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, 2007





o
            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 of incorporation or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)





1291
                SW 29 AvenuePompano
                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 registeredNone
            
            not
                applicable




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 o







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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of 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. o





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





State
      issuer's revenues for its most recent fiscal year. $ 12,115,045 for the 12
      months ended September 30, 2007.





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. (see definition of affiliate in Rule
      12b-2 of the Exchange Act.) The aggregate market value of the common equity
      held
      by non-affiliates computed at the closing price of the registrant’s common stock
      on December 7, 2007 is approximately $37.8 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 December 7, 2007, 42,150,792 shares of
      common stock were 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 o  No
x








**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, 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, 2007. 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, a Florida corporation, and its subsidiaries.










**PART
      I**





**ITEM
              1.**
            **DESCRIPTION
                OF BUSINESS**





**Our
      Business, Products and Services**





We
      are a
      leading online service provider of live and on-demand Internet video, corporate
      web communications and content management applications. We had approximately
      100
      full time employees as of September 30, 2007, with operations organized in
      two
      main operating groups:





·
            Digital
                Media Services Group





·
            Web
                Communications Services Group





Products
      and services provided by each of the groups are:





***Digital
      Media Services Group***





Our
      Digital Media Services Group, which operates primarily from facilities in San
      Francisco, California, consists of our Smart Encoding division, our DMSP
      (“Digital Media Services Platform”) division, our UGC (“User Generated Content”)
      division and our EDNet division. This group represented approximately 33.1%
      and
      55.0% of our revenues for the years ended September 30, 2007 and 2006,
      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.





Our
      Smart
      Encoding division provides both automated and manual encoding and editorial
      services for processing digital media, using a set of coordinated technologies
      and processes that allow the quick and efficient on-line search, retrieval
      and
      streaming of this media, which can include photos, videos, audio, engineering
      specs, architectural plans, web pages, and many other pieces of business
      collateral. Our DMSP division provides an on-line, subscription based service
      that includes access to enabling technologies and features for our clients
      to
      acquire, store, index, secure, manage, distribute and transform these digital
      assets into saleable commodities. Our UGC division, which also operates as
      Auction Video, provides a video ingestion and flash encoder that can be used
      by
      our clients on a stand-alone basis or in conjunction with the DMSP. In addition,
      our EDNet division provides connectivity within the entertainment and
      advertising industries through its managed network, which encompasses production
      and post-production companies, advertisers, producers, directors, and talent.





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 a subscription basis over the Internet. This product,
      the initial version of what became the DMSP, was initially designed and managed
      by Science Applications International Corporation (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 - encoding, storage, search and retrieval and distribution. A limited
      version of the DMSP, with three of the four products accessible, was first
      placed in service with third-party customers in November 2005. The fourth
      product was made available to our DMSP customers as of October
      2006.




1




On
      March
      27, 2007 we completed the acquisition of the assets, technology and patents
      pending of privately owned Auction Video, Inc., a Utah corporation, and Auction
      Video Japan, Inc., a Tokyo-Japan corporation. The primary assets acquired were
      the video ingestion and flash transcoder that is already integrated into our
      DMSP, related technology and patents pending, customer lists and employment
      and
      non-compete agreements.





***Web
      Communications Services Group***





Our
      Web
      Communications Services Group includes a) our Webcasting division, which
      operates primarily from facilities in Pompano Beach, Florida and 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, b) o ur
      Infinite Conferencing (“Infinite”) division, which operates primarily from facilities in the New York City
      area and
      provides “reservationless” and operator-assisted audio and web conferencing
      services and c) our
      Travel division, which produces and distributes Internet-based multi-media
      streaming videos related to hotels, resorts, time-shares, golf facilities,
      and
      other travel destinations. This group represented approximately 66.9% and 45.0%
      of our revenues for the years ended September 30, 2007 and 2006, respectively.
      These revenues are comprised primarily of production, usage and distribution
      fees.





Our
      Webcasting division, which operates primarily from facilities in Pompano Beach,
      Florida, 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. The
      Webcasting division also has a sales and production support office in New York
      City as well as additional production and back-up webcasting facilities in
      our
      San Francisco office. 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.





On
      April
      27, 2007 we completed the acquisition of Infinite Conferencing LLC (“Infinite”),
      a Georgia limited liability company. The consideration for the merger was a
      combination of $14 million in cash and approximately 1.38 million shares of
      Onstream Media restricted common stock, for an aggregate purchase price of
      approximately $18 million. The primary assets acquired, in addition to
      Infinite’s ongoing audio and web conferencing business operations, were accounts
      receivable, equipment, internally developed software, customer lists and
      employment and non-compete agreements. The audioconferencing and webconferencing operations
      of Infinite Conferencing, which operates primarily from facilities in Millburn,
      New Jersey, are also considered part of the Web Communications Services
      Group.




Our
      Web
      Communications Services Group also includes our Travel division. These
      production and distribution 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.





**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 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.




2





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.





For
      the
      years ended September 30, 2007 and 2006 the Company provided smart encoding
      services to a significant customer, America Online, Inc., under a contract
      that
      can be terminated upon a 30-day notification. Revenues from sales to this
      customer were approximately $461,000, or approximately 4%, and $911,000, or
      approximately 11%, of total consolidated revenue for the years ended September
      30, 2007 and 2006, respectively. These revenues represented approximately 11%
      and 20% of Digital Media Services Group revenues for the same periods.





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 ON24,
      IVT, WILink, Talkpoint, Wall Street Transcripts, Netbriefings, PTEK Holdings,
      Shareholder.com, Thomson Financial Group, ViaVid and others that offer live webcasts
      of quarterly earnings conference calls. This list includes entities that are
      currently active resellers of our services and not in significant competition
      with us, but could compete with us under certain circumstances. 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.




3




Competition
      for audio and web conferencing is primarily segregated between the low-cost,
      low-service offerings such as FreeConference.Com and other more high-end
      providers such as Premiere Global Services. We, through our Infinite division,
      service a niche market for audio and web conferencing services primarily for
      SMB
      (small to medium size) companies looking for superior customer service at an
      affordable rate. Our niche also includes a growing demand for lead generation
      seminars, which we address by offering a dedicated account manager to coordinate
      a customized solution for each event.





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, Digital Generation (DG)
      Systems, Globecast, MediaNet, SohoNet, Pathfire, Source Elements and Ascent
      Media.





While
      there is competition for the provision of digital media services by our Digital
      Media Services Group, this is a relatively new product with few established
      providers. We believe that our approach of partnering with technology providers
      such as SAIC, Autonomy/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
      media services limits direct competition. However, companies that compete in
      some portion of the digital media services market targeted by us include
      MerlinOne, ClearStory Systems, Equant, 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 $4.0 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.




4





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.





As
      part
      of our March 2007 acquisition of Auction Video, a pending United States patent
      was assigned to us covering certain aspects of uploading live webcam images,
      which we believe has potential value. A parallel filing was done to protect
      these patent rights on an international basis, via the filing of a “Patent
      Cooperation Treaty Request”. We are currently pursuing the final approval of
      this patent application.





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 7, 2007 we had approximately 100 full time employees, of whom 57 were
      design, production and technical personnel, 20 were sales and marketing
      personnel and 23 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.





5




**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.




6


**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.





***We
      have an accumulated deficit and we anticipate continuing losses that will
      eventually 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 $95.5 million as of September 30, 2007. For the year ended
      September 30, 2007, we had a net loss of approximately $14.8 million and cash
      used in operations was approximately $2.3 million. However, we had approximately
      $1.2 million of working capital, including approximately $560,000 of cash,
      as of
      September 30, 2007.





We
      have
      projected capital expenditures for the next twelve months of approximately
      $1.1
      million (including the payment of $276,000 in accounts payable at September
      30,
      2007 which will not be reflected as capital expenditures in our cash flow
      statement until it is paid), which includes software and hardware upgrades
      to
      both our Digital Services Media Platform (“DMSP”) as well as our webcasting
      system infrastructure. We expect increases in our operating expenses during
      fiscal year 2008 arising from a Sarbanes-Oxley 404 compliance program. We may
      be
      able to defer these expenses based on the status of regulatory changes in this
      area, although at this point the continuation of past deferrals of these
      expenses is not considered likely and we currently anticipate expending up
      to
      $200,000 in the first year. We also anticipate additional operating expenses
      in
      fiscal year 2008 related to the continuation of our marketing program expansion
      that began in previous fiscal years, although we cannot guarantee that this
      expansion will be continued or that our marketing efforts will be successful.





In
      addition to the above, we have agreed to pay any difference between $2.0 million
      and the proceeds of the sale of first 688,311 shares issued to the former
      shareholders of Infinite Conferencing, which difference is currently estimated
      to be approximately $923,000. This amount is payable in cash or, subject to
      certain restrictions, in shares, which could be due as soon as January 15,
      2008.
      See details in separate risk factor below.





We
      cannot
      assure that our revenues will continue to increase, nor can we assure that
      they
      will not decrease. The DMSP was first placed in service with third-party
      customers in November 2005, but related revenues to date have been minimal
      and
      we cannot assure what the future 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 the ability of our operations to generate working capital,
      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 2008.





Our
      operations have historically been financed primarily through the issuance of
      equity and debt. 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.
      If
      our current burn rate continues or increases, we will need to eventually raise
      additional working capital, which we cannot assure will be successfully
      raised. ****** 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 if and when needed, we may be required to curtail some of our
      operations.




7





***We
      will probably be required in the near future to pay the former shareholders
      of
      Infinite Conferencing approximately $923,000 in cash or, subject to certain
      restrictions, in shares.***





In
      accordance with the terms of our acquisition of Infinite Conferencing, we agreed
      to pay any difference between $2.0 million and the proceeds of the sale of
      first
      688,311 shares issued to the former shareholders of Infinite. As of December
      7,
      2007, those former shareholders had sold 635,000 shares at an average price
      which, if applied to the entire 688,311 shares, would result in our payment
      of
      approximately $923,000 (in cash or, subject to certain restrictions, in shares),
      which could be due as soon as January 15, 2008, although this date could be
      later subject to the notice and proof requirements in the governing documents.
      Based on certain restrictions, we have estimated that we will be able to issue
      no more than approximately 80,000 additional ONSM common shares to satisfy
      any
      additional payment that is required, which would be valued at the average share
      price for the thirty days prior to such issuance. The issuance of ONSM common
      shares to the former Infinite shareholders in excess of this amount would
      require ONSM shareholder approval, which cannot be assured. In addition, if
      we
      satisfy this obligation through the issuance of equity, the percentage ownership
      of our company held by existing shareholders will be reduced and those
      shareholders may experience significant dilution.





If
      we
      raise additional capital to pay this amount through the issuance of debt, this
      will result in increased interest expense. 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 if and when needed, we may be required to curtail some of our
      operations.





In
      accordance with SFAS 141, contingent consideration should only be recorded
      once
      the contingency is resolved and the additional consideration is issued or
      becomes issuable and since these conditions were not met as of September 30,
      2007, we have not made any entries on our financial statements as of that date
      to reflect this contingency.





***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 $2.1 million to complete the platform
      in a commercially viable form, including $600,000 related to our acquisition
      of
      video ingestion and flash transcoder software as part of the Auction Video
      acquisition in March 2007. Although we believe there is a market for the DMSP,
      which had 135 monthly recurring subscribers as of December 2007, there have
      only
      been limited DMSP revenues recognized 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.




8





Goodwill
      from the Onstream Merger was approximately $8.4 million at September 30, 2007
      and property and equipment as of September 30, 2007 included approximately
      $2.5
      million (net of depreciation) related to the DMSP.





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





Our
      prior
      acquisitions of several businesses, including the Onstream Merger and the
      Infinite Merger, have resulted in significant increases in goodwill and other
      unamortized intangible assets. Goodwill and other unamortized intangible assets,
      which include acquired customer lists, were approximately $26.8 million at
      September 30, 2007, representing approximately 73% of our total assets and
      80%
      of the book value of shareholder equity. In addition, property and equipment
      as
      of September 30, 2007 includes approximately $2.5 million (net of depreciation)
      related to the DMSP.





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.





***We
      may continue to experience volatility in our stock price, which has been below
      $1.00 per share since November 19, 2007. In addition, if our stock price is
      below $1.00 for thirty days, it could eventually result in NASDAQ delisting
      of
      our common shares, which would in turn expose us to financial penalties in
      connection with securities previously sold by us.***





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,




9




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





As
      of
      December 7, 2007, the closing bid price for ONSM common stock was $0.94 per
      share, which represented the fourteenth consecutive business day under $1.00.
      Per NASDAQ Marketplace Rule 4310(c)(4), maintenance of a $1.00 closing bid
      price
      is necessary in order to be eligible for continued listing on the NASDAQ Capital
      Market. If the closing bid price stays below $1.00 for thirty consecutive
      business days, the NASDAQ can be expected to issue a letter to the Company
      establishing a 180 calendar day deadline for the Company to become compliant
      with the minimum bid price. The Company may be considered compliant, subject
      to
      the NASDAQ staff's discretion, if its common stock closes at $1.00 per share
      or
      more for a minimum of ten consecutive business days before the 180-day deadline.
      If the Company is not considered compliant by the 180-day deadline, but meets
      all other initial listing criteria for the NASDAQ Capital Market, NASDAQ may
      extend the initial deadline by an additional 180 calendar days.




In
      the
      event our common stock is not listed or quoted, or is suspended from trading
      on
      an eligible market for a period of 20 or more trading days (which need not
      be
      consecutive), the purchasers of the 8%
      Senior
      Convertible Debentures and the 8% Subordinated Convertible
      Debentures may
      require us to redeem any shares obtained from the conversion of those notes
      and
      still held, for 115% of the market value for the previous five days. 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 for a period of 3 or more trading days (which
      need not be consecutive) on the NASDAQ Capital Market, until the situation
      is
      cured. We believe that the applicability of these provisions would be limited
      by
      equity and/or by statute to a certain timeframe after the original security
      purchase.





In
      the
      event our common shares are delisted for more than five (5) consecutive trading
      days then we are liable to the purchasers of approximately $11.0 million of
      our
      common shares in March and April 2007, for a compensatory payment (pro rated
      on
      a daily basis) of one and one-half percent (1.5%) per month until the situation
      is cured, such payment based on the purchase price of the shares still held
      and
      provided that such payments may not exceed ten percent (10%) of the initial
      purchase price of the shares with respect to any one purchaser. We believe
      that
      the applicability of this provision would be limited by equity and/or by statute
      to a certain timeframe after the original security purchase.




10




***If
      the selling security holders listed in our more recent registration statements
      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 listed in our more recent
      registration statements on Forms S-3 (declared effective in July 2006 and June
      2007) 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 warrant, or the conversion of shares of our Series
      A-10
      Convertible Preferred Stock will be dilutive to our existing common
      shareholders.***





As
      of
      September 30, 2007 there were outstanding options and warrants to purchase
      a
      total of 14,636,231 shares of our common stock, with an average exercise price
      of $1.67 per share and approximately 60% exercisable from $0.71 to $1.65 per
      share. In addition, as of September 30, 2007 there were 69,196 shares of our
      Series A-10 Convertible Preferred Stock outstanding, which are convertible
      at
      $1.00 per share into 691,960 shares of our common stock. The closing ONSM share
      price was $0.94 per share on December 7, 2007.





***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 the operating effectiveness of the company's internal controls.
      We
      were not subject to these requirements for the fiscal year ended September
      30,
      2006 nor are we subject to them for the fiscal year ended September 30, 2007.
      We
      are evaluating our internal control systems in order to allow our management
      to
      report on 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, 2008.
      Under the rules in effect as of December 7, 2007, our independent registered
      public accounting firm will be required to attest to the operating effectiveness
      of the company's 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,
      2009.





While
      we
      expect to eventually expend significant resource 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.




11





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 Capital 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.





***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 69,196 shares
      of our Series A-10 Convertible Preferred Stock were issued and outstanding
      at
      September 30, 2007. 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
      an approximately 16,500 square foot facility at 1291 SW 29 th 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 2010 and provides for a two-year renewal
      option. The monthly base rental is approximately $20,400 (including our share
      of
      property taxes and common area expenses) with annual five percent (5%)
      increases.





We
      lease
      an approximately 8,500 square foot facility at 200 Vallejo Street in San
      Francisco, which serves as administrative headquarters for the Digital Media
      Services 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. Our lease expires in May 2009
      and
      provides for one five-year renewal option at 95% of fair market value. The
      monthly base rental is approximately $17,200 (including month-to-month parking)
      with annual increases up to five percent (5%).




12





We
      lease
      an approximately 3,000 square foot facility at 56 Main Street in Millburn,
      New
      Jersey, which houses the Infinite Conferencing audio and web conferencing
      operations. Our monthly rental is approximately $6,500 and the lease expires
      on
      July 31, 2008.





We
      also
      maintain business offices located at 440 Ninth Avenue, New York City, New York.
      These offices total approximately 1,000 square feet and serve primarily for
      webcasting sales activities and backup to Florida-based webcasting operations.
      Our monthly rental is approximately $6,600 and the lease expires on December
      31,
      2008.





We
      also
      lease small limited purpose office space in Colorado, Utah and Japan (Toyko),
      as
      well as equipment space at co-location or other equipment housing facilities
      in
      South Florida, Atlanta, Jersey City, San Francisco and Colorado
      Springs.





**ITEM
              3.**
            **LEGAL
                PROCEEDINGS**





We
      are
      involved in litigation and regulatory investigations arising in the ordinary
      course of business. While the ultimate outcome of these matters is not presently
      determinable, it is the opinion of management that the resolution of these
      outstanding claims will not have a material adverse effect on our financial
      position or results of operations.





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





On
      September 18, 2007 we held our 2007 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 July 31, 2007 were approved. 29,486,819
      shares were present, all by valid proxy and including 12,353,088 shares held
      in
      street names and thus only eligible to vote on certain of these matters. At
      the
      2007 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 Carl Silva 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
                AbstentionsRandy
                S. Selman
            
            
            29,056,877
            
            
            11,173
            
            
            418,769Alan
                M. Saperstein
            
            
            28,911,236
            
            
            156,814
            
            
            418,769Benjamin
                Swirsky
            
            
            29,067,579
            
            
            471
            
            
            418,769Robert
                J. Wussler
            
            
            29,046,523
            
            
            21,527
            
            
            418,769Charles
                C. Johnston
            
            
            28,893,130
            
            
            174,920
            
            
            418,769Clifford
                Friedland
            
            
            29,056,983
            
            
            11,067
            
            
            418,769Carl
                Silva
            
            
            29,045,767
            
            
            22,283
            
            
            418,769





On
      December 6 ,
      2007
      Mr. Benjamin Swirsky resigned from his post on the Board of
      Directors, for
      health-related reasons .
      On the
      same day, the remaining members of the Board appoint ed  Mr. Leon  Nowalsky as
      Mr.
      Swirsky’s replacement.





13





**Ratification
      of Accountants** - Our shareholders ratified the appointment of Goldstein Lewin & Co.,
      Certified Public Accountants, as our independent accountants. The vote totals
      were 29,304,693 shares for, 151,458 shares against and 30,668 share
      abstentions.





**New
      Incentive Plan -** Our
      shareholders approved the
      Onstream Media Corporation 2007 Equity Incentive Plan (“New Incentive Plan”),
      which provides for the grant of up to six million (6,000,000) shares of Common
      Stock pursuant to incentive stock options or nonstatutory stock options
      (together with incentive stock options, "Stock Options"), stock purchase rights,
      stock appreciation rights and restricted and unrestricted stock awards
      (the latter four, collectively, "Stock Awards") for employees, directors
      and consultants. The
      vote
      totals were 13,296,876 shares for, 2,361,609 shares against and 1,475,246 share
      abstentions.




14


**PART
      II**





**ITEM
              5.**
            **MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                ISSUER PURCHASES OF EQUITY
                SECURITIES**





Our
      common stock is quoted on the NASDAQ Capital Market, under the trading symbol
      "ONSM."





The
      following table sets forth the high and low closing sale prices for our common
      stock as reported on the NASDAQ Capital Market for the period from October 1,
      2005 through December 7, 2007. These prices do not include retail mark-ups,
      markdowns or commissions, and may not necessarily represent actual transactions.


*High*
              
              *Low*FISCAL
                  YEAR 2006:First
                  Quarter
              
              $
              1.17
              
              $
              0.65Second
                  Quarter
              
              $
              1.15
              
              $
              0.85Third
                  Quarter
              
              $
              1.30
              
              $
              0.78Fourth
                  Quarter
              
              $
              0.95
              
              $
              0.56FISCAL
                  YEAR 2007:First
                  Quarter
              
              $
              3.15
              
              $
              0.46Second
                  Quarter
              
              $
              3.59
              
              $
              2.28Third
                  Quarter
              
              $
              3.15
              
              $
              2.19Fourth
                  Quarter
              
              $
              2.34
              
              $
              1.20FISCAL
                  YEAR 2008:First
                  Quarter (to Dec 7)
              
              $
              1.66
              
              $
              0.91





On
      December 7, 2007, the last reported sale price of the common stock on the NASDAQ
      Capital Market was $0.94 per share. As of December 7, 2007 there were
      approximately 578 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. 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 period from August 4, 2007 through September 30, 2007, we issued 7,451
      unregistered shares of common stock for consulting, financial advisory and
      legal
      services. The services are being provided over periods ranging up to three
      months, and will result in a professional fees expense of approximately $11,000
      over the service period. None of these shares were issued to Company directors
      or officers.




15





During
      the period from October 1, 2007 through December 7, 2007, we issued 5,085
      unregistered shares of common stock for consulting, financial advisory and
      legal
      services. The services are being provided over periods ranging up to two months,
      and will result in a professional fees expense of approximately $9,000 over
      the
      service period. None of these shares were issued to Company directors or
      officers.





