock splits and repurchases,
      *current and projected capital requirements,
      *issuance of debt or equity securities,
      *strategic  plans  and  transactions,   including  mergers,  acquisitions,
      divestitures, joint ventures and other equity investments,

                                       33
<PAGE>

      *customer  financing  activities,  business and related  customer  finance
      business and funding plans,
      *overall company risk management program and major insurance programs, and
      *investment   policies,   administration  and  performance  of  the  trust
      investments of our employee benefit plans.

      Messrs.  Swirsky,  Wussler,  and  Yates  are the  members  of the  Finance
Committee.

Governance and Nominating Committee

      The Governance and Nominating Committee reviews and makes  recommendations
to the board of directors with respect to:

      *the  responsibilities and functions of the board and board committees and
      with respect to board compensation,
      *the  composition  and  governance  of the board,  including  recommending
      candidates to fill  vacancies  on, or to be elected or re-elected  to, the
      board,
      *candidates  for election as Chief  Executive  Officer and other corporate
      officers, and
      *monitoring the  performance of the Chief Executive  Officer and our plans
      for senior management succession.

      The  consideration  of any  candidate  to  become a member of our board of
directors  will  be  based  on  the  board's   assessment  of  the  individual's
background,  skills  and  abilities,  and if such  characteristics  qualify  the
individual  to fulfill  the needs of the board at that time.  The board does not
assign  any  particular  weight  or  priority  to any  particular  factor it may
consider.  Candidates  for  director  may be  identified  by  management,  other
directors  or  advisors to our  company.  The board of  directors  may employ an
executive search firm to assist it in future searches for board candidates.

      Messrs.  Swirsky,  Wussler,  Johnston  and  Yates are the  members  of the
Governance and Nominating Committee.

Code of Ethics

      Effective  December  18, 2003,  our board of  directors  adopted a Code of
Business Conduct and Ethics that applies to, among other persons,  our President
(being our principal  executive  officer) and our Chief Financial Officer (being
our principal financial and accounting  officer),  as well as persons performing
similar  functions.  As adopted,  our Code of  Business  Conduct and Ethics sets
forth written standards that are designed to deter wrongdoing and to promote:

* honest and  ethical  conduct,  including  the  ethical  handling  of actual or
apparent conflicts of interest between personal and professional relationships;

* full, fair,  accurate,  timely, and  understandable  disclosure in reports and
documents  that  we file  with,  or  submit  to,  the  Securities  and  Exchange
Commission and in other public communications made by us;

* compliance with applicable governmental laws, rules and regulations;

* the prompt  internal  reporting of violations of the Code of Business  Conduct
and  Ethics  to an  appropriate  person  or  persons  identified  in the Code of
Business Conduct and Ethics; and

* accountability for adherence to the Code of Business Conduct and Ethics.

                                       34
<PAGE>

      Our Code of Business Conduct and Ethics requires, among other things, that
all of our  company's  personnel  shall be accorded full access to our President
and Chief  Financial  Officer with respect to any matter that may arise relating
to the Code of  Business  Conduct  and  Ethics.  Further,  all of our  company's
personnel are to be accorded full access to our company's  board of directors if
any such matter  involves an alleged breach of the Code of Business  Conduct and
Ethics by our President or Chief Financial Officer.

      In addition,  our Code of Business Conduct and Ethics  emphasizes that all
employees,  and particularly managers and/or supervisors,  have a responsibility
for  maintaining  financial  integrity  within  our  company,   consistent  with
generally  accepted  accounting  principles,  and federal,  provincial and state
securities  laws.  Any employee  who becomes  aware of any  incidents  involving
financial  or  accounting  manipulation  or  other  irregularities,  whether  by
witnessing  the  incident  or being  told of it,  must  report  it to his or her
immediate  supervisor or to our company's  President or Chief Financial Officer.
If the incident  involves an alleged breach of the Code of Business  Conduct and
Ethics  by the  President  or Chief  Financial  Officer,  the  incident  must be
reported  to any member of our board of  directors.  Any  failure to report such
inappropriate  or  irregular  conduct  of  others is to be  treated  as a severe
disciplinary  matter.  It is against our company policy to retaliate against any
individual who reports in good faith the violation or potential violation of our
company's Code of Business Conduct and Ethics by another.

      Our  Code of  Business  Conduct  and  Ethics  is filed  herewith  with the
Securities  and Exchange  Commission as Exhibit 14.1 to this annual  report.  We
will  provide a copy of the Code of  Business  Conduct  and Ethics to any person
without  charge,  upon  request.   Requests  can  be  sent  to:  Onstream  Media
Corporation, 1291 SW 29 Avenue, Pompano Beach, Florida 33069.

Compliance With Section 16(a) of the Exchange Act

      Based  solely  upon a  review  of  Forms  3 and 4 and  amendments  thereto
furnished to us under Rule 16a-3(d) of the  Securities  Exchange Act of 1934, as
amended,  during  the  fiscal  year  ended  September  30,  2005 and Forms 5 and
amendments  thereto  furnished  to us with  respect  to the  fiscal  year  ended
September  30,  2005,  we are not aware of any person  that  failed to file on a
timely basis,  as disclosed in the  aforementioned  Forms,  reports  required by
Section  16(a) of the  Securities  Exchange  Act of 1934  during the fiscal year
ended September 30, 2005, other than indicated below:

On April 22, 2005 and April 25, 2005, David Glassman,  our Senior  VP-Marketing,
filed Forms 3 and 3/A, respectively, related to his initial holdings in Onstream
Media Corporation as a result of the Onstream Merger. In accordance with Section
16 of the  Securities  Exchange Act of 1934,  this filing due date was within 10
days of the applicable event, or January 2, 2005.

Clifford  Friedland,  our  Senior  VP-  Business  Development  and  one  of  our
directors,  has not filed a Form 3 on a timely  basis,  related  to his  initial
holdings in Onstream Media  Corporation as a result of the Onstream Merger.  Mr.
Friedland  has  represented  to us  that  he  will  file  this  form  as soon as
practicable.

Robert Tomlinson,  our CFO, filed a Form 4 on April 22, 2005, related to 150,000
stock options granted him on December 15, 2004. In accordance with Section 16 of
the Securities  Exchange Act of 1934, this filing due date was within 10 days of
the applicable event, or December 25, 2004. Mr. Tomlinson has not filed a Form 4
on a timely basis related to the  accelerated  vesting of those  options,  which
occurred on July 6, 2005, nor the granting of 100,000 additional options to him,
which also occurred on July 6, 2005. Mr. Tomlinson has represented to us that he
will file these forms as soon as practicable.

Randy Selman, our CEO and Chairman of the Board and Alan Saperstein, our COO and
one of our  directors,  have not  filed a Form 4 on a timely  basis  related  to
850,000  options  granted each of them on December 23, 2004, nor the accelerated
vesting  of  400,000  of  those  options  for each of them,  which  occurred  on
September 13, 2004,  nor the granting of 450,000  additional  options to each of
them,  which  occurred  on July 6,  2005.  Mr.  Selman and Mr.  Saperstein  have
represented to us that they will file these forms as soon as practicable.

Charles Johnston,  Benjamin Swirsky,  and Robert Wussler,  each being one of our
directors, have not filed a Form 3 or Form 4 on a timely basis related to100,000
options granted to each of them on December 23, 2004 nor the granting of 100,000
additional  options  to each of  them,  which  occurred  on  July 6,  2005.  Mr.
Johnston,  Mr.  Swirsky,  and Mr. Wussler have  represented to us that they will
file these forms as soon as practicable.

General Ronald W. Yates, one of our directors,  has not filed a Form 3 or Form 4
on a timely basis related to 50,000 options  granted to him on December 23, 2004
nor the granting of 100,000 additional options to him, which occurred on July 6,
2005.  General Yates has represented to us that he will file these forms as soon
as practicable.

Eric Jacobs, our Corporate Secretary, filed a Form 4 and a Form 5 on January 11,
2006,  for share  purchases  of 1,444,  1,649 and 1,966 shares on June 30, 2005,
September  30, 2005 and December 31, 2005,  respectively.  This was not a timely
filing.


                                       35
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

      The  following  table  sets  forth  certain  information  relating  to the
compensation of (i) our Chief Executive Officer;  and (ii) each of our executive
officers who earned more than $100,000  salary and bonus  (excluding  severance)
during  the  most  recent  fiscal  year  (collectively,   the  "Named  Executive
Officers"):

<TABLE>
<CAPTION>
                                      Annual Compensation                           Long-Term Compensation
                              -----------------------------------       ----------------------------------------------
                                                                                 Awards                    Payouts
                                                                        --------------------------   -----------------
                                                                                      Securities                 All
                                                                        Restricted    Underlying       LTIP     other
Name, Principal      Fiscal                          Other Annual         Stock      Options/SARs    Payouts     comp
 Position             Year     Salary        Bonus       Comp             Awards          (#)          ($)       ($)
------------------   ------   --------       -----   ------------       ----------   -------------   --------   ------
<S>                  <C>      <C>            <C>     <C>                <C>          <C>             <C>        <C>
Randy S. Selman -      2005   $175,536         -0-   $     47,441(1)           -0-       1,300,000        -0-      -0-
President, Chief       2004   $166,350         -0-   $     34,945(2)           -0-             -0-        -0-      -0-
Executive Officer      2003   $140,000         -0-   $     15,631(3)           -0-             -0-        -0-      -0-
and Director

Alan Saperstein -      2005   $165,000         -0-   $     53,048(4)           -0-       1,300,000        -0-      -0-
Chief Operating        2004   $165,050         -0-   $     40,942(5)           -0-             -0-        -0-      -0-
Officer, Treasurer     2003   $140,000         -0-   $     21,462(6)           -0-             -0-        -0-      -0-
and Director

Cliff Friedland -      2005   $124,003         -0-   $     44,108(7)           -0-             -0-        -0-      -0-
Senior VP Busi-        2004        -0-         -0-            -0-              -0-             -0-        -0-      -0-
ness Development       2003        -0-         -0-            -0-              -0-             -0-        -0-      -0-
and Director

David Glassman -       2005   $124,003         -0-   $     35,881(8)           -0-             -0-        -0-      -0-
Senior VP              2004        -0-         -0-            -0-              -0-             -0-        -0-      -0-
Marketing              2003        -0-         -0-            -0-              -0-             -0-        -0-      -0-

Robert Tomlinson-      2005   $150,000         -0-   $     43,234(9)           -0-         250,000        -0-      -0-
Chief Financial        2004   $  7,981         -0-   $        375(10)          -0-             -0-        -0-      -0-
Officer                2003        -0-         -0-            -0-              -0-             -0-        -0-      -0-

George Stemper -       2005   $154,003(11)     -0-   $    190,062(12)          -0-          35,000        -0-      -0-
VP - Govt Markets      2004   $134,653         -0-   $     37,567(13)          -0-             -0-        -0-      -0-
and former Chief       2003   $140,000         -0-   $     18,462(14)          -0-             -0-        -0-      -0-
Operating Officer
</TABLE>

                                       36
<PAGE>

(1)   Includes  $12,441  for  medical and other  insurance;  $12,000  automobile
      allowance; $5,000 dues allowance and $18,000 deferred compensation.

(2)   Includes $9,295 for medical insurance;  $12,000  automobile  allowance and
      $13,650 deferred compensation.

(3)   Includes $5,126 for medical insurance and $12,000 automobile allowance.

(4)   Includes  $18,048  for  medical and other  insurance;  $12,000  automobile
      allowance; $5,000 dues allowance and $18,000 deferred compensation.

(5)   Includes $13,942 for medical insurance;  $12,000 automobile  allowance and
      $15,000 deferred compensation.

(6)   Includes $9,462 for medical insurance and $12,000 automobile allowance.

(7)   Includes  $13,841  for  medical  and other  insurance;  $9,129  automobile
      allowance;  $5,000 dues allowance and $16,139  deferred  compensation  and
      401(k) match.  Table excludes  amounts paid to Mr. Friedland during fiscal
      2005 related to compensation accrued prior to the Onstream Merger.

(8)   Includes  $5,613  for  medical  and  other  insurance;  $9,129  automobile
      allowance;  $5,000 dues allowance and $16,139  deferred  compensation  and
      401(k) match.  Table excludes  amounts paid to Mr.  Glassman during fiscal
      2005 related to compensation accrued prior to the Onstream Merger.

(9)   Includes  $17,734  for  medical  and other  insurance;  $9,000  automobile
      allowance and $16,500 deferred compensation and 401(k) match.

(10)  Includes $375 automobile allowance.

(11)  Includes  $78,500  representing  the fair value  assigned to 50,000 common
      shares issued under a professional services agreement.

(12)  Includes  $17,510  for  medical  and other  insurance;  $4,625  automobile
      allowance  and  $10,928  deferred  compensation  and  401(k)  match.  Also
      includes  $157,000  representing the fair value assigned to 100,000 common
      shares  issued in  connection  with the Onstream  Merger under a severance
      agreement.

(13)  Includes $13,942 for medical  insurance;  $8,625 automobile  allowance and
      $15,000 deferred compensation.

(14)  Includes $9,462 for medical insurance and $9,000 automobile allowance.

Employment Agreements

      Effective   December  27,  2004  we  entered  into  four-year   employment
agreements  with Messrs.  Randy Selman  (President and CEO) and Alan  Saperstein
(COO and Treasurer).  The contracts provide a base salary of $178,000,  with 10%
annual increases,  for Mr. Selman and a base salary of $165,000, with 10% annual
increases,  for Mr.  Saperstein.  As  additional  compensation,  each of Messrs.
Selman and  Saperstein  are  entitled  to receive a bonus for each  fiscal  year
during the term of the executive's  employment by us in an amount equal to 1% of
our earnings before income tax, depreciation and amortization (EBITDA) in excess
of the  EBITDA for the  previous  fiscal  year.  The base year for the bonus was
fiscal 2003.  The bonus is payable  within 30 days of the  determination  of the
amount of the bonus;  provided that at the  executive's  sole  discretion he may
elect to take his bonus in cash or in shares of our restricted common stock. The
shares  of our  common  stock  issued  as a bonus  will be  valued at 75% of the
average closing price of our common stock for the five trading days  immediately
prior to the  determination  of the  bonus.  No such  bonus  had been  earned or
accrued as of September 30, 2005.

      In  addition,  each  executive  receives an auto  allowance  of $1,000 per
month,  a  "deferred  compensation"  payment  of $1,500  per month and an annual
$5,000  allowance for the  reimbursement  of dues.  Upon a subsequent  change of
control or  termination  without  cause,  we would be  obligated  to pay Messrs.
Selman and Saperstein their base salaries for a three year period,  which can be
dispersed  in a lump  sum or  over  the  standard  term,  at the  option  of the
executive,  plus  full  benefits  for a  period  of two  years  from the date of
termination.  In addition,  if the five day average  closing price of the common

                                       37
<PAGE>

stock is  greater  than or equal to $2.50 per share on the date of  termination,
all options  previously  granted will be cancelled,  with all underlying  shares
(vested or unvested) issued to the executive,  and we will pay all taxes for the
executive.  If the five-day  average  closing  price of the common stock is less
than  $2.50  per  share on the date of  termination,  the  options  will  remain
exercisable under the original term.

      Effective  December  27, 2004 we also entered  into  four-year  employment
agreements  with Messrs.  Clifford  Friedland  (Senior Vice  President  Business
Development)  and  David  Glassman  (Senior  Vice  President   Marketing).   The
agreements  provide a base salary of  $163,000,  with 10% annual  increases.  As
additional compensation,  each of Messrs. Friedland and Glassman are entitled to
receive  a bonus  for  each  fiscal  year  during  the  term of the  executive's
employment  by us in an amount  equal to 1% of our earnings  before  income tax,
depreciation and amortization  (EBITDA) in excess of the EBITDA for the previous
fiscal year.  The base year for the bonus was fiscal 2003.  The bonus is payable
within 30 days of the determination of the amount of the bonus; provided that at
the  executive's  sole  discretion  he may elect to take his bonus in cash or in
shares of our restricted  common stock. The shares of our common stock issued as
a bonus will be valued at 75% of the average  closing  price of our common stock
for the five trading days immediately  prior to the  determination of the bonus.
No such bonus had been earned or accrued as of September 30, 2005.

      In  addition,  each  executive  receives an auto  allowance  of $1,000 per
month,  a  "deferred  compensation"  payment  of $1,500  per month and an annual
$5,000  allowance  for the  reimbursement  of dues.  Upon a change of control or
termination  without  cause,  we would be obligated to pay Messrs.  Glassman and
Friedland their base salaries for a three year period, which can be dispersed in
a lump sum or over the standard term, at the option of the executive,  plus full
benefits for a period of two years from the date of termination.

      Effective March 8, 2005 we entered into an Executive  Employment Agreement
with Robert E. Tomlinson (Chief Financial Officer). The term of the agreement is
for three years, with automatic successive one-year renewals unless both parties
agree to modify the terms of the agreement or one or both parties exercise their
respective  rights of termination  under the agreement.  Mr. Tomlinson is paid a
base salary of $150,000 per year, with annual  incremental  increases of 10% per
year beginning on December 27, 2005. In addition,  he receives an auto allowance
of $750 per month and a "deferred  compensation" payment of $1,500 per month. He
is entitled to a  performance  bonus equal to 1% of our earnings  before  income
tax,  depreciation  and  amortization  (EBITDA)  in excess of the EBITDA for the
previous fiscal year. At his sole  discretion this bonus, if earned,  is payable
in cash or shares of Onstream  Media's common stock which would be valued at 75%
of average  closing price for the five prior trading days  immediately  prior to
the  determination of such bonus; his ability to receive shares of common stock,
however,  is subject to shareholder  approval.  No such bonus had been earned or
accrued as of  September  30,  2005.  In the event of a change of control of the
company as described in the  agreement  all  unvested  options will  immediately
vest.  In the event  Mr.  Tomlinson  is  terminated  for  cause or he  voluntary
resigns, all unvested options will automatically terminate.

      Mr.  Tomlinson is entitled to (i)  participate  in any  profit-sharing  or
retirement plan and in other employee  benefits  applicable to our employees and
executives,  (ii) an automobile  allowance,  business  reimbursement expense and
fringe  benefits  commensurate  with  the  duties  and  responsibilities  of Mr.
Tomlinson, and (iii) benefits in the event of disability. The agreement contains
certain  non-disclosure  and  non-competition  provisions  and we have agreed to
indemnify Mr. Tomlinson in certain circumstances.

      Under the terms of the  agreement,  we may terminate the employment of Mr.
Tomlinson  upon  his  death  or  disability  or with or  without  cause.  If the
agreement  is  terminated  by us  without  cause or upon a change of  control as
described in the agreement,  the company would be obligated  give Mr.  Tomlinson
three  months  prior  notice  and upon  termination  pay him six months of total

                                       38
<PAGE>

compensation,  including benefits,  under the agreement. If Mr. Tomlinson should
voluntarily  terminate the agreement  following two months written notice of his
intent to do so, upon the  termination  we are  obligated to pay him one month's
total  compensation,  including  benefits.  To the extent that Mr.  Tomlinson is
terminated  for cause,  no severance  benefits are due him. If the  agreement is
terminated  as a result of Mr.  Tomlinson's  death,  his estate will receive six
months  base  salary and he will be  entitled to a portion of any bonus he would
have earned at the time of his death,  and if the  agreement is  terminated as a
result of his  disability,  as  defined  in the  agreement,  he is  entitled  to
compensation  in  accordance  with  our  disability   compensation   for  senior
executives to include compensation for at least 180 days.

Severance Benefits

      In connection  with the Onstream  Merger,  we issued 100,000 shares of our
common  stock to Mr.  George  Stemper,  our former COO,  who  assisted us in the
transition  after the Onstream  Merger.  In addition to these shares,  under the
terms of his severance  agreement,  we continued to compensate  Mr. Stemper at a
reduced salary of approximately $76,000 per annum plus all benefits until August
31,  2005.  At the time of Mr.  Stemper's  termination,  we also  entered into a
professional  services  agreement  with him and issued him 50,000  shares of our
common stock as an advance against sales  commissions to be earned in accordance
with the terms of that agreement.  Effective  September 1, 2005, we re-hired Mr.
Stemper as Vice President - Government  Markets and as part of that  arrangement
agreed that the 50,000 shares had been fully earned by Mr. Stemper. In addition,
options  previously  granted to Mr. Stemper,  representing the right to purchase
13,334  shares of our common stock are fully vested and will remain  exercisable
throughout the term as prescribed by the individual grant. These options will be
subject to the  cancellation and re-grant as described in 1996 Stock Option Plan
information below.

                                       39
<PAGE>

Stock Option Information

      The following table sets forth certain  information  with respect to stock
options granted in fiscal 2005 to the Named Executive Officers.


                 Option Grants in Year Ended September 30, 2005
                               (Individual grants)

<TABLE>
<CAPTION>
                                                          % of Total
                                           No. of          Options
                                         Securities       Granted to
                                         Underlying      Employees in
 Name                                  Options Granted   Fiscal Year    Exercise Price   Expiration Date
------------------------------------   ---------------   ------------   --------------   ---------------
<S>                                    <C>               <C>            <C>              <C>
Randy S. Selman - President, Chief             450,000          10.3%   $         1.57        12/23/2009
Executive Officer and Director                 400,000           9.1%   $         2.50         9/30/2009
                                               450,000          10.3%   $         1.12          7/6/2010

Alan Saperstein - Chief Operating              450,000          10.3%   $         1.57        12/23/2009
Officer, Treasurer and Director                400,000           9.1%   $         2.50         9/30/2009
                                               450,000          10.3%   $         1.12          7/6/2010

Cliff Friedland - Senior VP Business                (1)           --                --                --
Development and Director

David Glassman - Senior VP                          (1)           --                --                --
Marketing

Robert Tomlinson- Chief Financial              150,000           3.4%   $         1.21          7/6/2009
Officer                                        100,000           2.3%   $         1.12          7/6/2010

George Stemper - VP - Govt Markets              35,000(2)        0.8%   $         1.12          7/6/2010
and former Chief  Operating Officer
</TABLE>

      (1)   Table  excludes  options  issued in exchange  for options  issued by
            Acquired Onstream.

      (2)   Options  vest  over  one  year in  quarterly  installments  starting
            December 1, 2005.

                                       40
<PAGE>

         The following table sets forth certain information regarding stock
options held as of September 30, 2005 by the Named Executive Officers.

           Aggregate Option Exercises in Year Ended September 30, 2005
                           and Year-End Option Values

<TABLE>
<CAPTION>
                                                  NO. OF SECURITIES
                                                UNDERLYING UNEXERCISED           VALUE OF UNEXERCISED
                        SHARES                        OPTIONS AT               IN-THE-MONEY OPTIONS AT
                       ACQUIRED                   SEPTEMBER 30, 2005            SEPTEMBER 30, 2005(1)
                          ON       VALUE     ----------------------------    ---------------------------
NAME                   EXERCISE   REALIZED   EXERCISABLE    UNEXERCISABLE    EXERCISABLE   UNEXERCISABLE
--------------------   --------   --------   -----------    -------------    -----------   -------------
<S>                    <C>        <C>        <C>            <C>              <C>           <C>
Randy S. Selman,
  President, Chief
  Executive Officer
  and Director               --   $     --     1,330,000(2)            --    $        --   $          --

Alan Saperstein,
  Chief Operating
  Officer, Treasurer
  and Director               --   $     --     1,330,000(2)            --    $        --   $          --

Cliff Friedland,
  Senior VP Business
  Development
  and Director               --   $     --        89,527(3)            --    $        --   $          --

David Glassman,
  Senior VP
  Marketing                  --   $     --        89,527(3)            --    $        --   $          --

Robert Tomlinson,
  Chief Financial
  Officer                    --   $     --       250,000(4)            --    $        --   $          --

George Stemper,
  former Chief
  Operating Officer          --   $     --            --           35,000(5) $        --   $          --
</TABLE>

      (1)   The  dollar  value  of  the  unexercised   in-the-money  options  is
            calculated  based upon the  difference  between the option  exercise
            price and $1.12 per  share,  being the last sale price of our common
            stock on  September  30,  2005 as  reported  by the Nasdaq  SmallCap
            Market.

      (2)   Of such  exercisable  options at September 30, 2005,  30,000 options
            were  exercisable at $22.50 per share,  450,000 were  exercisable at
            $1.57 per share,  400,000  were  exercisable  at $2.50 per share and
            450,000 were  exercisable at $1.12 per share. The 30,000 options are
            subject to cancellation and repricing as described below.

                                       41
<PAGE>

      (3)   Of such exercisable  options at September 30, 2005, 667 options were
            exercisable at $4.50 per share and 88,860 were exercisable at $3.376
            per share.

      (4)   Of such exercisable  options at September 30, 2005,  150,000 options
            were  exercisable at $1.21 per share and 100,000 were exercisable at
            $1.12 per share.

      (5)   These options vest over one year in quarterly  installments starting
            December 1, 2005.

1996 Stock Option Plan

      On  February  9,  1997,  the  board of  directors  and a  majority  of our
shareholders  adopted our 1996 Stock  Option Plan (the  "Plan").  Pursuant to an
amendment to the Plan  ratified by  shareholders  on September 13, 2005, we have
reserved an aggregate of 4,500,000 shares of common stock for issuance  pursuant
to options  granted under the Plan ("Plan  Options")  and  2,000,000  shares for
restricted  stock grants  ("Stock  Grants") made under the Plan. At December 31,
2005,  we  have  options  to  purchase  2,935,226  shares  of our  common  stock
outstanding under the Plan. Such options were issued to our directors, employees
and consultants at exercise prices ranging from $1.12 to $22.50 per share.

      On December 15, 2004 a majority of our  shareholders  voted to approve the
cancellation (subject to the option holder's approval) of stock option grants to
directors,  executive officers, senior management and employees covering 292,992
shares  (227,776 of which were issued  under the 1996 Stock  Option plan) with a
weighted-average exercise price of $22.93, with such options to be re-issued six
months and one day from the date of cancellation with an exercise price equal to
the fair market value on the date of the reissue.  This cancellation has not yet
been  implemented and 121,774 of the Plan options  subject to this  cancellation
and re-issue had expired as of December 31, 2005.

      The stated purpose of the Plan is to increase our  employees',  advisors',
consultants' and non-employee  directors'  proprietary  interest in the company,
and  to  align  more  closely  their   interests   with  the  interests  of  our
shareholders,  as well as to enable us to attract  and retain  the  services  of
experienced and highly qualified employees and non-employee directors.  The Plan
is  administered by the  Compensation  Committee of our board of directors ("the
Committee"). The Committee determines, from time to time, those of our officers,
directors,  employees and consultants to whom Stock Grants and Plan Options will
be granted,  the terms and provisions of the respective Grants and Plan Options,
the dates  such Plan  Options  will  become  exercisable,  the  number of shares
subject to each Plan Option,  the purchase  price of such shares and the form of
payment of such purchase  price.  Stock Grants may be issued by the Committee at
up to a 10%  discount  to  market  at the  time of  grant.  At no  time  may the
Committee issue Stock Grants to exceed, in the aggregate,  2,000,000 shares. All
other  questions   relating  to  the   administration   of  the  Plan,  and  the
interpretation  of the  provisions  thereof  are  to be  resolved  at  the  sole
discretion of the board of directors or the Committee.

      Plan Options  granted  under the Plan may either be options  qualifying as
incentive stock options ("Incentive  Options") under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or options that do not so qualify
("Non-Qualified  Options").  In addition, the Plan also allows for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the  exercise  price of the Plan Option with shares of common stock owned
by the  eligible  person and to receive a new Plan Option to purchase  shares of
common  stock  equal in number to the  tendered  shares.  Any  Incentive  Option
granted under the Plan must provide for an exercise  price of not less than 100%

                                       42
<PAGE>

of the fair market value of the underlying shares on the date of such grant, but
the  exercise  price of any  Incentive  Option  granted to an eligible  employee
owning  more than 10% of our  common  stock  must be at least  110% of such fair
market value as determined on the date of the grant.

         The term of each Plan Option and the manner in which it may be
exercised is determined by the board of directors or the Committee, provided
that no Plan Option may be exercisable more than 10 years after the date of its
grant and, in the case of an Incentive Option granted to an eligible employee
owning more than 10% of our common stock, no more than five years after the date
of the grant. In any case, the exercise price of any stock option granted under
the Plan will not be less than 85% of the fair market value of the common stock
on the date of grant. The exercise price of Non-Qualified Options is determined
by the Committee.

      The per share  purchase  price of shares  subject to Plan Options  granted
under  the  Plan  may be  adjusted  in  the  event  of  certain  changes  in our
capitalization,  but any such  adjustment  shall not change  the total  purchase
price payable upon the exercise in full of Plan Options  granted under the Plan.
Officers,  directors  and  key  employees  of  and  consultants  to us  and  our
subsidiaries will be eligible to receive  Non-Qualified  Options under the Plan.
Only our  officers,  directors and employees who are employed by us or by any of
our subsidiaries thereof are eligible to receive Incentive Options.

      All Plan Options are nonassignable and nontransferable,  except by will or
by the  laws of  descent  and  distribution  and,  during  the  lifetime  of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause,  or if an  optionee is not our  employee  but is a member of our board of
directors and his service as a Director is terminated for any reason, other than
death or disability,  the Plan Option granted may be exercised on the earlier of
the  expiration  date or 90 days  following  the  date  of  termination.  If the
optionee dies during the term of his employment,  the Plan Option granted to him
shall lapse to the extent  unexercised on the earlier of the expiration  date of
the Plan Option or the date one year following the date of the optionee's death.
If the  optionee  is  permanently  and  totally  disabled  within the meaning of
Section  22(c)(3)  of the Code,  the Plan  Option  granted  to him lapses to the
extent  unexercised on the earlier of the  expiration  date of the option or one
year following the date of such disability.

      The Board of Directors  may amend,  suspend or  terminate  the Plan at any
time,  except  that no  amendment  shall be made which (i)  increases  the total
number of shares  subject  to the Plan or changes  the  minimum  purchase  price
therefore  (except in either case in the event of adjustments  due to changes in
our  capitalization)  without  the  consent of our  shareholders,  (ii)  affects
outstanding  Plan Options or any exercise  right  thereunder,  (iii) extends the
term of any Plan Option beyond ten years, or (iv) extends the  termination  date
of the Plan.

      Unless the Plan has been earlier  suspended or  terminated by the Board of
Directors,  the  Plan  shall  terminate  10 years  from  the date of the  Plan's
adoption.  Any such termination of the Plan shall not affect the validity of any
Plan Options previously granted thereunder.

      The  potential  benefit to be received  from a Plan Option is dependent on
increases in the market price of the common stock.  The ultimate dollar value of
the Plan  Options  that have been or may be granted  under the Plan is therefore
not ascertainable. On January 11, 2006, the closing price of our common stock as
reported on the Nasdaq SmallCap Market was $0.92.

                                       43
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table contains  information  regarding beneficial ownership of our
common stock as of January 9, 2006 held by:

      *     persons who own beneficially more than 5% of our outstanding  common
            stock,
      *     our directors,
      *     named executive officers, and
      *     all of our directors and officers as a group.

      Unless otherwise  indicated,  the address of each of the listed beneficial
owners identified is c/o Onstream Media  Corporation,  1291 Southwest 29 Avenue,
Pompano  Beach,  Florida  33069.  Unless  otherwise  noted,  we believe that all
persons named in the table have sole voting and investment power with respect to
all shares of our common stock beneficially owned by them. A person is deemed to
be the  beneficial  owner of  securities  that can be  acquired by such a person
within 60 days from  January  9, 2006 upon  exercise  of  options,  warrants  or
convertible  securities.  Each  beneficial  owner's  percentage  of ownership is
determined by assuming that options,  warrants and  convertible  securities that
are held by such a person  (but not  those  held by any  other  person)  and are
exercisable  within  60 days  from the date  hereof  have  been  exercised.  All
information is based upon a record list of  stockholders  as of January 9, 2006.
At that date, approximately 57% of the Company's outstanding shares were held by
CEDE & Co.,  which  is  accounted  for as a single  shareholder  of  record  for
multiple beneficial owners, but is not listed in the beneficial ownership table.
CEDE & Co. is a nominee of the Depository  Trust Company (DTC),  with respect to
securities  deposited by participants  with DTC, e.g.,  mutual funds,  brokerage
firms, banks, and other financial organizations.

<TABLE>
<CAPTION>
                                                                 Shares of Common Stock Beneficially Owned
                                                                 -----------------------------------------
Name and Address of Beneficial Owner                                     Number                 Percentage
------------------------------------                             ---------------           ---------------
<S>                                                              <C>                       <C>
Randy S. Selman (1)                                                    1,339,853                      9.4%
Alan M. Saperstein (2)                                                 1,341,820                      9.4%
Benjamin Swirsky (3)                                                     200,751                      1.5%
Robert Wussler (4)                                                       222,093                      1.7%
Charles C. Johnston (5)                                                  371,714                      2.8%
Cliff Friedland (6)                                                      832,276                      6.4%
David Glassman (7)                                                       832,109                      6.4%
Ronald W. Yates (8)                                                      164,810                      1.3%
Robert E. Tomlinson (9)                                                  250,000                      1.9%
All directors and officers as a group  (nine persons) (10)             5,555,426                     33.1%
Alpha Capital AG (11)                                                  1,179,954                      8.4%
CCJ Trust (12)                                                           731,276                      5.4%
DKR Soundshore Oasis Holding Fund, Ltd. (13)                           1,426,135                     9.99%
Fennmore Holdings, LLC (14)                                            1,424,334                     9.99%
Fred DeLuca (15)                                                       3,219,036                     20.2%
Neil Berman (16)                                                       1,052,356                      7.6%
Omicron Master Trust (17)                                                992,718                      7.2%
</TABLE>

(1) Includes 9,853 shares of our common stock presently outstanding,  options to
acquire  30,000  shares of our common  stock at an exercise  price of $22.50 per
share,  options to acquire  450,000  shares of our common  stock at an  exercise
price of $1.57 per share,  options to acquire 450,000 shares of our common stock
at an exercise price of $1.12 per share,  and options to acquire  400,000 shares
of our common stock at an exercise price of $2.50 per share.

                                       44
<PAGE>

(2) Includes 11,820 shares of our common stock presently outstanding, options to
acquire  30,000  shares of our common  stock at an exercise  price of $22.50 per
share, options to acquire 450,000 shares of our common stock with at an exercise
price of $1.57 per share,  options to acquire 450,000 shares of our common stock
at an exercise price of $1.12 per share and options to acquire 400,000 shares of
our common stock at an exercise price of $2.50 per share.

(3) Includes 751 shares of our common stock  presently  outstanding,  options to
acquire  100,000  shares of our common  stock at an exercise  price of $1.57 per
share and options to acquire  100,000  shares of our common stock at an exercise
price of $1.12 per share.

(4) Includes 616 shares of our common stock  presently  outstanding,  options to
acquire  6,667  shares of our  common  stock at an  exercise  price of $7.50 per
share,  options to acquire  100,000  shares of our common  stock at an  exercise
price of $1.57 per share,  options to acquire 100,000 shares of our common stock
at an exercise  price of $1.12 per share and warrants to purchase  14,810 shares
of our common stock at an exercise price of $3.376 per share.

(5)  Includes  171,714  shares of our common stock held by J&C  Resources,  LLC,
options to acquire  100,000  shares of our common stock at an exercise  price of
$1.57 per share and options to acquire  100,000 shares of our common stock at an
exercise  price of $1.12 per share.  Mr.  Johnston is the control  person of J&C
Resources,  LLC. Mr.  Johnston's  holdings  exclude our securities  owned by CCJ
Trust as described in footnote 12 below. CCJ Trust is a trust for Mr. Johnston's
adult children and he disclaims any beneficial ownership interest in CCJ Trust.

(6) Includes 447,216 shares of our common stock presently  outstanding,  148,100
shares of our common  stock held by Titan  Trust,  148,100  shares of our common
stock held by Dorado  Trust and options to acquire  88,860  shares of our common
stock at an exercise  price of $3.376 per share.  Mr.  Friedland  is the control
person and beneficial owner of both Titan Trust and Dorado Trust.

(7) Includes 447,049 shares of our common stock presently  outstanding,  148,100
shares of our common stock held by JMI Trust, 148,100 shares of our common stock
held by Europa Trust and options to acquire 88,860 shares of our common stock at
an exercise  price of $3.376 per share.  Mr.  Glassman is the control person and
beneficial owner of both JMI Trust and Europa Trust.

(8) Includes options to acquire 50,000 shares of our common stock at an exercise
price of $1.57 per share,  options to acquire 100,000 shares of our common stock
at an exercise  price of $1.12 per share and warrants to purchase  14,810 shares
of our common stock at an exercise price of $3.376 per share.

(9)  Includes  options  to  acquire  150,000  shares of our  common  stock at an
exercise  price of $1.21 per share and options to acquire  100,000 shares of our
common stock at an exercise price of $1.12 per share.

(10) See footnotes (1) through (9) above.

(11) Includes 42,454 shares of our common stock presently  outstanding,  250,000
shares of our common stock issuable upon the exercise of a common stock purchase
warrant with an exercise price of $1.00 per share,  387,500 shares of our common
stock  issuable  upon the exercise of common  stock  purchase  warrants  with an
exercise price of $1.65 per share  (including  125,000 shares  underlying  $1.65
Warrants  contingently  issuable upon the exercise of the  aforementioned  $1.00
warrant) and 500,000  shares of our common stock issuable upon the conversion of
$500,000  principal  amount 8% senior  secured  convertible  notes.  Mr.  Konrad

                                       45
<PAGE>

Ackerman is the control  person of Alpha Capital AG. The number of shares of our
common stock  acquired by the holder upon  conversion  of the 8% senior  secured
convertible  notes or the exercise of the  warrants  issued in  connection  with
those  notes is limited to the extent  necessary  to ensure that  following  the
conversion  and/or  exercise  the total  number of  shares of our  common  stock
beneficially  owned by the  holder  does not  exceed  9.999% of our  issued  and
outstanding common stock.

(12) Includes 164,416 shares of our common stock presently outstanding,  175,000
shares of our common stock issuable upon the exercise of a common stock purchase
warrant  with an exercise  price of $1.50 per share,  and 391,860  shares of our
common  stock  issuable  upon the  conversion  of 39,186  shares of Series  A-10
Convertible Preferred Stock. ATC Trustee LTD is the control person of CCJ Trust.
Mr. Rolf Hedinger is the control person of ATC Trustee LTD.

(13) Includes 46,135 shares of our common stock presently  outstanding,  240,000
shares of our common stock issuable upon the exercise of a common stock purchase
warrant with an exercise price of $1.00 per share,  449,000 shares of our common
stock  issuable  upon the exercise of common  stock  purchase  warrants  with an
exercise price of $1.65 per share  (including  120,000 shares  underlying  $1.65
Warrants  contingently  issuable upon the exercise of the  aforementioned  $1.00
warrant) and 700,000  shares of our common stock issuable upon the conversion of
$700,000 principal amount 8% senior secured convertible notes,  reduced by 9,000
shares due to conversion  limitations  discussed  below. Mr. Seth Fischer is the
control person of DKR Soundshore  Oasis Holding Fund,  Ltd. The number of shares
of our common  stock  acquired  by the holder upon  conversion  of the 8% senior
secured  convertible  notes or the exercise of the warrants issued in connection
with those notes is limited to the extent necessary to ensure that following the
conversion  and/or  exercise  the total  number of  shares of our  common  stock
beneficially  owned by the  holder  does not  exceed  9.999% of our  issued  and
outstanding common stock.

(14) Includes 64,834 shares of our common stock presently  outstanding,  130,000
shares of our common stock issuable upon the exercise of a common stock purchase
warrant with an exercise price of $2.28 per share,  450,000 shares of our common
stock  issuable  upon the  exercise of a common stock  purchase  warrant with an
exercise  price of $1.00 per share,  697,500 shares of our common stock issuable
upon the exercise of common stock  purchase  warrants with an exercise  price of
$1.65 per share (including 225,000 shares underlying $1.65 Warrants contingently
issuable  upon the  exercise of the  aforementioned  $1.00  warrant) and 350,000
shares of our common stock  issuable upon the  conversion of $350,000  principal
amount 8% senior  secured  convertible  notes  reduced by 268,000  shares due to
conversion limitations discussed below. Mr. Mark Nordlicht is the control person
of Fennmore Holdings,  LLC. The number of shares of our common stock acquired by
the holder upon  conversion of the 8% senior  secured  convertible  notes or the
exercise of the warrants issued in connection with those notes is limited to the
extent  necessary to ensure that  following the conversion  and/or  exercise the
total number of shares of our common stock beneficially owned by the holder does
not exceed  9.999% of our issued and  outstanding  common  stock.  Excludes  any
securities owned by Platinum Partners Value Arbitrage Fund, LP.

(15) Includes 147,466 shares of our common stock presently outstanding,  200,000
shares of our common stock issuable upon the exercise of a common stock purchase
warrant with an exercise price of $1.00 per share,  240,000 shares of our common
stock  issuable  upon the exercise of common  stock  purchase  warrants  with an
exercise price of $1.65 per share  (including  100,000 shares  underlying  $1.65
Warrants  contingently  issuable upon the exercise of the  aforementioned  $1.00
warrant),  500,000  shares of our common stock  issuable  upon the exercise of a
common  stock  purchase  warrant  with an  exercise  price of $1.50  per  share,
2,571,570  shares of our common stock  issuable  upon the  conversion of 257,157
shares of Series A-10  Convertible  Preferred  Stock,  and 400,000 shares of our
common stock issuable upon the conversion of $400,000 principal amount 8% senior
secured  convertible  notes,   reduced  by  840,000  shares  due  to  conversion
limitations  discussed  below. The number of shares of our common stock acquired
by the holder upon conversion of the 8% senior secured  convertible notes or the
exercise of the warrants issued in connection with those notes is limited to the
extent  necessary to ensure that  following the conversion  and/or  exercise the

                                       46
<PAGE>

total number of shares of our common stock beneficially owned by the holder does
not exceed 9.999% of our issued and outstanding common stock.

(16) Includes  146,106 shares of our common stock presently  outstanding,  6,250
shares of our common stock issuable upon the exercise of a common stock purchase
warrant with an exercise price of $2.65 per share,  150,000 shares of our common
stock  issuable  upon the  exercise of a common stock  purchase  warrant with an
exercise  price of $1.00 per share,  250,000 shares of our common stock issuable
upon the exercise of common stock  purchase  warrants with an exercise  price of
$1.65 per share (including 75,000 shares underlying $1.65 Warrants  contingently
issuable upon the exercise of the  aforementioned  $1.00  warrant),  and 500,000
shares of our common stock  issuable upon the  conversion of $500,000  principal
amount 8% senior secured  convertible  notes. The number of shares of our common
stock  acquired  by  the  holder  upon  conversion  of  the  8%  senior  secured
convertible  notes or the exercise of the  warrants  issued in  connection  with
those  notes is limited to the extent  necessary  to ensure that  following  the
conversion  and/or  exercise  the total  number of  shares of our  common  stock
beneficially  owned by the  holder  does not  exceed  9.999% of our  issued  and
outstanding common stock.

(17) Includes 21,468 shares of our common stock presently  outstanding,  175,000
shares of our common stock issuable upon the exercise of a common stock purchase
warrant with an exercise price of $1.00 per share,  271,250 shares of our common
stock  issuable  upon the exercise of common  stock  purchase  warrants  with an
exercise  price of $1.65 per share  (including  87,500 shares  underlying  $1.65
Warrants  contingently  issuable upon the exercise of the  aforementioned  $1.00
warrant), and 525,000 shares of our common stock issuable upon the conversion of
$525,000  principal  amount 8% senior secured  convertible  notes. The number of
shares of our common  stock  acquired  by the holder upon  conversion  of the 8%
senior  secured  convertible  notes or the  exercise of the  warrants  issued in
connection  with those notes is limited to the extent  necessary  to ensure that
following  the  conversion  and/or  exercise  the total  number of shares of our
common  stock  beneficially  owned by the holder  does not exceed  9.999% of our
issued and outstanding common stock.  Omicron Capital,  L.P., a Delaware limited
partnership ("Omicron Capital"),  serves as investment manager to Omicron Master
Trust, a trust formed under the laws of Bermuda  ("Omicron"),  Omicron  Capital,
Inc.,  a Delaware  corporation  ("OCI"),  serves as  general  partner of Omicron
Capital,  and Winchester Global Trust Company Limited  ("Winchester")  serves as
the trustee of Omicron. By reason of such relationships, Omicron Capital and OCI
may be deemed to share  dispositive  power over the  shares of our common  stock
owned by Omicron,  and Winchester may be deemed to share voting and  dispositive
power over the shares of our common stock owned by Omicron. Omicron Capital, OCI
and Winchester disclaim beneficial ownership of such shares of our common stock.
Omicron  Capital  has  delegated  authority  from  the  board  of  directors  of
Winchester  regarding the  portfolio  management  decisions  with respect to the
shares of common stock owned by Omicron and, as of April 21, 2003,  Mr.  Olivier
H. Morali and Mr. Bruce T. Bernstein,  officers of OCI, have delegated authority
from the board of directors of OCI regarding the portfolio  management decisions
of Omicron  Capital with respect to the shares of common stock owned by Omicron.
By reason of such  delegated  authority,  Messrs.  Morali and  Bernstein  may be
deemed to share  dispositive  power over the shares of our common stock owned by
Omicron.  Messrs.  Morali and Bernstein  disclaim  beneficial  ownership of such
shares of our common  stock and  neither of such  persons has any legal right to
maintain such delegated authority.  No other person has sole or shared voting or
dispositive  power with respect to the shares of our common stock being  offered
by Omicron,  as those terms are used for purposes under  Regulation 13D-G of the
Securities  Exchange Act of 1934,  as amended.  Omicron and  Winchester  are not
"affiliates" of one another, as that term is used for purposes of the Securities
Exchange  Act of  1934,  as  amended,  or of any  other  person  named  in  this
prospectus as a selling stockholder.  No person or "group" (as that term is used
in Section  13(d) of the  Securities  Exchange Act of 1934,  as amended,  or the
SEC's Regulation 13D-G) controls Omicron and Winchester.