In
      November 2006, the Company entered into a three-year consulting contract with
      the principal and beneficial owner of an entity which loaned the Company $1.0
      million in October 2006. The contract, for the provision of international
      business development and financial advice, is cancellable upon thirty days
      notice after the first year and originally called for the issuance of 60,000
      restricted common shares in advance every six months. The first two tranches
      under this contract (60,000 shares each) were issued in January and May 2007.
      This contract was amended in July 2007 for some additional short-term services,
      resulting in issuance of an additional 15,000 shares plus $22,425 for cash
      reimbursement of related travel expenses. This contract was amended again in
      October 2007, which resulted in the issuance of the remaining 240,000 restricted
      common shares, in exchange for the extension of the remaining term of the
      contract from two years to three years. These 240,000 shares will be valued
      based on fair market value as of the date of issuance and will result in a
      professional fees expense of approximately $334,000 over the service
      period.





On
      September 27, 2007, the Company’s Compensation Committee and Board of Directors
      approved the
      issuance of 25,000
      restricted shares of our common stock to Mr. Charles Johnston, director, as
      compensation for services to be rendered by him for the fiscal year ended
      September 30, 2008, in connection with his recent appointment as Chairman of
      our
      Audit Committee. These Plan shares were issued in December 2007 but will be
      valued at the fair market value at the date of the approval, and will result
      in
      a professional fees expense of approximately $43,000 over the service
      period.





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.





16




**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, our 2007 Equity
      Incentive Plan, individual compensation arrangements and any other compensation
      plans as of September 30, 2007.


Plan
                  category
              
              
              
              Number
                  of securities to be issued upon exercise of of outstanding options,
                  warrants and rights
              
              Weighted
                  average exercise price of outstanding options, warrants and
                  rights
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))(a)
              
              (b)
              
              (c)1996
                  Stock Option Plan
              
              
              (1
              )
              
              4,371,332
              
              $
              1.22
              
              
              none2007
                  Equity Incentive Plan
              
              
              (2
              )
              
              3,100,000
              
              $
              1.73
              
              
              2,900,000Equity
                  compensation plansapproved
                  by shareholders
              
              
              (3
              )
              
              2,431,390
              
              $
              2.09
              
              
              noneEquity
                  compensation plansnot
                  approved by shareholders
              
              
              
              
              
              none
              
              
              -
              
              
              none





(1)
            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 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 (up
                to 4,500,000 shares available for issuance as options and up to another
                2,000,000 shares available for stock grants).





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 (65,216 Non-Plan options and
      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 259,660 of the options (all 65,216 of the Non-Plan options
      and 194,444 of which were issued under the 1996 Stock Option plan) had expired
      as of September 30, 2007.




17





(2)
            On
                September 18, 2007, the Company’s Board of Directors and a majority of the
                Company's shareholders adopted the 2007 Equity Incentive Plan (the
“New
                Plan”), which authorized the issuance of up to 6,000,000 shares of ONSM
                common stock pursuant to stock options, stock purchase rights, stock
                appreciation rights and/or stock awards for employees, directors
                and
                consultants. The options and stock grants authorized for issuance
                under
                the New Plan were in addition to those already issued under the Plan,
                although the Company may no longer issue additional options or stock
                grants under the Plan.





(3)
            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.




18




**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 a
      leading online service provider of live and on-demand Internet video, corporate
      web communications and content management applications. We had approximately
      100
      full time employees as of September 30, 2007, with operations organized in
      two
      main operating groups:





·
            Digital
                Media Services Group





·
            Web
                Communications Services Group





Our
      Digital Media Services Group, which operates primarily from facilities in San
      Francisco, California, consists of our Smart Encoding division, our DMSP
      (“Digital Media Services Platform”) division, our UGC (“User Generated Content”)
      division and our EDNet division.





Our
      Smart
      Encoding division provides both automated and manual encoding and editorial
      services for processing digital media, using a set of coordinated technologies
      and processes that allow the quick and efficient on-line search, retrieval
      and
      streaming of this media, which can include photos, videos, audio, engineering
      specs, architectural plans, web pages, and many other pieces of business
      collateral. Our DMSP division provides an on-line, subscription based service
      that includes access to enabling technologies and features for our clients
      to
      acquire, store, index, secure, manage, distribute and transform these digital
      assets into saleable commodities. Our UGC division, which also operates as
      Auction Video, provides a video ingestion and flash encoder that can be used
      by
      our clients on a stand-alone basis or in conjunction with the DMSP. In addition,
      our EDNet division provides connectivity within the entertainment and
      advertising industries through its managed network, which encompasses production
      and post-production companies, advertisers, producers, directors, and talent.





Our
      Web
      Communications Services Group includes a) our Webcasting division, which
      operates primarily from facilities in Pompano Beach, Florida and 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, b) o ur
      Infinite Conferencing (“Infinite”) division, which operates primarily from facilities in the New York City
      area and
      provides “reservationless” and operator-assisted audio and web conferencing
      services and c) our
      Travel division, which produces and distributes 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.





**Fiscal
      2007 Highlights**





On
      March
      27, 2007 we completed the acquisition of the assets, technology and patents
      pending of privately owned Auction Video, Inc., a Utah corporation, and Auction
      Video Japan, Inc., a Tokyo-Japan corporation. The primary assets acquired were
      the video ingestion and flash transcoder that is already integrated into our
      Digital Media Services Platform (“DMSP”), related technology and patents
      pending, customer lists and employment and non-compete agreements.




19





On
      April
      27, 2007 we completed the acquisition of Infinite Conferencing LLC (“Infinite”),
      a Georgia limited liability company. The primary assets acquired, in addition
      to
      Infinite’s ongoing audio and web conferencing business operations, were accounts
      receivable, equipment, internally developed software, customer lists,
      trademarks, URLs (internet domain names), favorable supplier terms and
      employment and non-compete agreements.





We
      arranged a private equity financing totaling $11 million, to partially fund
      the
      Infinite transaction, consisting of the sale of Onstream Media restricted common
      stock at $2.25 per share to approximately sixty individuals, funds and other
      entities. The remainder of the purchase price was funded from our cash.





During
      the year ended September 30, 2007, we received approximately $6.9 million from
      the exercise of previously issued warrants and options and approximately $2.3
      million of proceeds from convertible notes entered into with four individual
      investors ( for total proceeds under those notes of $3.1 million when combined
      with funds received by us prior to October 1, 2006).





As
      of
      September 30, 2007, all 8% Senior and Subordinated Convertible Debentures had
      been converted to common shares and all notes payable, with the exception of
      two
      capitalized leases, had been repaid or converted to common shares.





As
      a
      result of acquisition, equity and financing transactions, including the above,
      during the year ended September 30, 2007, the number of our common shares
      outstanding increased by approximately 26.8 million shares, to approximately
      41.9 million common shares outstanding as of September 30, 2007.





See
      Liquidity and Capital Resources.





**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 Media Services Group recognizes revenues from the acquisition, editing,
      transcoding, indexing, storage and distribution of its customers’ digital media.
      Charges to customers by the Smart Encoding and UGC divisions 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. Charges to
      customers by the DMSP division are generally based on a monthly subscription
      fee, as well as charges for hosting, storage and professional services. 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
      primarily generates revenue from customer usage of digital telephone connections
      controlled by the Company. 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 usage of those services.





Our
      Web
      Communications Services Group recognizes revenue from live and on-demand
      internet webcasting, audio and web conferencing and production and internet
      distribution of travel information. The Webcasting division charges for live
      and
      on-demand webcasting at the time an event is accessible for streaming over
      the
      Internet. The
      Infinite Conferencing division generally charges for audio conferencing and
      web
      conferencing services on a per-minute usage rate, although webconferencing
      services are also available for a monthly subscription fee allowing a certain
      level of usage. Audio conferencing and web conferencing revenue is recognized
      based on the timing of the customer’s use of those services. The Travel
      division recognizes production revenue 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.




20





**Results
      of Operations**





Our
      consolidated net loss for the year ended September 30, 2007 was approximately
      $14.8 million ($0.48 loss per share) as compared to a loss of approximately
      $6.5
      million ($0.47 loss per share) for the prior fiscal year, an increase in our
      loss of approximately $8.3 million (128%). The increased net loss for fiscal
      2007, as compared to the prior fiscal year, was primarily due to higher non-cash
      interest expense in fiscal 2007 as compared to the prior fiscal year, arising
      from a significant increase in the number of conversions to equity of the 8%
      Senior and Subordinated Convertible Debentures and a resulting increase in
      the
      write-off of unamortized discount, as well as conversions of notes payable
      to
      equity during fiscal 2007 for which similar transactions did not occur in the
      prior fiscal year, and the resulting write-off of prepaid interest and
      fees.





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


PERCENTAGE
                  OF REVENUEYear
                  Ended September 30,2007
              
              2006Revenue:Smart
                  encoding, DMSP and UGC
              
              
              14.2
              %
              
              25.5
              %Network
                  usage
              
              
              17.4
              
              
              24.9Webcasting
              
              
              39.4
              
              
              43.0Audio
                  and web conferencing
              
              
              26.4
              
              
              -Other
              
              
              2.6
              
              
              6.6Total
                  revenue
              
              
              100.0
              %
              
              100.0
              %Cost
                  of revenue:Smart
                  encoding, DMSP and UGC
              
              
              8.6
              
              
              9.0Network
                  usage
              
              
              7.4
              
              
              10.8Webcasting
              
              
              14.2
              
              
              16.3Audio
                  and web conferencing
              
              
              4.5
              
              
              -Other
              
              
              1.0
              
              
              2.6Total
                  costs of revenue
              
              
              35.7
              %
              
              38.7
              %Gross
                  margin
              
              
              64.3
              %
              
              61.3
              %
  21
  PERCENTAGE
                  OF REVENUEYear
                  Ended September 30,2007
              
              2006Operating
                  expenses:Compensation
              
              
              55.1
              
              
              59.2Professional
                  fees
              
              
              27.6
              
              
              27.4Other
                  general and administrative
              
              
              18.0
              
              
              19.1Depreciation
                  and amortization
              
              
              25.6
              
              
              25.2Total
                  operating expenses
              
              
              126.3
              %
              
              130.9
              %Loss
                  from operations
              
              
              (62.0
              )%
              
              (69.6
              )%Other
                  expense, net:Interest
                  income
              
              
              0.6
              
              
              0.1Interest
                  expense
              
              
              (61.6
              )
              
              (25.3
              )Debt
                  extinguishment loss
              
              
              (1.1
              )
              
              -Income
                  from derivative instruments
              
              
              -
              
              
              15.5Other
                  income, net
              
              
              2.3
              
              
              2.5Total
                  other expense, net
              
              
              (59.8
              )%
              
              (7.2
              )%Net
                  loss
              
              
              (121.8
              )%
              
              (76.8
              )%





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.





For
                the year ended
              September
                30,
            
            Increase
                (Decrease)2007
            
            2006
            
            Amount
            
            PercentTotal
                revenue
            
            $
            12,115,045
            
            $
            8,419,451
            
            $
            3,695,594
            
            
            43.9
            %Total
                costs of revenue
            
            
            4,319,085
            
            
            3,256,094
            
            
            1,062,991
            
            
            32.6
            %Gross
                margin
            
            
            7,795,960
            
            
            5,163,357
            
            
            2,632,603
            
            
            51.0
            %General
                and administrative expenses
            
            
            12,207,877
            
            
            8,899,195
            
            
            3,308,682
            
            
            37.2
            %Depreciation
                and amortization
            
            
            3,099,940
            
            
            2,121,161
            
            
            978,779
            
            
            46.1
            %Total
                operating expenses
            
            
            15,307,817
            
            
            11,020,356
            
            
            4,287,461
            
            
            38.9
            %Loss
                from operations
            
            
            (7,511,857
            )
            
            (5,856,999
            )
            
            1,654,858
            
            
            28.3
            %Other
                expense
            
            
            (7,246,196
            )
            
            (609,214
            )
            
            6,636,982
            
            
            1089.4
            %Net
                loss
            
            $
            (14,758,053
            )
            $
            (6,466,213
            )
            $
            8,291,840
            
            
            128.2
            %





22




**Revenues
      and Gross Margin**





Consolidated
      operating revenue was approximately $12.1 million for the year ended September
      30, 2007, an increase of approximately $3.7 million (44%) from the prior fiscal
      year, due to increased revenues of the Web Communications Services
      Group.





Web
      Communications Services Group revenues were approximately $8.1 million for
      the
      year ended September 30, 2007, an increase of approximately $4.3 million (114%)
      from the prior fiscal year. This increase was primarily due to approximately
      $3.2 million of audio and web conferencing revenues recognized since the
      Infinite Merger on April 27, 2007, having no corresponding effect in the prior
      fiscal year, although we also experienced an approximately 32% increase in
      webcasting division sales over the prior fiscal year, arising from increased
      production services sales and a continuation of the past growth in our sales
      of
      higher priced video webcasts. The number of webcasts produced increased to
      approximately 5,900 webcasts for the year ended September 30, 2007, versus
      approximately 4,500 webcasts for the prior fiscal year, and the average revenue
      per webcast event increased to approximately $803 for fiscal 2007 as compared
      to
      approximately $792 for the prior fiscal year.





In
      April
      2007 we announced our selection as a member of the Qwest Communications
      International team that was awarded a stake in Networx Universal, the largest
      communications services contract in the world. Qwest and its team members will
      participate in the U.S. government program to provide leading-edge voice, data
      and video services, including managed and secure advanced data networks, to
      federal agencies nationwide. Our role as part of the Qwest team will be
      providing comprehensive video and audio encoding services and webcasting for
      live and archived distribution of content via a wide range of digital delivery
      networks.





In
      September 2007 we announced our selection by the Massachusetts Department of
      Revenue to provide digital media storage and streaming services under a one-year
      contract renewable annually over four subsequent years. In November 2007 we
      announced that we had been awarded a stake in a three-year Master Services
      Agreement (MSA) by the State of California to provide video and audio streaming
      services to the state and participating local governments.




The
      webcasting division achieved record revenue of approximately $648,000 during
      October 2007, which represents an increase of approximately 66% over the
      approximately $390,000 in webcasting revenue recorded during the same month
      of
      the previous year (October 2006), and also represents the Company's highest
      single month of webcasting revenues level since its 1993 inception. Infinite
      also achieved record audio and web conferencing revenue of approximately
      $700,000 during October 2007, which represents an increase of approximately
      24%
      as compared to the approximately $563,000 of revenue recorded by Infinite during
      the same month of the previous year (October 2006, which was prior to Onstream’s
      April 2007 acquisition of Infinite) and also represents Infinite’s highest
      single month of revenues since its 2001 inception. W hile
      record monthly revenue achieved in October does indicate the continued growth
      of
      our these two divisions, results from one month should not be used to
      extrapolate and/or project revenues for the quarter ending December 31, 2007
      or
      for any other monthly, quarterly or annual periods.




We
      expect
      the fiscal 2008 revenues of the Web Communications Services Group to exceed
      the
      corresponding fiscal 2007 amounts, including the continuation of audio and
      web
      conferencing revenues we began to recognize in May 2007 as a result of the
      Infinite Merger. We also expect revenues from the webcasting division to exceed
      the corresponding prior year amounts, due to the specific contracts noted above,
      as well as the results 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.




23





We
      have
      recently completed several feature enhancements to our proprietary webcasting
      platform, including embedded Flash video and animations as well as a webinar
      service providing the means to hold a virtual seminar on-line in real time
      and
      both audio and video editing capabilities. Additional upgrades expected include
      storage and search of webcasts in the DMSP by April 2008 and rapid CD-ROM
      creation by June 2008.




We
      recently announced an upgrade to our webcasting service, featuring broadcast
      quality video using the industry standard 16:9 aspect ratio and called Visual
      Webcaster HDTM. The new upgrade includes the ability to use high definition
      cameras and other HD sources input via SDI (Serial Digital Interface) into
      our
      encoders, providing a broadcast-quality experience. In addition, we expect
      to
      deploy iEncodeTM, a full-featured, turnkey, standalone webcasting solution,
      during the second quarter of fiscal 2008.  iEncode is being designed to
      operate inside a corporate LAN environment with multicast capabilities. 
Both Visual Webcaster HD and iEncode will be fully compatible with the DMSP
      for
      archiving, intelligent indexing and retrieval.




Digital
      Media Services Group revenues were approximately $4.0 million for the year
      ended
      September 30, 2007, a decrease of approximately $618,000 (13%) from the
      comparable prior year period. This decrease was primarily due to a decrease
      in
      smart encoding revenues arising from (i) an approximately $450,000 decrease
      in
      sales to a single customer from approximately $911,000 in fiscal 2006 to
      approximately $461,000 in fiscal 2007, as well as (ii) an approximately $311,000
      decrease in sales due to the January 2007 discontinuance of work for a former
      customer. EDNet equipment sales also declined by approximately $194,000 in
      fiscal 2007 as compared to fiscal 2006.





Several
      new Web 2.0 features, including automation upgrades such as "one click"
      publishing capabilities and basic video search capabilities were completed
      and
      deployed on our DMSP in June 2007. As of December 2007, we had approximately
      135
      monthly recurring subscribers to the “store and stream” application of the DMSP,
      which was developed as a focused interface for small to medium business (SMB)
      clients. Most of these subscribers were signed up since May 2007. We expect
      this
      DMSP customer base to continue to grow, especially as we add reporting and
      other
      features to this interface. In addition, we are also developing a provisioning
      function which will allow customers to sign up online for the DMSP on a fully
      automated basis, using a credit card, which we believe will accelerate even
      further the growth in this customer base and related revenues. Enhanced video
      search is expected to be completed and deployed by the end of the second quarter
      of fiscal 2008.





In
      addition to the “store and stream” application of the DMSP, we have entered into
      strategic partnership and other agreements with several entities assisting
      us in
      the deployment via the DMSP of enabling technologies necessary to create social
      networks with integrated professional and user generated multimedia content,
      such as found on YouTube, MySpace and other similar platforms.





One
      of
      the key components of our March 2007 acquisition of Auction Video was the video
      ingestion and flash transcoder, already integrated into the DMSP as an integral
      component of the social network services offered as part of our partnership with
      Five Across (Cisco Systems). Auction Video’s technology is being used in various
      applications such as on-line Yellow Pages listings, delivering video to mobile
      phones, multi-level marketing and on-line newspaper classified advertisements,
      and can also provide for direct input from webcams and other imaging equipment.
      In addition, our Auction Video service was recently approved by eBay to provide
      video hosting services for eBay users and PowerSellers (high volume users of
      eBay). This eBay approval also prompted our signing of partnerships with both
      Infopia and Hammertap, two of eBay’s third party software and service providers
      for PowerSellers. This acquisition is another strategic step in providing a
      complete range of enabling, turnkey technologies for our clients to facilitate
      “video on the web” applications, which we believe will make the DMSP a more
      competitive option as an increasing number of companies look to enhance their
      web presence with digital rich media and social applications.




24





In
      addition to the beneficial effect of the Auction Video technology on DMSP
      revenues, we believe that our ownership of that technology will provide us
      with
      other revenue opportunities, including software sales and licensing fees,
      although the timing and amount of these revenues cannot be assured. As a result
      of this technology, plus other enhancements to the DMSP as noted above and
      our
      increased sales and marketing focus on opportunities with social networks and
      other high-volume users of digital rich media, we expect the future revenues
      of
      the Digital Media Services Group to exceed the corresponding prior year amounts,
      although such increases cannot be assured and more specifically the Digital
      Media Services Group revenues for the first quarter of fiscal 2008 may not
      exceed such revenues for the corresponding 2007 quarter, which included
      significant smart encoding revenues from a contract with Discovery Education
      which was subsequently discontinued.





We
      are
      now estimating a minimum of forty percent (40%) year-over-year growth for our
      total revenues for the fiscal year ending September 30, 2008, as compared to
      our
      total revenues for the fiscal year ending September 30, 2007.





Consolidated
      gross margin was approximately $7.8 million for the year ended September 30,
      2007, an increase of approximately $2.6 million (51%) from the prior fiscal
      year. This increase was primarily due to approximately $2.7 million gross margin
      on the audio and web conferencing revenues recognized since the Infinite Merger
      on April 27, 2007, having no corresponding effect in the prior fiscal year,
      although we also experienced an approximately $793,000 increase in webcasting
      gross margin for fiscal 2007 period versus the prior fiscal year. This increase
      in webcasting gross margin was primarily due to an increase in the number of
      events as well as the average revenue per event, as discussed above, which
      allowed us to better leverage the fixed portion of our webcasting costs. The
      above increases in gross margin were partially offset by a decrease in smart
      encoding gross margin, arising primarily from decreased sales to the two smart
      encoding customers discussed above, as well as the decrease in EDNet equipment
      sales, also discussed above.





The
      gross
      margin percentage was 64.3% for the year ended September 30, 2007, versus 61.3%
      for the prior fiscal year. This increase was primarily due to 82.9% gross margin
      percentage on Infinite’s audio and web conferencing revenues, which is higher
      than our historical gross margin experience, although we also experienced
      increased gross margin percentages for EDNet usage, webcasting and certain
      other
      product lines for the year ended September 30, 2007, versus the prior fiscal
      year.





Based
      on
      our sales expectations discussed above, as well as anticipated higher than
      our
      historical gross margin percentages on audio and web conferencing revenues,
      we
      expect gross margin for fiscal year 2008 to exceed the corresponding prior
      year
      amounts, although such increase cannot be assured.





25





**Operating
      Expenses**





Consolidated
      operating expenses were approximately $15.3 million for the year ended September
      30, 2007, an increase of approximately $4.3 million (39%) over the prior fiscal
      year, primarily from increased compensation, professional fee and depreciation
      and amortization expenses.