                                       47
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


      On May 7, 2003 we entered  into an  agreement  with Mr. Fred Deluca  which
restructured  a previous  loan,  including a significant  increase in the loaned
amount  outstanding.  The new loan was evidenced by a three year promissory note
in the principal  amount of $3.0 million,  interest  payable only on a quarterly
basis  beginning  in July 2003 at the rate of 5.25% per annum.  The new loan was
collateralized  by a blanket security interest in our assets and a pledge of the
stock of our subsidiaries.

      We issued  Mr.  Deluca  140,000  shares of our newly  created  Series  A-8
Convertible  Preferred  Stock as  consideration  for  entering  into  the  above
agreement.  At the same time, he exchanged  approximately  123,667 shares of our
common stock already owned by him for an additional  92,750 shares of Class A-8.
We granted Mr. Deluca demand and  piggy-back  registration  rights  covering the
shares  of  common  stock  issuable  upon  the  conversion  of  the  Series  A-8
Convertible Preferred Stock.

      In  December  2004,  we repaid  $2.0  million of the May 2003 loan and the
remaining $1.0 million was invested in 100,000 shares of Series A-10 Convertible
Preferred Stock on the same terms as offered to new investors.  Also, Mr. Deluca
purchased  $400,000 of 8% senior secured  convertible notes on the same terms as
the other  investors.  In addition,  Mr. Deluca  exchanged all 232,750 shares of
Series A-8 for 139,650 shares of Series A-10,  but did not receive  accompanying
warrants.  Finally, Mr. DeLuca agreed to accept common shares,  valued as of the
date of issuance,  for  approximately  $149,000 of unpaid  interest on the three
year promissory note.

      In February 2004, we received a $300,000 loan from J&C Resources, LLC. One
of the members of our board of directors is the  President,  Chairman and CEO of
J&C  Resources,  LLC.  The term of the loan was one year,  and all  interest was
prepaid through the issuance of 21,000 shares of common stock.  In addition,  we
issued 9,000 shares of common stock as an  origination  fee and 10,000 shares of
common stock for legal and other fees. The proceeds from this loan were used for
working  capital pending the closing of new financing in December 2004, at which
time this loan was repaid.

      In December 2004, we paid $100,000 to each of Messrs.  Clifford  Friedland
and David  Glassman,  as a partial payment of accrued and unpaid salaries due to
them from Acquired  Onstream.  In February 2005 we paid an additional $50,000 to
each of Messrs.  Friedland  and  Glassman as a second  partial  payment of these
accrued salaries.

      In January 2005, we entered into an addendum to an August 2002  consulting
agreement with Mr. Neil Berman, a major shareholder, calling for the issuance of
5,000  restricted  common shares per month for the year ended December 31, 2005.
Under that agreement,  32,500  restricted common shares were issued for the year
ended December 31, 2004.

      In  August  2005,  we  received  a  $300,000  loan  from  Asset  Factoring
International,  Inc.,  whose  Investment  Manager  is a member  of our  board of
directors.  The term of the loan is one year, with a 2% loan origination fee and
interest of 8% per annum. All interest and fees are due and payable in the event
of early  repayment.  The terms of the loan,  which is  secured by  $600,000  of
recently purchased  equipment and software,  requires repayment within 5 days of
us obtaining other financing, including but not limited to equipment financing.

      In August 2005,  we entered into a consulting  agreement  with  Allenstown
Investments,  Ltd.,  whose  Investment  Manager  is a  member  of our  board  of
directors. The agreement is for a term of one year and calls for the issuance of
30,000 restricted common shares.

      In October 2005, we entered into a five-year note with Mr. Neil Berman,  a
major shareholder in the aggregate principal amount of $750,000. The note, which
is secured by $800,000 of hardware and  software,  bears  interest at 10.85% per
annum. At our option,  and with the consent of required security  holders,  both
interest  and  principal  may be paid in the form of our Series  A-10  Preferred
Stock.  In the event the loan is repaid in stock,  the  prepayment  penalty will
include all accrued interest.  $450,000 of the total funding commitment had been
advanced to us to date.

                                       48
<PAGE>

                                     PART IV

ITEM 13. EXHIBITS

      The  following  documents  are  filed  as a part  of  this  report  or are
incorporated by reference to previous filings, if so indicated:

Number      Description

2.1         Agreement  and Plan of Merger  dated as of October  22,  2003 by and
            between Visual Data  Corporation,  OSM, Inc., a subsidiary of Visual
            Data Corporation, and Onstream Media Corporation (11)
2.2         Amendment #1 to Agreement and Plan of Merger dated as of October 15,
            2004 by and between Visual Data Corporation, OSM, Inc., a subsidiary
            of Visual Data Corporation, and Onstream Media Corporation (13)
2.3         Agreement and Plan of Merger dated June 4, 2001 among  Entertainment
            Digital Network,  Inc.,  Visual Data Corporation and Visual Data San
            Francisco, Inc. (6)
2.4         Agreement   and  Plan  of   Reorganization   between   Visual   Data
            Corporation, Media on Demand, Inc. and Charles Saracino (7)
2.5         Voting Agreement (7)
3.1.1       Articles of Incorporation (1)
3.1.2       Articles of Amendment dated July 26, 1993 (1)
3.1.3       Articles of Amendment dated January 17, 1994 (1)
3.1.4       Articles of Amendment dated October 11, 1994 (1)
3.1.5       Articles of Amendment dated March 25, 1995 (1)
3.1.6       Articles of Amendment dated October 31, 1995 (1)
3.1.7       Articles of Amendment dated May 23, 1996 (1)
3.1.8       Articles of Amendment dated May 5, 1998 (5)
3.1.9       Articles of Amendment dated August 11, 1998 (2)
3.1.10      Articles of Amendment dated June 13, 2000 (4)
3.1.11      Articles of Amendment dated April 11, 2002 (8)
3.1.12      Articles of Amendment dated June 24, 2003, with regard to Series A-9
            Convertible  Preferred  Stock(9)
3.1.13      Articles of Amendment  dated June 20,  2003,  with regard to reverse
            stock split (10)
3.1.14      Articles of Amendment  dated  December 23, 2004,  with regard to the
            designations for Series A-10 Convertible Preferred Stock (17)
3.1.15      Articles  of  Amendment  dated  December  30,  2004,  with regard to
            corporate  name  change  (16)
3.1.16      Articles  of  Amendment  dated  February  7, 2005 with regard to the
            designations for Series A-10 Convertible Preferred Stock (18)
3.2         By-laws (1)
4.1         Specimen Common Stock Certificate (1)
4.2         Form of 8% Senior Secured Convertible Notes (17)
4.3         Form of $1.65 Warrant (17)
4.4         Form of $1.50 Warrant (17)
4.5         Form of $1.00 Warrant (23)
4.6         Form of $1.65 Warrant issuable upon exercise of $1.00 Warrant (23)
10.1        Form of Stock Option Plan and Amendment thereto (1)(3)
10.2        Employment  Agreement dated December 27, 2004 between Onstream Media
            Corporation and Randy S. Selman (13)
10.3        Employment  Agreement dated December 27, 2004 between Onstream Media
            Corporation and Alan Saperstein (13)
10.4        Employment  Agreement dated December 27, 2004 between Onstream Media
            Corporation and Cliff Friedland (13)

                                       49
<PAGE>

10.5        Employment  Agreement dated December 27, 2004 between Onstream Media
            Corporation and David Glassman (13)
10.6        Employment  Agreement  dated March 8, 2005  between  Onstream  Media
            Corporation and Robert Tomlinson (21)
10.7        Plan of Compensation  Package dated April 22, 2005 between  Onstream
            Media Corporation and Bradford Tyler (22)
10.8        Securities Purchase Agreement - A-9 Preferred (9)
10.9        Form  of  Securities   Purchase  Agreement  for  8%  Senior  Secured
            Convertible Notes (17)
10.10       Form of Additional Investment Right (17)
10.11       Form of Pledge Agreement (17)
10.12       Form of Security Agreement (17)
10.13       Form of Letter  Agreement with Additional  Investment  Right holders
            (19)
10.14       Deposit Control Agreement dated October 2004 (14)
14.1        Code of Business Conduct and Ethics (12)
14.2        Corporate Governance and Nominating Committee Principles (23)
14.3        Audit Committee Charter (15)
21.1        Subsidiaries of the registrant (13)
21.2        Financial  statements  of  Acquired  Onstream  for the  years  ended
            December  31,  2003 and 2002 and for the three and six months  ended
            June 30, 2004 and 2003 (20)
23.1        Consent of Independent Certified Public Accountants
31.1        Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2        Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1        Section 906 Certification of Chief Executive Officer
32.2        Section 906 Certification of Chief Financial Officer

(1)   Incorporated by reference to the exhibit of the same number filed with the
      registrant's  registration  statement  on Form SB-2,  registration  number
      333-18819, as amended and declared effective by the SEC on July 30, 1997.
(2)   Incorporated by reference to the  registrant's  current report on Form 8-K
      dated August 21, 1998.
(3)   Incorporated by reference to the registrant's Proxy Statement for the year
      ended September 30, 1998.
(4)   Incorporated  by reference to the  registrant's  Quarterly  Report on Form
      10-QSB for the period ended June 30, 2000.
(5)   Incorporated by reference to the registrant's Annual Report on Form 10-KSB
      for the year ended September 30, 2000.
(6)   Incorporated by reference to the  registrant's  current report on Form 8-K
      filed on June 12, 2001.
(7)   Incorporated by reference to the  registrant's  current report on Form 8-K
      filed on February 5, 2002.
(8)   Incorporated by reference to exhibit 3.1 to the registrant's  registration
      statement on Form S-3, file number 333-89042,  declared  effective on June
      7, 2002.
(9)   Incorporated by reference to the  registrant's  current report on Form 8-K
      filed July 2, 2003.
(10)  Incorporated  by reference to the  registrant's  Quarterly  Report on Form
      10-QSB for the period ended June 30, 2003.
(11)  Incorporated by reference to the  registrant's  current report on Form 8-K
      filed October 28, 2003.
(12)  Incorporated by reference to the registrant's Annual Report on Form 10-KSB
      for the year ended September 30, 2003.
(13)  Incorporated by reference to the registrant's Annual Report on Form 10-KSB
      for the year ended September 30, 2004.
(14)  Incorporated by reference to the  registrant's  current report on Form 8-K
      filed November 4, 2004.

                                       50
<PAGE>

(15)  Incorporated by reference to the registrant's Proxy Statement for the 2004
      Annual Shareholder's Meeting filed on November 14, 2004.
(16)  Incorporated by reference to the  registrant's  current report on Form 8-K
      filed on January 4, 2005.
(17)  Incorporated by reference to the registrant's current report on Form 8-K/A
      filed on January 4, 2005.
(18)  Incorporated by reference to the  registrant's  current report on Form 8-K
      filed February 11, 2005.
(19)  Incorporated by reference to the  registrant's  current report on Form 8-K
      filed February 17, 2005.
(20)  Incorporated by reference to the registrant's current report on Form 8-K/A
      filed March 8, 2005.
(21)  Incorporated by reference to the  registrant's  current report on Form 8-K
      filed March 11, 2005.
(22)  Incorporated by reference to the  registrant's  current report on Form 8-K
      filed July 11, 2005.
(23)  Incorporated by reference to the registrant's Proxy Statement for the 2005
      Annual Shareholder's Meeting filed on August 1, 2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

      The  aggregate  audit  fees  billed  to us by  Goldstein  Lewin & Co.  for
professional  services rendered for the audit of our annual financial statements
included in our Annual Report on Form 10-KSB for the fiscal year ended September
30, 2005 and for the review of our quarterly  financial  statements  included in
our quarterly  reports on Form 10-QSB for the quarters  ended December 31, 2004,
and March 31 and June 30, 2005 were $152,000.

      The  aggregate  audit  fees  billed  to us by  Goldstein  Lewin & Co.  for
professional  services rendered for the audit of our annual financial statements
included in our Annual Report on Form 10-KSB for the fiscal year ended September
30, 2004 and for the review of our quarterly  financial  statements  included in
our quarterly  reports on Form 10-QSB for the quarters  ended December 31, 2003,
and March 31 and June 30, 2004 were $119,985.


Audit Related Fees

      The aggregate  fees billed to us by  Goldstein,  Lewin & Co. for assurance
and related  services  relating to the performance of the audit of our financial
statements  which are not  reported  under the caption  "Audit  Fees" above were
$87,922  and $45,230 for the fiscal  years  ended  September  30, 2005 and 2004,
respectively.

Tax Fees

      The aggregate tax fees billed to us by Goldstein  Lewin & Co. were $11,836
and  $17,960  for  the  fiscal  years  ended   September   30,  2005  and  2004,
respectively.  Tax fees include the  preparation of federal and state  corporate
income tax returns as well as tax compliance, tax advice and tax planning.

All Other Fees

      Other than fees  relating to the  services  described  above under  "Audit
Fees," "Audit-Related Fees" and "Tax Fees," there were no additional fees billed

                                       51
<PAGE>

to us by Goldstein Lewin & Co. for services  rendered for the fiscal years ended
September 30, 2005 or 2004.

Audit Committee Policies

      Effective May 6, 2003,  the  Securities  and Exchange  Commission  adopted
rules  that  require  that  before our  independent  auditor is engaged by us to
render any auditing or permitted non-audit related service, the engagement be:

   *  approved by our audit committee; or

   *  entered into pursuant to pre-approval policies and procedures  established
      by the audit committee,  provided the policies and procedures are detailed
      as to the  particular  service,  the audit  committee  is informed of each
      service, and such policies and procedures do not include delegation of the
      audit committee's responsibilities to management.

      The audit committee  pre-approves all services provided by our independent
auditors,  including  those set forth above.  The audit committee has considered
the nature and amount of fees billed by Goldstein  Lewin & Co. and believes that
the  provision of services for  activities  unrelated to the audit is compatible
with maintaining Goldstein Lewin & Co.'s independence.

                                       52
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                              Onstream Media Corporation

                              By: /s/ Randy S. Selman
                                 --------------------
                                     Randy S. Selman, President, Chief
                                     Executive Officer

                              By: /s/ Robert E. Tomlinson
                                 ------------------------
                                   Robert E. Tomlinson, Chief Financial Officer

      In accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

         Signature                    Title                       Date

/s/ Randy S. Selman           Director, President,              January 12, 2006
-------------------
Randy S. Selman               Chief Executive Officer

/s/ Robert E. Tomlinson       Chief Financial Officer and
-----------------------
Robert E. Tomlinson           Principal Accounting Officer      January 12, 2006

/s/ Clifford Friedland        Director and Senior VP            January 12, 2006
----------------------
Clifford Friedland            Business Development

/s/ Alan Saperstein           Director and Chief                January 12, 2006
-------------------
Alan Saperstein               Operating Officer

/s/ Benjamin Swirsky          Director                          January 12, 2006
--------------------
Benjamin Swirsky

/s/ Robert J. Wussler         Director                          January 12, 2006
---------------------
Robert J. Wussler

/s/ Charles C. Johnston       Director                          January 12, 2006
-----------------------
Charles C. Johnston

/s/ Ronald W. Yates           Director                          January 12, 2006
-------------------
Gen. Ronald W. Yates

                                       53

<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders of Onstream Media Corporation:


We have audited the accompanying  consolidated  balance sheets of Onstream Media
Corporation  (formerly Visual Data Corporation) and subsidiaries as of September
30,  2005 and 2004,  and the  related  consolidated  statements  of  operations,
stockholders'  equity and cash flows for the years then ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes 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  financial  position of Onstream  Media
Corporation and  subsidiaries as of September 30, 2005 and 2004, and the results
of their  operations and their cash flows for the years then ended in conformity
with U.S. generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going  concern.  As more fully  described in
Note 1 to  the  financial  statements,  the  Company  has  incurred  significant
recurring  losses  from  operations  since  inception.   This  condition  raises
substantial  doubt  about  its  ability  to  continue  as a going  concern.  The
Company's  continued existence is dependent upon its ability to raise additional
capital  and to  successfully  market  and sell its  services  and or  products.
Management's  plans  regarding  these  matters  are  described  in Note  1.  The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.



GOLDSTEIN LEWIN & CO.

/s/ GOLDSTEIN LEWIN & CO.

Boca Raton, Florida
January 12, 2006


                                       F-1
<PAGE>


                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                     September 30,
                                                                 2005           2004
                                                              -----------   -----------
                                     ASSETS

CURRENT ASSETS:
<S>                                                           <C>           <C>
   Cash and cash equivalents                                  $     4,137   $    14,269
   Restricted cash                                                  8,485       207,876

   Accounts receivable, net of allowance for
     doubtful accounts of $28,690 and $68,739, respectively     1,274,974     1,365,604

   Prepaid expenses                                               604,928       456,521

   Inventories                                                     86,168        51,044

   Other current assets                                             8,914         2,524
                                                              -----------   -----------
Total current assets                                            1,987,606     2,097,838

PROPERTY AND EQUIPMENT, net                                     4,809,877       745,056

INTANGIBLE ASSETS, net                                            917,761     1,645,496

GOODWILL, net                                                   9,692,845     1,601,444

OTHER NON-CURRENT ASSETS                                          113,998     1,372,555
                                                              -----------   -----------

Total assets                                                  $17,522,087   $ 7,462,389
                                                              ===========   ===========
</TABLE>



                                   (Continued)

                                       F-2
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                   (Continued)
<TABLE>
<CAPTION>
                                                                                          September 30,
                                                                                       2005            2004
                                                                                   ------------    ------------
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
<S>                                                                                <C>             <C>
   Accounts payable and accrued liabilities                                        $  1,710,808    $  1,562,166
   Amounts due to shareholders and officers                                             224,419            --
   Deferred revenue                                                                     170,971          77,711
   Notes payable - current portion                                                      330,598         365,500
   Detachable Warrants and Embedded Conversion Feature
     associated with  8% Convertible Debentures -  current portion                    2,314,521            --
                                                                                   ------------    ------------

Total current liabilities                                                             4,751,317       2,005,377

8% Convertible Debentures, net of discount                                            1,243,322            --
Notes payable, net of discount and current portion                                      399,600       2,660,225
Detachable Warrants and Embedded Conversion Feature
associated with  8% Convertible Debentures, net of current portion                      702,647            --
                                                                                   ------------    ------------

Total liabilities                                                                     7,096,886       4,665,602
                                                                                   ------------    ------------

COMMITMENTS AND CONTINGENCIES

EQUITY SECURITIES SUBJECT TO POTENTIAL RESCISSION:
Series A-10 Convertible Preferred stock, including potentially redeemable common
stock issued upon conversion                                                          4,779,998            --
Detachable warrants associated with 8% Convertible Debentures; beneficial
  conversion rights included in 8% Convertible Debentures; and potentially
  redeemable common stock issued upon conversion and/or in lieu of interest on
  8% Convertible Debentures                                                           2,595,596            --
                                                                                   ------------    ------------
Total equity securities subject to potential rescission                               7,375,594            --
                                                                                   ------------    ------------

STOCKHOLDERS' EQUITY:
Series A-8 Convertible Preferred stock, par value $.0001 per share, auth- orized
     300,000 shares, 0 and 232,750 issued and outstanding, respectively                    --                23
Series A-10 Convertible Preferred stock, par value $.0001 per share, auth-
     orized 700,000 shares, 416,031 and 0 issued and outstanding, respectively               41            --
Series A-11 Convertible Preferred stock, par value $.0001 per share, auth-
   orized 25,000 shares, 0 and 25,000 issued and outstanding, respectively                 --                 3
Common stock, par value $.0001 per share; authorized 75,000,000 shares,
   12,191,001 and 4,666,324 issued and outstanding, respectively                          1,219             467
 Unamortized discount                                                                (2,067,461)           --
 Additional paid-in capital                                                          75,556,043      62,473,209
 Accumulated deficit                                                                (70,440,235)    (59,676,915)
                                                                                   ------------    ------------
Total stockholders' equity                                                            3,049,607       2,796,787
                                                                                   ------------    ------------

Total liabilities and stockholders' equity                                         $ 17,522,087    $  7,462,389
                                                                                   ============    ============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       F-3
<PAGE>



                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                  Years Ended,
                                                                          ----------------------------
                                                                                  September 30,
                                                                              2005            2004
                                                                          ------------    ------------
REVENUE:
<S>                                                                       <C>             <C>
    Digital asset management                                              $  1,969,697    $  1,155,655
    Network usage and services                                               2,049,337       2,137,719
    Network equipment sales and rentals                                        458,369         660,468
    Webcasting                                                               3,470,814       3,373,814
    Travel production and distribution                                         208,177         251,232
                                                                          ------------    ------------
Total revenue                                                                8,156,394       7,578,888
                                                                          ------------    ------------
COSTS OF REVENUE:
    Digital asset management                                                   633,801         310,472
    Network usage and services                                               1,192,456       1,092,206
    Network equipment sales and rentals                                        201,435         398,188
    Webcasting                                                               1,003,962         953,914
    Travel production and distribution                                          71,206          28,367
                                                                          ------------    ------------
Total costs of revenue                                                       3,102,860       2,783,147
                                                                          ------------    ------------
GROSS MARGIN                                                                 5,053,534       4,795,741
                                                                          ------------    ------------

OPERATING EXPENSES:
    General and administrative:
        Compensation                                                         4,778,694       3,952,447
        Professional fees                                                    2,824,400       1,107,084
        Other                                                                1,575,215       1,499,494
     Impairment loss on goodwill                                               330,000         470,000
     Depreciation and amortization                                           1,152,633       1,373,587
                                                                          ------------    ------------
Total operating expenses                                                    10,660,942       8,402,612
                                                                          ------------    ------------
Loss from operations                                                        (5,607,408)     (3,606,871)
                                                                          ------------    ------------
OTHER (EXPENSE) INCOME:
   Interest income                                                              11,355           6,344
   Interest expense                                                         (4,015,504)       (595,248)
   Other (expense) income, net                                                 (26,331)        223,109
                                                                          ------------    ------------
Total other (expense) income, net                                           (4,030,480)       (365,795)
                                                                          ------------    ------------
Net loss                                                                  $ (9,637,888)   $ (3,972,666)
                                                                          ============    ============
Loss per share - basic and diluted:

Net loss per share                                                        $      (1.17)   $      (0.92)
                                                                          ============    ============

Weighted average shares of common stock outstanding - basic and diluted      8,261,642       4,337,370
                                                                          ============    ============
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     YEARS ENDED SEPTEMBER 30, 2004 AND 2005



<TABLE>
<CAPTION>
                                                   Preferred Stock
                                    ------------------------------------------------    ---------------------------
                                       Series     Series    Series                              Common Stock
                                        A8/A9       A10      A11        ------------    ---------------------------
                                    ------------  ------ ------------
                                       Shares     Shares    Shares         Amount          Shares         Amount
                                    ------------    --   ------------   ------------    ------------   ------------
<S>                <C> <C>               <C>                            <C>                <C>         <C>
Balance, September 30, 2003              277,750    --           --     $         28       3,246,443   $        325


Proceeds from sale of  stock, net           --      --         25,000              3         497,495             49

Issuance of shares, warrants
   and options for services and
   incentives                               --      --           --             --           195,000             20
Conversion of Series A-8 and
   A-9 preferred shares to
   common shares                         (45,000)   --           --               (5)        176,192             18
Issuance of shares and warrants
  for loan payments and
  interest                                  --      --           --             --           434,694             44
Issuance of shares for                      --      --           --             --            64,000              6
   satisfaction of obligations
Dividends paid                              --      --           --             --            52,500              5
Net loss                                    --      --           --             --              --             --
                                    ------------    --   ------------   ------------    ------------   ------------

Balance, September 30, 2004              232,750    --         25,000   $         26       4,666,324   $        467
                                    ------------    --   ------------   ------------    ------------   ------------
</TABLE>

<TABLE>
<CAPTION>

                                     Additional Paid-in
                                           Capital
                                    ---------------------    Accumulated
                                       Gross     Discount      Deficit           Total
                                    ------------    ---      ------------    ------------
<S>                <C> <C>          <C>             <C>      <C>             <C>
Balance, September 30, 2003         $ 58,829,927    $--      $(55,576,128)   $  3,254,152


Proceeds from sale of  stock, net      1,362,582     --              --         1,362,634

Issuance of shares, warrants
   and options for services and
   incentives                            957,582     --              --           957,602
Conversion of Series A-8 and
   A-9 preferred shares to
   common shares                             (13)    --              --              --
Issuance of shares and warrants
  for loan payments and
  interest                             1,054,977     --              --         1,055,021
Issuance of shares for                   154,234     --              --           154,240
   satisfaction of obligations
Dividends paid                           113,920     --          (128,121)        (14,196)
Net loss                                    --       --        (3,972,666)     (3,972,666)
                                    ------------    ---      ------------    ------------

Balance, September 30, 2004         $ 62,473,209    $--      $(59,676,915)   $  2,796,787
                                    ------------    ---      ------------    ------------
</TABLE>


                                   (Continued)

                                       F-5
<PAGE>



                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     YEARS ENDED SEPTEMBER 30, 2004 AND 2005
                                   (Continued)


<TABLE>
<CAPTION>
                                               Preferred Stock
                                  ------------------------------------------------------------
                                     Series          Series          Series                               Common Stock
                                      A8/A9            A10            A11         ------------    ---------------------------
                                     Shares          Shares          Shares          Amount          Shares         Amount
                                  ------------    ------------    ------------    ------------    ------------   ------------
<S>                <C> <C>             <C>                              <C>       <C>                <C>         <C>
Balance, September 30, 2004            232,750            --            25,000    $         26       4,666,324   $        467

Issuance of shares, warrants
   and options for Acquired
   Onstream purchase                      --              --              --              --         2,207,966            221

Issuance of  Series A-10
   preferred shares, net                  --           315,000            --                32            --             --

Conversion of Series A-8
   shares into Series A-10
   preferred shares                   (232,750)        139,650            --                (9)           --             --

Conversion of 8% Convertible
   Debentures to common shares            --              --              --              --         2,725,659            273

Conversion of Series A-10
   preferred shares to common
   shares                                 --           (61,969)           --                (6)        619,690             62

Issuance of shares, warrants
   and options for services and
   incentives                             --              --              --              --           712,626             71

Redemption of Series A-11
   shares                                 --              --           (25,000)             (3)           --             --
Warrants issued with 8%
   Convertible Debentures                 --              --              --              --              --             --

Common shares issued for
   severance and professional
   services                               --              --              --              --           300,000             30

Common shares issued for
   financing penalty                      --              --              --              --           606,000             61

Common shares issued for
   interest on 8% Convertible
   Debentures and Notes Payable           --              --              --              --           352,736             34

Series A-10 preferred shares
   issued for interest                    --             8,562            --              --              --             --

Dividends accrued on Series
   A-10 preferred                         --            14,788            --                 1            --             --

Equity securities subject to
   potential rescission                   --              --              --              --              --             --

Net loss                                  --              --              --              --              --             --
                                  ------------    ------------    ------------    ------------    ------------   ------------
Balance, September 30, 2005               --           416,031            --      $         41      12,191,001   $      1,219
                                  ------------    ------------    ------------    ------------    ------------   ------------
</TABLE>

<TABLE>
<CAPTION>

                                       Additional Paid-in
                                             Capital
                                   ----------------------------    Accumulated
                                      Gross          Discount        Deficit          Total
                                   ------------    ------------    ------------    ------------
<S>                <C> <C>         <C>             <C>             <C>             <C>
Balance, September 30, 2004        $ 62,473,209    $       --      $(59,676,915)   $  2,796,787

Issuance of shares, warrants
   and options for Acquired
   Onstream purchase                  7,311,672            --              --         7,311,893

Issuance of  Series A-10
   preferred shares, net              5,905,919      (2,928,041)           --         2,977,910

Conversion of Series A-8
   shares into Series A-10
   preferred shares                           9            --              --              --

Conversion of 8% Convertible
   Debentures to common shares        2,725,386            --              --         2,725,659

Conversion of Series A-10
   preferred shares to common
   shares                                   (56)        356,550        (356,550)           --

Issuance of shares, warrants
   and options for services and
   incentives                         1,678,794            --              --         1,678,865

Redemption of Series A-11
   shares                              (499,997)           --              --          (500,000)
Warrants issued with 8%
   Convertible Debentures             4,246,483            --              --         4,246,483

Common shares issued for
   severance and professional
   services                             470,970            --              --           471,000

Common shares issued for
   financing penalty                    943,779            --              --           943,840

Common shares issued for
   interest on 8% Convertible
   Debentures and Notes Payable         459,140            --              --           459,174

Series A-10 preferred shares
   issued for interest                   85,620            --              --            85,620

Dividends accrued on Series
   A-10 preferred                       147,877         504,030        (768,882)       (116,974)

Equity securities subject to
   potential rescission             (10,392,762)           --              --       (10,392,762)

Net loss                                   --              --        (9,637,888)     (9,637,888)
                                   ------------    ------------    ------------    ------------
Balance, September 30, 2005        $ 75,556,043    $ (2,067,461)   $(70,440,235)   $  3,049,607
                                   ------------    ------------    ------------    ------------
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       F-6
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                          Years Ended
                                                                                   --------------------------
                                                                                          September 30,
                                                                                       2005          2004
                                                                                   -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                <C>            <C>
   Net loss                                                                        $(9,637,888)   $(3,972,666)
   Adjustments to reconcile net loss to net cash (used in) operating activities:
     Depreciation and amortization                                                   1,152,633      1,373,587
     Amortization of discount on notes payable                                         494,150        337,624
     Amortization of discount on convertible debentures                              2,065,592         89,635
     Interest penalty payable in common shares                                         943,840           --
     Interest expense paid in common shares                                            367,838        119,874
     Interest expense paid in A-10 preferred shares                                     85,620           --
     Amortization of deferred services and incentives, including                     1,768,598        645,649
        shares issued for severance and services
     Impairment loss on goodwill                                                       330,000        470,000
     Loss on equity basis investment in Acquired Onstream                              100,025        276,240
     Decrease in allowance for doubtful accounts                                           694         35,999
     Gain from settlements of obligations                                              (44,079)      (458,286)
     Loss on disposition/retirement of fixed assets                                     28,252         30,139
     Changes in assets and liabilities, net of effects from the Onstream
         Merger:
       Decrease (Increase) in accounts receivable                                       89,936       (585,033)
       Decrease (Increase) in prepaid expenses                                         108,524       (101,498)
       Decrease (Increase) in other current assets                                      (1,270)          (868)
      (Increase) Decrease in inventories                                               (35,125)       118,438
       Increase in accounts payable and accrued liabilities                            253,709        488,575
       Increase in deferred revenue                                                     43,260         34,796
                                                                                   -----------    -----------
Net cash (used in) operating activities                                             (1,885,691)    (1,097,795)
                                                                                   -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Advances to Acquired Onstream                                                   (1,457,811)      (512,512)
    Costs of Onstream Merger                                                          (153,317)          --
    Payment of accounts payable and accrued liabilities assumed
       at time of Onstream Merger                                                     (510,373)          --
    Acquisition of property and equipment                                           (1,732,815)      (190,424)
    Sale of assets                                                                      50,000           --
    Purchase of Virage software and assets                                                --         (648,250)
                                                                                   -----------    -----------
Net cash (used in) investing activities                                             (3,804,316)    (1,351,186)
                                                                                   -----------    -----------
</TABLE>

                                   (Continued)

                                       F-7
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Continued)
<TABLE>
<CAPTION>
                                                                                            Years Ended
                                                                                   ----------------------------
                                                                                           September 30,
                                                                                       2005            2004
                                                                                   ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                                                <C>             <C>
    Proceeds from sale of 8% Convertible Debentures, net of expenses               $  4,013,713    $       --
    Proceeds from sale of Additional 8% Convertible Debentures,                       2,115,500            --
       net of expenses
    Proceeds from Series A-10 convertible preferred, net of expenses                  1,977,910            --
    Proceeds from restricted cash                                                       200,000         794,432
    Proceeds from loans and notes payable                                               750,000         400,000
    Proceeds from convertible debenture                                                    --           150,000
    Proceeds from issuance of common stock, net                                            --           862,635
    Proceeds from subscription receivable for preferred stock                              --           300,000
    Dividends                                                                          (116,974)        (14,196)
    Repayment of loans, notes and leases payable                                     (2,760,274)         (3,475)
    (Payment of) proceeds from Series A-11 convertible preferred                       (500,000)        500,000
   Payment of convertible debentures                                                       --          (608,520)
                                                                                   ------------    ------------

Net cash provided by financing activities                                             5,679,875       2,380,876
                                                                                   ------------    ------------

NET (DECREASE) IN CASH AND CASH EQUIVALENTS                                             (10,132)        (68,105)

CASH AND CASH EQUIVALENTS, beginning of period                                           14,269          82,374
                                                                                   ------------    ------------
CASH AND CASH EQUIVALENTS, end of period                                                  4,137          14,269
                                                                                   ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash payments for interest                                                    $     55,606    $     40,303
                                                                                   ============    ============

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
     Issuance of shares, options and warrants in conjunction with the
        Onstream Merger                                                            $  7,311,893    $       --
     Issuance of warrants with 8% Convertible Debentures                           $    695,525    $       --
     Issuance of warrants with Additional 8% Convertible Debentures                $  1,230,732    $       --
     Issuance of warrants with Series A-10 convertible preferred                   $    922,756    $       --
       Conversion of note payable to Series A-10 convertible preferred             $  1,000,000    $       --
       Conversion of Series A-8 convertible preferred to Series A-10 convertible
       preferred                                                                   $  1,396,500    $       --
       Conversion of Series A-10 convertible preferred to common shares            $    619,690    $       --
       Conversion of 8% Convertible Debentures to common shares                    $  2,705,000    $       --
       Conversion of convertible debentures to common shares                       $       --      $    150,000
       Conversion of preferred stock to common stock                               $       --      $    450,000
       Equity securities becoming subject to potential rescission
            including portion classified as liability                              $ 10,392,762    $       --
       Issuance of common shares for repayment of debt                             $       --      $    750,000
      Issuance of shares, warrants and options for deferred
          services and incentives                                                  $  1,678,865    $    957,602
       Issuance of shares for payment of accounts payable                          $       --      $     72,300
       Advances to Acquired Onstream by issuing common stock                       $       --      $     81,940
       Issuance of common shares for severance, services and financial penalties   $  1,414,840    $       --
       Issuance of common shares for interest                                      $    459,174       $122, 015
       Issuance of A-10 preferred shares for interest and dividends                $    233,498    $       --
       Sale of Curaspan investment for promissory note (fully reserved)            $    150,000
       Issuance of common shares for dividends                                     $       --      $    113,925
       Settlement of accounts and notes payable                                    $       --      $    456,286
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       F-8
<PAGE>


                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Onstream Media Corporation  (formerly Visual Data Corporation) (the "Company" or
"Onstream" or "ONSM"),  organized in 1993, is an online service provider of live
and on-demand  rich media  communications,  including  digital asset  management
services  and  webcasting.   Digital  asset  management  services  are  provided
primarily  to  entertainment,  advertising  and  financial  industry  customers.
Webcasting services are provided primarily to corporate,  education,  government
and travel industry customers.

See Note 2 regarding the  Company's  December 23, 2004  acquisition  of Acquired
Onstream.  As a result of that  acquisition,  the  Company  changed  its name to
Onstream  Media  Corporation  in January 2005 and has  reorganized  the previous
three  operating   groups  into  two  groups  -  Digital  Asset  Management  and
Webcasting.  The Digital Asset Management group includes the previous Networking
Solutions Group, as well as the operations  resulting from software licenses and
other  assets  acquired  from  Virage,  Inc.  and  Acquired  Onstream.  The  new
Webcasting Group includes the previous Webcasting and Travel groups.

Our Digital  Asset  Management  Group,  which  operates  from  facilities in San
Francisco, California, provides digital asset management services. Digital asset
management is a set of  coordinated  technologies  and processes  that allow the
quick and efficient storage,  retrieval, and reuse of the digital files that are
essential to all businesses.  These digital files include photos,  videos, audio
files, engineering specs,  architectural plans, web pages, and many other pieces
of business collateral. Digital asset management provides the business rules and
processes needed to acquire,  store, index, secure, search, export and transform
these assets and their descriptive information.

In addition,  through our subsidiary  doing  business under the name EDNet,  the
Digital Asset Management Group provides  connectivity  within the  entertainment
and  advertising  industries  through its  managed  network,  which  encompasses
production and post-production companies, advertisers, producers, directors, and
talent.  The global  network,  with  approximately  500 active clients in cities
throughout  the United  States,  Canada,  Mexico,  Europe,  and the Pacific Rim,
enables  high-speed  exchange  of  high  quality  audio,  compressed  video  and
multimedia data communications, utilizing long distance carriers, regional phone
companies, satellite operators, and major internet service providers. EDNet also
provides  systems  integration  and engineering  services,  application-specific
technical  advice,  audio  equipment,   proprietary  and  off-the-shelf  codecs,
teleconferencing  equipment,  and other  innovative  products to facilitate  the
Company's broadcast and production  applications.  EDNet generates revenues from
the sale, rental and installation of equipment, network usage, distribution fees
and other related fees.

The  Webcasting  Group  provides  an array of  web-based  media  services to the
corporate market including live audio and video webcasting,  packaged  corporate
announcements,  and rich media  information  storage  and  distribution  for any
business entity. The Webcasting Group also produces  Internet-based  multi-media
streaming videos related to hotels, resorts,  time-shares,  golf facilities, and
other travel destinations. The Company warehouses this travel content on its own
on-line travel portal -  www.travelago.com  ("Travelago").  See Note 3 regarding
the disputed sale of these travel related assets and operations.  The Webcasting
Group generates revenues through production and distribution fees.

                                       F-9
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Liquidity and Going Concern

The consolidated  financial statements have been presented on the basis that the
Company is a going concern, which contemplates the realization of assets and the
satisfaction  of liabilities  in the normal course of business.  The Company has
incurred  losses  since  its  inception,  and  has  an  accumulated  deficit  of
approximately  $70.4 million as of September 30, 2005. The Company's  operations
have been financed  primarily  through the issuance of equity and debt.  For the
year ended September 30, 2005, ONSM had a net loss of approximately $9.6 million
and cash used in operations  of  approximately  $1.9 million.  The Company had a
working capital deficit of $2,763,711 at September 30, 2005.

The Company is constantly  evaluating  its cash needs and existing burn rate, in
order to make appropriate  adjustments to operating  expenses.  Depending on its
actual  future cash needs,  the  Company  may need to raise  additional  debt or
equity capital to provide funding for ongoing future operations, or to refinance
existing  indebtedness.  No  assurances  can be given that the  Company  will be
successful  in  obtaining  additional  capital,  or that  such  capital  will be
available on terms acceptable to the Company.  The Company's continued existence
is  dependent  upon its  ability  to raise  capital  and to market  and sell its
services  successfully.  The financial statements do not include any adjustments
to reflect future effects on the  recoverability and classification of assets or
amounts  and  classification  of  liabilities  that may result if the Company is
unsuccessful.

The holders of the 8%  Convertible  Debentures,  the  Additional 8%  Convertible
Debentures  and the  Series  A-10  Preferred  Stock may be  entitled  to certain
rescission rights - see Note 5.

Basis of Consolidation

The  accompanying  consolidated  financial  statements  include the  accounts of
Onstream Media Corporation and its subsidiaries - Entertainment Digital Network,
Inc., Media On Demand,  Inc., HotelView  Corporation and OSM Acquisition,  Inc..
All significant  intercompany  accounts and transactions have been eliminated in
consolidation.  The Company uses the equity method of accounting for investments
where its ownership is between 20% and 50%.

Accounting Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States,  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Estimates are used when accounting for allowances for doubtful accounts,
revenue reserves,  inventory  reserves,  depreciation and  amortization,  taxes,
contingencies  and  impairment  allowances.  Such  estimates  are reviewed on an
on-going basis and actual results could materially differ from those estimates.



                                      F-10

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash and cash equivalents

Cash and  cash  equivalents  consists  of all  highly  liquid  investments  with
original maturities of three months or less.

Restricted cash

Restricted cash consisted of amounts provided by a major investor in conjunction
with a  loan.  The  restricted  cash is to be  utilized  by the  Company  at the
lender's discretion. See Note 5.

Fair Value of Financial Instruments

The carrying amounts of cash and cash  equivalents,  restricted  cash,  accounts
receivable,  accounts  payable,  accrued expenses and notes payable  approximate
fair value due to the short maturity of the instruments.

Bad Debt Reserves

The Company evaluates the  collectibility of its accounts  receivable based on a
combination  of factors.  In cases  where the Company is aware of  circumstances
that may impair a specific customer's ability to meet its financial  obligations
to the Company,  the Company records a specific allowance against amounts due to
us, and thereby reduce the net  recognized  receivable to the amount the Company
reasonably  believes will be  collected.  For all other  customers,  the Company
recognizes  allowances  for  doubtful  accounts  based on the length of time the
receivables  are past due,  the  current  business  environment  and  historical
experience. At September 30, 2005 and 2004, bad debt reserves were approximately
$29,000 and $69,000, respectively.

Concentration of Credit Risk

The  Company at times has cash in banks in excess of FDIC  insurance  limits and
places  its  temporary  cash  investments  with high  credit  quality  financial
institutions.  The Company performs ongoing credit evaluations of its customers'
financial  condition  and does not require  collateral  from them.  Reserves for
credit losses are maintained at levels  considered  adequate by management.  See
Note 7 regarding revenues from significant customers.

Inventories

Inventories  are  stated at the lower of cost  (first-in,  first-out  method) or
market by analyzing market  conditions,  current sales prices,  inventory costs,
and inventory  balances.  The Company  evaluates  inventory  balances for excess
quantities and obsolescence on a regular basis by analyzing  backlog,  estimated
demand,  inventory on hand,  sales levels and other  information.  Based on that
analysis,  the Company  management  estimates the amount of provisions  made for
obsolete or slow moving inventory.

Property and Equipment

Property and  equipment  are recorded at cost,  less  accumulated  depreciation.
Property  and  equipment  under  capital  leases  are stated at the lower of the
present value of the minimum  lease  payments at the beginning of the lease term
or the fair value at the inception of the lease.  Depreciation is computed using
the straight-line  method over the estimated useful lives of the related assets.
Amortization  expense on assets  acquired  under  capital  leases is included in
depreciation expense. The costs of leasehold improvements are amortized over the
lesser of the lease term or the life of the improvement.

                                      F-11
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005



NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Software

Included in property and equipment is computer  software  developed for internal
use, including the Digital Media Services Platform ("DMSP") - see notes 2 and 3.
Such amounts have been  accounted for in accordance  with  Statement of Position
98-1  "Accounting for the Costs of Computer  Software  Developed or Obtained for
Internal  Use" and  Emerging  Issues  Task  Force  pronouncement  ("EITF")  00-2
"Accounting  for Web Site  Development  Costs".  Such costs are  amortized  on a
straight-line basis over three years, commencing when the related asset has been
substantially placed in service.

Goodwill and other intangible assets

Statement of Financial  Accounting  Standards  ("SFAS") 142, "Goodwill and Other
Intangible  Assets",  adopted by the Company effective October 1, 2001, provides
that  goodwill  is no  longer  amortized  but  is  reviewed  annually  (or  more
frequently if impairment  indicators  arise) for  impairment.  Other  intangible
assets,  such as customer lists,  continue to be amortized to expense over their
estimated useful lives, although they are still subject to review and adjustment
for impairment.