Compensation
      expense for the year ended September 30, 2007 was approximately $1.7 million
      greater than the prior fiscal year. This increase is primarily due to (a)
      approximately $857,000 of compensation expense recognized as a result of the
      Infinite Merger since April 27, 2007, having no corresponding effect in the
      prior fiscal year, (b) approximately $384,000 of increased webcasting division
      compensation, primarily for sales staff increases as well as commissions on
      increased webcasting sales and (c) approximately $213,000 of increased executive
      and administrative staff compensation, including the effect of contractual
      raises as well as the impact of non-cash equity compensation recognized in
      accordance with SFAS 123R, which we implemented in fiscal 2007, having no
      corresponding effect in the prior fiscal year period.





Professional
      fee expense for the year ended September 30, 2007 was approximately $1.0 million
      greater than the prior fiscal year. This increase is primarily related to
      amounts incurred under consulting contracts for financial related services,
      paid
      by the issuance of common shares and options to purchase common shares, as
      opposed to cash. In addition, the expense recognized for a given share or option
      payment was generally higher during the current fiscal year than in the prior
      fiscal year, due to the significant increase in the quoted market price of
      an
      ONSM common share since December 2006 through September 2007 (although the
      market price had declined to $0.94 per share as of December 7, 2007). These
      existing contracts will result in future professional fee expenses of
      approximately $1.2 million, primarily recognized during the next six to twelve
      months, although the ultimate expense will be dependent on our valuation of
      those shares and options at the time they are issued. Based on this, as well
      as
      expected increased cash and non-cash expenditures associated with (i)
      Sarbanes-Oxley and other regulatory compliance initiatives and (ii) expanded
      marketing programs, we expect professional fees expense to exceed the
      corresponding amounts for fiscal year 2008.





Depreciation
      and amortization expense for the year ended September 30, 2007 was approximately
      $1.0 million greater than the prior fiscal year. This increase was primarily
      due
      to (a) amortization and depreciation of the tangible and intangible assets
      acquired as a result of our March 2007 acquisition of Auction Video and our
      April 2007 acquisition of Infinite Conferencing, having no corresponding effect
      in the prior fiscal year and (b) the increased percentage of the DMSP being
      depreciated as of October 2006, from 75% of the carrying value to 100% of the
      carrying value.





As
      a
      result of the factors discussed above, including but not limited to the recent
      acquisitions of Auction Video and Infinite Conferencing, we expect our
      consolidated operating expenses to exceed the corresponding prior year amounts
      for the fiscal year 2008. Furthermore, since the Auction Video acquisition
      occurred on March 27, 2007 and the Infinite Merger occurred on April 27, 2007,
      operating expenses related to those operations were reflected for only six
      and
      five months, respectively, in our results for the year ended September 30,
      2007.





**Other
      Expense**





Other
      expense increased to approximately $7.2 million for the year ended September
      30,
      2007, versus approximately $609,000 for the prior fiscal year, an increase
      of
      approximately $6.6 million (1089%). This increase was primarily due to an
      increase in interest expense of approximately $5.3 million primarily due to higher non-cash interest expense in fiscal 2007 as compared
      to
      the prior fiscal year, arising from a significant increase in the number of
      conversions to equity of the 8% Senior and Subordinated Convertible Debentures
      and a resulting increase in the write-off of unamortized discount, as well
      as
      conversions of notes payable to equity during fiscal 2007 for which similar
      transactions did not occur in the corresponding prior fiscal year, and the
      resulting write-off of prepaid interest and fees.




26





As
      of
      September 30, 2007, we had no further 8% Senior and Subordinated Convertible
      Debentures or notes payable (other than two capitalized leases) outstanding
      and
      therefore we anticipate a significant decline in interest expense during
      subsequent accounting periods.





For
      the
      year ended September 30, 2006, we reflected an approximately $1.3 million
      valuation gain from adjusting certain derivatives to market value in accordance
      with EITF 00-19. However, effective within the year ended September 30, 2007,
      we
      adopted FASB Staff Position (“FSP”) EITF 00-19-2, “ Accounting
      for R egistration
      Payment Arrangements ” ,
      which
      establishes that contingent obligations under registration payment arrangements,
      as defined in FSP EITF 00-19-2, shall be recognized and measured separately
      in
      accordance with Statement of Financial Accounting Standard (“SFAS”) No. 5,
“Accounting for Contingencies” and FASB Interpretation (“FIN”) No. 14,
“Reasonable Estimation of the Amount of a Loss”, and not under EITF 00-19. As
      the Company determined that all of the underlying factors that had resulted
      in
      the Company’s previous determination to account for certain warrants and
      conversion features as derivatives were registration payment arrangements and
      as
      a result of its adoption of FSP EITF 00-19-2, these warrants and conversion
      features were no longer considered derivatives to be accounted for under EITF
      00-19, we do not expect to record future valuation EITF 00-19 valuation gains
      and losses for these items. In addition, we do not expect to record future
      liabilities or expenses for these items related to SFAS 5 or FIN 14, although
      the ONSM share price is less than $1.00 as of December 7, 2007, a continuation
      of which could eventually affect our NASDAQ listing status.





In
      accordance with the accounting rules for debt extinguishments, the renegotiated
      note payable to J&C Resources was recorded at its fair value at the date the
      modifications, primarily conversion rights, were approved by our Board of
      Directors, which value was significantly higher than the value at the time
      the
      modifications were renegotiated with the lender two weeks earlier. That
      accounting resulted in our recognition of a non-cash debt extinguishment loss
      during the year ended September 30, 2007 of $135,000, which was the difference
      between the $435,000 fair value of the ONSM shares that the note was convertible
      into as of the Board approval date and the $300,000 face value of the note.
      At
      the time it was renegotiated, the note was convertible into ONSM shares with
      a
      value equal to or less than the face value of the note.





**Liquidity
      and Capital Resources**





Although
      our financial statements for the year ended September 30, 2007 reflect a net
      loss of approximately $14.8 million and cash used in operations of approximately
      $2.3 million, we had cash of approximately $560,000 and working capital of
      approximately $1.2 million at September 30, 2007. Our combined financial results
      for the three months ended June 30, 2007 reflected net cash used by operating
      activities (before changes in current assets and liabilities) of approximately
      $142,000. Consistent with the effect of seasonally lower webcasting revenues
      for
      the three months ended September 30, 2007, net cash used by operating activities
      (before changes in current assets and liabilities) for that period increased
      to
      approximately $355,000. However, in December 2007, we entered into a equipment
      financing line of credit arrangement with several individuals under which we
      can
      borrow up to an aggregate of $1.5 million for equipment purchases, including
      purchases made and paid for by us during the twelve (12) months prior to the
      date of the agreement. Our receivables are also unencumbered and may be borrowed
      against by us, subject to approval of the holders of a majority of our Series
      A-10 Convertible Preferred Stock. Therefore, we believe that we have sufficient
      capital resources to fund our continued operations.




27





On
      March
      27, 2007 we completed the acquisition of the assets, technology and patents
      pending of privately owned Auction Video, Inc., a Utah corporation, and Auction
      Video Japan, Inc., a Tokyo-Japan corporation. The acquisitions were made with
      a
      combination of approximately 467,000 shares of restricted ONSM common stock
      and
      $500,000 cash, for an aggregate purchase price of approximately $2.0 million.
      The primary assets acquired were the video ingestion and flash transcoder that
      is already integrated into our DMSP, related technology and patents pending,
      customer lists and employment and non-compete agreements. In addition to the
      beneficial effect of the Auction Video technology on DMSP revenues, we believe
      that our ownership of that technology will provide us with other revenue
      opportunities, including software sales and licensing fees, although the timing
      and amount of these revenues cannot be assured.





On
      April
      27, 2007 we completed the acquisition of Infinite Conferencing LLC (“Infinite”),
      a Georgia limited liability company. The consideration for the merger was a
      combination of $14 million in cash and approximately 1.38 million shares of
      Onstream Media restricted common stock, for an aggregate purchase price of
      approximately $18 million. The primary assets acquired, in addition to
      Infinite’s ongoing audio and web conferencing business operations, were accounts
      receivable, equipment, internally developed software, customer lists,
      trademarks, URLs (internet domain names), favorable supplier terms and
      employment and non-compete agreements.





The
      cash
      requirements of our fiscal 2007 operations prior to the Infinite Merger,
      including capital expenditures and the acquisitions of Infinite and Auction
      Video, were funded primarily by:





(i)
            approximately
                $6.7 million received by us during the six months ended March 31,
                2007
                from the exercise of previously issued warrants and options, resulting
                in
                our issuance of approximately 4.4 million registered common shares.
                These
                warrants and options had exercise prices ranging from $1.00 to $2.50
                per
                share,





(ii)
            approximately
                $2.3 million received by us during the six months ended March 31,
                2007 as
                proceeds from convertible notes entered into with four individual
                investors, for total proceeds under those notes of $3.1 million when
                combined with funds received by us prior to October 1, 2006. During
                the six months ended March 31, 2007, we issued (i) 3,045,902 restricted
                common shares as the result of the conversion of these notes and
                (ii)
                2,258,185 restricted common shares for payment of interest and fees
                incurred in connection with those promissory notes, and





(iii)
            approximately
                $10.2 million (net of fees and expenses) received by us during March
                and
                April 2007 from a private equity financing we arranged to partially
                fund
                the Infinite transaction, consisting of the sale of 4,888,889 restricted
                common shares at $2.25 per share to approximately sixty individuals,
                funds
                and other entities.





In
      addition to the above, as of March 31, 2007, all 8% Senior and Subordinated
      Convertible Debentures, as well as notes payable, had been repaid or converted
      to common stock. During the six months ended March 31, 2007, we issued an
      aggregate of 5,299,153 registered common shares as a result of conversions
      of
      $5,225,000 (plus accrued interest) of 8% Senior and Subordinated Convertible
      Debentures.




28




Our
      accumulated deficit was approximately $95.3 million at September 30, 2007.
      We
      have incurred losses since our inception and our operations have been financed
      primarily through the issuance of equity and debt. 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.





In
      accordance with the terms of our acquisition of Infinite Conferencing, we agreed
      to pay any difference between $2.0 million and the proceeds of the sale of
      first
      688,311 shares issued to the former shareholders of Infinite. As of December
      7,
      2007, those former Infinite shareholders had sold 635,000 shares at an average
      price which, if applied to the entire 688,311 shares, would result in our
      payment of approximately $923,000 (in cash or, subject to certain restrictions,
      in shares), which could be due as soon as January 15, 2008, although this date
      could be later subject to the notice and proof requirements in the governing
      documents. Based on certain restrictions, we have estimated that we will be
      able
      to issue no more than approximately 80,000 additional ONSM shares to satisfy
      any
      additional payment that is required, which would be valued at the average share
      price for the thirty days prior to such issuance. The closing ONSM share price
      was $0.94 per share on December 7, 2007. In accordance with SFAS 141, contingent
      consideration should only be recorded once the contingency is resolved and
      the
      additional consideration is issued or becomes issuable and since these
      conditions were not met as of September 30, 2007, we have not made any entries
      on our financial statements as of that date to reflect this
      contingency.





We
      expect
      increases in our operating expenses during fiscal year 2008 arising from a
      Sarbanes-Oxley 404 compliance program. We may be able to defer these expenses
      based on the status of regulatory changes in this area, although at this point
      the continuation of past deferrals of these expenses is not considered likely
      and we currently anticipate expending up to $200,000 in the first year. We
      also
      anticipate additional operating expenses in fiscal year 2008 related to the
      continuation of our marketing program expansion that began in previous fiscal
      years, although we cannot guarantee that this expansion will be continued or
      that our marketing efforts will be successful.





Projected
      capital expenditures for the next twelve months total approximately $1.1 million
      (including the payment of $276,000 in accounts payable at September 30, 2007
      which will not be reflected as capital expenditures in our cash flow statement
      until it is paid), which includes software and hardware upgrades to the DMSP
      and
      the webcasting system infrastructure.





During
      the year ended September 30, 2007, we received approximately $6.9 million from
      the exercise of previously issued warrants and options. As of August 3, 2007,
      there were still approximately 720,000 registered options and warrants
      outstanding, excluding options held by directors and employees, to purchase
      ONSM
      shares with exercise prices of $1.10 or less and an average exercise price of
      approximately $1.06 per share. The closing ONSM share price was $0.94 per share
      on December 7, 2007.





During
      August 2007, we entered into an agreement with ASPA-Japan Co., Ltd. (“ASPA”) a
      leading video application service provider, whereby ASPA will serve as the
      exclusive sales agent in certain Middle Eastern countries for all of our
      products and services and they will be paid commissions on all sales made by
      them in the region. In exchange for this exclusivity, which has an initial
      term
      of five years, ASPA agreed to pay us a fee of $1.0 million, of which $100,000
      has been received and the balance was due on or before September 30, 2007.
      As of
      December 7, 2007, the balance was not paid and although no formal contract
      amendment or extension has been agreed to, we continue discussions with ASPA
      in
      hopes of resolving this matter. If we formally discontinue these discussions
      without the establishment of a satisfactory contractual relationship, we intend
      to retain the funds already paid. A 25% commission is payable by us to the
      former Auction Video shareholders upon the funds received.




29





In
      December 2007, we entered into a equipment financing line of credit arrangement
      with several individuals under which we can borrow up to an aggregate of $1.5
      million for equipment purchases, including purchases made and paid for by us
      during the twelve (12) months prior to the date of the agreement. We have agreed
      to grant the lenders a security interest in the equipment purchased with the
      proceeds of the line. The outstanding balance bears interest at 12% per annum,
      payable monthly in cash or restricted stock, at our option. An origination
      fee
      of $150,000 is payable within ten (10) days of the initial funding under the
      arrangement, in a single issuance of restricted stock or in ten equal monthly
      cash installments, at our option. Principal may be repaid at any time, but
      no
      later than three (3) years after the date of the agreement and may be paid
      in
      cash or restricted stock, at our option. All payments in restricted stock are
      priced at seventy-five percent (75%) of the average ONSM closing price for
      the
      twenty (20) trading days prior to the date the applicable payment is due. The
      outstanding principal is due on demand in the event a payment default is uncured
      ten (10) business days after written notice. As of December 7, 2007, we had
      not
      received any funding under this arrangement.





Other
      than working capital which may become available to us through the exercise
      of
      outstanding options and warrants, receipt of the ASPA sales agency fee, or
      from
      borrowing against our receivables and/or equipment, 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 any options
      or warrants will be exercised, that ASPA will pay the remaining balance due,
      that we will be able to borrow against our receivables and/or equipment, or
      that
      we will increase our revenues and/or control our expenses to a level sufficient
      to continue and/or provide positive cash flow.





We
      cannot
      assure that our revenues will continue at their present levels, nor can we
      assure that they will not decrease. Although we believe there is a market for
      the DMSP, which had 135 monthly recurring subscribers as of December 2007,
      there
      have only been limited DMSP revenues recognized to date and we do not know
      when,
      if ever, that we will generate significant revenues from this product. As long
      as our cash flow from sales remains insufficient to completely fund operating
      expenses, financing costs and capital expenditures, 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. 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
      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.




30


Cash
      used
      in operating activities was approximately $2.3 million for the year ended
      September 30, 2007, as compared to approximately $1.5 million for the prior
      fiscal year. The $2.3 million reflects our net loss of approximately $14.8
      million, reduced by approximately $12.8 million of non-cash expenses included
      in
      that loss and increased by approximately $363,000 arising from a net increase
      in
      non-cash working capital items during the period. The increase in non-cash
      working capital items for the year ended September 30, 2007 is primarily due
      to
      an approximately $169,000 increase in accounts receivable and an approximately
      $134,000 decrease in accounts payable and accrued liabilities, both excluding
      the effects of the Infinite and Auction Video acquisitions. This compares to
      a
      net decrease in non-cash working capital items of approximately $750,000 for
      the
      prior fiscal year. The primary non-cash expenses included in our loss for the
      year ended September 30, 2007 were approximately $7.3 million of amortization
      of
      discount on debentures and notes payable, including amounts arising from early
      debt repayment, approximately $3.1 million of depreciation and amortization
      and
      approximately $2.3 million of amortization of deferred professional fee expenses
      paid for by issuing stock and options. 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.





Cash
      used
      in investing activities was approximately $16.1 million for the year ended
      September 30, 2007 as compared to approximately $1.1 million for the prior
      fiscal year. Current and prior period investing activities included acquisition
      of property and equipment, although the current year investing activities also
      included approximately $14.7 million of aggregate cash payments made in
      connection with the Infinite and Auction Video acquisitions.





Cash
      provided by financing activities was approximately $18.7 million for the year
      ended September 30, 2007 as compared to approximately $2.9 million for the
      prior
      fiscal year. Current period financing activities primarily related to
      approximately $17.1 million net proceeds from the sale of common shares,
      including shares issued in a private financing arranged to partially fund the
      Infinite Merger and shares issued upon exercise of previously issued common
      stock warrants and options, as well as approximately $1.6 million from loans
      and
      notes payable, net of repayments, while the prior year financing activities
      were
      primarily related to approximately $1.8 million received from the sale of 8%
      Subordinated Convertible Debentures as well as approximately $1.1 million from
      loans and notes payable, net of repayments.





**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 those that are both most
      important to the management’s most subjective judgments. Our most critical
      accounting policies and estimates are described as follows.





Our
      prior
      acquisitions of several businesses, including the Onstream Merger and the
      Infinite Merger, have resulted in significant increases in goodwill and other
      intangible assets. Goodwill and other unamortized intangible assets, which
      include acquired customer lists, were approximately $26.8 million at September
      30, 2007, representing approximately 73% of our total assets and 80% of the
      book
      value of shareholder equity. In addition, property and equipment as of September
      30, 2007 includes approximately $2.5 million (net of depreciation) related
      to
      the DMSP.




31





In
      accordance with GAAP, we periodically test 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.





**ITEM
              7.**
            **FINANCIAL
                STATEMENTS**





Our
      financial statements are contained in pages F-1 through F-53, which appear
      at
      the end of this annual report.





32




**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, 2007, 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. ****




33


**PART
      III**





**ITEM
              9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE
                GOVERNANCE; 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
            
            PositionRandy
                S. Selman
            
            51
            
            Chairman
                of the Board, President and Chief Executive OfficerClifford
                Friedland
            
            56
            
            Vice
                Chairman of the Board, Senior Vice President Business DevelopmentAlan
                M. Saperstein
            
            48
            
            Director,
                Chief Operating Officer and TreasurerDavid
                Glassman
            
            56
            
            Senior
                Vice President and Chief Marketing OfficerRobert
                E. Tomlinson
            
            50
            
            Senior
                Vice President and Chief Financial OfficerRobert
                J. Wussler (1)(2)(3)(4)
            
            71
            
            DirectorCharles
                C. Johnston (1)(2)(3)
            
            72
            
            DirectorCarl
                L. Silva (1)(2)(3)(4)
            
            44
            
            DirectorLeon
                Nowalsky(2)(3)
            
            46
            
            Director




(1)
            Member
                of the Audit Committee.




(2)
            Member
                of the Compensation 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. 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.




34





***Clifford
      Friedland*** .
      Mr.
      Friedland has been a member of our Board of Directors since 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 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. 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.




35





***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 Chairman of the Wussler Group, a global entity
      in
      the telecommunication business. Mr. Wussler has been the President of Ted Turner
      Pictures LLC and 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 Audit (as Chairman), Compensation and Governance and Nominating
      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.





***Carl
      Silva.*** Mr.
      Silva, who has been a member of our Board of Directors since July 2006, serves
      on our Audit, Compensation (as Chairman), Governance and Nominating and Finance
      Committees. Mr. Silva has over 20 years of experience in the telecommunications
      and high tech industry, and he has held a variety of positions in business
      development, sales, marketing, software engineering, and systems engineering
      during this time. In May 2003, Mr. Silva started Anza Borrego Partners (ABP)
      as
      a management consulting firm designed to support entrepreneurs in the growth
      of
      their businesses. Mr. Silva is currently president and CEO or Cognigen Business
      Systems, Inc., a joint venture of ABP and Cognigen Networks, Inc. (NASDAQ:
      CNGW). Mr. Silva was Senior Vice-President for SAIC’s Converged Network
      Professional services organization from July 1998 to May 2003. From September
      1994 to June 1998, he was with Telcordia Technologies (formerly Bell
      Communications Research, or Bellcore), where he implemented the first VoIP
      softswitch in the cable industry.





***Leon
      Nowalsky*** .
      Mr.
      Nowalsky was appointed a member of our Board of Directors in December 2007
      and
      serves on our Compensation and Governance and Nominating (as Chairman)
      Committees. Mr. Nowalsky, a partner in the New Orleans-based law firm of
      Nowalsky, Bronston & Gothard APLLC (NBG), possesses over 20 years experience
      in the field of telecommunications law and regulation. Mr. Nowalsky presently
      is
      a founder and board member of Thermo Credit, LLC, a specialty finance company
      for the telecommunications industry and J.C. Dupont, Inc., a Louisiana based
      oil
      and gas concern. Mr. Nowalsky has been general counsel for Telemarketing
      Communications of America, Inc., (“TMC”), as well as lead counsel in TMC’s
      mergers and acquisitions program, and following TMC’s acquisition by a wholly
      owned subsidiary of Advanced Telecommunications Corporation, Mr. Nowalsky served
      as ATC’s chief regulatory counsel as well as interim general counsel. In 1990,
      Mr. Nowalsky left ATC to set up a private law practice specializing in
      telecommunications regulatory matters, mergers and acquisitions and corporate
      law, which later expanded to become NBG. Mr. Nowalsky has previously served
      as a
      director of the following companies: Network Long Distance, Inc., a long
      distance company which was acquired by IXC Communications; RFC Capital Corp.,
      a
      specialty finance company dedicated exclusively to the telecommunications
      industry which was purchased in 1999 by TFC Financial Corp., a division of
      Textron (NYSE:TXT); and New South Communications, a facilities-based competitive
      local exchange carrier which merged to form NUVOX; W2Com, LLC, a video
      conferencing and distance learning provider which was acquired by Arel
      Communications & Software, Ltd. (NASDAQ: ARLC).