The Company  reviews its  long-lived  assets for impairment  whenever  events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be  recoverable.  The  Company  assesses  the  recoverability  of such assets by
comparing  the estimated  undiscounted  cash flows  associated  with the related
asset or group of assets against their respective  carrying amounts.  The amount
of an  impairment,  if any, is  calculated  based on the excess of the  carrying
amount over the fair value of those assets.

See Note 2 - Goodwill and other Acquisition-Related Intangible Assets.

Revenue Recognition

Revenues  from sales of goods and services are  recognized  when (i)  persuasive
evidence of an arrangement between the Company and the customer exists, (ii) the
good or  service  has been  provided  to the  customer,  (iii)  the price to the
customer is fixed or determinable and (iv) collectibility of the sales prices is
reasonably assured.

The Digital Asset  Management  Group  recognizes  revenues from the acquisition,
editing,  transcoding,  indexing,  storage and  distribution  of its  customers'
digital  media.  The  customer  charges are  generally  based on the activity or
volume  of  such  media,  expressed  in  megabytes  or  similar  terms,  and are
recognized at the time the service is  performed.  Fees charged to customers for
customized  applications  or set-up  are  recognized  as revenue at the time the
application or set-up is completed.

The EDNet division of the Digital Asset Management Group generates revenues from
customer  usage of digital  telephone  connections  controlled  by the  Company,
bridging services and the sale of equipment. The Company purchases digital phone
lines  from  telephone  companies  and  sells  access to the  lines,  as well as
separate  per-minute  usage  charges.  Network  usage and  bridging  revenue  is
recognized based on the timing of the customer's use of those services.

                                      F-12
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005



NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition (Continued)

The equipment EDNet sells is various audio codecs and video  transport  systems.
The audio codecs and video  transport  systems  enable  customers to collaborate
with other companies or with other locations. As such, revenue is recognized for
the sale of  equipment  when the  equipment  is  installed  or upon signing of a
contract after a free trial period.  All sales are final and there are no refund
rights or rights of return. The Company leases some equipment to customers under
terms that are accounted for as operating leases.  Rental revenue from leases is
recognized  ratably  over the life of the lease  and the  related  equipment  is
depreciated over its estimated useful life. All leases of the related  equipment
contain fixed terms.

The Webcasting Group recognizes  revenue from live and on-demand webcasts at the
time an event is accessible for streaming over the Internet. Webcasting services
are  provided to  customers  using the  Company's  proprietary  streaming  media
software, tools and processes.  Customer billings are typically based on (i) the
volume of data streamed at rates agreed upon in the customer  contract or (ii) a
set monthly fee. Since the primary  deliverable  for the  webcasting  group is a
webcast,  returns are  inapplicable.  If the Company has difficulty in producing
the webcast,  it may reduce the fee charged to the customer.  Historically these
reductions have been immaterial, and are recorded in the month the event occurs.

Services  for live  webcast  events  are  usually  sold for a single  price that
includes on-demand  webcasting services in which the Company hosts an archive of
the webcast  event for future access on an on-demand  basis for periods  ranging
from one month to one year. However, on-demand webcasting services are sometimes
sold separately without the live event component and the Company has referred to
these separately billed transactions as verifiable and objective evidence of the
amount of its revenues related to on-demand services.  In addition,  the Company
has determined that the material portion of all views of archived  webcasts take
place within the first ten days after the live webcast.

Based on its review of the above  data,  the  Company  has  determined  that the
material  portion  of  its  revenues  for  on-demand   webcasting  services  are
recognized  during  the  period in which  those  services  are  provided,  which
complies with the provisions of Staff  Accounting  Bulletin  ("SAB") No. 101 and
SAB  104,  "Revenue  Recognition",  and  EITF  00-21,  "Accounting  for  Revenue
Arrangements with Multiple  Elements".  Furthermore,  the Company has determined
that the  maximum  potentially  deferrable  revenue  from  on-demand  webcasting
services  charged  for but not  provided  as of  September  30, 2005 and 2004 is
immaterial in relation to the Company's recorded liabilities.

The Webcasting  Group  recognizes a portion of their travel contract  revenue at
the time of completion of video production  services with the remaining  revenue
recognized  over the term of the contract.  Per hit charges are recognized  when
users watch a video on the  Internet.  Fixed  monthly fees are  recognized  on a
monthly basis consistent with the terms of the contract. Commissions on bookings
are recognized when the stays are completed.

Deferred revenue represents amounts billed to customers for webcasting, EDNET or
digital asset management  services to be provided in future accounting  periods.
As projects or events are completed and/or the services provided, the revenue is
recognized.

Comprehensive Income or Loss

The  Company  has no  components  of other  comprehensive  income  or loss,  and
accordingly, net loss equals comprehensive loss for all periods presented.


                                      F-13

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Advertising and marketing

Advertising  and marketing  costs,  which are charged to operations as incurred,
were  approximately  $204,000 and $13,000 for the years ended September 30, 2005
and 2004, respectively.

Derivatives

The  Company  accounts  for  non-hedging  contracts  that are  indexed  to,  and
potentially  settled in, its own common stock in accordance  with the provisions
of EITF 00-19,  "Accounting for Derivative Financial Instruments Indexed to, and
Potentially  Settled in, a Company's  Own Stock".  These  non-hedging  contracts
accounted for in accordance  with EITF 00-19  include  freestanding  warrants to
purchase the Company's common stock as well as embedded conversion features that
have been  bifurcated  from the host financing  contract in accordance  with the
requirements  of SFAS 133,  "Accounting  for Derivative  Instruments and Hedging
Activities".  Under  certain  circumstances  that could  require  the Company to
settle these equity items in cash or stock,  and without regard to  probability,
EITF 00-19  could  require  the  classification  of all or part of the item as a
liability and the adjustment of that  reclassified  amount to fair value at each
reporting date, with such  adjustments  reflected in the Company's  statement of
operations.

Income Taxes

As part of the process of preparing our consolidated  financial statements,  the
Company is required to estimate its income taxes in each of the jurisdictions in
which it  operates.  This  process  involves  estimating  current  tax  exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting  purposes.  These differences result in deferred
tax assets and liabilities, which are included within the Company's consolidated
balance sheet.  The Company then assesses the  likelihood  that the deferred tax
assets  will be  recovered  from  future  taxable  income  and to the  extent it
believes that recovery is not likely, it establishes a valuation  allowance.  To
the extent  the  Company  establishes  a  valuation  allowance  or changes  this
allowance  in a period,  it  includes  an  expense  or a benefit  within the tax
provision in the Company's statement of operations.

The Company has approximately  $59.0 million in net operating loss carryforwards
at of September 30, 2005,  which expire in 2011 through 2025. The utilization of
approximately  $16.0 million of the net operating  loss  carryforward,  acquired
from the 2001  acquisition of EDNET and the 2002 acquisition of MOD and included
in this  total,  against  future  taxable  income  may be limited as a result of
ownership changes and other  limitations.  The Company also has an approximately
$3.5 million capital loss carryforward which expires in 2008.


                                      F-14

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes (continued)

Significant  judgment is required in  determining  the  Company's  provision for
income  taxes,  its  deferred  tax  assets  and  liabilities  and any  valuation
allowance recorded against those deferred tax assets. The Company has a deferred
tax  asset of  approximately  $22.2  million  primarily  resulting  from the net
operating  loss  carryforwards.  A full  valuation  allowance  has been recorded
related  to the  deferred  tax asset due to the  uncertainty  of  realizing  the
benefits of certain net operating  loss  carryforwards  before they expire.  The
valuation allowance is based on the Company's  historical taxable income and its
estimates of future taxable income in each jurisdiction in which it operates and
the period over which its  deferred tax assets will be  recoverable.  Management
will  continue  to assess the  likelihood  that the  deferred  tax asset will be
realizable and the valuation allowance will be adjusted accordingly.

Accordingly,  no  income  tax  benefit  has been  recorded  in the  accompanying
consolidated  statement  of  operations  as a result  of the net tax  losses  of
approximately  $1.8 million and $2.9 million for the years ended  September  30,
2005 and 2004,  respectively.  The primary  differences between the net loss for
book and tax purposes are the following items expensed for book purposes but not
deductible  for  tax  purposes  -  amortization  of  customer  lists,  valuation
allowance  of  goodwill,  losses  on an equity  basis  from  Acquired  Onstream,
inventory and  receivable  reserves,  and expenses for stock  options  issued in
payment for  consulting  and other  professional  fees but not  exercised by the
recipients.  In addition,  the amount of  depreciation  expense  allowed for tax
purposes   currently   exceeds  the   depreciation   expense  on  the  Company's
consolidated financial statements. There are no significant cumulative temporary
differences as of September 30, 2005.

Net Loss Per Share

For the years ended  September 30, 2005 and 2004, net loss per share is based on
the  weighted  average  number  of shares of  common  stock  outstanding,  which
includes the effect of 606,000  penalty shares that the Company was obligated to
issue  through June 29, 2005,  and did issue on such date,  under the terms of a
convertible debenture agreement- see Note 6.

Since  the  effect of  common  stock  equivalents  was  anti-dilutive,  all such
equivalents  were excluded from the calculation of net loss per share. The total
outstanding options and warrants,  which have been excluded from the calculation
of net loss per share,  were  15,114,093 and 1,134,274 at September 30, 2005 and
2004, respectively, which includes contingent warrants - see Notes 4 and 8.

In  addition,  the  potential  dilutive  effects  of the  following  convertible
securities  outstanding  at  September  30,  2005  have been  excluded  from the
calculation of net loss per share: (i) 416,031 shares of Series A-10 Convertible
Preferred Stock ("Series A-10") which could  potentially  convert into 4,160,310
shares of our common stock and (ii)  $3,820,000  of senior  secured  convertible
notes  ("8%  Convertible  Debentures")  which  could  potentially  convert  into
3,820,000 shares of our common stock.



                                      F-15
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


Stock Compensation

The Company has a stock based  compensation plan for its employees (the "Plan").
The Company has elected to continue using  Accounting  Principles  Board Opinion
("APB") 25,  "Accounting  for Stock  Issued to  Employees,"  in  accounting  for
employee  stock  options.   The  following   table   summarizes  the  pro  forma
consolidated results of operations of the Company as though the fair value based
accounting method in "Accounting for Stock-Based  Compensation" ("SFAS 123") had
been used in  accounting  for  employee  options  issued  within the Plan ("Plan
Options") and outside the Plan ("Non-Plan Options").

                                               For the years ended
                                                  September 30,
                                           ----------------------------
                                               2005            2004
                                           ------------    ------------
Net loss, as reported                      $ (9,637,888)   $ (3,972,666)
Total stock based compensation expense *     (2,401,720)       (532,610)
                                           ------------    ------------
Pro forma net loss                         $(12,039,608)   $ (4,505,276)
                                           ============    ============
Net loss per share - basic and diluted:
    Net loss per share, as reported        $      (1.17)   $      (0.92)
                                           ------------    ------------
    Net loss per share, pro forma          $      (1.46)   $      (1.04)
                                           ------------    ------------

* Total stock based  compensation  expense is  determined  by applying  the fair
value based method for all employee awards, net of tax.

The fair value of each option  granted is  estimated  on the date of grant using
the Black-Scholes model with the following  assumptions:  expected volatility of
44% to 65%,  risk-free  interest  rate of 6.25%,  expected  dividends  of $0 and
expected term is the full term of the related option, ranging from 4 to 5 years.

In December 2004, the Company issued 1,350,000 Non-Plan Options to directors and
management as additional  compensation  for the closing of the Onstream  Merger,
which it accounted  for in  accordance  with APB 25. The  compensation  value of
these options,  approximately  $1.0 million,  is included in the above table for
the year ended  September  30, 2005,  as it is considered to be an internal cost
associated  with a business  combination,  which is expensed in accordance  with
SFAS 141, "Business Combinations". See Note 2.

The Company has granted Non-Plan Options to consultants and other third parties.
These options have been accounted for under SFAS 123, under which the fair value
of the  options at the time of their  issuance  is  reflected  in the  Company's
consolidated  financial  statements  and  expensed  at  the  time  the  services
contemplated by the options are provided to the Company.

 In December  2004,  the FASB issued SFAS 123R,  "Share-Based  Payments",  which
requires  all  companies  to  measure  compensation  cost  for  all  share-based
payments,  including  employee stock options,  at fair value. In April 2005, the
Securities and Exchange Commission ("SEC") made certain changes to the effective
dates of SFAS 123R.  SFAS 123R,  as amended by the SEC, is effective  for public
companies for the first interim or annual period of their fiscal year  beginning
after June 15, 2005, except small business issuers (as defined in SEC Regulation
S-B),  for which it is  effective  for the first  fiscal  year  beginning  after
December 15, 2005.  The Company is in the process of  determining  the impact of
this statement on its consolidated financial statements, although our ability to
quantify the future  impact is limited due to the lack of our ability to predict
future  share-based  payments and the potential  variability  of these  payments
between accounting periods.

See Note 8 for additional information related to all stock option issuances.


                                      F-16
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005



NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Employee 401(k) plan

The Company's 401(k) plan, the Onstream Media Corporation 401(k) Retirement Plan
and Trust (the  "Plan"),  is available to all  full-time  employees and provides
them with tax deferred  salary  reductions and  alternative  investment  options
(directly solely by the employees).  Employees may contribute a portion of their
salary,  subject to certain limitations,  including an annual maximum of $14,000
for employees  under 50 years of age and $18,000 for employees  over 50 years of
age. The Company matches  employees'  contributions to the Plan, up to the first
8% of eligible compensation,  at a 25% rate. The Company's matching contribution
was approximately $38,000 and $25,000 for the years ended September 30, 2005 and
2004,  respectively.  The Company expensed  approximately  $28,000 and $8,000 in
those fiscal  years,  respectively,  with the  remaining  amounts of $10,000 and
$17,000.,  respectively,  satisfied by amounts  previously funded by the Company
but forfeited by terminated employees.  The Company's  contributions to the Plan
vest over five years.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
presentation.





















                                      F-17

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Effects of Recent Accounting Pronouncements

In November  2004, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting Standards ("SFAS") 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4. The amendments made by SFAS 151 clarify that
abnormal amounts of idle facility expense,  freight,  handling costs, and wasted
materials (spoilage) should be recognized as current-period  charges and require
the allocation of fixed  production  overheads to inventory  based on the normal
capacity of the production  facilities.  The guidance is effective for inventory
costs  incurred  during  fiscal years  beginning  after June 15,  2005.  Earlier
application  is permitted  for  inventory  costs  incurred  during  fiscal years
beginning after November 23, 2004. . The Company has evaluated the impact of the
adoption of SFAS 151, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets, an
amendment of APB 29,  Accounting for Nonmonetary  Transactions."  The amendments
made by SFAS 153 are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. Further, the
amendments  eliminate the narrow exception for nonmonetary  exchanges of similar
productive  assets and  replace it with a broader  exception  for  exchanges  of
nonmonetary  assets that do not have commercial  substance.  Previously,  APB 29
required that the accounting for an exchange of a productive asset for a similar
productive  asset or an  equivalent  interest in the same or similar  productive
asset should be based on the recorded amount of the asset  relinquished.  APB 29
provided  an  exception  to its basic  measurement  principle  (fair  value) for
exchanges  of  similar  productive  assets.  The FASB  believes  that  exception
required that some nonmonetary exchanges,  although commercially substantive, be
recorded on a carryover  basis. By focusing the exception on exchanges that lack
commercial  substance,  the FASB believes SFAS 153 produces financial  reporting
that more faithfully  represents the economics of the transactions.  SFAS 153 is
effective for nonmonetary asset exchanges  occurring in fiscal periods beginning
after June 15, 2005.  Earlier  application  is permitted for  nonmonetary  asset
exchanges occurring in fiscal periods beginning after the date of issuance.  The
provisions of this statement shall be applied  prospectively.  The Company is in
the process of  determining  the impact of this  statement  on its  consolidated
financial statements.

 In December 2004, the FASB issued SFAS 123R, "Share-Based  Payments",  which is
discussed in this Note 1 above, under "Stock compensation".

In March 2005, the FASB issued FASB  Interpretation  ("FIN") 47, "Accounting for
Conditional  Asset  Retirement  Obligations",  which  clarifies  that  the  term
"conditional asset retirement  obligations" as used in SFAS 143, "Accounting for
Asset Retirement Obligations",  refers to a legal obligation to perform an asset
retirement  activity  in which the timing  and/or the method of  settlement  are
conditional  on a future  event that may or may not be within the control of the
entity.  This uncertainty  should be factored into measurement of the liability,
based on  guidance  provided  in FIN 47. FIN 47 is  effective  for fiscal  years
ending  after  December  15, 2005 and adoption by the Company is not expected to
have a  material  impact to the  Company's  overall  results  of  operations  or
financial position.



                                      F-18

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Effects of Recent Accounting Pronouncements (Continued)

In  June  2005,  the  FASB  issued  SFAS  154,  "Accounting  Changes  and  Error
Corrections",  which replaced APB Opinion 20,  "Accounting  Changes" and SFAS 3,
"Reporting Accounting Changes in Interim Financial Statements". SFAS 154 changes
the  requirements  for the accounting and reporting of a change in an accounting
principle.  APB 20 required that most voluntary changes in accounting  principle
be  recognized by including  the  cumulative  effect of the new principle in net
income  for the  period  of the  change.  SFAS  154 now  requires  retrospective
application  of changes in an  accounting  principle to prior  period  financial
statements,  unless it is impracticable to determine the necessary  information.
SFAS 154 is effective  for fiscal years  beginning  after  December 15, 2005 and
adoption  by the  Company  is not  expected  to have a  material  impact  to the
Company's overall results of operations or financial position.

In June 2005,  the Emerging  Issues Task Force ("EITF")  issued EITF 05-2,  "The
Meaning of Conventional  Convertible  Debt Instrument in Issue No. 00-19".  EITF
05-2 retained the definition of a conventional  convertible  debt  instrument as
set forth in EITF 00-19, and which is used in determining  certain exemptions to
the accounting  treatments prescribed under SFAS 133, "Accounting for Derivative
Instruments  and Hedging  Activities".  EITF 05-2 also  clarified  that  certain
contingencies  related  to the  exercise  of a  conversion  option  would not be
outside  the  definition  of  "conventional"  and  determined  that  convertible
preferred stock with a mandatory  redemption date would also qualify for similar
exemptions if the economic  characteristics of the preferred stock are more akin
to debt than equity. EITF 05-2 is effective for new instruments entered into and
instruments  modified  in periods  beginning  after June 29, 2005 We adopted the
provisions of EITF 05-2 on July 1, 2005, which did not have a material effect on
our financial  statements.  However, see Notes 4 and 5 related to classification
of certain  amounts  related to  detachable  warrants  and  embedded  conversion
features  as a  liability  as of  September  30,  2005,  which  was based on our
application of EITF 00-19 as well as other authoritative literature.

In July 2005,  the FASB issued FASB Staff Position  ("FSP")  150-5,  "Accounting
Under  SFAS 150 for  Freestanding  Warrants  and Other  Similar  Instruments  on
Redeemable  Shares".  FSP 150-5  clarifies  that  warrants  on  shares  that are
redeemable or puttable immediately upon exercise and warrants on shares that are
redeemable  or puttable  in the future  qualify as  liabilities  under SFAS 150,
regardless of the redemption  feature or redemption  price. The FSP is effective
for the first  reporting  period  beginning  after June 30, 2005, with resulting
changes to prior  period  statements  reported  as the  cumulative  effect of an
accounting  change in accordance with the transition  provisions of SFAS 150. We
adopted  the  provisions  of FSP  150-5 on July 1,  2005,  which  did not have a
material  effect on our  financial  statements.  However,  see Note 4 related to
classification  of certain amounts  related to detachable  warrants and embedded
conversion  features as a liability as of September 30, 2005, which was based on
our application of SFAS 150 as well as other authoritative literature.

In July 2005, the FASB issued EITF 05-6,  "Determining the  Amortization  period
for  Leasehold  Improvements  Purchased  After Lease  Inception or Acquired in a
Business  Combination",  which addressed the  amortization  period for leasehold
improvements made on operating leases acquired significantly after the beginning
of the lease. The EITF is effective for leasehold  improvements  made in periods
beginning after June 29, 2005. We adopted the provisions of EITF 05-6 on July 1,
2005,  which did not have a material impact to the Company's  overall results of
operations or financial position.





                                      F-19

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS

Information regarding the Company's intangible assets is as follows:

<TABLE>
<CAPTION>
                                               September 30, 2005                         September 30, 2004
                             --------------------------------------------   --------------------------------------------
                                Gross                                         Gross
                               Carrying      Accumulated      Net Book       Carrying       Accumulated       Net Book
                                Amount       Amortization       Value         Amount        Amortization       Value
                             ------------    ------------    ------------   ------------    ------------    ------------
<S>                          <C>             <C>             <C>            <C>             <C>             <C>
Goodwill-Acquired Onstream   $  8,421,401    $       --      $  8,421,401   $       --      $       --      $       --
Goodwill - EDNet                1,271,444            --         1,271,444      1,601,444            --         1,601,444
Customer Lists - MOD            3,071,722      (2,303,791)        767,931      3,071,722      (1,689,447)      1,382,275
Customer Lists - Virage           332,000        (182,170)        149,830        332,000         (68,779)        263,221
                             ------------    ------------    ------------   ------------    ------------    ------------

                             $ 13,096,567    $ (2,485,961)   $ 10,610,606   $  5,005,166    $ (1,758,226)   $  3,246,940
                             ============    ============    ============   ============    ============    ============
</TABLE>

On  October  22,  2003 the  Company  executed  an  agreement  and plan of merger
agreement with privately held Acquired  Onstream to acquire the remaining 74% of
Acquired Onstream not already owned by the Company.  On December 23, 2004, after
approval  by a majority  of the  Company's  shareholders  in a duly  constituted
meeting,  Acquired  Onstream  was merged with and into OSM  Acquisition  Inc., a
Delaware  corporation and the Company's  wholly owned  subsidiary (the "Onstream
Merger").  At that time, all  outstanding  shares of Acquired  Onstream  capital
stock and options not already owned by the Company were converted into 2,207,966
shares of the ONSM  restricted  common stock and 463,554 options and warrants to
purchase  ONSM  common  stock at an  exercise  price of  $3.376  per  share.  An
investment  banking firm issued a fairness opinion regarding this transaction to
the Company's board of directors.

Acquired Onstream was a development stage company founded in 2001 that began the
development of a feature rich digital asset  management  service,  offered on an
application  service  provider  ("ASP") basis,  to allow  corporations to better
manage  their  digital  rich media  without  the major  capital  expense for the
hardware,  software and  additional  staff  necessary to build their own digital
asset management  solution.  This new product (the "Onstream Media Platform") is
being  designed and managed by Science  Applications  International  Corporation
("SAIC"), one of the country's foremost IT security firms, providing services to
all branches of the federal government as well as leading corporations.

The  summarized  balance sheet of Acquired  Onstream as of the December 23, 2004
Onstream  Merger is as follows,  showing the fair values assigned by the Company
to Acquired  Onstream's  assets and  liabilities in accordance with SFAS 141 and
recorded by the Company at that time.

         Cash and other current assets                  $     36,059
         Property and equipment                            2,667,417
                                                        ------------
         Total assets                                   $  2,703,476
                                                        ============

         Accounts payable and accrued expenses          $    814,739
         Notes payable and capitalized lease                 335,179
                                                        ------------
         Total liabilities                                 1,149,918
         Shareholder's equity                              1,553,558
                                                        ------------
         Total liabilities and shareholder's equity     $  2,703,476
                                                        ============

                                      F-20

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)

Property and equipment in the above table  represents  the  partially  completed
Digital Media Services Platform ("DMSP"), primarily Acquired Onstream's payments
to its vendors SAIC, Virage, North Plains and Nine Systems. This was the primary
asset  included in the purchase of Acquired  Onstream,  and was recorded at fair
value as of the December 23, 2004  closing,  in  accordance  with SFAS 141 - see
Note 3. The fair value, determined by an independent third party appraiser,  was
primarily based on the discounted projected cash flows related to this asset for
the next five years,  as projected  by the  Company's  and  Acquired  Onstream's
management on a stand-alone  basis without  regard to the Onstream  Merger.  The
discount  rate  utilized by the  independent  third party  appraiser  considered
equity risk factors  (including  small stock risk and bridge/IPO  stage risk) as
well as risks associated with  profitability  and working capital,  competition,
and intellectual  property. The projections were adjusted for charges related to
fixed assets, working capital and workforce retraining.

The $8,421,401 excess included in the $9,974,959 (see below) paid by the Company
for 100% of Acquired  Onstream over  $1,553,558 (the fair values assigned to the
tangible and intangible  assets,  net of liabilities at fair value) was recorded
by the Company as goodwill, subject to regular future valuations and adjustments
as required by SFAS 142. The Company's  management performed internal valuations
of  this  goodwill  as of  December  31,  2004  and as of  September  30,  2005,
determining  that no  impairment  existed  as of  those  dates.  These  internal
valuations were performed on a basis consistent with the valuations of EDNET and
MOD in conjunction  with the September 30, 2005 and 2004  financial  statements.
The  Company  anticipates  that its next  evaluation  of the  Acquired  Onstream
goodwill and other  intangible  assets will be performed in connection  with its
December 31, 2005 financial statements and at least annually thereafter.  In the
event that it is  determined  that the  Company  will be unable to  successfully
complete,  produce,  market, or sell the DMSP, an impairment charge reflected in
the Company's statement of operations could result at that time.

Accounts  payable of $435,000 was comprised of amounts due to SAIC, North Plains
and other  vendors,  which have been paid by the Company as of April 1, 2005 and
therefore the carrying values were  determined to be a reasonable  approximation
of fair value.

Accrued  expenses  included  $362,000  of salary  and  expenses  due to  Company
shareholders  and officers,  who were major  shareholders in Acquired  Onstream.
This amount is after  reduction  for $200,000 paid by the Company at the time of
the Onstream Merger and the repayment of these  remaining  amounts is subject to
mutual agreement by the Company and the officers. Therefore, the carrying values
were determined to be a reasonable  approximation of fair value. $100,000 of the
remaining amount was paid by the Company in February 2005.

A note  payable  of  $181,500  bearing  interest  was  repaid by the  Company in
February  2005 and therefore  the carrying  value plus the interest  included in
accrued  expenses is determined to be a reasonable  approximation of fair value.
The   capitalized   lease   liability  of  $153,000   bears  interest  at  rates
approximating market - see notes 4 and 5.

The $9,974,959 paid by the Company for 100% of Acquired Onstream,  was comprised
of the following:

$6,623,898  - the value of 2,207,966  shares of ONSM  restricted  common  stock,
issued in exchange for all outstanding shares of Acquired Onstream capital stock
and options not already  owned by the Company as of December 23, 2004 and valued
based on the  Company's  share value of $3.00 on October 22, 2003,  the date the
Company executed the merger agreement for the remaining 74% of Acquired Onstream
not already owned by the Company,  such valuation date established in accordance
with the requirements of SFAS 141.

                                      F-21
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005



NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)

$688,000 - the value of 462,073  options and  warrants  to purchase  ONSM common
stock at an exercise  price of $3.376 per share,  valued  based on  Black-Sholes
methodology.

$402,563 - the carrying value of the Company's  investment in Acquired  Onstream
prior to the Onstream Merger, comprised of prior investments of $950,000 in cash
and stock,  reduced by $547,437  representing  the  Company's  share of Acquired
Onstream  operating  losses,  accounted  for by the Company on the equity  basis
through December 23, 2004.

In March 2003, the Company increased its initial $200,000 investment in Acquired
Onstream  by  an  additional   $750,000  through  the  issuance  of  Series  A-7
Convertible Preferred Stock. At that time, the Company appointed two of the four
members of the Acquired Onstream board of directors and began to account for its
investment  in  Acquired  Onstream  under the equity  method.  Included in other
income and expense  for the nine months  ended June 30, 2005 and 2004 are losses
of   approximately   $100,000  and  $223,000,   respectively,   which  represent
approximately 28% of Acquired Onstream's net loss for those periods.  The equity
method of accounting was discontinued after the Onstream Merger.

$2,098,832 - Cash and other  advances made to or on behalf of Acquired  Onstream
prior to the Onstream Merger,  including the Company's payment of $1,477,438 for
principal and interest on Acquired Onstream's note payable to Virage, guaranteed
by the Company.

$161,666 - Direct costs of the Acquired Onstream purchase,  including a fairness
opinion from an investment banking firm.

The Company also issued  common stock  options to directors  and  management  as
additional  compensation  for the Onstream Merger - see "stock  compensation" in
Note 1.

The carrying value of the Company's investment in Acquired Onstream at September
30, 2004 was $502,589,  included in the balance sheet caption other  non-current
assets.  Also  included in other  non-current  assets at that date was  $642,671
advanced from the Company to or on behalf of Acquired Onstream.

The following table sets forth the unaudited pro-forma  consolidated  results of
operations for the years ended September 30, 2005 and 2004, giving effect to the
Onstream  Merger,  as if the acquisition had occurred as of the beginning of the
periods presented:

                                           For the years ended
                                              September 30,
                                      ---------------------------
                                          2005           2004
                                              (unaudited)

Revenue                               $  8,166,469    $ 7,584,118
                                      ============    ===========
Net loss                              $ (8,267,456)   $(5,514,915)
                                      ============    ===========
Net loss applicable to common stock   $ (9,363,187)   $(6,533,809)
                                      ============    ===========
Net loss per common share             $      (0.94)   $     (0.81)
                                      ============    ===========
Net loss applicable to common stock
  per common share                    $      (1.06)   $     (0.96)
                                      ============    ===========

                                      F-22
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)

The above pro-forma  numbers include the effects of the $6.5 million in debt and
equity  financing  discussed  in  Notes  4 and 6,  since  that  financing  was a
condition  of the  Onstream  Merger.  The  effect  of  including  the  pro-forma
adjustments for this financing  decreases the pro-forma net loss presented above
by approximately  $1,629,000 for the year ended September 30, 2005 and increases
the pro-forma net loss presented  above by  approximately  $477,000 for the year
ended September 30, 2004. The difference  between the pro-forma net loss and the
pro-forma  net loss  applicable  to common stock as presented  above is entirely
related to the  inclusion  of the  effects  of the  equity  portion of this $6.5
million financing.

EDNet, which is part of the Digital Asset Management Group, was purchased by the
Company in June 2001. MOD, which is part of the Webcasting  Group, was purchased
by the Company in February 2002. In February 2004, the Company  acquired certain
assets and licensed  certain  software from Virage,  Inc.,  which operations are
part of the Digital Asset Management  Group. The  consideration was (i) $400,000
cash upon closing and (ii) a convertible secured note payable of $206,250, which
was repaid on June 21, 2004. The Company  determined  that the purchase is not a
"significant" transaction under Regulation S-B.

SFAS 142,  Goodwill and Other Intangible  Assets,  which addresses the financial
accounting  and  reporting  standards for goodwill and other  intangible  assets
subsequent to their acquisition,  requires that goodwill no longer be amortized,
and instead, be tested for impairment on a periodic basis. The Company performed
impairment tests on the two reporting units, the Webcasting Group and EDNet (the
previous  Networking  Solutions Group). The Company,  assisted by an independent
third  party  appraiser,  assessed  the fair  value of the net assets of each of
those  reporting  units by  considering  the  projected  cash flows of those two
groups and by analysis of comparable  companies,  including  such factors as the
relationship of the comparable  companies'  revenues to their respective  market
values.  Based on these  factors,  the  Company  reduced the  carrying  value of
EDNet's net assets by $330,000 and $470,000  for the years ended  September  30,
2005 and 2004,  respectively.  The valuations of EDNet and the Webcasting  Group
incorporate  management's  estimates of sales growth,  which sales estimates are
dependent  on the  effect of the  introduction  of the DMSP,  which is yet to be
realized.  The  Company  also  concluded  that  there was no  impairment  of the
Webcasting Group's net assets for the years ended September 30, 2005 and 2004.

The Company is required to perform reviews for impairment in future periods,  at
least  annually,  that may  result in  future  periodic  write-downs.  Tests for
impairment between annual tests may be required if events occur or circumstances
change that would more likely than not reduce the fair value of the net carrying
amount.

Amortization  expense  of the  customer  lists was  approximately  $728,000  and
$683,000  for the  years  ended  September  30,  2005  and  2004,  respectively.
Estimated amortization expense for future fiscal years is as follows:

         For the fiscal year ended September 30,
         2006                                    $   728,000
         2007                                        190,000
                                                 -----------
                                                 $   918,000
                                                 ===========

As of September 30, 2004,  the Company owned  preferred  shares  representing  a
minority  interest in Curaspan,  Inc.  having an original cost of  approximately
$108,000.  This  investment  was  fully  reserved  since  2002  as a  result  of
Curaspan's   continuing  operating  losses  and  negative  financial  condition.
However,  on August 5, 2005 the Company sold those preferred  shares to Curaspan
for $50,000 cash and a $150,000  note from  Curaspan,  payable in equal  monthly
installments over 2 years at 6% interest,  commencing  October 4, 2005. The note
is collateralized by Curaspan's assets, subordinate to a lending bank's interest
in certain of those assets. In addition,  the preferred shares are being held in
escrow and will be returned to the  Company in the event of  Curaspan's  uncured
default  under  the note.  Due to  Curaspan's  continued  operating  losses  and
negative financial condition,  proceeds from this sale will be recognized by the
Company as other income on a cash basis as received. All scheduled payments have
been made through January 4, 2006.

                                      F-23
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 3:  PROPERTY AND EQUIPMENT

Property and  equipment,  including  equipment  acquired  under capital  leases,
consists of:

<TABLE>
<CAPTION>
                                    September 30,    September 30,
                                    ------------    ------------      Useful Lives
                                        2005            2004            (Years)
                                    ------------    ------------   ---------------
<S>                                 <C>             <C>           <C>
Equipment and Software              $  7,178,929    $  6,530,075             1-5
DMSP                                   3,503,879            --                 3
Travel video library                   1,368,112       1,368,112               2
Furniture and fixtures                   231,905         219,373             5-7
Capitalized internal use software        385,985         113,794               3
Leasehold improvements                   234,988         243,833               5
                                    ------------    ------------
                                      12,903,798       8,475,187
Less:  Accumulated depreciation
         and amortization             (8,093,921)     (7,730,131)
                                    ------------    ------------

Net book value                      $  4,809,877    $    745,056
                                    ============    ============
</TABLE>

Depreciation  and  amortization  of  property  and  equipment  included  in  the
statements of operations amounted to approximately $413,000 and $675,000 for the
years ended September 30, 2005 and 2004, respectively.

The DMSP is  comprised  of four  separate  "products",  only  two of which  were
available on an individual  basis at the time of the Onstream  Merger.  The four
separate   products  are   transcoding,   storage,   search  and  retrieval  and
distribution.  Effective April 29, 2005, all four products were accessible on an
integrated  basis via an SAIC designed  interface using North Plains  technology
and  incorporating  security  features  available through SAIC. The DMSP has not
been  depreciated as of September 30, 2005. A limited version of the DMSP, which
included  three  of  the  four  products,  was  first  placed  in  service  with
third-party  customers  in  November  2005.  See Note 2  regarding  the  initial
purchase of this asset from  Acquired  Onstream  and Note 5  regarding  the SAIC
contract.

On May 18, 2005 the Company agreed to sell its travel video library,  as well as
all rights  associated with that library,  including the customer  contracts and
the  related   websites,   for   $455,000.   The  Company   received  a  $50,000
non-refundable deposit at the time of the initial agreement,  with the remaining
balance due upon closing,  originally  anticipated to be no later than September
2005. As part of the sale, the buyer also agreed to pay the Company  $15,000 per
month for a three-year  period,  in exchange for hosting and streaming  services
for the travel  video  library and similar  content  obtained  elsewhere  by the
buyer.  On September 23, 2005 the buyer filed a legal action against the Company
alleging  that the  Company  did not  deliver  the assets as agreed and  seeking
return of the $50,000  deposit plus  reimbursement  of unspecified due diligence
expenses,  attorney fees and interest.  On December 4, 2005, the Company filed a
response  objecting  to all claims by the buyer,  which it believes  are without
merit.  The Company has not refunded the deposit,  which is included in deferred
revenue as of September 30, 2005. The Company does not believe that the ultimate
resolution of this matter will have a material impact on its financial condition
or results of operations.  Pending closing of this transaction,  the Company had
the right to continue, and has continued, its travel production and distribution
operations.  The cost of the travel  video  library is fully  depreciated  as of
September  30,  2005  and the  associated  travel  production  and  distribution
revenues were $208,177 and $251,232, respectively, for the years ended September
30, 2005 and 2004.

                                      F-24
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE

8% Convertible Debentures

On December 23, 2004,  the Company sold senior  secured  convertible  notes ("8%
Convertible  Debentures"),  which have a $1.00  conversion rate per common share
and include five-year  warrants to purchase  1,522,500 common shares of ONSM for
$1.65 per share,  to several  accredited  investors for gross  proceeds of $4.35
million. The 8% Convertible  Debentures are collateralized by a blanket security
interest in our assets and a pledge of the stock of our subsidiaries.

The 8% Convertible Debentures included an Additional Investment Right ("AIR") of
$2.175  million,  of which $2.050 million was exercised in February 2005 and the
remaining  $125,000 was exercised in April 2005. The debentures issued under the
AIR (the "Additional 8% Convertible  Debentures")  have  substantially  the same
terms  as the 8%  Convertible  Debentures,  although  additional  warrants  were
granted to induce the early exercise.  The Additional 8% Convertible  Debentures
included  five-year warrants to purchase 761,250 common shares of ONSM for $1.65
per share and one-year warrants to purchase  2,175,000 common shares of ONSM for
$1.00 per  share.  The  one-year  warrants  were  subject to the  approval  of a
majority of the Company's shareholders,  which was obtained at the September 13,
2005 shareholder  meeting, and at which time the one-year term of those warrants
began. In the event the one-year warrants are exercised,  the Company will issue
additional  five year warrants,  exercisable at $1.65 per share, to purchase 50%
of the  common  shares  of ONSM  acquired  upon  the  exercise  of the  one-year
warrants.

The  8%  Convertible   Debentures  contain  a  provision   requiring   mandatory
redemptions  of up to $1.0 million by June 2006,  with at least $500,000 of that
occurring by December 2005. These  redemption  amounts are reduced by the amount
of securities  converted into common shares before those dates.  As of September
30, 2005, $2,705,000 of 8% Convertible  Debentures,  plus accrued interest,  had
been  converted  into  2,725,659  common  shares.  Accordingly,  the  Company is
classifying the entire outstanding balance of the 8% Convertible Debentures as a
non-current  liability as of  September  30,  2005.  As of  September  30, 2005,
$3,820,000 of the 8%  Convertible  Debentures  (including  the AIR) had not been
converted. See Note 9 regarding conversions occurring after September 30, 2005.

The Company included the common shares underlying the 8% Convertible  Debentures
(including the AIR shares) on a registration statement declared effective by the
SEC on June 29, 2005.  Beginning on the date of such registration,  and provided
that the average  price  during at least 20 days of the 30-day  period  prior to
conversion exceeds $1.63 per share, all or part of the 8% Convertible Debentures
will  automatically  convert  to  common  shares,  the  dollar  amount of the 8%
Convertible  Debentures  being  converted based on a formula  incorporating  the
trading volume and share price of ONSM stock.  Beginning in September  2007, any
remaining  8%  Convertible  Debentures  will be paid  in  nine  equal  quarterly
installments.  All or  part of  these  installments  may be paid in ONSM  common
shares subject to a formula based on trading volume and share price and provided
that the volume weighted average share price during the quarter prior to payment
exceeds $1.18 per share.  However,  the number of shares  acquired by any holder
upon  conversion is limited so that following the conversion the total number of
shares owned by the holder does not exceed  9.999% of the  Company's  issued and
outstanding  stock.  The closing ONSM share price was $0.92 per share on January
11, 2006.

The 8%  Convertible  Debentures  and the  Additional 8%  Convertible  Debentures
provide cash penalties of 1% of the original  purchase price for each month that
(a) the  Company's  common  shares are not listed on the Nasdaq Small Cap Market
for a  period  of 3  trading  days or (b) the  common  shares  underlying  those
securities and the related  warrants are not saleable subject to an S-3 or other
registration  statement  then  effective  with the SEC. The latter  penalty only
applies for a five-year  period  beginning  with the June 29, 2005  registration
statement  effective  date and  does not  apply to  shares  saleable  under  the
provisions of Rule 144(k).

                                      F-25
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

8% Convertible Debentures (continued)

The $1.65  warrants  provide  that in the event the shares are not subject to an
effective registration statement at the time of exercise, the holder could elect
a "cashless exercise" whereby the Company would issue shares based on the excess
of the market price at the time of the exercise over the warrant exercise price.

The holders of the 8%  Convertible  Debentures and the Additional 8% Convertible
Debentures may be entitled to certain rescission rights - see Note 5.

Based on the  Company's  application  of EITF 00-19 and SFAS 133, it  determined
that the  existence  of the 1% per  month  penalties  for  lack of an  effective
registration  and/or listing for the company's  shares, as well as the "cashless
exercise"  option,  all discussed  above,  required that a portion of the amount
originally recorded as equity for the $1.00 warrants and the embedded conversion
feature in the 8% Convertible Debenture and Additional 8% Convertible Debenture,
as well as the  entire  value  recorded  in equity  for the $1.65  warrants,  be
classified as a current and non-current liability. Although the Company does not
believe that these actual  assessment of these  penalties is likely,  EITF 00-19
requires that the  accounting  for them be done without  regard to  probability.
These  amounts,  totaling  $3,017,168,  were also subject to the  accounting for
potential rescission, which is discussed in Note 5. EITF 00-19 requires that the
amount  recorded  as a liability  be  adjusted  to fair value at each  reporting
period.  Since the  Company  determined  that there was no  material  difference
between the original  amounts  recorded  for these items in aggregate  and their
fair value as of  September  30, 2005 in  aggregate,  there was no effect on the
statement of operations  related to this matter for the year ended September 30,
2005.

The  placement  agent  fees  and  direct  issue  costs  for  the 8%  Convertible
Debentures financing were approximately $336,000 in cash plus five-year warrants
to purchase  435,000 shares of ONSM common stock for $1.65 per share. The broker
dealer fees and legal expenses for the Additional 8% Convertible Debentures were
approximately  $57,500 plus warrants to purchase  217,500  shares of ONSM common
stock for $1.65 per share.

The  estimated  fair  value  of all  warrants  given in  connection  with the 8%
Convertible  Debentures  plus  the  value  of  the  8%  Convertible  Debentures'
beneficial  conversion  feature is $2,131,025,  which,  in accordance  with EITF
98-05  ("Accounting  for  Convertible   Securities  with  Beneficial  Conversion
Features") and EITF 00-27 ("Application of Issue No. 98-5 to Certain Convertible
Instruments"),  was allocated to additional  paid in capital and debt  discount.
The Company's management calculated the discount based primarily on its estimate
of the fair  value of the  warrants  as a  percentage  of the face  value of the
convertible securities. The estimate was based on the closing price of the stock
at the date of the agreement and the relationship to the conversion price of the
instrument  and the exercise  price of the warrants.  The debt  discount,  which
totals  $2,467,269  after  inclusion of other direct costs  associated  with the
financing, is being amortized to interest expense over the four year term of the
8% Convertible Debentures.  In addition, the unamortized portion of the discount
related to  converted  securities  is  expensed  as  interest at the time of the
conversion.

The  estimated  fair  value  of the  warrants  (including  warrants  subject  to
shareholder  approval and  contingent  warrants)  given in  connection  with the
Additional  8%  Convertible  Debentures  plus  the  value of the  Additional  8%
Convertible  Debentures'  beneficial conversion feature, plus other direct costs
associated  with the  financing,  exceed  the face  value of the  Additional  8%
Convertible  Debentures.  In  accordance  with EITF 98-05 and EITF 00-27,  which
limits the recorded  discount to the face value of the related debt,  $2,175,000
was  allocated  to  additional  paid in capital and debt  discount  and is being
amortized  to  interest  expense  over the four year term of the  Additional  8%
Convertible  Debentures.  In addition,  the unamortized  portion of the discount
related to  converted  securities  is  expensed  as  interest at the time of the
conversion.

                                      F-26
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

8% Convertible Debentures (continued)

The above transactions are summarized as follows through September 30, 2005:

         Initial gross proceeds                       $  6,525,000
         Less: conversions to common shares             (2,705,000)
         Less: initial discount                         (4,642,269)
         Plus: amortization of discount                  2,065,591
                                                      -------------
         8% Convertible Debentures, net of discount   $  1,243,322
                                                      ============


The interest on the Convertible  Debentures of 8% per annum is payable quarterly
in cash,  or  common  shares  (at 85% of the  market  price  per  share)  at the
Company's  option.  During the year ended September 30, 2005, the Company issued
267,248 common shares in lieu of the $310,427  interest  accrued and due through
that date.