36





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.





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 NSADAQ Marketplace Rules. Our independent directors are Messrs.
      Wussler, Johnston, Silva and Nowalsky.





**Expansion
      of our Board of Directors**





Under
      the
      terms of the purchase and sale agreement for our Series A-10 Convertible
      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.





**Director
      Compensation Table**





The
      following table presents director compensation for the year ended September
      30,
      2007:




Name
            
            Fees
                Earned or Paid in Cash ($) (1)
            
            StockAwards
                ($)
            
            OptionAwards
                ($) (3)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Change
                in Pension Value and Nonqualified Deferred Compensation Earnings
                ($)
            
            All
                other compensation
              ($)
            
            Total
                compensation
              ($)Robert
                J. Wussler
            
            $
            15,000
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            $
            15,000Charles
                C. Johnston
            
            $
            15,000
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            $
            15,000Carl
                L. Silva
            
            $
            15,000
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            $
            15,000Benjamin
                Swirsky
            
            $
            15,000
            (2)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            $
            15,000Leon
                Nowalsky
            
            
            -0-
            (2)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-








(1)
            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.




37





(2)
            On
                December 6, 2007 Mr. Benjamin Swirsky resigned from his post on the
                Board
                of Directors, for health-related reasons. On the same day, the remaining
                members of the Board appointed Mr. Leon Nowalsky as Mr. Swirsky’s
                replacement.





(3)
            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, 2007 members of our Board of Directors
                (excluding those who are Named Executive Officers) held outstanding
                options and warrants to purchase an aggregate of 829,620 shares of
                our
                common stock at prices ranging from $0.71 to $3.376 per share. No
                options
                were issued to the directors who were not also Named Executive Officers
                during the year ended September 30,
                2007.





In
      December 2004, and in connection with the Onstream Merger, Messrs. Wussler,
      Johnston and Swirsky each
      received immediately exercisable five-year options to purchase 100,000 shares
      of
      our common stock with an exercise price of $1.57 per share (fair market value
      on
      the date of issuance). These options were issued outside of our 1996 Stock
      Option Plan and are still outstanding. In July 2005 Messrs.
      Wussler, Johnston and Swirsky each
      received immediately exercisable five-year Plan options to purchase 100,000
      shares of our common stock with an exercise price of $1.12 per share (fair
      market value on the date of issuance), which are still outstanding. In July
      2006
      we issued immediately exercisable four-year Plan options to purchase 50,000
      shares of our common stock with an exercise price of $0.88 per share (fair
      market value on the date of issuance) granted to Mr. Carl L. Silva upon his
      initial appointment to our board of directors, which are still outstanding.
      In
      September 2006 Messrs.
      Wussler, Johnston and Swirsky each
      received immediately exercisable five-year Plan options to purchase 50,000
      shares of our common stock with an exercise price of $0.71 per share (above
      fair
      market value on the date of issuance), which are still outstanding.





Messrs.
      Wussler and Silva also each hold warrants to purchase 14,810 ONSM common shares
      at $3.376 per share, issued at the time of the Onstream Merger in exchange
      for
      warrants issued to them by Acquired Onstream.





In
      December 2007, pursuant to approval by our Compensation Committee and our Board
      of Directors, we issued 25,000
      restricted Plan shares of our common stock to Mr. Charles Johnston as
      compensation for services to be rendered by him for the fiscal year ended
      September 30, 2008, in connection with his recent appointment as Chairman of
      our
      Audit Committee. These shares will be valued at $1.73 per share, the fair market
      value at the date of the approval.





In
      December 2007 we issued immediately exercisable four-year Plan options to
      purchase 50,000 shares of our common stock with an exercise price of $1.00
      per
      share (above fair market value on the date of issuance) granted to Mr. Leon
      Nowalsky upon his initial appointment to our board of directors.





**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 B to our proxy statement for our 2007 Annual Meeting filed with the
      SEC
      on July 31, 2007.




38





The
      Audit
      Committee is presently composed of Messrs. Johnston (chairman), Wussler and
      Silva. 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 and they are “audit committee financial experts” within the meaning of
      the applicable regulations of the Securities and Exchange Commission promulgated
      pursuant to the Sarbanes-Oxley Act of 2002. The Audit Committee met (in-person
      and/or by telephone conference) six times in fiscal 2007.





**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
      our
      2007 Equity Incentive 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 is presently composed of Messrs. Silva (chairman),
      Wussler, Johnston and Nowalsky. The
      Compensation Committee met (in-person
      and/or by telephone conference) three times in fiscal 2007 .





**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,




*
            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.
      Wussler and Silva are the members of the Finance Committee. The Finance
      Committee met in fiscal 2007 in conjunction with meetings of the full Board
      of
      Directors.





**Governance
      and Nominating Committee**





While
      we
      have not adopted a formal charter for the Governance and Nominating Committee,
      in June 2003 our Board of Directors adopted Corporate Governance and Nominating
      Committee Principles. A copy of our Corporate Governance and Nominating
      Committee Principles was included as Exhibit C to the proxy statement for our
      2005 Annual Meeting filed with the SEC on August 1, 2005.




39





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.





The
      Governance and Nominating Committee is presently composed of Messrs. Nowalsky
      (chairman), Johnston, Wussler and Silva, who are each "independent" as
      independence for nominating committee members is defined within the NASDAQ
      Marketplace Rules. The Governance and Nominating Committee met in fiscal 2007
      in
      conjunction with meetings of the full Board of Directors.





**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.
  40





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, 2007 and Forms 5 and amendments thereto
      furnished to us with respect to the fiscal year ended September 30, 2007, as
      well as any written representation from a reporting person that no Form 5 is
      required, 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,
      2007, other than indicated below.





Robert
      Tomlinson, our CFO, filed a Form 4 on July 23, 2007, related to 100,000 stock
      options granted him on July 6, 2005. 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 July 16, 2005. In addition, Mr. Tomlinson filed a Form
      4 on
      July 23, 2007, related to 100,000 stock options granted him on September 29,
      2006.





Randy
      Selman, our CEO and Chairman of the Board, Alan Saperstein, our COO and one
      of
      our directors and Clifford Friedland, our Senior VP-Business Development and
      one
      of our directors, have not filed a Form 4 on a timely basis related to 100,000
      options granted each of them on September 29, 2006. Mr. Selman, Mr. Saperstein
      and Mr. Friedland 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
      at the time of the option grant, have not filed a Form 3 or Form 4 on a timely
      basis related to 50,000 options granted each of them on September 29, 2006.
      Mr.
      Johnston, Mr. Swirsky and Mr. Wussler have represented to us that they will
      file
      these forms as soon as practicable.




41





David
      Glassman, our Senior VP-Marketing, has not filed a Form 4 on a timely basis
      related to 100,000 options granted to him on September 29, 2006. Mr. Glassman
      has represented to us that he will file this form as soon as
      practicable.





**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**





**Summary
      Compensation Table**





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 in total compensation during the most recent fiscal
      year (collectively, the “Named Executive Officers”):




Name,
                PrincipalPosition
            
            Fiscal
              Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            StockAwards
                ($) (11)
            
            OptionAwards
                ($) (11)
            
            Securities
              Underlying
                Options (#)
              (11)
            
            All
                other compensation
              ($)
                (13)
            
            Total
                compensation
              ($)
                (11)Randy
                S. Selman -
            
            
            2007
            
            $
            224,272
            
            
            -0-
            
            
            -0-
            
            
            -0-
            (12)
            
            620,000
            (12)
            $
            48,679
            (1)
            $
            272,951President,
                Chief
            
            
            2006
            
            $
            191,541
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            100,000
            
            $
            48,242
            (2)
            $
            239,783Executive
                Officerand
                DirectorAlan
                Saperstein -
            
            
            2007
            
            $
            206,689
            
            
            -0-
            
            
            -0-
            
            
            -0-
            (13)
            
            620,000
            (12)
            $
            54,901
            (3)
            $
            261,590Chief
                Operating
            
            
            2006
            
            $
            177,552
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            100,000
            
            $
            54,230
            (4)
            $
            231,782Officer,
                Treasurerand
                DirectorCliff
                Friedland -
            
            
            2007
            
            $
            192,940
            
            
            -0-
            
            
            -0-
            
            
            -0-
            (13)
            
            620,000
            (12)
            $
            58,263
            (5)
            $
            251,203Senior
                VP - Busi-
            
            
            2006
            
            $
            175,400
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            100,000
            
            $
            57,278
            (6)
            $
            232,678ness
                Developmentand
                DirectorDavid
                Glassman -
            
            
            2007
            
            $
            192,940
            
            
            -0-
            
            
            -0-
            
            
            -0-
            (13)
            
            620,000
            (12)
            $
            51,629
            (7)
            $
            244,569Senior
                VP -
            
            
            2006
            
            $
            175,400
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            100,000
            
            $
            45,749
            (8)
            $
            221,149MarketingRobert
                Tomlinson-
            
            
            2007
            
            $
            191,134
            
            
            -0-
            
            
            -0-
            
            
            -0-
            (13)
            
            620,000
            (12)
            $
            51,950
            (9)
            $
            243,084Chief
                Financial
            
            
            2006
            
            $
            161,411
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            100,000
            
            $
            48,977
            (10)
            $
            210,388Officer





(1)
            Includes
                $13,679 for medical and other insurance; $12,000 automobile allowance;
                $5,000 dues allowance and $18,000 deferred
                compensation.




42




(2)
            Includes
                $13,242 for medical and other insurance; $12,000 automobile allowance;
                $5,000 dues allowance and $18,000 deferred
                compensation.




(3)
            Includes
                $19,901 for medical and other insurance; $12,000 automobile allowance;
                $5,000 dues allowance and $18,000 deferred
                compensation.




(4)
            Includes
                $19,230 for medical and other insurance; $12,000 automobile allowance;
                $5,000 dues allowance and $18,000 deferred
                compensation.




(5)
            Includes
                $19,897 for medical and other insurance; $12,000 automobile allowance;
                $5,000 dues allowance and $21,366 deferred compensation and 401(k)
                match.
                Table excludes amounts paid to Mr. Friedland during fiscal 2007 related
                to
                compensation accrued prior to the Onstream
                Merger.




(6)
            Includes
                $19,222 for medical and other insurance; $12,000 automobile allowance;
                $5,000 dues allowance and $21,056 deferred compensation and 401(k)
                match.
                Table excludes amounts paid to Mr. Friedland during fiscal 2006 related
                to
                compensation accrued prior to the Onstream
                Merger.




(7)
            Includes
                $13,263 for medical and other insurance; $12,000 automobile allowance;
                $5,000 dues allowance and $21,366 deferred compensation and 401(k)
                match.
                Table excludes amounts paid to Mr. Glassman during fiscal 2007 related
                to
                compensation accrued prior to the Onstream
                Merger.




(8)
            Includes
                $7,693 for medical and other insurance; $12,000 automobile allowance;
                $5,000 dues allowance and $21,056 deferred compensation and 401(k)
                match.




(9)
            Includes
                $19,871 for medical and other insurance; $10,875 automobile allowance
                and
                $21,204 deferred compensation and 401(k)
                match.




(10)
            Includes
                $19,164 for medical and other insurance; $9,000 automobile allowance
                and
                $20,813 deferred compensation and 401(k)
                match.




(11)
            The
                above table does not include the compensation value of any shares
                or
                options issued to the Named Executive Officers for the year ended
                September 30, 2006, nor are such amounts contemplated in the total
                compensation reported for that period, as this period was before
                the
                effective date of the required disclosure of such information by
                the SEC.
                However, the number of securities underlying option awards during
                that
                period are included in the above table, as previously
                reported.




(12)
            During
                the year ended September 30, 2007, each of the Named Executive Officers
                was issued options to purchase 620,000 common shares at $1.73 per
                share,
                which was the fair value at date of grant.220,000
                of those options vest based on performance over the two year period
                from
                October 1, 2007 through September 30, 2009 and since that service
                period
                starts after September 30, 2007, there was no related compensation
                expense
                for the year then ended. The remaining 400,000 of those options vest
                based
                on service over a four year period that starts on September 27, 2007.
                The
                four days from the vesting period start date through September 30,
                2007
                represent approximately one quarter of one percent of an approximately
                1,460 day total service period, which is considered immaterial for
                inclusion of compensation expense for the year ended September 30,
                2007.
                The entire compensation expense for these options will be recognized
                over
                the two years starting October 1, 2007, using the Black-Scholes
                model.




(13)
            The
                Named Executive Officers did not receive non-equity incentive plan
                compensation or compensation from changes in pension value and
                nonqualified deferred compensation earnings during the periods covered
                by
                the above table.





**Employment
      Agreements**




On
      September 27, 2007, our Compensation Committee and our Board of Directors
      approved three-year employment agreements with Messrs. Randy Selman (President
      and CEO), Alan Saperstein (COO and Treasurer), Robert Tomlinson (Chief Financial
      Officer), Clifford
      Friedland (Senior Vice President Business Development) and David Glassman
      (Senior Vice President Marketing), collectively referred to as “the
      Executives” . Other
      than the extended term of the new agreements, the following salary, raise and
      benefit payments are substantially the same as the Executives would have
      received under the employment agreements previously in place that
      would have expired December 27, 2008. The new agreements provide annual base
      salaries of $253,000 for Mr. Selman, $230,000 for Mr. Saperstein, $207,230
      for
      Mr. Tomlinson and $197,230 for Messrs. Friedland and Glassman, and allow for
      10%
      annual increases through December 27, 2008 and 5% per year thereafter. In
      addition, each of the Executives receives an auto allowance payment of $1,000
      per month, a “retirement savings” payment of $1,500 per month, and an annual
      $5,000 allowance for the reimbursement of dues or charitable donations. We
      also
      pay insurance premiums for the Executives, including medical, life and
      disability coverage.




43





As
      part
      of the above employment agreements, and in accordance with the terms of the
      “2007 Equity Incentive Plan” approved by our shareholders in their September 18,
      2007 annual meeting, we g ranted
      each of the Executives options (“Plan Options”) to purchase an aggregate of
      400,000 shares of our common stock at an exercise price of $1.73 per share,
      the
      fair market value at the date of the grant, which shall be exercisable for
      a
      period of four (4) years from the date of vesting. The options vest in
      installments of 100,000 per year, starting on September 27, 2008, and they
      automatically vest upon the happening of the following events on a date more
      than six (6) months after the date of the agreement: (i) change of control
      (ii)
      constructive termination, and (iii) termination other than for cause, each
      as
      defined in the employment agreements. Unvested options automatically terminate
      upon (i) termination for cause or (ii) voluntary termination. In the event
      the
      agreement is not renewed or the Executive is terminated other than for cause,
      the Executives shall be entitled to require us to register the
      options.





The
      Executives will be eligible for a performance bonus, based on meeting revenue
      and cash flow objectives. In
      connection with this bonus program, we g ranted
      each of the Executives Plan Options to purchase an aggregate of 220,000 shares
      of our common stock at an exercise price of $1.73 per share, the fair market
      value at the date of the grant, which shall be exercisable for a period of
      four
      (4) years from the date of vesting. Up to one-half of these shares will be
      eligible for vesting on a quarterly basis and the rest annually, with the total
      grant allocated over a two-year period starting October 1, 2007. Vesting of
      the
      quarterly portion is subject to achievement of increased revenues over the
      prior
      quarter as well as positive and increased net cash flow per share (defined
      as
      cash provided by operating activities per the Company’s statement of cash flow,
      measured before changes in working capital components and not including
      investing or financing activities) for that quarter. Vesting of the annual
      portion is subject to meeting the above cash flow requirements on a
      year-over-year basis, plus a revenue growth rate of at least 30% for the fiscal
      year over the prior year. In the event of quarter to quarter decreases in
      revenues and or cash flow, the options shall not vest for that quarter but
      the
      unvested quarterly options shall be added to the available options for the
      year,
      vested subject to achievement of the applicable annual goal. In the event
      options do not vest based on the quarterly or annual goals, they shall
      immediately expire. In the event the agreement is not renewed or the Executive
      is terminated other than for cause, the Executives shall be entitled to require
      us to register the vested options. We have agreed that this bonus program will
      continue after the initial two-year period, with the specific bonus parameters
      to be negotiated in good faith between the parties at least ninety (90) days
      before the expiration of the program then in place.





Under
      the
      terms of the agreements, upon a termination subsequent to a change of control,
      termination without cause or constructive termination, each as defined in the
      agreements, we would be obligated to pay each of the Executives an amount equal
      to three times the Executive’s base salary plus full benefits for a period of
      the lesser of (i) three years from the date of termination or (ii) the date
      of
      termination until a date one year after the end of the initial employment
      contract term. We may defer the payment of all or part of this obligation for
      up
      to six months, to the extent required by Internal Revenue Code Section 409A.
      In
      addition, if the five day average closing price of the common stock is greater
      than or equal to $2.50 per share on the date of any termination or change in
      control, all options previously granted the Executive(s) will be cancelled,
      with
      all underlying shares (vested or unvested) issued to the executive, and we
      will
      pay all taxes for the Executive(s). If the five-day average closing price of
      the
      common stock is less than $2.50 per share on the date of any termination or
      change in control, the options will remain exercisable under the original
      term.




44





As
      part
      of the above employment agreements, and i n
      consideration for the provision in the new employment agreements that change
      of
      control benefits would not be paid related to any merger and any related
      financing occurring within six months of entering into the new agreements,
      we
      agreed to grant each of the Executives fully vested four-year options for shares
      equivalent to one percent (1%) of the total number of shares issued in
      connection with any such merger and/or any related financing. If we enter into
      a
      definitive merger agreement during that six month period, the number of options
      will be determined and granted at the time of signing that definitive merger
      agreement and will have an exercise price equal to the fair value at the date
      of
      grant. We agreed to register these and all other shares or options held by
      the
      Executives with or simultaneously to any shares registered in connection with
      such a merger and/or any related financing.





Under
      the
      terms of the agreements, we may terminate an Executive’s employment upon his
      death or disability or with or without cause. To the extent that an Executive
      is
      terminated for cause, no severance benefits are due him. If an employment
      agreement is terminated as a result of the Executive’s death, his estate will
      receive one year base salary plus any bonus or other compensation amount or
      benefit then payable or that would have been otherwise considered vested or
      earned under the agreement during the one-year period subsequent to the time
      of
      his death. If an employment agreement is terminated as a result of the
      Executive’s 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, plus any bonus or
      other compensation amount or benefit then payable or that would have been
      otherwise considered vested or earned under the agreement during the one-year
      period subsequent to the time of his disability. These employment agreements
      contain certain non-disclosure and non-competition provisions and we have agreed
      to indemnify the Executives in certain circumstances.




45





As
      part
      of the above employment agreements, we agreed that i n
      the
      event the Company is sold for a Company Sale Price in excess of the Current
      Capitalization during the term of the agreements, both terms as defined below,
      and the Company Sale Price represents at least $2.50 per share (adjusted for
      recapitalization including but not limited to splits and reverse splits), the
      Executives and certain other employees, will receive, as a group, cash
      compensation of twelve and one-half percent (12.5%) of the excess of the Company
      Sale Price over the Current Capitalization, payable in immediately available
      funds at the time of closing such transaction. The Current Capitalization is
      defined as the sum of (i) the number of common shares issued and outstanding,
      (ii) the common stock equivalent shares related to paid for but not converted
      preferred shares and (iii) the number of common shares underlying “in-the-money”
warrants and options, such sum multiplied by the market price per share and
      then
      reduced by the proceeds payable upon exercise of the “in-the-money” warrants and
      options, all determined as of the date of this new agreement but the market
      price per share used for this purpose to be no less than $2.00. The Company
      Sale
      Price is defined as the number of common shares outstanding at the time the
      Company is sold multiplied by the price per share paid in such Company Sale
      transaction. The 12.5% was allocated in the new employment agreements as two
      and
      one-half percent (2.5%) each to Messrs. Selman, Saperstein, Friedland and
      Glassman and one and one-half percent (1.5%) to Mr. Tomlinson. The remaining
      one
      percent (1.0%) will be allocated by the Board and our management at a later
      date, which will be primarily to compensate our other executives not having
      employment contracts, but may also include additional allocation to some or
      all
      of these five senior Executives.





The
      above
      description is qualified in its entirety by the terms and conditions of the
      employment agreements.





46




**Outstanding
      Equity Awards at Fiscal Year-End Table**





The
      following table sets forth certain information regarding stock options held
      as
      of September 30, 2007 by the Named Executive Officers. There were no outstanding
      stock awards held by them as of that date:


NUMBER
                  OF SECURITIES UNDERLYING UNEXERCISED OPTIONS (#)
              
              EQUITY
                  INCENTIVE PLAN AWARDS: NUMBER OF SECURITIES UNDERLYING UNEXERCISED
                  UNEARNED
              
              OPTION
                  EXERCISE
              
              OPTION
                  EXPIRATIONNAME
              
              EXERCISABLE
              
              UNEXERCISABLE
              
              OPTIONS
                (#)
              
              PRICE
                  ($)
              
              DATERandy
                  Selman (3)
              
              
              100,000
              
              
              
              
              
              
              
              $
              0.71
              
              
              9/29/2011450,000
              
              
              
              
              
              
              
              $
              1.12
              
              
              7/6/2010450,000
              
              
              
              
              
              
              
              $
              1.57
              
              
              12/27/09400,000
              
              
              
              
              
              
              
              $
              2.50
              
              
              9/30/0913,333
              (1)
              
              
              
              
              
              
              $
              22.50
              
              
              8/1/2008400,000
              (2)
              
              
              
              $
              1.73
              
              
              9/28/2012-
                  9/28/2015220,000
              (2)
              $
              1.73
              
              
              12/31/2011-9/28/2013Alan
                  Saperstein (3)
              
              
              100,000
              
              
              
              
              
              
              
              $
              0.71
              
              
              9/29/2011450,000
              
              
              
              
              
              
              
              $
              1.12
              
              
              7/6/2010450,000
              
              
              
              
              
              
              
              $
              1.57
              
              
              12/27/09400,000
              
              
              
              
              
              
              
              $
              2.50
              
              
              9/30/0913,333
              (1)
              
              
              
              
              
              
              $
              22.50
              
              
              8/1/2008400,000
              (2)
              
              
              
              $
              1.73
              
              
              9/28/2012-
                  9/28/2015220,000
              (2)
              $
              1.73
              
              
              12/31/2011-9/28/2013Cliff
                  Friedland (3)
              
              
              100,000
              
              
              
              
              
              
              
              $
              0.71
              
              
              9/29/201188,860
              
              
              
              
              
              
              
              $
              3.376
              
              
              7/1/2012400,000
              (2)
              
              
              
              $
              1.73
              
              
              9/28/2012-
                  9/28/2015220,000
              (2)
              $
              1.73
              
              
              12/31/2011-9/28/2013David
                  Glassman (3)
              
              
              100,000
              
              
              
              
              
              
              
              $
              0.71
              
              
              9/29/201188,860
              
              
              
              
              
              
              
              $
              3.376
              
              
              7/1/2012400,000
              (2)
              
              
              
              $
              1.73
              
              
              9/28/2012-
                  9/28/2015220,000
              (2)
              $
              1.73
              
              
              12/31/2011-9/28/2013Robert
                  Tomlinson (3)
              
              
              100,000
              
              
              
              
              
              
              
              $
              0.71
              
              
              9/29/2011100,000
              
              
              
              
              
              
              
              $
              1.12
              
              
              7/6/2010150,000
              
              
              
              
              
              
              
              $
              1.21
              
              
              7/6/2009400,000
              (2)
              
              
              
              $
              1.73
              
              
              9/28/2012-
                  9/28/2015220,000
              (2)
              $
              1.73
              
              
              12/31/2011-9/28/2013





(1)
            The
                13,333 options are subject to cancellation and repricing as described
                below.




47





(2)
            Vesting
                of the options to purchase 400,000 shares and 220,000 shares is based
                on
                years of service and achieving certain financial objectives, respectively.
                These vesting conditions are discussed in detail under “Employment
                Agreements” above.





(3)
            The
                executive’s employment agreement provides that under certain
                circumstances, all options previously granted the executive will
                be
                cancelled, with all underlying shares (vested or unvested) issued
                to the
                executive, and we will pay all taxes for the executive.These
                conditions are discussed in detail under “Employment Agreements”
                above.




**1996
      Stock Option Plan and** **2007
      Equity Incentive 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 September 30, 2007, there
      were unexercised options to purchase 4,371,332 shares of our common stock
      outstanding under the Plan. Such options were issued to our directors, employees
      and consultants at exercise prices ranging from $0.71 to $22.50 per share.





On
      September 18, 2007, the Company’s Board of Directors and a majority of our
      shareholders adopted the 2007 Equity Incentive Plan (the “New Plan”), which
      authorized the issuance of up to 6,000,000 shares of ONSM common stock pursuant
      to stock options, stock purchase rights, stock appreciation rights and/or stock
      awards for employees, directors and consultants. The options and stock grants
      authorized for issuance under the New Plan were in addition to those already
      issued under the Plan, although we may no longer issue additional options or
      stock grants under the Plan.





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 201,110 of the Plan options subject to this cancellation
      and re-issue had expired as of December 7, 2007.





The
      stated purpose of the Plan and the New 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
      and the New 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. All other
      questions relating to the administration of the Plan and the New Plan, and
      the
      interpretation of the provisions thereof are to be resolved at the sole
      discretion of the Board of Directors or the Committee.




48




Plan
      Options granted under the Plan or the New 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 allowed 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% 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 or the New 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
      or
      the New 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 employees of and consultants to us and our subsidiaries
      are eligible to receive Non-Qualified Options under the Plan or the New Plan.
      Only such individuals 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 or the New Plan at any
      time, except that no amendment shall be made which (i) increases the total
      number of shares subject to the Plan or the New 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 or the New Plan.




49





Unless
      the Plan or New Plan has been earlier suspended or terminated by the Board
      of
      Directors, the Plan or the New Plan shall terminate 10 years from the date
      of
      the Plan's or the New Plan’s adoption. Any such termination of the Plan or the
      New 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 or the new Plan are
      therefore not ascertainable. On December 7, 2007, the closing price of our
      common stock as reported on the NASDAQ Capital Market was $0.94 per
      share.




50
 
  **ITEM
                11.**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS**





The
      following table contains information regarding beneficial ownership of our
      common stock as of December 7, 2007 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 December 7, 2007 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 (unless otherwise indicated below) have been
      exercised. All information is based upon a record list of stockholders as of
      December 7, 2007. At that date, a pproximately
      58% 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.
      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. Shares held by Cede & Co.
      are not reflected in the following table.


Shares
                  of Common Stock Beneficially OwnedName
                  and Address of Beneficial Owner
              
              Number
              
              PercentageRandy
                  S. Selman (1)
              
              
              1,437,035
              
              
              3.3
              %Alan
                  M. Saperstein (2)
              
              
              1,438,903
              
              
              3.3
              %Robert
                  Wussler (3)
              
              
              265,426
              
              
              0.6
              %Charles
                  C. Johnston (4)
              
              
              744,828
              
              
              1.8
              %Cliff
                  Friedland (5)
              
              
              946,026
              
              
              2.2
              %David
                  Glassman (6)
              
              
              945,859
              
              
              2.2
              %Carl
                  L. Silva (7)
              
              
              64,810
              
              
              0.2
              %Leon
                  Nowalsky (8)
              
              
              50,000
              
              
              0.1
              %Robert
                  E. Tomlinson (9)
              
              
              363,750
              
              
              0.9
              %All
                  directors and officers as a group (nine persons) (10)
              
              
              6,256,637
              
              
              13.5
              %Fred
                  DeLuca (11)
              
              
              4,043,849
              
              
              9.5
              %




(1)  Includes
      9,952 shares of our common stock presently outstanding, options to acquire
      100,000 ONSM common shares at $0.71 per share, options to acquire 450,000 ONSM
      common shares at $1.12 per share, options to acquire 450,000 ONSM common shares
      at $1.57 per share, options to acquire 400,000 ONSM common shares at $2.50
      per
      share and options to acquire 13,333 ONSM common shares at $22.50 per share.
      Also
      includes unvested options to acquire 13,750 ONSM common shares at $1.73 per
      share, which could potentially vest within 60 days after December 7, 2007,
      subject to the achievement of certain performance objectives. Options to acquire
      another 606,250 ONSM common shares at $1.73 per share are excluded from the
      ownership table, as they are not expected to vest within that time frame,
      although they could vest under certain circumstances such as (i)
      change of control, (ii) constructive termination or (iii) termination other
      than
      for cause. See Item 10 - Executive Compensation.




51





(2)  Includes
      11,820 shares of our common stock presently outstanding, options to acquire
      100,000 ONSM common shares at $0.71 per share, options to acquire 450,000 ONSM
      common shares at $1.12 per share, options to acquire 450,000 ONSM common shares
      at $1.57 per share, options to acquire 400,000 ONSM common shares at $2.50
      per
      share and options to acquire 13,333 ONSM common shares at $22.50 per share.
      Also
      includes unvested options to acquire 13,750 ONSM common shares at $1.73 per
      share, which could potentially vest within 60 days after December 7, 2007,
      subject to the achievement of certain performance objectives. Options to acquire
      another 606,250 ONSM common shares at $1.73 per share are excluded from the
      ownership table, as they are not expected to vest within that time frame,
      although they could vest under certain circumstances such as (i)
      change of control, (ii) constructive termination or (iii) termination other
      than
      for cause. See Item 10 - Executive Compensation.





(3)  Includes
      616 shares of our common stock presently outstanding, options to acquire 50,000
      ONSM common shares at $0.71 per share, options to acquire 100,000 ONSM common
      shares at $1.12 per share, options to acquire 100,000 ONSM common shares at
      $1.57 per share and warrants to purchase 14,810 ONSM common shares at $3.376
      per
      share.





(4)  Includes
      25,000 restricted shares of our common stock presently outstanding, 460,214
      shares of our common stock held by J&C Resources, LLC, 9,614 shares of our
      common stock held by Asset Factoring, Ltd., options to acquire 50,000 ONSM
      common shares at $0.71 per share, options to acquire 100,000 ONSM common shares
      at $1.12 per share and options to acquire 100,000 ONSM common shares at $1.57
      per share. Mr. Johnston is the control person of J&C Resources, LLC and
      Asset Factoring, Ltd. and exercises sole voting and dispositive powers over
      these shares. Mr. Johnston's holdings exclude our securities owned by CCJ Trust.
      CCJ Trust is a trust for Mr. Johnston's adult children and he disclaims any
      beneficial ownership interest in CCJ Trust.





(5)  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, options to acquire 100,000 ONSM common shares at $0.71 per share
      and options to acquire 88,860 ONSM common shares at $3.376 per share. Also
      includes unvested options to acquire 13,750 ONSM common shares at $1.73 per
      share, which could potentially vest within 60 days after December 7, 2007,
      subject to the achievement of certain performance objectives. Options to acquire
      another 606,250 ONSM common shares at $1.73 per share are excluded from the
      ownership table, as they are not expected to vest within that time frame,
      although they could vest under certain circumstances such as (i)
      change of control, (ii) constructive termination or (iii) termination other
      than
      for cause. See Item 10 - Executive Compensation. Mr.
      Friedland is the control person and beneficial owner of both Titan Trust and
      Dorado Trust and exercises sole voting and dispositive powers over these
      shares.





(6)  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, options to acquire 100,000 ONSM common shares at $0.71 per share
      and options to acquire 88,860 ONSM common shares at $3.376 per share. Also
      includes unvested options to acquire 13,750 ONSM common shares at $1.73 per
      share, which could potentially vest within 60 days after December 7, 2007,
      subject to the achievement of certain performance objectives. Options to acquire
      another 606,250 ONSM common shares at $1.73 per share are excluded from the
      ownership table, as they are not expected to vest within that time frame,
      although they could vest under certain circumstances such as (i)
      change of control, (ii) constructive termination or (iii) termination other
      than
      for cause. See Item 10 - Executive Compensation. Mr.
      Glassman is the control person and beneficial owner of both JMI Trust and Europa
      Trust and exercises sole voting and dispositive powers over these
      shares.




52





(7)  Includes
      options to acquire 50,000 ONSM common shares at $0.88 per share and warrants
      to
      purchase 14,810 ONSM common shares at $3.376 per share.





(8)  Includes
      options to acquire 50,000 ONSM common shares at $1.00 per share.





(9)  Includes
      options to acquire 100,000 ONSM common shares at $0.71 per share, options to
      acquire 100,000 ONSM common shares at $1.12 per share and options to acquire
      150,000 ONSM common shares at $1.21 per share. Also includes unvested options
      to
      acquire 13,750 ONSM common shares at $1.73 per share, which could potentially
      vest within 60 days after December 7, 2007, subject to the achievement of
      certain performance objectives. Options to acquire another 606,250 ONSM common
      shares at $1.73 per share are excluded from the ownership table, as they are
      not
      expected to vest within that time frame, although they could vest under certain
      circumstances such as (i)
      change of control, (ii) constructive termination or (iii) termination other
      than
      for cause. See Item 10 - Executive Compensation.





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





(11)  Includes
      3,839,304 shares of our common stock presently outstanding, warrants to acquire
      21,212 ONSM common shares at $1.65 per share, warrants to acquire 83,333 ONSM
      common shares at $1.50 per share and options to acquire 100,000 ONSM common
      shares at $2.46 per share.





The
      above
      table of beneficial ownership excludes Lewis Asset Management, LAM Opportunity
      Fund, Ltd and Lewis Opportunity Fund, LP, as our records indicate that their
      beneficial ownership is less than 5% based on the criteria outlined above.
      However, we have noted that on May 29, 2007, Lewis Asset Management filed a
      Form
      SC 13G/A (Statement of Acquisition of Beneficial Ownership by Individuals)
      with
      the Securities and Exchange Commission, indicating that Lewis Asset Management
      believed their beneficial ownership interest exceeded 5% as of that date. We
      have not undertaken to request any subsequent update of this information from
      Lewis Asset Management.





The
      above
      table of beneficial ownership excludes Frederick W. and Joan A. Moran,
      Communications Investment Partners, L.P. and Communications Investment Partners,
      L.P. - Side Pocket, as our records indicate that the beneficial ownership of
      these entities is less than 5% based on the criteria outlined above. However,
      we
      have noted that on October 19, 2007, Communications Investment Partners, L.P.,
      on behalf of itself and these other entities, filed a Form 13-D (General
      Statement of Acquisition of Beneficial Ownership) with the Securities and
      Exchange Commission, indicating that it believed the combined beneficial
      ownership interest of those entities exceeded 5% as of that date. We have not
      undertaken to request any subsequent update of this information from
      Communications Investment Partners, L.P. or the Morans.





**Securities
      Authorized for Issuance Under Equity Compensation Plans -** See
      Item
      5 - Market For Common Equity And Related Stockholder Matters And Small Business
      Issuer Purchases Of Equity Securities.




53




**ITEM
              12.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**





**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 Class 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 Class 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 Class 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 Class A-8
      for
      139,650 shares of Class 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. Mr. DeLuca converted the 239,650 Class A-10 shares, plus
      subsequent dividends paid in kind, to 2,886,990 common shares during March,
      June
      and July 2007.





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 (including 7,500 shares issued to Asset
      Factoring International, Inc., a related entity). 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. J&C Resources also received
      $24,500 from us as finder’s fee compensation in the December 2004 financing
      transactions.





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
      privately held Onstream Media prior to the closing of the Onstream Merger.
      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 September
      2006 we paid an additional $15,000 to Mr. Friedland only, as a third partial
      payment of these accrued salaries. In January 2007 we paid an additional $50,000
      to each of Messrs. Friedland and Glassman as a fourth 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 January 2006, we entered into a one-year consulting
      agreement with Mr. Berman calling for the issuance of 120,000 restricted common
      shares as well as 100,000 four-year common stock options immediately exercisable
      at $1.00 per share. In January 2007, we entered into a one-year consulting
      agreement with Mr. Berman calling for the issuance of 120,000 restricted common
      shares as well as 100,000 four-year common stock options immediately exercisable
      at $2.46 per share.




54





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 was one year, with a 2% loan origination fee and interest of 8% per annum.
      All interest and fees were due and payable in the event of early repayment.
      The
      terms of the loan, which was secured by $600,000 of equipment and software,
      required repayment within 5 days of us obtaining other financing, including
      but
      not limited to equipment financing. Asset Factoring agreed to several extensions
      for the repayment of this loan after we obtained such other financing in October
      and November 2005 until we repaid $360,000 in April 2006, which represented
      principal and the initially negotiated loan origination fee and interest, plus
      subsequently negotiated extension fees.





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
      was for a term of one year and resulted in 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, collateralized by
      hardware and software. Interest, at 10.85% per annum, was payable upon maturity.
      At our option, and with the consent of required security holders, both interest
      and principal could be paid with Series A-10 Preferred Stock. We received
      $300,000 of the note amount as of September 30, 2005 and an additional $150,000
      in October 2005, resulting in a notes payable balance of $450,000 as of
      September 30, 2006. We received the remaining $300,000 in December 2006.
      Following Board of Director approval of the modified terms on October 25, 2006,
      the note was formally modified in January 2007 to increase  the
      principal amount to $1,500,000, adjust the remaining term to four years,
      increase the interest rate to 17.75% (which the lender may request prepayment
      of
      in our common shares at $1.00 per share) and modify the note priority to
      unsecured and subordinated to all other debt. In addition, the new terms allowed
      us or the lender to convert the loan balance to restricted common stock at
      $1.00
      per share at any time. We received $100,000 of the increased note amount in
      December 2006, $50,000 in January 2007 and the $600,000 balance in March 2007.
      During March 2007, Mr. Berman exercised his option to require prepayment of
      interest and fees in shares and also converted this note to common stock.
      Accordingly, we issued an aggregate of 2,789,592 unregistered common shares
      for
      conversion of the note and the related interest and fees due. We have granted
      Mr. Berman demand registration rights, effective six months from the date of
      the
      modified note, for any unregistered common shares issuable thereunder. Upon
      such
      demand, we will have 60 days to file a registration statement and shall use
      our
      best efforts to obtain promptly the effectiveness of such registration
      statement. 784,592 of the 2,789,592 shares were included in a registration
      statement declared effective by the SEC on June 15, 2007 and as of December
      7,
      2007 we have not received any demand for registration of the
      balance.





In
      June
      2006 we received a $300,000 loan from J&C Resources, LLC. The principal
      balance was due in one year or three days after receipt of funding, including
      exercise of warrants, in excess of $1.0 million, whichever occurs first. Total
      interest, origination and legal fess totaling $21,000 cash and 21,000 common
      shares were due on maturity. Finders fees of $9,000 cash and 9,000 common shares
      were payable at loan maturity to Asset Factoring Ltd, a related entity. In
      January and February 2007, all fees due upon maturity were paid in cash and
      stock, as applicable. Following Board of Director approval of the modified
      terms
      on December 20, 2006, the note was formally modified in January 2007 to be
      convertible into common shares at $1.22 per share and to bear interest at 14.67%
      per annum, non-compounding, which we could settle in shares at $1.22 per share.
      During March 2007, we exercised our option to force early conversion of this
      note to common stock, and as a result were required to pay interest (in shares)
      for the entire original term of the note. Accordingly, we issued an aggregate
      of
      300,000 unregistered common shares for conversion of the note and the related
      interest due.




55





On
      October 27, 2006 we entered into a four-year convertible note with SBV
      Capital Corporation in the aggregate principal amount of $1.0 million, which
      was
      funded in installments through December 2006. We elected to prepay all interest
      on a non-compounding, non-refundable basis for the entire remaining term of
      the
      loan, with the aggregate issuance of 694,495 unregistered common shares during
      November and December 2006. The note was converted into 1.0 million unregistered
      common shares on January 10, 2007.  We have granted SBV Capital demand
      registration rights, effective six months from the date of the note, for any
      unregistered common shares issuable thereunder. Upon such demand, we will have
      60 days to file a registration statement and shall use our best efforts to
      obtain promptly the effectiveness of such registration statement. 1,000,000
      of
      the 1,694,495 total principal and interest shares were included in a
      registration statement declared effective by the SEC on June 15, 2007 and as
      of
      December 7, 2007 we have not received any demand for registration of the
      balance.





On
      November 20, 2006, we entered into a three-year consulting contract with
      the principal and beneficial owner of SBV Capital Corporation, for the provision
      of international business development and financial advice. The contract, which
      was cancellable upon thirty days notice after the first year, called for the
      issuance of 60,000 restricted common shares in advance every six months. The
      first
      two tranches under this contract (60,000 shares each) were issued in January
      and
      May 2007. This contract was amended in July 2007 for some additional short-term
      services, resulting in issuance of an additional 15,000 shares plus $22,425
      for
      cash reimbursement of related travel expenses. This contract was amended again
      in October 2007, which resulted in the issuance of the remaining 240,000
      restricted common shares, in exchange for the extension of the remaining term
      of
      the contract from two years to three years.





In
      November 2006, we issued 100,000 unregistered shares of common stock, as well
      as
      immediately exercisable four-year options to purchase 50,000 shares at $1.00
      per
      share, to Mr. Neil Berman, a major shareholder, as a finder’s fee in connection
      with the $1.0 million loan from SBV Capital Corporation.





**Director
      independence**





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 NSADAQ Marketplace Rules. Our independent directors are Messrs.
      Wussler, Johnston, Silva and Nowalsky.