Notes Payable

Notes payable consist of the following as of September 30:

<TABLE>
<CAPTION>
                                                                                    2005          2004
                                                                                -----------    -----------
<S>                                                                             <C>            <C>
Note  payable  to  affiliate  of a director  of the  Company,  with  original
   funding in August 2005                                                       $   300,000    $      --
Note payable to a major shareholder of the Company,  with original funding in
   September 2005                                                                   300,000           --
Capitalized software lease                                                          130,198
Note payable to major investor - The principal was paid with cash and stock
   in December 2004 and the interest was paid with stock in January 2005               --        3,119,875
Note  payable  to  affiliate of a director  of the  Company,  with  original
   funding in February  2004.  Interest was paid in advance and the principal
   balance was paid in full in December 2004                                           --          300,000
Note  payable  to an  executive  and former  director of the Company, with
   original  funding in September 2004. The principal balance and accrued
   interest was paid in full in December 2004                                          --          100,000
                                                                                -----------    -----------

Total notes payable                                                                 730,198      3,519,875

Less: discounts on notes payable                                                   (     --)      (494,150)
                                                                                -----------    -----------

Notes payable, net of discount                                                      730,198      3,025,725
Less: current portion                                                              (330,598)      (365,500)
                                                                                -----------    -----------
Long term notes payable, net of discount                                        $   399,600    $ 2,660,225
                                                                                ===========    ===========

</TABLE>

Interest  expense to related parties was  approximately  $52,000 and $48,000 for
the years ended  September  30,  2005 and 2004,  respectively.  Related  parties
include Company directors and employees, and their affiliates, but exclude major
shareholders.


                                      F-27
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

Notes Payable  (continued)

On August 19, 2005,  the Company  received a $300,000 loan from Asset  Factoring
International,  Inc.,  whose  Investment  Manager  is a member  of our  board of
directors.  The term of the loan is one year, with a 2% loan origination fee and
interest of 8% per annum. All interest and fees are due and payable in the event
of early repayment.  The terms of the loan, which is  collateralized by $600,000
(original purchase price) of recently purchased equipment and software, requires
repayment within 5 days of the Company obtaining other financing,  including but
not limited to equipment financing.  Accordingly,  Asset Factoring has agreed to
extend the repayment of this loan to at least February 1, 2006.

On October 11,  2005,  the Company  entered  into a five-year  note with a major
shareholder in the aggregate  principal  amount of $750,000.  The note, which is
collateralized  by $800,000  (original  purchase  price) of  recently  purchased
hardware and  software,  bears  interest at 10.85% per annum.  At the  Company's
option,  and with the consent of required  security  holders,  both interest and
principal may be paid in the form of the Company's  Series A-10 Preferred Stock.
In the event the loan is repaid in stock,  the  prepayment  penalty will include
all accrued interest. $300,000 of the related funding had been advanced prior to
the signing of the note and is  reflected in notes  payable as of September  30,
2005.  $150,000 of the  remaining  funding was  received in October 2005 and the
$300,000 balance of the funding commitment has not yet been received.

As part of the Onstream  Merger,  the Company  assumed a  capitalized  lease for
software, which has an outstanding principal balance of $130,198 as of September
30, 2005. The balance is payable in equal monthly payments of $3,366 through May
2009, which includes interest at approximately 7% per annum. See Note 5.

All notes  payable  outstanding  as of  September  30,  2004 were  satisfied  on
December  23, 2004 by cash  payments  totaling  approximately  $2.4  million and
issuance of 100,000 shares of Series A-10 Convertible Preferred ("Series A-10"),
which included  five-year warrants to purchase 500,000 common shares of ONSM for
$1.50 per share.  In connection  with the retirement of this  indebtedness,  the
Company wrote off the related  unamortized  discount of approximately  $494,000,
which is included in interest expense for the year ended September 30, 2005. The
details of the $2.4 million in repaid notes are as follows:

As  compensation  to a lender  for a May 2003 note  restructuring,  the  Company
issued  the lender  140,000  shares of Series A-8  Convertible  Preferred  Stock
("Series A-8") with a stated value of $840,000, which was recorded as a discount
to the $3.0 million note.  Approximately  $164,000 of transaction  fees paid for
the  restructuring  were expensed as incurred.  In  accordance  with APB 21, the
unamortized transaction costs from the original December 2001 obligation and the
discount from the May 2003  restructuring were reflected in the balance sheet as
a debt discount,  which was being  amortized over the term of the loan using the
effective interest method. The unamortized portion of this discount,  shown as a
reduction of the face value of the note on the balance sheet, was  approximately
$460,000 at September  30,  2004.  $2.0 million of this loan was repaid from the
proceeds of new  financing  received by the Company in December  2004,  with the
remaining $1.0 million  converted to 100,000 shares of Series A-10 and five-year
warrants to purchase  500,000 common shares of ONSM for $1.50 per share.  During
January 2005,  the Company  issued 85,488 shares of common stock in repayment of
approximately  $149,000  of  interest  due on  this  note  through  the  date of
repayment.

                                      F-28
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

Notes Payable  (continued)

On February 26, 2004,  the Company  received a $300,000 loan from J&C Resources,
LLC, whose  President,  Chairman and CEO is a members of our board of directors.
The term of the loan was one year,  and all  interest  was  prepaid  through the
issuance of 21,000 shares of common stock. In addition, the Company issued 9,000
shares of common stock as an  origination  fee and 10,000 shares of common stock
for legal and other fees. The shares issued for interest,  origination and other
fees  resulted in a charge of  approximately  $83,000,  which was  recorded as a
discount  and was being  amortized  over the term of the note.  The  unamortized
portion of this discount,  shown as a reduction of the face value of the note on
the balance sheet,  was  approximately  $34,000 at September 30, 2004. This loan
was  repaid  from the  proceeds  of new  financing  received  by the  Company in
December 2004.

On September 30, 2004, the Company  received a $100,000  short-term loan from an
employee  and former  director of the  Company.  The  principal  balance and the
combined   interest  and  service  fees  ($3,000  first  month,   $200  per  day
thereafter),  plus another $150,000 in aggregate lent on substantially  the same
terms by this  lender and  another  party in October  2004,  was repaid from the
proceeds of new financing received by the Company in December 2004.














                                      F-29

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 5:  COMMITMENTS AND CONTINGENCIES

Rescission rights - The holders of the 8% Convertible Debentures, the Additional
8% Convertible Debentures and the Series A-10 Preferred Stock may be entitled to
certain rescission rights. The resale registration statement of shares of common
stock  underlying these securities and the related warrants was originally filed
by the Company on February 23, 2005.  Pursuant to the Securities Act of 1933 and
the related rules and regulations, as interpreted by the Securities and Exchange
Commission, as a result of a portion of the additional investment rights granted
with the 8%  Convertible  Debentures,  which  were the  basis of the sale of the
Additional 8% Convertible  Debentures,  being unexercised at the time the resale
registration statement was originally filed, the private offerings have not been
completed and accordingly,  the public and private offerings would be integrated
and result in a violation of Section 5 of the Securities Act.  Accordingly,  the
investors who purchased the private  placement  securities  may have a number of
remedies  available  to them,  including  the  potential  right to  rescind  the
purchase of those securities plus,  potentially,  any amount representing damage
to such investors.

The Company is unable to predict if the investors would attempt to exercise such
potential rescission rights. Each investor's decision would be based upon, among
other  things,  a decline in the price of the  Company's  common stock and other
factors.  These potential  rescission rights would require the Company to refund
at least the gross  proceeds of these  private  offerings to the  investors.  In
order to satisfy such  potential  obligations,  the Company would be required to
utilize our available  capital resources and obtain alternate sources of capital
for such purposes.  The Company presently does not have the capital available to
satisfy all potential claims for rescission. The inability to obtain alternative
sources of  capital  would have a  material  effect on the  Company's  financial
condition and results of operations.

For purposes of accounting for this  contingency in accordance with Statement of
Financial Accounting Standards 5, "Accounting for Contingencies",  the Company's
management has evaluated the above factors and has determined  that the ultimate
liability to the company from the potential assertion by investors of rescission
rights is not probable.  This conclusion is based on management's  determination
that the factors  and/or  conditions  that would  encourage an attempt to assert
such rights are  significantly  outweighed by the factors and/or conditions that
would  discourage  an attempt  to assert  such  rights.  Since the  Company  has
determined  that a rescission is not probable,  although it may be possible,  no
accrual is required under SFAS 5. In addition, the existing  current/non-current
classification of the liability now shown for the 8% Convertible  Debentures was
not  adjusted,  based on the same  rationale  that an  effect  on the  Company's
liability arising from this issue is not probable.

As of September 30, 2005, the Company's balance sheet reflects a liability,  net
of discount,  of $1,243,322 associated with the 8% Convertible  Debentures.  The
total  proceeds  arising from the 8% Convertible  Debentures,  the Additional 8%
Convertible  Debentures and the Series A-10 Preferred Stock,  including  related
dividends  and  interest  paid in kind,  were  $11,636,084.  The excess of these
proceeds over the recorded liability was $10,392,762, of which a) $7,375,594 was
reclassified from shareholders' equity, where it was originally recorded, to the
balance sheet classification "equity securities subject to potential rescission"
as of September 30, 2005, in  accordance  with Emerging  Issues Task Force Topic
D-98,   "Classification  and  Measurement  of  Redeemable   Securities"  and  b)
$3,017,168 was reclassified to the liability  "Detachable  Warrants and Embedded
Conversion  Feature  associated with 8% Convertible  Debentures",  in accordance
with EITF 00-19 and other applicable accounting, as discussed in Note 4.

As  of  November  30,  2005,  fifteen  individual  investors  had  converted  8%
Convertible  Debentures of $2,875,000 and 61,969 shares of Series A-10 Preferred
Stock to ONSM common shares.  This  represents  approximately  $3,565,000 of the
amounts included in "equity  securities  subject to potential  rescission" as of
September  30, 2005.  An additional  amount of  approximately  $1,375,000 of the
September  30,  2005  balance  of  "equity   securities   subject  to  potential
rescission"  represents the securities  owned but not converted by these fifteen
individual  investors.  The Company has not yet  determined  the effect of these
conversions on the potential rescission rights.

                                      F-30
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 5:  COMMITMENTS AND CONTINGENCIES  (continued)

Consulting  agreements  - The Company is  obligated  under  agreements  to issue
approximately  471,000  common  shares  and  options to  purchase  approximately
700,000  shares  (with  exercise  prices  from  $1.00 to $2.50)  for  consulting
services subsequent to September 30, 2005, which will be valued at fair value as
of the date of issuance and expensed under SFAS 123.  These  contracts also call
for future cash payments of approximately $249,000.

SAIC agreement - As part of the December 2004 Onstream  Merger (see Note 2), the
Company  became  obligated  under a Basic  Ordering  Agreement for  Professional
Solutions  ("BOA")  entered  into by  Acquired  Onstream  and SAIC in June 2003,
pursuant to which SAIC would build an  outsourced  solution for  customers  that
allows  for  management  and use of  digital  rich  media  and  offers  flexible
applications, including collaboration and re-purposing (the "DMSP"). SAIC agreed
to design the DMSP, as hosted and managed by SAIC, to allow for the addition and
customization of applications to fit the specific needs of customers.  SAIC also
agreed to provide  certain  hosting  and  back-office  services  directly to the
Company,  as  Acquired  Onstream's  successor,  and in support of the  Company's
customers.

The original term of the BOA runs through December 31, 2006 and the Company,  as
Acquired Onstream's successor,  may, at its option, extend the term for up to an
additional  48 months by  executing  four,  one year renewal  options.  Acquired
Onstream agreed to minimum expenditures of $1.9 million in the aggregate through
December 31,  2006,  the initial term of the BOA, and $1 million for each of the
four one-year  renewal periods  thereafter.  SAIC agreed that its services under
the BOA would be billed at a discount to its regular rates  throughout  the term
of the BOA. The Company may  terminate  the BOA prior to the  expiration  of the
term for  convenience  upon 30 days notice.  SAIC may  terminate  the BOA if the
Company,  as  Acquired  Onstream's  successor,  does  not  satisfy  the  minimum
expenditure thresholds or is otherwise in material breach of its obligations.

Contemporaneously  with the BOA, Acquired Onstream and SAIC entered into a Stock
Issuance Agreement,  pursuant to which Acquired Onstream,  at its option,  could
pay up to 20% of $1,250,000 of invoices for services subsequent to the execution
of the Stock Issuance Agreement,  with its common stock. Such common stock would
be valued at the lesser of $0.50 per share or fair  market  value as of the date
of issuance.  Prior to the Onstream Merger, Acquired Onstream had issued 158,910
shares  of  its  common  stock  to  SAIC  under  this  arrangement,   valued  at
approximately  $59,000 and  converted  to 23,535  ONSM shares in December  2004.
Acquired  Onstream  granted to SAIC  certain  piggyback  registration  rights in
connection  with any such shares of common stock issued to SAIC.  Within 30 days
after notice of a forward merger of Acquired  Onstream with another  entity,  or
the sale of all or substantially  all of the assets of the Acquired  Onstream to
another  entity,  SAIC had the right to terminate the Stock Issuance  Agreement.
SAIC did not terminate the Agreement and the Company has continued to pay 20% of
SAIC  invoices  with ONSM common  stock - 87,715 ONSM shares  valued at $130,153
were issued to SAIC subsequent to the Onstream Merger and through  September 30,
2005,  including $57,142 included in Acquired Onstream's accounts payable at the
time of the Onstream  Merger - see Note 2. SAIC has not objected to the use of a
fair market value for ONSM shares  consistent  with the December 2004 conversion
of its Acquired  Onstream  shares to ONSM shares,  even though such valuation is
higher  than the $0.50  per  share  maximum  established  in the Stock  Issuance
Agreement.  However,  the Company has entered into  negotiations with SAIC which
may result in the future discontinuance of the stock payment option.

As of September 30, 2005, SAIC had been paid approximately $1,736,000 in cash or
common stock (which  includes  approximately  $909,000  paid under a predecessor
professional  services  agreement for design and technology  demonstration  of a
media asset management  system,  not considered BOA  expenditures)  and was owed
approximately  $143,000, of which the Company paid $50,000 in cash subsequent to
that date.

                                      F-31
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 5:  COMMITMENTS AND CONTINGENCIES (Continued)

Employment Contracts and Severance

On December 27,  2004,  in  connection  with the  Company's  closing of Onstream
Merger (see Note 2), the Company  entered into  four-year  employment  contracts
with the Company's President,  Executive Vice President, Chief Marketing Officer
and Executive Vice President of Business Development.  The contracts provide for
base annual salaries of $163,000 ($178,000 for the President) increasing 10% per
year.  Each  executive  also  receives  a  combined  auto  allowance,   deferred
compensation allocation and dues reimbursement allowance of $35,000 per year. In
the event of a subsequent  change of control or termination  without cause,  the
Company is obligated to make payments of base salary for three years,  which the
executive may elect to take in a lump sum payment,  plus benefits for two years.
On March 8,  2005 the  Company  entered  into a  similar  three-year  employment
agreement with its Chief Financial  Officer,  with a base salary of $150,000 and
other  compensation of $27,000 per year. In the event of a subsequent  change of
control or termination  without cause, the company is obligated to make payments
of base salary and benefits for nine months.

Lease Commitments

In  September  2002,  the  Company  completed  the  sale and  lease  back of its
principal  executive offices in Pompano Beach,  Florida.  In connection with the
agreement  the  Company  entered  into a  five-year  operating  lease  ending in
September 2007. The lease provides for one five-year renewal option. The monthly
base rental is currently approximately $17,000 (including the Company's share of
property  taxes and  common  area  expenses)  with  annual  three  percent  (3%)
increases.  Approximately  $80,000 is included in accounts  payable at September
30, 2005 related to amounts due under this lease.

In May 2004,  the Company  entered into a five-year  operating  lease for office
space in San Francisco.  The lease provides for one five-year  renewal option at
95% of fair market value. The monthly base rental is approximately  $15,000 with
annual increases up to five percent (5%).

In December 2005,  the Company  extended its annual  operating  lease for office
space in New York City,  through  December 31, 2006.  The monthly base rental is
approximately $6,000.

Future minimum lease payments required under the non-cancelable leases, plus the
capital lease discussed in Note 4, are as follows:

<TABLE>
<CAPTION>
                                              Operating      Capital       All
        Year Ending September 30:                Leases       Lease       Leases
<S>                                           <C>          <C>          <C>
   2006                                       $  446,448   $   40,394   $  486,842

   2007                                          408,155       40,394      448,549

   2008                                          196,517       40,394      236,911

   2009                                          111,095       26,931      138,026

   2010                                             --           --           --
                                              ----------   ----------   ----------
Total minimum lease payments                  $1,162,215      148,113   $1,310,328
                                              ==========                ----------
Less: amount representing interest                             17,916
                                                           ----------
Present value of net minimum lease payments                   130,197
Less: current portion                                          30,597
                                                           ----------
Long-term portion                                          $   99,600
                                                           ==========
</TABLE>

                                      F-32
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 5:  COMMITMENTS AND CONTINGENCIES (Continued)

Lease Commitments (continued)

Total rental  expense for all operating  leases was  approximately  $452,000 and
$483,000 for the years ended September 30, 2005 and 2004, respectively.

Annual Long Distance Purchase Commitment

EDNet entered into a two-year  long distance  telephone  rate  agreement  with a
national  telecommunications  company,  which included a purchase  commitment of
approximately  $384,000  (before  taxes) per year.  The Company is in compliance
with this agreement, which expires in March 2006, and in December 2005 completed
negotiations  for a two-year  renewal  that  included a purchase  commitment  of
approximately  $120,000  (before  taxes) per year with  approximately  40% lower
rates.

NOTE 6:  CAPITAL STOCK

Common Stock

In  October  2003,  the  Company  raised  approximately  $864,000  in a  private
placement to a group of 17 accredited investors for 411,500 shares of its common
stock,  plus  four-year  warrants for an aggregate of 82,300 common shares at an
exercise price of $3.00 per share.  In connection  with this private  placement,
the  Company  issued  53,495  shares  of  common  stock,  with a fair  value  of
approximately $112,000, for commissions and finders fees, which were recorded as
a reduction of additional  paid-in  capital.  The Company granted the purchasers
registration  rights  covering the shares,  including  the shares  issuable upon
exercise of the warrants.

In  February  2004,  the Company  issued  32,500  shares of common  stock for an
origination  fee in  connection  with the  issuance of Series  A-11  Convertible
Preferred Stock and 52,500 shares of common stock for prepaid  dividends related
to the same issuance.

During the year ended  September 30, 2004,  the Company issued 195,000 shares of
common stock for consulting and financial advisory  services.  The services were
provided  over  periods  ranging  from  1  to  12  months,  and  resulted  in  a
professional  fees expense of  approximately  $434,000 over the service  period.
During the same  period,  the Company  issued  warrants  and options to purchase
270,000  shares of common  stock at prices from $2.25 to $2.50 per share,  which
will result in  professional  fees expense of  approximately  $523,000  over the
service period from 12 to 24 months. See Note 8.

During the year ended  September 30, 2004,  the Company issued 176,192 shares of
common stock  arising from the  conversion  of preferred  shares - 33,334 common
shares for 25,000 shares of Series A-8  Convertible  Preferred Stock and 142,858
common shares for 20,000 shares of Series A-9 Convertible Preferred Stock.

During the year ended  September 30, 2004,  the Company issued 434,694 shares of
its common stock for loan payments and interest,  primarily the following  three
transactions:

         In  October  2003,  under the  terms of a  redemption  agreement  for a
         portion of 6%  convertible  debentures  originally  sold on December 8,
         2000, the debentures were satisfied by  approximately  $610,000 in cash
         and 300,000 shares of the Company's  common stock,  valued at $2.50 per
         share,  or  $750,000.  This  transaction  resulted  in a  net  gain  of
         approximately  $185,000,  included in other  income and expense for the
         year ended September 30, 2004.

                                      F-33
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005

NOTE 6:  CAPITAL STOCK  (Continued)

Common Stock (Continued)

         In February  2004, the Company issued 40,000 shares of common stock for
         interest and expenses  related to a loan from an affiliate of a Company
         director - see Note 4.

         In March 2004 the  Company  sold an  aggregate  of  $150,000  principal
         amount of 14% convertible debentures to accredited investors.  The term
         of the debentures were one year, and all interest and fees were prepaid
         through the issuance of 19,226 shares of common  stock.  In April 2004,
         the holders  converted  the  debentures  into  75,000  shares of common
         stock,  using a fixed  conversion  price of $2.10 per share,  which was
         below the stock price at the time of the original  sale.  Approximately
         $72,000 for the value of this  beneficial  conversion  feature plus the
         common  shares  issued for  interest  and fees was  charged to interest
         expense during the year ended September 30, 2004.

During the year ended  September 30, 2004,  the Company  issued 64,000 shares of
common  stock to settle  approximately  $154,000  of  certain  liabilities  with
various vendors,  which was approximately equal to the value of the stock at the
date of  issuance.  This  included  34,000  shares of common  stock  provided to
vendors  of  Acquired  Onstream  to settle  approximately  $82,000  of  Acquired
Onstream  obligations,  which was  recorded by the Company as an increase in its
receivable from Acquired Onstream.

In December  2004, the Company  issued  2,207,966  shares of its common stock in
connection with the Onstream Merger - see Note 2.

During the year ended  September 30, 2005,  the Company  issued  2,725,659  ONSM
common  shares  as a result of a eleven  individual  investors'  conversions  of
$2,705,000 8% Convertible  Debentures and Additional 8% Convertible  Debentures,
plus accrued interest through the respective  conversion dates - see Notes 4 and
5. Also during the year ended  September 30, 2005,  the Company  issued  619,690
ONSM common shares as a result of four  individual  investors'  conversions of a
total of 61,969 shares of Series A-10 preferred  shares,  which included accrued
dividends through the respective conversion dates - see Note 5 and below.

During the year ended  September 30, 2005,  the Company issued 712,626 shares of
common stock for consulting, financial, advisory and other services, as follows:

         497,135  shares  valued at  approximately  $779,000 and  recognized  as
         professional  fees expense over the various service periods of up to 24
         months.  12,273 of these shares were issued to a company  controlled by
         the Company's  former CFO. None of the remaining  shares were issued to
         Company  directors  or  officers.  See Note 5 regarding  the  Company's
         obligation to issue additional shares under such agreements.

         10,000  shares  issued to an employee as a bonus,  with an  immediately
         expensed  value of  approximately  $12,100 and 26,759  shares of common
         stock to employees under the Plan valued at approximately $34,000.

         87,715 shares issued to SAIC for services in connection  with the DMSP,
         valued at $130,153 - see Note 5.

         91,017  shares for legal  services  valued at  approximately  $134,000,
         including $14,400 included in Acquired  Onstream's  accounts payable at
         the time of the Onstream Merger - see Note 2.

                                      F-34
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 6:  CAPITAL STOCK  (Continued)

Common Stock (Continued)

During the year ended September 30, 2005, the Company issued options to purchase
its common shares, in exchange for consulting and financial  advisory  services,
such  options  valued  at  approximately   $590,000.   The  Company   recognized
professional  fee expenses  arising from these and prior issuances of shares and
options for  consulting  and  financial  advisory  services,  including  amounts
related  to  certain  executive   severance   agreements   discussed  above,  of
approximately $1,769,000 and $646,000 for the years ended September 30, 2005 and
2004,  respectively.  As a result  of  previously  granted  or  issued  options,
warrants  or shares for  consulting  expenses,  the  Company  has  approximately
$566,000 in deferred equity  compensation  expense at September 30, 2005,  which
will be amortized  over the  remaining  periods of service for these  issuances,
which range from two to 21 months. The deferred equity  compensation  expense is
included in the balance sheet captions  prepaid  expenses and other  non-current
assets.

In January  2005,  also in connection  with the Onstream  Merger and pursuant to
Board and  shareholder  approval  received in December  2004, the Company issued
150,000 shares of ONSM common stock to Envision  Management  Group, a consulting
firm  controlled  by Ms. Gail  Babitt,  our former CFO,  and the Company  issued
100,000  shares of ONSM  common  stock to Mr.  George  Stemper,  our  former COO
currently employed by the Company in another capacity.  The Company recorded the
issuance  of these  common  shares at  $392,500,  based on the fair value of the
250,000  shares at the date of Board and  shareholder  authorization,  which was
included in professional fee expense during the year ended September 30, 2005.

In January  2005,  pursuant to Board  approval  received in December  2004,  the
Company  issued Mr.  Stemper  50,000  shares of ONSM common  stock as an advance
against  sales  commissions  to be  earned by him  through  August  31,  2005 in
connection  with a professional  services  agreement.  The Company  recorded the
issuance  of these  common  shares at  $78,500,  based on the fair  value of the
50,000  shares  at the date of Board  authorization.  Based on an August 1, 2005
employment  agreement  entered into between the Company and Mr.  Stemper,  these
shares  are  considered  fully  earned  by him as of  August  31,  2005 and were
expensed by the Company as of that date.

On June 29, 2005, the Company  issued 606,000 ONSM common shares,  to satisfy in
full a penalty of 2,000 common shares per day for every day starting  August 31,
2004,  that certain  common shares issued in April 2004 (arising from March 2004
convertible  debentures)  were not  registered.  The Company  recorded  interest
expense  of  $943,840  for the year ended  September  30,  2005,  related to its
valuation of this stock issued in  satisfaction  of this penalty.  The valuation
was based on the closing  share price for each day that the penalty was incurred
through  June 29, 2005,  when a  registration  statement  filed with the SEC and
containing these shares was declared effective.

During the year ended  September 30, 2005,  the Company  issued  267,248  common
shares in lieu of the $310,427 interest accrued and due through that date on the
8%  Convertible  Debentures and  Additional 8%  Convertible  Debentures.  During
January 2005,  the Company  issued 85,488 shares of common stock in repayment of
approximately  $149,000 of interest  due on a $3.0 million note through the date
of repayment. See Note 4.


                                      F-35
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005



NOTE 6:  CAPITAL STOCK  (Continued)

Preferred Stock

As of September 30, 2005, the only preferred stock outstanding is Series A-10
Convertible Preferred Stock.

Series A-8 Convertible Preferred Stock

In May 2003,  the  Company  issued  140,000  shares of  Series  A-8  Convertible
Preferred   Stock  ("Series  A-8")  to  a  shareholder   as   compensation   for
restructuring an existing loan to the Company and loaning the Company additional
funds - see Note 4. In  addition,  the  shareholder  converted  his  outstanding
common stock in the Company into 92,750 shares of Series A-8. In December  2004,
this  shareholder  converted  all 232,750  shares of Series A-8 held by him into
139,650 shares of Series A-10 Preferred Stock.

In May 2003,  the Company also paid a finders fee of 25,000 shares of Series A-8
to a third party,  which the holder  converted to 33,334  shares of common stock
during the year ended September 30, 2004.

Series A-9 Convertible Preferred Stock

In June 2003, the Company  completed an agreement for a $750,000 private sale of
Series A-9 Preferred Stock. In the first tranche the Company  received  $450,000
for the  issuance  of  30,000  shares  of  Series  A-9 and four  year  warrants,
exercisable at $4.50 per share,  to purchase  10,000 shares of its common stock.
In  September  2003,  the  holders  of  the  Series  A-9  converted  the  30,000
outstanding  shares into 214,286  shares of common stock.  At the same time, the
investors  executed  the second  tranche of the Series  A-9,  issuance of 20,000
shares of its Series A-9 Preferred Stock plus four year warrants, exercisable at
$3.00 per share,  to purchase  40,000 shares of common stock As of September 30,
2003,  the Company had not received the $300,000  proceeds,  which was therefore
reflected in the September 30, 2003 balance sheet as a  subscription  receivable
and satisfied during the first quarter of fiscal 2004.

In March 2004, the holders of 20,000 shares of Series A-9 converted those shares
to 142,858 shares of common stock,  based on a $2.10 per common share conversion
price and a stated  value of $15.00 per Series A-9 share.  During the year ended
September 30, 2004 the Company declared and paid cash dividends of approximately
$14,000 on the Series A-9.

Series A-10 Convertible Preferred Stock

On December 23, 2004, the Company sold 215,000 shares of Series A-10 Convertible
Preferred  Stock  for  $2.15  million  ("Series  A-10")  to  sixteen  accredited
investors,  plus 100,000  shares of Series A-10 for $1.0  million of  previously
outstanding  debt to a single  accredited  investor  - see  Note 4. The  315,000
shares of Series A-10 included  five-year  warrants to purchase 1,575,000 common
shares of ONSM for $1.50 per share.  Another  8,562  shares of Series  A-10 were
issued to the purchasers in January 2005 as  compensation  for their funds being
held in  escrow  from June  2004  through  December  2004,  pending  shareholder
approval, in accordance with Nasdaq Marketplace Rule 4350(i), of the issuance in
excess of 19.99% of the  Company's  common  stock.  In December  2004,  a single
shareholder  converted all 232,750 shares of Series A-8 held by him into 139,650
shares of Series A-10.

The Company's Board of Directors  declared a dividend payable on May 15, 2005 to
Series  A-10  shareholders  of record as of May 10,  2005 of 13,974  Series A-10
preferred  shares,  in lieu of a $139,738  cash  payment.  During the year ended
September 30, 2005, the Company issued 619,690 ONSM common shares as a result of
four  investors  converting  a total of 61,989  shares of Series A-10  preferred
shares,  which  included  814 Series  A-10 shares  issued for accrued  dividends
through the respective conversion dates.

                                      F-36
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005



NOTE 6:  CAPITAL STOCK  (Continued)

Preferred Stock (Continued)

The holders of the Series A-10 may be  entitled to certain  rescission  rights -
see Note 5.

The  Series  A-10 has a coupon of 8% per  annum,  payable  annually  in cash (or
semi-annually at the Company's option in cash or in additional  shares of Series
A-10),  has a stated  value of $10.00 per  preferred  share and has a conversion
rate of $1.00 per common share. The Series A-10 is not redeemable by the Company
and any shares of Series A-10 that are still  outstanding  as of  December  2008
will  automatically  convert  into common  shares.  Series A-10 is senior to all
other  preferred share classes that may be issued by the Company and the Company
may not incur any additional  indebtedness greater than $1.5 million without the
consent of the holders of at least 50% of the  outstanding  Series A-10  shares.
The Series A-10 holders have the right to designate  one member of the Company's
board of directors.  In February 2005, the board of directors and the holders of
a majority of the issued and outstanding  shares of Series A-10 voted to approve
an  increase in the  authorized  number of Series  A-10 from  500,000  shares to
700,000 shares to provide for the possible  issuance of shares of Series A-10 as
dividends on Series A-10 presently outstanding.

The  placement  agent fees and direct issue costs for the Series A-10  financing
were approximately  $172,000 plus five-year  warrants to purchase  approximately
215,000 shares of ONSM common stock for $1.50 per share.

The estimated  fair value of all warrants  given in  connection  with the Series
A-10 plus the Series A-10's beneficial conversion feature, is $2,755,951, which,
in accordance  with EITF 98-05 and EITF 00-27,  was allocated to additional paid
in capital and  discount.  The  Company's  management  calculated  the  discount
primarily  based  on its  estimate  of the  fair  value  of  the  warrants  as a
percentage  of the face value of the  convertible  securities.  The estimate was
based on the  closing  price of the stock at the date of the  agreement  and the
relationship to the conversion price of the instrument and the exercise price of
the warrants.  The discount,  which totals  $2,928,041  after inclusion of other
direct costs  associated  with the financing,  is being  amortized as a dividend
over the four-year term of the Series A-10. In addition, the unamortized portion
of the discount  related to converted  securities  is expensed as an  additional
dividend at the time of the conversion.

Series A-11 Convertible Preferred Stock

On  February  10,  2004,  the  Company  sold  25,000  shares of its Series  A-11
non-voting  redeemable  Convertible Preferred Stock, plus three-year warrants to
purchase  130,000  shares of its common  stock,  for  $500,000.  The  three-year
warrants  are  exercisable  at $2.28 per share  (based on 105% of the  Company's
common  stock  average  closing  bid price for the five  trading  days  prior to
February 10, 2004).  The Company also issued 32,500 shares of restricted  common
stock to the purchaser as an  origination  fee and issued an  additional  52,500
shares of restricted  common stock in lieu of dividend payments over the initial
18-month term after  closing.  The Company  determined  that the estimated  fair
value  of the  warrants  and the  beneficial  conversion  feature,  computed  in
accordance with EITF 98-05 and EITF 00-27, was immaterial. In December 2004, the
Company redeemed all outstanding shares of Series A-11 for cash.

                                      F-37
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005



NOTE 7:  SEGMENT INFORMATION

The  Company's  operations  are  currently  comprised of two  operating  groups,
Digital Asset Management and Webcasting.  These operating units are managed from
the Company's Pompano Beach facility and the San Francisco  facility directed by
EDNet.  See Note 1 for details about the Company's  redefinition of its segments
in fiscal 2005.

All material balances related to Company sales, primary business activities, and
location of property and equipment are within the United States.

In March 2004,  Thomson  Financial Group completed the acquisition of CCBN. As a
result,  we have combined  revenues from both of these companies for disclosure.
For the years ended September 30, 2005 and 2004 the Company provided  webcasting
services to one significant customer, Thomson Financial Group, under a contract,
which can be  terminated  upon a 30-day  notification.  Revenues  from  sales to
Thomson  Financial Group  (including  CCBN) were  approximately  $1,389,000,  or
approximately 17%, and approximately  $1,808,000, or approximately 24%, of total
consolidated   revenue  for  the  years  ended  September  30,  2005  and  2004,
respectively. These revenues represented approximately 38% and 50% of Webcasting
Group revenues for the same periods.

For the year  ended  September  30,  2005 the  Company  provided  digital  asset
management services to another significant customer, America Online, Inc., under
a contract  which can be terminated  upon a 30-day  notification.  Revenues from
sales to this customer were  approximately  $1,184,000,  or approximately 15% of
total consolidated revenue for the year ended September 30, 2005. These revenues
represented approximately 26% of Digital Asset Management Group revenues for the
same period.












                                      F-38

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005



NOTE 7:  SEGMENT INFORMATION (Continued)

Detailed  below are the  results of  operations  by segment  for the years ended
September 30, 2005 and 2004, and total assets by segment as of those dates.

                                                For the years ended
                                                   September 30,
                                            --------------------------
                                                2005           2004
                                            -----------    -----------
Revenue:

Digital Asset Management Group              $ 4,477,402    $ 3,953,842
Webcasting Group                              3,678,992      3,625,046
                                            -----------    -----------
Total consolidated revenue                  $ 8,156,394    $ 7,578,888
                                            ===========    ===========

Segment operating income (loss):

Digital Asset Management Group              $   763,540    $   615,426
Webcasting Group                                826,634        931,531
                                            -----------    -----------
Total segment operating income                1,590,174      1,546,957

Depreciation and amortization                (1,152,633)    (1,373,587)
Impairment loss on goodwill                    (330,000)      (470,000)
Corporate and unallocated shared expenses    (5,714,949)    (3,310,241)
Other (expense) income, net                  (4,030,480)      (365,795)
                                            -----------    -----------

Net loss                                    $(9,637,888)   $(3,972,666)
                                            ===========    ===========


                                                   September 30,
                                            -------------------------
                                                 2005         2004
                                            -----------   -----------
Total assets:

Digital Asset Management Group              $14,580,103   $ 3,373,128
Webcasting Group                              1,925,137     1,996,286
Corporate and unallocated                     1,016,847     2,092,975
                                            -----------   -----------
Total                                       $17,522,087   $ 7,462,389
                                            ===========   ===========


Depreciation,  amortization  and  impairment  losses  are  not  utilized  by the
Company's  primary  decision makers for making decisions with regard to resource
allocation or performance evaluation.


                                      F-39
<PAGE>



                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 8:  STOCK OPTIONS AND WARRANTS

As of September  30, 2005,  the Company had  15,114,093  issued and  outstanding
options and  warrants,  including  2,940,895  Plan Options;  2,436,273  Non-Plan
Options to employees and directors;  1,199,906  Non-Plan Options to consultants;
and 8,537,019  warrants issued in connection  with various  financings and other
transactions, and including contingent warrants as discussed below.

On  February 9, 1997,  the Board of  Directors  and a majority of the  Company's
shareholders adopted the 1996 Stock Option Plan (the "Plan"). On April 11, 2002,
an amendment to the Plan, ratified by the shareholders, reserved an aggregate of
733,334 Plan Options and added an equity compensation component. On December 15,
2004, a majority of the Company's  shareholders  voted to increase the number of
shares  available  for issuance  under the plan to  3,500,000,  including  stock
grants of up to 500,000  shares.  On  September  13,  2004,  a  majority  of the
Company's  shareholders  voted to increase  the number of shares  available  for
issuance under the plan to 6,500,000,  including stock grants of up to 3,000,000
shares.

In June 2003 the Company  affected a  one-for-fifteen  reverse stock split.  All
references to shares,  share prices, per share amounts and stock plans have been
adjusted retroactively for the one-for-fifteen reverse stock split.

As of  September  30,  2005 the  Company  has  granted  options  to  management,
employees and directors under the Plan. The term of these options are from three
to eight years and the vesting  periods are from  immediate  to four years.  All
options are granted at a price equal to or greater than the fair market value at
the date of grant. On December 15, 2004 a majority of the Company's shareholders
voted to approve the cancellation  (subject to the option holder's  approval) of
Plan Options to directors,  senior  management  and employees  covering  227,776
shares (plus 65,216 Non-Plan Options) with a weighted-average  exercise price of
$21.93,  with such options to be re-issued  six months and one day from the date
of  cancellation  with an exercise  price equal to the fair market  value on the
date of the reissue.  This cancellation has not yet been implemented and 121,774
of the Plan Options subject to this  cancellation and re-issue had expired as of
December 31, 2005.

In July 2005 the Company's Board of Directors granted  2,634,224  five-year Plan
options,  exercisable at $1.12 per share, which was the fair market value on the
date of grant. This included 1,500,000 fully vested options to Company directors
and senior  management,  with the balance issued to other Company  employees and
vesting  quarterly  during the year ended  September 30, 2006. At the same time,
the Board accelerated the vesting of 150,000  four-year Plan options  previously
granted to a Company  executive in December  2004 at an exercise  price of $1.21
per share,  which was the fair market  value on the date of grant.  The options,
which  were to vest in  installments  of  50,000  options  per  year,  beginning
December 15, 2005,  were declared  fully vested.  At the same time,  the Company
issued 26,759 Plan fully paid stock grants to Company executives.

                                      F-40
<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 8:  STOCK OPTIONS AND WARRANTS (Continued)


Detail of Plan Option  activity for the years ended  September 30, 2005 and 2004
is as follows:


<TABLE>
<CAPTION>
                                            September 30, 2004      September 30, 2005
                                          ----------------------  ---------------------
                                                       Weighted               Weighted
                                                       Average                Average
                                          Number of    Exercise   Number of   Exercise
                                            Shares      Price      Shares       Price
                                          ---------    ---------  --------    ---------
<S>                                         <C>        <C>         <C>        <C>
Balance, beginning of period                236,100    $   21.93   464,942    $   31.40
Granted during the period                 2,984,224         1.14      --
Expired or forfeited during the period     (279,429)        2.66  (228,842)       41.17
                                          ---------                -------
Balance, end of the period                2,940,895         1.89   236,100        21.93
                                          ---------                -------
Exercisable at end of the period          1,806,671    $    2.37   213,436    $   22.67
                                          ---------                -------
</TABLE>

The  Company's  1,700,000  outstanding  Plan Options at  September  30, 2005 not
subject to the cancellation  and re-grant  discussed above have a remaining life
of  approximately  5 years and exercise  prices  ranging from $1.12 to $1.57 per
share.  The  Company's   106,671   outstanding  Plan  Options  subject  to  this
cancellation and re-grant have a remaining life of less than 1 year and exercise
prices ranging from $7.50 to $26.25 per share.

As of September 30, 2005, the Company has 2,436,273 outstanding Non Plan options
issued to employees and  directors,  of which  2,431,390  were issued during the
year  ended  September  30,  2005.  During  that  period,   the  Company  issued
immediately  exercisable five-year options to certain executives,  directors and
other  management  for the purchase of  1,350,000  shares of our common stock at
$1.57 per share (fair market value at date of  issuance);  five-year  options to
certain  executives,  fully-vested as of September 30, 2005, for the purchase of
800,000  shares of our common stock at $2.50 per share  (greater  than the $1.57
fair market value at date of issuance); and 281,390 options at an exercise price
of $3.376 per share in conjunction with the Onstream Merger.

As of September 30, 2005, the Company had 1,199,906 outstanding Non Plan options
issued to  consultants,  of which  929,240  were  issued  during  the year ended
September 30, 2005, 870,000 with exercise prices ranging from $1.10 to $3.00 per
share, and 59,240 issued at an exercise price of $3.376 per share in conjunction
with the Onstream  Merger.  These options  issued to  consultants  have exercise
prices  from $1.10 to $4.50 per share and expire at various  dates from  January
2006 to March 2010.  395,000 of the above  options,  including  125,000  options
issued prior to the year ended  September  30, 2005,  were not vested as of that
date. See Note 5.

                                      F-41

<PAGE>

                   ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2005


NOTE 8:  STOCK OPTIONS AND WARRANTS (Continued)

As of  September  30,  2005,  the Company  had  outstanding  vested  warrants to
purchase an aggregate of 7,449,519 shares of common stock, inclusive of warrants
issued in connection  with various  financings.  The warrants  contain  exercise
prices  ranging  from $1.00 to $45.00  expiring  from August 2005 to April 2010.
During the year ended September 30, 2005 the Company granted  7,022,693 of these
warrants - 2,175,000  one-year  warrants at an exercise price of $1.00 per share
issued in connection  with the Additional 8% Convertible  Debentures;  2,936,250
five-year  warrants at an exercise price of $1.65 per share in conjunction  with
the sale of 8% Convertible Debentures and Additional 8% Convertible  Debentures;
1,790,000  five-year  warrants  at an  exercise  price  of  $1.50  per  share in
conjunction  with the sale of Series A-11;  and 121,443  warrants at an exercise
price of $3.376 per share in conjunction with the Onstream Merger.  In addition,
262,300 of these  warrants were granted by the Company in connection  with other
financing  activities  in periods  prior to the year ended  September  30, 2005-
10,000  four-year  warrants at an exercise  price of $4.50 per share issued with
the sale of Series A-9; 40,000  one-year  warrants at an exercise price of $3.00
per share issued with the sale of Series A-9; 130,000 three-year  warrants at an
exercise  price of $2.28 per share  issued  with the sale of  Series  A-11;  and
82,300  four-year  warrants at an exercise  price of $3.00 per share issued with
the sale of common stock. See Notes 4 and 6.

These vested warrants do not include 1,087,500  warrants at an exercise price of
$1.65 per share,  which have been  approved  for  issuance  by a majority of the
Company's  shareholders,  such  issuance  contingent  on the  exercise  of $1.00
warrants  issued in connection  with the Additional 8% Convertible  Debentures -
see Note 5.

NOTE 9: SUBSEQUENT EVENTS - FINANCING AND EQUITY TRANSACTIONS

During  October 2005,  the Company issued 174,211 ONSM common shares as a result
of two  investors'  conversion of $170,000 of 8%  Convertible  Debentures,  plus
accrued interest.

During   October  2005,  the  Company  issued  45,000  ONSM  common  shares  for
professional services valued at approximately $45,000.

The  Company's  Board of Directors  declared a dividend  payable on November 15,
2005 to Series A-10  shareholders  of record as of  November  10, 2005 of 16,641
Series A-10 preferred shares, in lieu of a $166,413 cash payment.

On November 30, 2005, the Company borrowed  $300,000 from Platinum Credit Group,
LLC,  secured by a secondary  lien on up to $300,000 of the  Company's  tangible
equipment  and  other  assets.  In  addition,   the  Company  dedicated  certain
receivables  and  financing  proceeds to assure the  repayment of the Note on or
before its due date of March 1, 2006.  Origination  and finder's  fees  totaling
$30,000 were paid in connection  with this  financing.  Interest was paid in the
form of 44,444 shares of ONSM common stock,  which the Company agreed to include
on the next S-3 or other registration statement filed.

During  December  2005, the Company issued 15,510 ONSM common shares as a result
of three investors' conversion of 1,551 shares of Series A-10 Preferred.

During  January  2006,  the Company  issued  95,672 common shares in lieu of the
$74,622 interest accrued and due through December 31, 2005 on the 8% Convertible
Debentures and the Additional 8% Convertible Debentures.

During January 2006,  the Company  issued 305,878 common shares as  satisfaction
for equipment  purchases of $151,350  included in accounts  payable at September
30, 2005, plus another $75,000 of equipment  purchases to be received after that
date.  During  January  2006,  the Company also issued  20,000 common shares for
professional services valued at approximately $20,000.

                                      F-42