56





**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
              
              Description2.1
              
              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)2.6.1
              
              Infinite
                  Conferencing Merger Agreement dated March 26, 2007 (22)2.6.2
              
              Infinite
                  Conferencing Merger - Form of Registration Rights Agreement
                  (22)2.6.3
              
              Infinite
                  Conferencing Merger - Form of Lock-Up Agreement (22)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 (16)3.1.15
              
              Articles
                  of Amendment dated December 30, 2004, with regard to corporate
                  name change
                  (15)3.1.16
              
              Articles
                  of Amendment dated February 7, 2005 with regard to the designations
                  for
                  Series A-10 Convertible Preferred Stock (17)3.2
              
              By-laws
                  (1)4.1
              
              Specimen
                  Common Stock Certificate (1)4.2
              
              Form
                  of 8% Senior Secured Convertible Notes (16)4.3
              
              Form
                  of $1.65 Warrant (16)4.4
              
              Form
                  of $1.50 Warrant (16)4.5
              
              Form
                  of $1.00 Warrant (20)4.6
              
              Form
                  of $1.65 Warrant issuable upon exercise of $1.00 Warrant
                  (20)
  57
  4.7
              
              Form
                  of Subordinated Secured Convertible Note (21)4.8
              
              Form
                  of $1.50 Warrant for Subordinated Secured Convertible Notes
                  (21)10.1
              
              Form
                  of 1996 Stock Option Plan and Amendment thereto (1)(3)10.2
              
              Form
                  of 2007 Equity Incentive Plan (24)10.3
              
              Employment
                  Agreement dated September 27, 2007 between Onstream Media Corporation
                  and
                  Randy S. Selman (25)10.4
              
              Employment
                  Agreement dated September 27, 2007 between Onstream Media Corporation
                  and
                  Alan Saperstein (25)10.5
              
              Employment
                  Agreement dated September 27, 2007 between Onstream Media Corporation
                  and
                  Clifford Friedland (25)10.6
              
              Employment
                  Agreement dated September 27, 2007 between Onstream Media Corporation
                  and
                  David Glassman (25)10.7
              
              Employment
                  Agreement dated September 27, 2007 between Onstream Media Corporation
                  and
                  Robert Tomlinson (25)10.8
              
              Form
                  of Subscription Agreement used for sale of $11.0 million common
                  shares -
                  March 2007 (22)10.9
              
              Form
                  of Securities Purchase Agreement for 8% Senior Secured Convertible
                  Notes
                  (16)10.10
              
              Form
                  of Additional Investment Right (16)10.11
              
              Form
                  of Pledge Agreement (16)10.12
              
              Form
                  of Security Agreement (16)10.13
              
              Form
                  of Letter Agreement with Additional Investment Right holders
                  (18)10.14
              
              Deposit
                  Control Agreement dated October 2004 (14)10.15
              
              Form
                  of Subscription Agreement for Subordinated Secured Convertible
                  Notes
                  (21)10.16
              
              Form
                  of Subordination Agreementfor
                  Subordinated Secured Convertible Notes(21)10.17
              
              Form
                  of Security Agreementfor
                  Subordinated Secured Convertible Notes(21)14.1
              
              Code
                  of Business Conduct and Ethics (12)14.2
              
              Corporate
                  Governance and Nominating Committee Principles (20)14.3
              
              Audit
                  Committee Charter (24)21.1
              
              Subsidiaries
                  of the registrant21.2
              
              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
                  (19)21.3.1
              
              Infinite
                  Conferencing, LLC - Audited December 31, 2006 and 2005 Financial
                  Statements (23)21.3.2
              
              Infinite
                  Conferencing, LLC - Reviewed March 31, 2007 and 2006 Financial
                  Statements
                  (23)23.1
              
              Consent
                  of Independent Registered Public Accounting Firm31.1
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Executive
                  Officer31.2
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Financial
                  Officer32.1
              
              Section
                  906 Certification of Chief Executive Officer32.2
              
              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.




58




(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.




(15)
            Incorporated
                by reference to the registrant’s current report on Form 8-K filed on
                January 4, 2005.




(16)
            Incorporated
                by reference to the registrant’s current report on Form 8-K/A filed on
                January 4, 2005.




(17)
            Incorporated
                by reference to the registrant's current report on Form 8-K filed
                February
                11, 2005.




(18)
            Incorporated
                by reference to the registrant's current report on Form 8-K filed
                February
                17, 2005.




(19)
            Incorporated
                by reference to the registrant's current report on Form 8-K/A filed
                March
                8, 2005.




(20)
            Incorporated
                by reference to the registrant's Proxy Statement for the 2005 Annual
                Shareholder’s Meeting filed on August 1,
                2005.




(21)
            Incorporated
                by reference to the registrant's current report on Form 8-K/A filed
                April
                3, 2006.




(22)
            Incorporated
                by reference to the registrant's current report on Form 8-K filed
                March
                28, 2007.




(23)
            Incorporated
                by reference to the registrant's current report on Form 8-K/A filed
                July
                11, 2007.




(24)
            Incorporated
                by reference to the registrant’s proxy statement for the 2007 Annual
                Meeting filed with the SEC on July 31,
                2007.




(25)
            Incorporated
                by reference to the registrant's current report on Form 8-K/A filed
                December 21, 2007.





59




**ITEM
              14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES**





**Audit
      Fees**




The
      aggregate audit fees billed to us by Goldstein Lewin & Co. for professional
      services rendered during the fiscal year ended September 30, 2007 were $231,000,
      for the audit of our annual financial statements included in our Annual Report
      on Form 10-KSB for the fiscal year ended September 30, 2006 and for the review
      of our quarterly financial statements included in our quarterly reports on
      Form
      10-QSB for the quarters ended December 31, 2006, and March 31 and June 30,
      2007.





The
      aggregate audit fees billed to us by Goldstein Lewin & Co. for professional
      services rendered during the fiscal year ended September 30, 2006 were $220,216,
      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, 2005, and March 31 and June 30,
      2006.




**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
      $46,214 and $42,402 for the fiscal years ended September 30, 2007 and 2006,
      respectively.




**Tax
      Fees**





The
      aggregate tax fees billed to us by Goldstein Lewin & Co. were $14,582 and
      $9,198 for the fiscal years ended September 30, 2007 and 2006, 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 to us
      by Goldstein Lewin & Co. for services rendered for the fiscal years ended
      September 30, 2007 or 2006.




**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




60





*  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.





61





**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 CorporationBy:
            /s/ Randy
              S.
              SelmanRandy
              S. Selman, President, ChiefExecutive
              Officer


By:
              /s/ Robert
                E.
                TomlinsonRobert
                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,
              
              December
                  21, 2007Randy
                  S. Selman
              
              Chief
                  Executive Officer/s/
                  Robert E. Tomlinson
              
              Chief
                  Financial Officer andRobert
                  E. Tomlinson
              
              Principal
                  Accounting Officer
              
              December
                  21, 2007/s/
                  Clifford Friedland
              
              Director
                  and Senior VP
              
              December
                  21, 2007Clifford
                  Friedland
              
              Business
                  Development/s/
                  Alan Saperstein
              
              Director
                  and Chief
              
              December
                  21, 2007Alan
                  Saperstein
              
              Operating
                Officer/s/
                  Robert J. Wussler
              
              Director
              
              December
                  21, 2007Robert
                  J. Wussler/s/
                  Charles C. Johnston
              
              Director
              
              December
                  21, 2007Charles
                  C. Johnston/s/
                  Carl Silva
              
              Director
              
              December
                  21, 2007Carl
                  SilvaDirectorLeon
                  Nowalsky




The
      above
      signatures represent a majority of the outside directors and a majority of
      the
      total directors.




62




**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Shareholders of Onstream Media Corporation
 Pompano
        Beach, Florida
 
 We
        have
        audited the accompanying consolidated balance sheets of Onstream Media
        Corporation and subsidiaries as of September 30, 2007 and 2006, 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, 2006 and 2005, and the results of their
        operations and their cash flows for the years then ended in conformity with
        generally accepted accounting principles in the United States of America.
  /s/
        Goldstein Lewin & Co.
 
 GOLDSTEIN
        LEWIN & CO.
 Certified
        Public Accountants
 
 Boca
        Raton, Florida
 December
        21, 2007
  F-1
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS
  September
                  30,2007
              
              2006**ASSETS**CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              560,230
              
              $
              222,963Restricted
                  cash
              
              
              -
              
              
              8,485Accounts
                  receivable, net of allowance fordoubtful
                  accounts of $65,254 and $28,550, respectively
              
              
              2,620,177
              
              
              1,529,820Prepaid
                  expenses
              
              
              565,649
              
              
              398,203Inventories
              
              
              85,459
              
              
              66,807Other
                  current assets
              
              
              137,632
              
              
              49,271Total
                  current assets
              
              
              3,969,147
              
              
              2,275,549PROPERTY
                  AND EQUIPMENT, net
              
              
              5,551,026
              
              
              4,898,715INTANGIBLE
                  ASSETS, net
              
              
              5,108,604
              
              
              190,025GOODWILL,
                  net
              
              
              21,696,948
              
              
              9,692,845OTHER
                  NON-CURRENT ASSETS
              
              
              157,931
              
              
              109,078Total
                  assets
              
              $
              36,483,656
              
              $
              17,166,212
 
 (Continued)
  F-2
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS
 
 (Continued)
  September
                  30,2007
              
              2006**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**CURRENT
                  LIABILITIES:Accounts
                  payable and accrued liabilities
              
              $
              2,266,134
              
              $
              2,826,676Amounts
                  due to shareholders and officer
              
              
              109,419
              
              
              209,419Deferred
                  revenue
              
              
              215,400
              
              
              268,2378%
                  Convertible Debentures - current portion, net of discount
              
              
              -
              
              
              726,478Notes
                  payable - current portion
              
              
              138,629
              
              
              892,032Detachable
                  Warrants and Embedded Conversion Featureassociated
                  with 8% Convertible Debentures
              
              
              -
              
              
              834,125Detachable
                  Warrants and Embedded Conversion Featureassociated
                  with 8% Subordinated Convertible Debentures
              
              
              -
              
              
              281,809Total
                  current liabilities
              
              
              2,729,582
              
              
              6,038,7768%
                  Convertible Debentures, net of discount and current
                  portion
              
              
              -
              
              
              912,6578%
                  Subordinated Convertible Debentures, net of discount
              
              
              -
              
              
              1,294,870Notes
                  payable, net of discount and current portion
              
              
              255,329
              
              
              533,758Total
                  liabilities
              
              
              2,984,911
              
              
              8,780,061COMMITMENTS
                  AND CONTINGENCIESSTOCKHOLDERS'
                  EQUITY:Series
                  A-10 Convertible Preferred stock, par value $.0001 per share,authorized
                  700,000 shares, 69,196 and 430,983 issued and outstanding,
                  respectively
              
              
              7
              
              
              43Common
                  stock, par value $.0001 per share; authorized 75,000,000 shares,
                  41,880,707 and 15,127,253 issued and outstanding,
                  respectively
              
              
              4,188
              
              
              1,513Additional
                  paid-in capital
              
              
              129,090,403
              
              
              87,699,908Unamortized
                  discount
              
              
              (98,491
              )
              
              (1,369,617
              )Accumulated
                  deficit
              
              
              (95,497,362
              )
              
              (77,945,696
              )Total
                  stockholders’ equity
              
              
              33,498,745
              
              
              8,386,151Total
                  liabilities and stockholders’ equity
              
              $
              36,483,656
              
              $
              17,166,212
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-3
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
  Years
                  Ended
                September
                  30,2007
              
              2006REVENUE:Smart
                  encoding, DMSP and UGC
              
              $
              1,718,684
              
              $
              2,154,556Network
                  usage
              
              
              2,105,477
              
              
              2,092,928Webcasting
              
              
              4,769,053
              
              
              3,620,866Audio
                  and web conferencing
              
              
              3,198,818
              
              
              -Other
              
              
              323,013
              
              
              551,101Total
                  revenue
              
              
              12,115,045
              
              
              8,419,451COSTS
                  OF REVENUE:Smart
                  encoding, DMSP and UGC
              
              
              1,037,439
              
              
              757,871Network
                  usage
              
              
              895,573
              
              
              905,905Webcasting
              
              
              1,722,901
              
              
              1,367,347Audio
                  and web conferencing
              
              
              545,615
              
              
              -Other
              
              
              117,557
              
              
              224,971Total
                  costs of revenue
              
              
              4,319,085
              
              
              3,256,094GROSS
                  MARGIN
              
              
              7,795,
                  960
              
              
              5,163,357OPERATING
                  EXPENSES:General
                  and administrative:Compensation
              
              
              6,679,964
              
              
              4,979,920Professional
                  fees
              
              
              3,344,615
              
              
              2,310,116Other
              
              
              2,183,298
              
              
              1,609,159Depreciation
                  and amortization
              
              
              3,099,940
              
              
              2,121,161Total
                  operating expenses
              
              
              15,307,817
              
              
              11,020,356Loss
                  from operations
              
              
              (7,511,857
              )
              
              (5,856,999
              )OTHER
                  EXPENSE, NET:Interest
                  income
              
              
              69,487
              
              
              4,978Interest
                  expense
              
              
              (7,464,897
              )
              
              (2,128,362
              )Debt
                  extinguishment loss
              
              
              (135,000
              )
              
              -Income from
                  derivative instruments
              
              
              -
              
              
              1,300,959Other
                  income, net
              
              
              284,214
              
              
              213,211Total
                  other expense, net
              
              
              (7,246,196
              )
              
              (609,214
              )Net
                  loss
              
              $
              (14,758,053
              )
              $
              (6,466,213
              )Loss
                  per share - basic and diluted:Net
                  loss per share
              
              $
              (0.48
              )
              $
              (0.47
              )Weighted
                  average shares of common stock outstanding - basic and
                  diluted
              
              
              30,636,669
              
              
              13,624,786
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-4
 
 ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENT OF STOCKHOLDERS' EQUITY
 YEARS
        ENDED SEPTEMBER 30, 2006 AND 2007
  Series
                  A- 10
                Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-in Capital
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Gross
              
              Discount
              
              Deficit
              
              TotalBalance,
                  September 30, 2005
              
              
              416,031
              
              $
              41
              
              
              12,191,001
              
              $
              1,219
              
              $
              77,365,612
              
              $
              (2,067,461
              )
              $
              (70,440,235
              )
              $
              4,859,176Conversion
                  of 8%Convertible
                  Debentures to
                common
                  shares
              
              
              -
              
              
              -
              
              
              906,506
              
              
              91
              
              
              906,415
              
              
              -
              
              
              -
              
              
              906,506Conversion
                  of Series A-10 preferred shares to common shares
              
              
              (18,874
              )
              
              (2
              )
              
              188,740
              
              
              19
              
              
              (17
              )
              
              69,463
              
              
              (69,463
              )
              
              -Warrants
                  issued with 8% Subordinated Convertible Debentures (includes beneficial
                  conversion)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              917,917
              
              
              -
              
              
              -
              
              
              917,917Issuance
                  of shares, warrants and options for equipment and services
              
              
              -
              
              
              -
              
              
              1,092,715
              
              
              109
              
              
              1,449,999
              
              
              -
              
              
              -
              
              
              1,450,108Common
                  shares issued for interest on 8% Convertible Debentures and Notes
                  Payable
              
              
              -
              
              
              -
              
              
              727,458
              
              
              73
              
              
              534,585
              
              
              -
              
              
              -
              
              
              534,658Common
                  shares issued upon exercise of Warrants
              
              
              -
              
              
              -
              
              
              20,833
              
              
              2
              
              
              20,831
              
              
              -
              
              
              -
              
              
              20,833Dividends
                  accrued on Series A-10 preferred
              
              
              33,826
              
              
              4
              
              
              -
              
              
              -
              
              
              338,264
              
              
              628,381
              
              
              (969,785
              )
              
              (3,136
              )Decrease
                  in equity securities subject to potential rescission
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,084,219
              
              
              -
              
              
              -
              
              
              7,084,219Reclassification
                  to liability ofDetachable
                Warrants
                  andEmbedded
                  Conversion
                Feature
                  associated with 8%
                Subordinated
                  ConvertibleDebentures
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (917,917
              )
              
              -
              
              
              -
              
              
              (917,917
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,466,213
              )
              
              (6,466,213
              )Balance,
                  September 30, 2006
              
              
              430,983
              
              $
              43
              
              
              15,127,253
              
              $
              1,513
              
              $
              87,699,908
              
              $
              (1,369,617
              )
              $
              (77,945,696
              )
              $
              8,386,151
 
 (Continued)
  F-5
 
 ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENT OF STOCKHOLDERS' EQUITY
 YEARS
        ENDED SEPTEMBER 30, 2006 AND 2007
 (Continued)
 
 Series
                  A- 10
                Preferred
                  Stock
              
              Common
                  Stock
              
              Additional
                  Paid-in Capital
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Gross
              
              Discount
              
              Deficit
              
              TotalBalance,
                  September 30, 2006
              
              
              430,983
              
              $
              43
              
              
              15,127,253
              
              $
              1,513
              
              $
              87,699,908
              
              $
              (1,369,617
              )
              $
              (77,945,696
              )
              $
              8,386,151Cumulative
                  effect of change inaccounting
                  principle - adoption ofFSP
                  EITF 00-19-2
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,416,891
              
              
              -
              
              
              (
                  1,300,957
              )
              
              1,115,934Conversion
                  of 8% ConvertibleDebentures
                  to common shares
              
              
              -
              
              
              -
              
              
              5,299,153
              
              
              530
              
              
              5,298,624
              
              
              -
              
              
              -
              
              
              5,299,154Conversion
                  of Series A-10 preferred shares to common shares
              
              
              (393,368
              )
              
              (39
              )
              
              3,933,680
              
              
              393
              
              
              (354
              )
              
              966,124
              
              
              (966,124
              )
              
              -Conversion
                  of Notes Payableto
                  common shares
              
              
              -
              
              
              -
              
              
              3,045,902
              
              
              305
              
              
              3,099,695
              
              
              -
              
              
              -
              
              
              3,100,000Issuance
                  of shares, warrants and options for equipment and services
              
              
              -
              
              
              -
              
              
              910,608
              
              
              91
              
              
              2,509,790
              
              
              -
              
              
              -
              
              
              2,509,881Common
                  shares and options issued for interest and fees on 8% Convertible
                  Debentures and Notes Payable
              
              
              -
              
              
              -
              
              
              2,279,156
              
              
              228
              
              
              5,028,803
              
              
              -
              
              
              -
              
              
              5,029,031Common
                  shares issued upon exercise of warrants and options
              
              
              -
              
              
              -
              
              
              4,552,154
              
              
              455
              
              
              6,879,882
              
              
              -
              
              
              -
              
              
              6,880,337Sale
                  of common shares, net of issuance costs
              
              
              -
              
              
              -
              
              
              4,888,889
              
              
              489
              
              
              10,206,537
              
              
              -
              
              
              -
              
              
              10,207,026Common
                  shares issued for Infinite Conferencing and Auction Video
                  acquisitions
              
              
              -
              
              
              -
              
              
              1,843,912
              
              
              184
              
              
              5,499,816
              
              
              -
              
              
              -
              
              
              5,500,000Dividends
                  accrued or paid on Series A-10 preferred
              
              
              31,581
              
              
              3
              
              
              -
              
              
              -
              
              
              315,811
              
              
              305,002
              
              
              (526,532
              )
              
              94,284Beneficial
                  conversion included inJ&C
                  Resources note
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              135,000
              
              
              -
              
              
              -
              
              
              135,000Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (14,758,053
              )
              
              (14,758,053
              )Balance,
                  September 30, 2007
              
              
              69,196
              
              $
              7
              
              
              41,880,707
              
              $
              4,188
              
              $
              129,090,403
              
              $
              (98,491
              )
              $
              (95,497,362
              )
              $
              33,498,745
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-6
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
  Years
                  Ended
                September
                  30,2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (14,758,053
              )
              $
              (6,466,213
              )Adjustments
                  to reconcile net loss to net cash (used in) operating
                  activities:Depreciation
                  and amortization
              
              
              3,099,940
              
              
              2,121,161Amortization
                  of discount on notes payable
              
              
              5,015,103
              
              
              54,364Amortization
                  of discount on convertible debentures
              
              
              2,290,995
              
              
              1,387,716Interest
                  expense paid in common shares and options
              
              
              108,754
              
              
              523,313Interest
                  expense on notes converted to 8% SubordinatedConvertible
                  Debentures
              
              
              -
              
              
              25,000Amortization
                  of deferred professional fee expenses paid in equity
              
              
              2,323,215
              
              
              1,397,775Debt
                  extinguishment loss
              
              
              135,000
              
              
              -Income
                  from derivative instruments
              
              
              -
              
              
              (1,300,959
              )Decrease
                  (Increase) in allowance for doubtful accounts
              
              
              37,022
              
              
              (1,130
              )Gain
                  from settlements of obligations and sales of equipment
              
              
              (193,403
              )
              
              (
                  11,691
              )Net
                  cash (used in) operating activities, before changes incurrent
                  assets and liabilities
              
              
              (1,941,427
              )
              
              (2,270,664
              )Changes
                  in current assets and liabilities, net of effect of
                  acquisitions:Decrease
                  (Increase) in accounts receivable
              
              
              (169,479
              )
              
              (253,716
              )Decrease
                  (Increase) in prepaid expenses
              
              
              79,319
              
              
              6,785Decrease
                  (Increase) in other current assets
              
              
              (67,517
              )
              
              (40,357
              )(Increase)
                  Decrease in inventories
              
              
              (18,652
              )
              
              19,361(Decrease)
                  Increase in accounts payable and accrued liabilities
              
              
              (133,980
              )
              
              920,225(Decrease)
                  Increase in deferred revenue
              
              
              (52,837
              )
              
              97,266Net
                  cash (used in) operating activities
              
              
              (2,304,573
              )
              
              (1,521,100
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Payments
                  in connection with the acquisition of Infinite Conferencing,net
                  of cash acquired
              
              
              (14,201,668
              )
              
              -Payments
                  in connection with the acquisition of Auction Video
              
              
              (523,066
              )
              
              -Payment
                  of accounts payable and accrued liabilities assumedat
                  time of Onstream Merger
              
              
              (100,718
              )
              
              (15,000
              )Acquisition
                  of property and equipment
              
              
              (1,260,191
              )
              
              (1,105,249
              )Net
                  cash (used in) investing activities
              
              
              (16,085,643
              )
              
              (1,120,249
              )
  (Continued)
  F-7
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 (Continued)
  Years
                  Ended
                September
                  30,2007
              
              2006CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from sale of common shares, net of expenses
              
              $
              17,087,363
              
              $
              20,833Proceeds
                  from loans and notes payable, net of expenses
              
              
              2,050,000
              
              
              2,022,815Proceeds
                  from sale of 8% Subordinated Convertible Debentures,
                net
                  of expenses
              
              
              -
              
              
              1,756,634Repayment
                  of loans, notes and leases payable
              
              
              (409,880
              )
              
              (940,107
              )Net
                  cash provided by financing activities
              
              
              18,727,483
              
              
              2,860,175NET
                  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              337,267
              
              
              218,826CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              222,963
              
              
              4,137CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              560,230
              
              $
              222,963SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:Cash
                  payments for interest
              
              $
              94,568
              
              $
              208,646SUPPLEMENTAL
                  SCHEDULE OF NON-CASH INVESTING AND FINANCING
                  ACTIVITIES:Conversion
                  of Series A-10 convertible preferred to common shares
              
              $
              3,933,680
              
              $
              188,740Conversion
                  of 8% Convertible Debentures to common shares
              
              $
              5,299,154
              
              $
              906,506Conversion
                  of note payable and interest to 8% SubordinatedConvertible
                  Debentures
              
              $
              -
              
              $
              375,000Conversion
                  of notes payable to common shares
              
              $
              3,100,000
              
              $
              -Issuance
                  of shares for acquisition of Infinite Conferencing - see note 2for
                  assets acquired
                and
                  liabilities assumed
              
              $
              4,000,000
              
              $
              -Issuance
                  of shares for acquisition of Auction Video - see note 2for
                  assets acquired and liabilities assumed
              
              $
              1,500,000
              
              $
              -Cumulative
                  effect of change in accounting principle - adoption ofFSP
                  EITF 00-19-2, resulting in reversal of previousreclassifications
                  from equity to liability
              
              $
              2,416,891
              
              $
              -Net
                  decrease in amount of equity securities subject to potentialrescission,
                  including portion classified as liability
              
              $
              -
              
              $
              7,084,219Derivative
                  instruments reclassified from equity to liability
              
              $
              -
              
              $
              917,917Issuance
                  of shares, warrants and options for deferredservices
                  and incentives
              
              $
              2,
                  382,480
              
              $
              1,123,064Issuance
                  of warrants to placement agent for sale of common shares
              
              $
              518,445
              
              $
              -Issuance
                  of warrants with 8% Subordinated Convertible Debentures
              
              $
              -
              
              $
              424,459Issuance
                  of shares for payment of accounts payable
              
              $
              127,400
              
              $
              327,044Issuance
                  of common shares and options for interest
              
              $
              5,029,031
              
              $
              534,658Issuance
                  of A-10 preferred shares for dividends
              
              $
              315,815
              
              $
              338,268Purchase
                  of equipment under capital lease
              
              $
              339,483
              
              $
              -Disposal
                  of property and equipment
              
              $
              -
              
              $
              641,860
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-8
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        1:
        NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 
 Nature
        of
        Business
 
 Onstream
        Media Corporation (the "Company" or "Onstream" or "ONSM"), organized in 1993,
        is
        a leading online service provider of live and on-demand Internet video,
        corporate web communications and content management applications, including
        digital media services and webcasting services. Digital media services are
        provided primarily to entertainment, advertising and financial industry
        customers. Webcasting services are provided primarily to corporate, education,
        government and travel industry customers.
 
 Our
        Digital Media Services Group, which operates primarily from facilities in
        San
        Francisco, California, consists of our Smart Encoding division, our DMSP
        (“Digital Media Services Platform”) division, our UGC (“User Generated Content”)
        division and our EDNet division.
 
 Our
        Smart
        Encoding division provides both automated and manual encoding and editorial
        services for processing digital media, using a set of coordinated technologies
        and processes that allow the quick and efficient on-line search, retrieval,
        and
        streaming of this media, which can include photos, videos, audio, engineering
        specs, architectural plans, web pages, and many other pieces of business
        collateral. Our DMSP division provides an on-line, subscription based service
        that includes access to enabling technologies and features for our clients
        to
        acquire, store, index, secure, manage, distribute and transform these digital
        assets into saleable commodities ***.*** **** Our
        UGC
        division, which also operates as Auction Video - see note 2, provides a video
        ingestion and flash encoder that can be used by our clients on a stand-alone
        basis or in conjunction with the DMSP.
 
 Our
        EDNet
        division 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 network usage,
        the
        sale, rental and installation of equipment, and other related fees.
 
 Our
        Web
        Communications Services Group consists of our Webcasting and Travel divisions,
        which operate primarily from facilities in Pompano Beach, Florida and our
        Infinite Conferencing division, which operates primarily from facilities
        in the
        New York City metropolitan area.
 
 Our
        Webcasting division 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 Travel division 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, and related settlement, of these travel related assets
        and
        operations. The Webcasting and Travel divisions generate revenues through
        production and distribution fees.
 
 The
        Company’s recently acquired Infinite Conferencing (“Infinite”) division generates revenues from usage charges and fees for other services provided
        in
        connection with “reservationless” and operator-assisted audio and web
        conferencing services - see note 2.
  F-9
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        1:
        NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Liquidity
 
 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 $95.5 million as of September 30, 2007. The Company's operations
        have been financed primarily through the issuance of equity and debt. For
        the
        year ended September 30, 2007, ONSM had a net loss of approximately $14.8
        million and cash used in operations of approximately $2.3 million. However,
        the
        Company had working capital of approximately $1.2 million at September 30,
        2007.
 
 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.
 
 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, OSM Acquisition, Inc., AV
        Acquisition, Inc., Auction Video Japan, Inc. and Infinite Conferencing,
        Inc. All significant intercompany accounts and transactions have been eliminated
        in consolidation.
 
 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.
 
 Cash
        and
        cash equivalents
 
 Cash
        and
        cash equivalents consists of all highly liquid investments with original
        maturities of three months or less.
  F-10
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        1:
        NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 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. Bad debt reserves were approximately $65,000 and $29,000, at
        September 30, 2007 and 2006, 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.
 
 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.
  F-11
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        1:
        NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Goodwill
        and other intangible assets
 
 In
        accordance with Statement of Financial Accounting Standards (“SFAS”) 142,
“Goodwill and Other Intangible Assets”, goodwill is reviewed annually (or more
        frequently if impairment indicators arise) for impairment. Other intangible
        assets, such as customer lists, are 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 Media Services Group recognizes revenues from the acquisition, editing,
        transcoding, indexing, storage and distribution of its customers’ digital media.
        Charges to customers by the Smart Encoding and UGC divisions 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. Charges to
        customers by the DMSP division are generally based on a monthly subscription
        fee, as well as charges for hosting, storage and professional services. 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 Media Services Group generates revenues from customer
        usage of digital telephone connections controlled by EDNet, as well as bridging
        services and the sale of equipment. EDNet 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.
 
 EDNet
        sells various audio codecs and video transport systems, equipment which enables
        its 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. EDNet 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.
  F-12
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        1:
        NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Revenue
        Recognition (Continued)
 
 The
        Web
        Communications Services 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”) 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, 2006 and 2007 is immaterial in relation to the
        Company’s recorded liabilities.
 
 The
        Infinite Conferencing division of the Web Communications Services Group
        generates revenues from audio conferencing and web conferencing services,
        plus
        recording and other ancillary services. Infinite owns telephone switches
        used
        for audio conference calls by its customers, which are generally charged
        for
        those calls based on a per-minute usage rate. Infinite provides on-line
        webconferencing services to its customers, charging either a per-minute rate
        or
        a monthly subscription fee allowing a certain level of usage. Audio conferencing
        and web conferencing revenue is recognized based on the timing of the customer’s
        use of those services.
 
 The
        Web
        Communications Services Group recognizes a portion of its 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, smart
        encoding or DMSP services to be provided in future accounting periods. As
        projects or events are completed and/or the services provided, the revenue
        is
        recognized. The Company received $135,000 in non-refundable smart encoding
        fees
        during the year ended September 30, 2006 that were not included in the revenue
        reported for that period. Based on applicable accounting literature, including
        SAB 104, “Revenue Recognition”, the Company has included this amount on its
        September 30, 2006 balance sheet under the caption “Deferred Revenue” and
        recognized it as revenue during the year ended September 30, 2007. Deferred
        revenue at September 30, 2006 also included a $50,000 initial payment received
        by the Company in connection with the sale of its travel video library, which
        payment was refunded as part of a litigation settlement in fiscal 2007 -
        see
        Note 3. Deferred revenue at September 30, 2007 included a $50,000 initial
        payment received from ASPA-Japan Co., Ltd. (“ASPA”) in connection with an
        exclusive sales agency agreement which final status has not been determined
        -
        See Note 9.
  F-13
 
 ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        1:
        NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 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.
 
 Advertising
        and marketing
 
 Advertising
        and marketing costs, which are charged to operations as incurred, were
        approximately $340,000
        and $348,000 for the years ended September 30, 2007 and 2006,
        respectively.
 
 Derivatives
 
 Through
        September 30, 2006, the Company accounted 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 included
        freestanding warrants to purchase the Company’s common stock as well as embedded
        conversion features that were 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, subject to the accounting for equity
        securities that were subject to potential rescission as discussed in Note
        4.
        Effective within the year ended September 30, 2007, the Company elected early
        adoption of FASB Staff Position (“FSP”) EITF 00-19-2, “ Accounting
        for R egistration
        Payment Arrangements ” ,
        which
        was issued on December 21, 2006 and establishes that contingent obligations
        under registration payment arrangements, as defined in FSP EITF 00-19-2,
        shall
        be recognized and measured separately in accordance with SFAS 5, “Accounting for
        Contingencies” and FASB Interpretation (“FIN”) No. 14, “Reasonable
        Estimation of the Amount of a Loss”, and not under EITF 00-19. The Company
        determined that all of the underlying factors that had resulted in the Company’s
        previous determination to account for these warrants and conversion features
        as
        derivatives were registration payment arrangements and as a result of its
        adoption of FSP EITF 00-19-2, these warrants and conversion features were
        no
        longer considered derivatives to be accounted for under EITF 00-19, and will
        instead be evaluated and accounted for based on the requirements of SFAS
        5 and
        FIN 14.
 
 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.
  F-14
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        1:
        NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Income
        Taxes (continued)
 
 The
        Company has approximately $78.0 million in Federal net operating loss
        carryforwards as of September 30, 2007, which expire in 2011 through 2027.
        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.
 
 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 $29.4 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
        $8.9
        million and $7.0 million for the years ended September 30, 2007 and 2006,
        respectively. The primary differences between the net loss for book and tax
        purposes are non-taxable book income from derivative instruments as well
        as the
        following items expensed for book purposes but not deductible for tax purposes
        -
        amortization of loan discount, amortization of customer lists,  inventory
        and receivable reserves, and expenses for stock options and shares issued
        in
        payment for consulting and other professional fees but not exercised by the
        recipients, or in the case of shares, not registered for or eligible for
        resale.
 
 Net
        Loss
        Per Share
 
 For
        the
        years ended September 30, 2007 and 2006, net loss per share is based on the
        net
        loss divided by the weighted average number of shares of common stock
        outstanding. Since the effect of common stock equivalents was anti-dilutive,
        all
        such equivalents were excluded from the calculation of weighted average shares
        outstanding. The total outstanding options and warrants, which have been
        excluded from the calculation of weighted average shares outstanding, were
        14,636,231 and 15,212,431 at September 30, 2007 and 2006, respectively.
 
 In
        addition, the potential dilutive effects of the following convertible securities
        outstanding at September 30, 2007 have been excluded from the calculation
        of
        weighted average shares outstanding: 69,196 shares of Series A-10 Convertible
        Preferred Stock (“Series A-10”) which could potentially convert into 691,960
        shares of ONSM common stock. The potential dilutive effects of the following
        convertible securities outstanding at September 30, 2006 have been excluded
        from
        the calculation of weighted average shares outstanding: (i) 430,983 shares
        of
        Series A-10 Convertible Preferred Stock (“Series A-10”) which could potentially
        convert into 4,309,830 shares of ONSM common stock and (ii) $3,000,000 of
        senior
        secured convertible notes (“8% Convertible Debentures”) and $2,225,000 of
        subordinated convertible notes (“8% Subordinated Debentures”) which in aggregate
        could potentially convert into 5,225,000 shares of ONSM common
        stock.
  F-15
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 Stock
        Compensation
 
 The
        Company has a stock based compensation plan for its employees (the “Plan”).
 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, which
        the
        Company adopted as of October 1, 2006 (the required date) and first applied
        during the year ended September 30, 2007, using the
        modified-prospective-transition method. Under this method, compensation cost
        recognized for the year ended September 30, 2007 includes compensation cost
        for
        all share-based payments granted subsequent to September 30, 2006, based
        on the
        grant-date fair value estimated in accordance with the provisions of SFAS
        123(R). As of October 1, 2006, there were no outstanding share-based payments
        granted prior to that date, but not yet vested. The results for the prior
        periods have not been restated. The fair value of each Plan option expensed
        during the year ended September 30, 2007 was estimated on the date of grant
        using the Black-Scholes model with the following assumptions: expected
        volatility from 75% to 92%, risk-free interest rate of 6.25%, expected dividends
        of $0 and expected term of 2 to 5 years, the full term of the related options.
        Certain Plan options granted to executives in September 2007 (see note 5)
        were
        not reflected as expense during the year ended September 30, 2007 due to
        the
        immateriality of the vested and/or earned portion of those options as of
        that
        date.
 
 Prior
        to
        October 1, 2006, the Company had elected to use Accounting Principles Board
        Opinion (“APB”) 25, "Accounting for Stock Issued to Employees," in accounting
        for employee stock options and accordingly no compensation cost was required
        to
        be recognized for options granted that had an exercise price equal to the
        market
        value of the underlying common stock on the date of grant. 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 during the year ended September
        30,
        2006 in accounting for employee options issued within the Plan (“Plan Options”)
        and outside the Plan (“Non-Plan Options”).
  For
                    the year ended
                  September
                    30, 2006Net
                    loss, as reported
                
                $
                (6,466,213
                )Total
                    stock based compensation expense
                
                
                (1,397,297
                )Pro
                    forma net loss
                
                $
                (7,863,510
                )Net
                    loss per share - basic and diluted:Net
                    loss per share, as reported
                
                $
                (0.47
                )Net
                    loss per share, pro forma
                
                $
                (0.58
                )
  Total
        stock based compensation expense was determined by applying the fair value
        based
        method for all employee awards, net of tax. The fair value of each
        option reflected above as compensation expense for the year ended
        September 30, 2006 was estimated on the date of grant using the Black-Scholes
        model with the following assumptions: expected volatility from 65% to 75%,
        risk-free interest rate of 6.25%, expected dividends of $0 and expected term
        of
        5 years, the full term of the related options.
 
 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 as professional fees at the
        time
        the services contemplated by the options are provided to the Company. The
        fair
        value of each Non-Plan option first expensed during the year ended September
        30,
        2007 was estimated on the date of grant using the Black-Scholes model with
        the
        following assumptions: expected volatility from 56% to 112%, risk-free interest
        rate of 6.25%, expected dividends of $0 and expected term of 4 years, the
        full
        term of the related options. For Non-Plan options first expensed during the
        year
        ended September 30, 2006, the expected volatility was from 51% to 75% and
        the
        expected term was 4 to 5 years.
 
 See
        Note
        8 for additional information related to all stock option issuances.
 
 Compensation
        and related expenses
 
 Compensation
        costs for employees considered to be direct labor are included as part of
        webcasting and smart encoding costs of revenue. Accounts payable and accrued
        liabilities includes approximately $578,000 and $393,000 as of September
        30,
        2007 and 2006, respectively, related to salaries, commissions, taxes, vacation
        and other benefits earned but not paid as of those dates.
  F-16
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 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 established by
        the
        Internal Revenue Code. 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 $40,000 and $42,000 for the years
        ended
        September 30, 2007 and 2006, respectively. The Company expensed approximately
        $40,000 and $34,000 in those fiscal years, respectively, with the remaining
        amount of $8,000 in fiscal 2006 satisfied by amounts previously funded by
        the
        Company and expensed but forfeited by terminated employees. The Company’s
        contributions to the Plan vest over five years, and the unvested portion
        of the
        Company’s previous contributions was approximately $118,000 as of September 30,
        2007.
 
 Reclassifications
 
 Certain
        prior year amounts have been reclassified to conform to the current year
        presentation.
 
 Effects
        of Recent Accounting Pronouncements
 
 In
        June
        2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards (“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 as of October 1, 2006 did not have a material impact
        on
        the Company's overall results of operations or financial position. As indicated
        in Note 4, the cumulative effect of the Company’s adoption of FSP EITF 00-19-2
        was reflected via direct adjustments to equity accounts without affecting
        net
        income, as prescribed by that pronouncement.
 
 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”, which retained the
        definition of a conventional convertible debt instrument set forth in EITF
        00-19
        and which is used in determining certain exemptions to the accounting 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 was effective
        for
        new instruments entered into and instruments modified in periods beginning
        after
        June 29, 2005, and the Company adopted it on July 1, 2005, with no material
        effect on its 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, 2006, which was based
        on
        the Company’s application of EITF 00-19 as well as other authoritative
        literature. As noted under “Derivatives” above, the Company’s adoption of FSP
        EITF 00-19-2 within the year ended September 30, 2007, resulted in
        discontinuance of this liability classification under EITF 00-19.
  F-17
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        1:
        NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Effects
        of Recent Accounting Pronouncements (Continued)
 
 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 or in the future qualify as liabilities
        under
        SFAS 150, regardless of the redemption feature or redemption price. FSP 150-5
        was effective for the first reporting period beginning after December 31,
        2005
        and the Company adopted it on July 1, 2005, with no material effect on its
        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, 2006, which was based on the Company’s application
        of SFAS 150 as well as other authoritative literature. As noted under
“Derivatives” above, the Company’s adoption of FSP EITF 00-19-2 within the
        year ended September 30, 2007, resulted in discontinuance of this liability
        classification under EITF 00-19.
 
 In
        June
        2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for
        Uncertainty in Income Taxes”, which clarifies SFAS 109, “Accounting for Income
        Taxes” by prescribing a recognition threshold and measurement attribute for the
        financial statement recognition and measurement of a tax position taken or
        expected to be taken in a tax return. FIN 48 will be effective for the Company’s
        fiscal year beginning October 1, 2007 and the Company is currently reviewing
        the
        effect FIN 48 may have on its financial statements.
 
 In
        September 2006, the FASB issued SFAS 157, "Fair Value Measurements". SFAS
        157
        does not expand the use of fair value measures in financial statements, but
        standardizes its definition and guidance by defining fair value as used in
        numerous accounting pronouncements, establishes a framework for measuring
        fair
        value and expands disclosure related to the use of fair value measures. SFAS
        157
        is effective for the Company’s fiscal year beginning October 1, 2008 and the
        Company is currently evaluating the impact SFAS 157 may have on its financial
        statements.
 
 In
        February 2007, the FASB issued SFAS 159, "The Fair Value Option for
        Financial Assets and Financial Liabilities". Under SFAS 159, the Company
        may elect to report most financial instruments and certain other items at
        fair
        value on an instrument-by-instrument basis with changes in fair value reported
        in earnings. After the initial adoption, the election is made at the acquisition
        of an eligible financial asset, financial liability, or firm commitment or
        when
        certain specified reconsideration events occur. The fair value election may
        not
        be revoked once an election is made. SFAS
        159
        is effective for the Company’s fiscal year beginning October 1, 2008 and the
        Company is currently evaluating the impact SFAS 159 may have on its financial
        statements.
 
 In
        December 2007, the FASB issued SFAS 141R, “Business Combinations”, which
        establishes principles and requirements for how an acquirer recognizes and
        measures in its financial statements the identifiable assets acquired, the
        liabilities assumed, and any noncontrolling interest in an acquiree, including
        the recognition and measurement of goodwill acquired in a business
        combination.  The requirements of SFAS 141R are effective for the
        Company’s fiscal year beginning October 1, 2009 and early adoption is
        prohibited. T he
        Company is currently evaluating the impact SFAS 141R may have on its financial
        statements.
  F-18
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        2:
        GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
 
 Information
        regarding the Company’s goodwill and other acquisition-related intangible assets
        is as follows:
 
 September
                  30, 2007
              
              September
                  30, 2006Gross
                  CarryingAmount
              
              Accumulated
                Amortization
              
              Net
                  Book
                Value
              
              Gross
                  CarryingAmount
              
              Accumulated
                Amortization
              
              Net
                  Book
                ValueGoodwill:Infinite
                  Conferencing
              
              $
              12,000,887
              
              $
              -
              
              $
              12,000,887
              
              $
              -
              
              $
              -
              
              $
              -Acquired
                  Onstream
              
              
              8,421,401
              
              
              -
              
              
              8,421,401
              
              
              8,421,401
              
              
              -
              
              
              8,421,401EDNet
              
              
              1,271,444
              
              
              -
              
              
              1,271,444
              
              
              1,271,444
              
              
              -
              
              
              1,271,444Auction
                  Video
              
              
              3,216
              
              
              -
              
              
              3,216
              
              
              -
              
              
              -
              
              
              -Total
                  goodwill
              
              
              21,696,948
              
              
              -
              
              
              21,696,948
              
              
              9,692,845
              
              
              -
              
              
              9,692,845Acquisition-related
                  intangible assets:Infinite
                  Conferencing -customer
                  lists, trademarks,
                URLs,
                  supplier terms andconsulting/non-
                  competes
              
              
              4,583,604
              
              
              (
                  375,000
              )
              
              4,208,604
              
              
              -
              
              
              -
              
              
              -Auction
                  Video - customer lists,patent
                  pending and
                consulting/non-
                  competes
              
              
              1,150,000
              
              
              (
                  250,000
              )
              
              900,000
              
              
              -
              
              
              -
              
              
              -MOD
                  - customer lists
              
              
              3,071,722
              
              
              (
                  3,071,722
              )
              
              -
              
              
              3,071,722
              
              
              (
                  2,918,136
              )
              
              153,586Virage
                  - customer lists
              
              
              332,000
              
              
              (
                  332,000
              )
              
              -
              
              
              332,000
              
              
              (
                  295,561
              )
              
              36,439Total
                  intangible assets
              
              
              9,137,326
              
              
              (
                  4,028,722
              )
              
              5,108,604
              
              
              3,403,722
              
              
              (
                  3,213,697
              )
              
              190,025Total
                  goodwill and other acquisition-related intangible assets
              
              $
              30,834,274
              
              $
              (
                  4,028,722
              )
              $
              26,805,552
              
              $
              13,096,567
              
              $
              (
                  3,213,697
              )
              $
              9,882,870
  Infinite
        Conferencing - April 27, 2007
 
 On
        April
        27, 2007 the Company completed the acquisition of Infinite Conferencing LLC
        (“Infinite”), a Georgia limited liability company. The transaction, by which the
        Company acquired 100% of the membership interests of Infinite, was structured
        as
        a merger by and between Infinite and the Company’s wholly-owned subsidiary,
        Infinite Conferencing, Inc. (the “Infinite Merger”). The primary assets
        acquired, in addition to Infinite’s ongoing audio and web conferencing business
        operations, were accounts receivable, equipment, internally developed software,
        customer lists, trademarks, URLs (internet domain names), favorable supplier
        terms and employment and non-compete agreements. The operations
        of Infinite are part of the Web Communications Services Group.
 
 The
        consideration for the Infinite Merger was a combination of $14 million in
        cash
        and 1,376,622 shares of Onstream Media restricted common stock (valued at
        approximately $4.0 million, or $2.906 per share), for an aggregate purchase
        price of approximately $18 million, before transaction costs. Onstream
        arranged a private equity financing for net proceeds totaling approximately
        $10.2 million, to partially fund the cash portion of the transaction - see
        Note
        6.
  F-19
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        2:
        GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
        (Continued)
 
 Infinite
        Conferencing - April 27, 2007 (Continued)
 
 The
        use
        of $2.906 per share, the average share price for the thirty days prior to
        the
        announcement of the definite merger agreement, to value the portion of the
        purchase price paid in shares, was in accordance with the merger agreement.
        However, EITF No. 99-12 indicates that securities given in a business
        combination should be measured during a period only up to "a few days before
        and
        after” the measurement date. In cases where there is a formula, the measurement
        date is when the number of shares first becomes fixed, which in this case
        was
        March 26, 2007, when the March 23, 2007 signing of the definitive merger
        agreement was publicly announced. The ONSM market price was $2.73 per share
        on
        March 21, 2007, $2.78 per share on March 26, 2007 and $2.64 per share on
        March
        27, 2007. Although the $2.906 price used to value the shares was outside
        the
        high end of the range indicated by these prices, the Company’s management
        believes that it was not materially different (particularly when considering
        that the equity portion was only approximately 22% of the total purchase
        price)
        and so is acceptable as reasonably indicative of fair value as of the date
        of
        the Infinite Merger.
 
 At
        the
        closing of the Infinite Merger, the Company entered into a lock-up agreement
        with the former Infinite shareholders that limits the number of shares that
        they
        may sell, to 25% per quarter and/or weekly sales of 30,000 shares, commencing
        with the registration of such shares with the SEC and which percentage and
        weekly limitation may be increased at our option. The lock-up agreement also
        provides that in the event that the accumulated gross proceeds of the sale
        of
        first 50% of the 1,376,622 shares issued to them is less than $2.0 million,
        the
        Company, at its sole option but provided that all securities to be issued
        in
        connection with the merger agreement and any related financing or other
        transactions do not exceed 19.99% of ONSM outstanding common stock at the
        measurement date, will pay the difference in registrable ONSM common shares,
        or
        cash to the extent required by the 19.99% restriction. These 1,376,622 shares
        were included in a registration statement declared effective by the SEC on
        June
        15, 2007 and the payment for any shortfall is computed 190 days thereafter,
        or
        December 22, 2007. However, the payment is not expected to be due until January
        15, 2008 or possibly later, subject to the notice and proof requirements
        in the
        governing documents. As of December 7, 2007, the former Infinite shareholders
        had sold 635,000 shares at an average price of $1.56 per share, which average
        price would result in an additional payment by the Company in cash or shares
        of
        approximately $923,000 if applied to the first 50% of the shares issued to
        those
        former Infinite shareholders. The
        closing ONSM share price was $0.94 per share on December 7, 2007.
 
 Due
        to
        the 19.99% restriction noted above, the Company has estimated that it will
        be
        able to issue no more than approximately 80,000 additional ONSM shares to
        satisfy any additional payment that is required, which would be valued at
        the
        average share price for the thirty days prior to such issuance. In accordance
        with SFAS 141, any such payment made in shares will not change the originally
        recorded purchase price. However, in the event the Company is required to
        pay
        cash under this arrangement, it will be recorded as additional purchase price
        included in goodwill and subject to periodic evaluation for impairment as
        discussed below. In accordance with SFAS 141, contingent consideration should
        only be recorded once the contingency is resolved and the additional
        consideration is issued or becomes issuable and since these conditions were
        not
        met as of September 30, 2007, the Company has not made any entries on its
        financial statements as of that date to reflect this contingency.
 
 In
        connection with the merger agreement, the Company entered into two employment
        contracts and one consulting contract with three key Infinite executives.
        The
        employment contracts included five-year option grants for the purchase of
        up to
        200,000 common shares with an exercise price of $2.50 per share (fair market
        value at the date of closing) and vesting over two years - see Note 8. The
        employment and consulting contracts contain non-compete provisions with a
        minimum term of three years from the merger closing.
  F-20
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        2:
        GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
        (Continued)
 
 Infinite
        Conferencing - April 27, 2007 (Continued)
 
 The
        summarized balance sheet of Infinite as of the April 27, 2007 closing of
        the
        Infinite Merger is as follows, showing the fair values assigned by the Company
        to Infinite’s assets and liabilities in accordance with SFAS 141 and recorded by
        the Company at that time.
 Accounts
                    receivable
                
                $
                893,228Property
                    and equipment
                
                
                894,388Other
                    tangible assets (includes $14,861 cash)
                
                
                48,817Identifiable
                    intangible assets
                
                
                4,583,604Total
                    assets
                
                $
                6,420,037Accounts
                    payable and accrued expenses
                
                $
                204,395Shareholder’s
                    equity
                
                
                6,215,642Total
                    liabilities and shareholder’s equity
                
                $
                6,420,037
 
 Infinite’s
        accounts receivable, net of reserves, were considered to be reasonably
        collectible and were generally due within thirty days of the closing of the
        Infinite Merger and therefore their book carrying value as of the date of
        acquisition was considered to be a reasonable estimate of their fair value.
 
 Infinite’s
        management estimated the fair value of their property and equipment, primarily
        phone switch equipment and related internally developed billing and management
        reporting software, based on information regarding third-party sales of similar
        equipment and the estimated cost to recreate the customized software. The
        Company is amortizing these assets over useful lives ranging from 3 to 5
        years.
 
 The
        fair
        value of certain intangible assets (internally developed software, customer
        lists, trademarks, URLs (internet domain names), favorable contractual terms
        and
        employment and non-compete agreements) acquired as part of the Infinite Merger
        was determined by Company management. This fair value was primarily based on
        the
        discounted projected cash flows related to these assets for the next three
        to
        six years, as projected by the Company’s and Infinite’s management on a
        stand-alone basis without regard to the Infinite Merger. The discount rate
        utilized considered equity risk factors (including small stock 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
        Company is amortizing these assets over useful lives ranging from 3 to 6
        years.
 
 Infinite’s
        accounts payable and accrued expenses were generally due within thirty days
        of
        the closing of the Infinite Merger and therefore their book carrying value
        as of
        the date of acquisition was considered to be a reasonable estimate of their
        fair
        value.
 
 The
        Company purchased Infinite for $18,216,529 in cash and stock. In conjunction
        with the acquisition, liabilities were assumed as follows:
 Identifiable
                    tangible and intangible assets
                
                $
                6,420,037Goodwill
                
                
                12,000,887Acquired
                    assets (at fair value)
                
                
                18,420,924Less:
                    Cash paid for non-cash assets
                
                
                (14,201,668
                )Less:
                    Cash acquired for cash
                
                
                (
                    14,861
                )Less:
                    Shares issued for non-cash assets
                
                
                (
                    4,000,000
                )Assumed
                    liabilities
                
                $
                204,395
  F-21
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        2:
        GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
        (Continued)
 
 Infinite
        Conferencing - April 27, 2007 (Continued)
 
 The
        $12,000,887 excess included in the $18,216,529 paid by the Company for 100%
        of
        Infinite over $6,215,642 (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 other intangible assets are being amortized to expense over
        their
        estimated useful lives, although the unamortized balances are still subject
        to
        review and adjustment for impairment. Annual reviews for impairment in future
        periods 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.
 
 The
        following table sets forth the unaudited pro-forma consolidated results of
        operations for the years ended September 30, 2007 and 2006, giving effect
        to the
        Infinite Merger as if the acquisition had occurred as of the beginning of
        the
        periods presented:
 For
                          the years
                        ended
                          September 30,2007
                    
                    
                    2006(unaudited)Revenues
                    
                    $
                    16,121,548
                    
                    $
                    13,999,077Net
                        loss
                    
                    $
                    (13,910,074
                    )
                    $
                    (
                        5,618,417
                    )Net
                        loss per share
                    
                    $
                    (0.40
                    )
                    $
                    (0.28
                    )
  The
        above
        pro-forma net loss per share is based on a
        weighted average number of shares of common stock which includes (i) the
        shares
        issued in connection with the Infinite Merger, (ii) the shares issued for
        approximately $10.2 million net proceeds in the private equity financing
        discussed above and in Note 6, since that financing was integral to and directly
        associated with the Infinite Merger and (iii) shares issued as a result of
        the
        exercise of options and warrants, to the extent necessary to fund the portion
        of
        the Infinite purchase price not satisfied by the first two items. Since the
        effect of common stock equivalents was anti-dilutive, all such equivalents
        are
        excluded from the calculation of the pro forma weighted average number of
        shares
        and the pro forma net loss per share.
 
 Auction
        Video - March 27, 2007
 
 On
        March
        27, 2007 the Company completed the acquisition of the assets, technology
        and
        patents pending of privately owned Auction Video, Inc., a Utah corporation,
        and
        Auction Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction
        Video”). The Auction Video, Inc. transaction was structured as a purchase of
        assets and the assumption of certain identified liabilities by the Company’s
        wholly-owned U.S. subsidiary, AV Acquisition, Inc. The Auction Video Japan,
        Inc.
        transaction was structured as a purchase of 100% of the issued and outstanding
        capital stock of Auction Video Japan, Inc. The acquisitions were made with
        a
        combination of 467,290 shares of restricted ONSM common stock (valued at
        approximately $1.5 million, or $3.21 per share) issued to the stockholders
        of
        Auction Video Japan, Inc. and $500,000 cash paid to certain stockholders
        and
        creditors of Auction Video, Inc., for an aggregate purchase price of
        approximately $2.0 million, before transaction costs. The Company has determined
        that these transactions do not meet the requirements established by the
        Securities and Exchange Commission for a “significant acquisition”, and
        therefore no pro-forma or other financial information related to the periods
        prior to the acquisition is being presented. The operations
        of Auction Video are part of the Digital Media Services Group.
  F-22
 
 ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        2:
        GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
        (Continued)
 
 Auction
        Video - March 27, 2007 (Continued)
 
 The
        Company allocated $2,046,996 of the Auction Video purchase price to the
        identifiable tangible and intangible assets acquired, based on a determination
        of their reasonable fair value as of the date of the acquisition. $600,000
        was
        assigned as the value of the video ingestion and flash transcoder, which
        was
        already integrated into the Company’s DMSP as of the date of the acquisition and
        was added to that asset’s carrying cost for financial statement purposes, with
        depreciation over a three-year life commencing April 2007 - see Note 3. Future
        cost savings for Auction Video services to be provided to Onstream Media
        customers existing prior to the acquisition were valued at $250,000 and are
        reflected in other current and non-current assets as of September 30, 2007,
        being amortized to cost of sales over a two-year period commencing April
        2007.
        The technology and patent pending related to the video ingestion and flash
        transcoder, the Auction Video customer lists and the consulting and non-compete
        agreements entered into with the former executives and owners of Auction
        Video
        were valued in aggregate at approximately $1,150,000 and are being amortized
        over various lives between two to five years commencing April 2007. Other
        tangible assets acquired were valued at $46,996.
 
 The
        Company purchased Auction Video for $2,023,963 in cash and stock. In conjunction
        with the acquisition, liabilities were assumed as follows:
 Identifiable
                    tangible and intangible assets
                
                $
                2,046,996Goodwill
                
                
                3,216Acquired
                    assets (at fair value)
                
                
                2,050,212Less:
                    Cash paid for non-cash assets
                
                
                (
                    523,066
                )Less:
                    Cash acquired for cash
                
                
                (
                    897
                )Less:
                    Shares issued for non-cash assets
                
                
                (
                    1,500,000
                )Assumed
                    liabilities
                
                $
                26,249
  In
        connection with the acquisition, the Company entered into three consulting
        contracts with three key Auction Video employees, such contracts including
        two-year option grant to one of the consultants for the purchase of up to
        35,000
        common shares with an exercise price of $2.98 per share (fair market value
        at
        the date of closing) and vesting over two years - see Note 8. The consulting
        contracts contain non-compete provisions with a minimum term of two years
        from
        the acquisition closing.
 
 Acquired
        Onstream - December 23, 2004
 
 On
        October 22, 2003 the Company executed an agreement and plan of merger agreement
        with privately held Onstream Media Corporation (“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. The Company also issued common stock options to directors
        and management as additional compensation at the time of and for the Onstream
        Merger, which was accounted for in accordance with APB 25 - see Note 1.
  F-23
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        2:
        GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
        (Continued)
 
 Acquired
        Onstream - December 23, 2004 (Continued)
 
 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 “Digital Media Services
        Platform” or “DMSP”) was initially 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
                
                $
                36,059Property
                    and equipment
                
                
                2,667,417Total
                    assets
                
                $
                2,703,476Accounts
                    payable and accrued expenses
                
                $
                814,739Notes
                    payable and capitalized lease
                
                
                335,179Total
                    liabilities
                
                
                1,149,918Shareholder’s
                    equity
                
                
                1,553,558Total
                    liabilities and shareholder’s equity
                
                $
                2,703,476
 
 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 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 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 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.
 
 Other
        acquisitions - 2002 through 2004
 
 EDNet,
        which is part of the Digital Media Services Group, was purchased by the Company
        in June 2001. MOD, which is part of the Web Communications Services 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 Media Services Group.
  F-24
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        2:
        GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
        (Continued)
 
 Other
        acquisitions - 2002 through 2004 (Continued)
 
 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 was collateralized
        by
        Curaspan’s assets, subordinate to a lending bank’s interest in certain of those
        assets. In addition, the preferred shares were held in escrow to 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 were recognized by the Company as other income on a cash basis
        as
        received. All scheduled payments were made, including the final payment on
        September 4, 2007.
 
 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 two reporting units, the Webcasting division (MOD) and EDNet as
        of
        September 30, 2006, as well as Acquired Onstream as of December 31, 2006.
        The
        Company 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 concluded that there was no impairment of the
        net
        assets of neither the Webcasting division nor EDNet as of September 30, 2006
        and
        no impairment of Acquired Onstream’s net assets as of December 31,
        2006.
 
 SFAS
        142
        allows the carryforward of a previous detail valuation, provided certain
        criteria are met, including no significant changes in assets and liabilities
        of
        the reporting unit since the previous valuation, a substantial margin between
        the previous valuation and the carrying value at the time and a determination
        that a current year impairment would be remote based on an analysis of past
        events and changes in circumstances since the previous valuation. The Company
        determined that these criteria were met as of September 30, 2007 and based
        on
        this, as well as its internal valuation calculations and review for impairment
        performed on a basis consistent with the previous year, determined that an
        independent valuation of EDNet’s unamortized goodwill was not necessary, and
        that no impairment existed, as of September 30, 2007.
 
 The
        valuations of EDNet and Acquired Onstream incorporate management’s estimates of
        future sales and operating income, which estimates in the case of Acquired
        Onstream are dependent on a product (the DMSP) from which meaningful sales
        are
        yet to be realized.
 
 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.
  F-25
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        3:
        PROPERTY AND EQUIPMENT
 
 Property
        and equipment, including equipment acquired under capital leases, consists
        of:
 
 September
                  30,
              
              September
                  30,
              
              Useful
                  Lives2007
              
              2006
              
              (Years)Equipment
                  and Software
              
              $
              9,466,448
              
              $
              7,493,679
              
              
              1-5DMSP
              
              
              4,784,875
              
              
              4,081,978
              
              
              3Travel
                  video library
              
              
              1,368,112
              
              
              1,368,112
              
              
              2Furniture
                  and fixtures
              
              
              179,205
              
              
              179,205
              
              
              5-7Capitalized
                  internal use software
              
              
              558,485
              
              
              333,485
              
              
              3Leasehold
                  improvements
              
              
              296,652
              
              
              288,745
              
              
              516,653,777
              
              
              13,745,204Less:
                  Accumulated depreciation and amortization
              
              
              (11,102,751
              )
              
              (
                  8,846,489
              )Net
                  book value
              
              $
              5,551,026
              
              $
              4,898,715
 
 Depreciation
        and amortization expense for property and equipment was approximately $2,285,000
        and $1,393,000 for the years ended September 30, 2007 and 2006, respectively.
        The Company recorded the disposal of approximately $642,000 of fully depreciated
        furniture and equipment during the year ended September 30, 2006.
 
 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. 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, at which time depreciation of 75% (for three
        of the
        four products in service, based on guidance in SFAS 86, “Accounting for the
        Costs of Computer Software to be Sold, Leased or Otherwise Marketed”) of the
        DMSP’s carrying cost began and continued until the fourth product was placed in
        service during October 2006, at which time the Company began to depreciate
        of
        100% of the DMSP’s carrying cost. See Note 2 regarding the initial purchase of
        this asset from Acquired Onstream and Note 5 regarding the SAIC
        contract.
 
 On
        March
        27, 2007 the Company completed the acquisition of Auction Video - see Note
        2.
        The assets acquired included a video ingestion and flash transcoder, which
        was
        already integrated into the Company’s DMSP as of the date of the acquisition.
        Based on the Company’s determination of the fair value of that transcoder at the
        date of the acquisition, $600,000 was added to the DMSP’s carrying cost as
        reflected above, which additional cost is being depreciated over a three-year
        life commencing April 2007.
 
 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.  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
        due
        diligence expenses alleged to be approximately $354,000 plus attorney fees
        and
        interest. On December 4, 2005, the Company filed a response objecting to
        all
        claims by the buyer, which it believed were without merit. On February 12,
        2007,
        the Company agreed to a full settlement of this legal action, which required
        only the refund of the $50,000 deposit, which was classified as deferred
        revenue
        on the Company’s balance sheet as of September 30, 2006. The Company refunded
        the deposit shortly after agreeing to the settlement.
  F-26
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE
 
 As
        of
        September 30, 2007, all debt including the 8% Subordinated Convertible
        Debentures, the 8% Senior Convertible Debentures and notes payable, except
        the
        capitalized software and equipment leases, had been repaid or converted to
        ONSM
        common shares.
 
 8%
        Subordinated Convertible Debentures
 
 In
        March
        and April 2006 the Company sold to several accredited investors $2.3 million
        principal amount of 8% subordinated secured convertible notes (“8%
        Subordinated Convertible Debentures”) ,
        together with common stock purchase warrants to purchase an aggregate of
        805,000
        shares of ONSM common stock for $1.50 per share. As
        of
        September 30, 2007, all of these 8% Subordinated Convertible Debentures had
        been
        converted into registered ONSM common shares, using a $1.00
        per share conversion rate.
 
 The
        conversion of $500,000 principal amount 8% Subordinated Convertible Debentures
        to common shares occurred at the Company’s election on January 22, 2007, as a
        result of the automatic conversion provisions contained in those notes. However,
        $250,000 principal amount of 8% Subordinated Convertible Debentures also
        eligible for the automatic conversion was not converted on that date as the
        debenture holder had in excess of the 4.99% beneficial ownership threshold
        cited
        in those debentures. The Company, in consultation with its legal counsel,
        subsequently determined that the waiver of such threshold by the debenture
        holder was sufficient to allow the Company to convert these debentures to
        common
        shares. This waiver was obtained and the debentures converted during March
        2007.
 
 In
        connection with the 8% Subordinated Convertible Debentures, the Company issued
        five year common stock purchase warrants to purchase an aggregate of 805,000
        shares of ONSM common stock, exercisable starting six months after issuance.
        These warrants have an exercise price of $1.50 per share, subject to adjustment
        in the event of stock splits, stock dividends, pro rata distributions of
        equity
        securities, evidences of indebtedness, rights or warrants to purchase common
        stock or cash or any other asset or mergers or consolidations. Starting one
        year
        after issuance, the warrants include a cashless exercise feature, which
        provides 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
        number of shares of ONSM common stock that can be issued upon the exercise
        of
        the warrants is limited to the extent necessary to ensure that following
        the
        exercise the total number of shares of ONSM common stock beneficially owned
        by
        the holder does not exceed 4.999% of the Company’s issued and outstanding common
        stock. See Note 8.
 
 In
        March
        and April 2006 the Company paid the selling agents fees totaling $163,000
        and
        issued them 182,500 common stock purchase warrants with terms identical to
        the
        warrants sold with the initial $2.3 million principal 8% subordinated secured
        convertible notes. See Note 8.
 
 The
        interest on the Subordinated Convertible Debentures of 8% per annum was payable in
        arrears with the first interest payment due on September 28, 2006 and payment
        dates quarterly thereafter in cash,
        or common shares (at 85% of the market price per share) at the Company’s option.
        The Company issued 165,068 common shares in lieu of the $93,284 interest
        accrued
        during the year ended September 30, 2006, which included 1,917 shares issued
        for
        $1,917 interest due on conversions during that period. The Company issued
        40,976
        common shares in lieu of the $50,947 interest accrued during the year ended
        September 30, 2007, which included 31,681 shares issued for $31,681 interest
        due
        on conversions during that period.
  F-27
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
 
 8%
        Subordinated Convertible Debentures (Continued)
 
 The
        Company included the 8% Subordinated Convertible Debentures and related $1.50
        warrants on a Registration Statement (the “Registration Statement”) which was
        declared effective by the Securities and Exchange Commission (“SEC”) on July 26,
        2006. The Company is only required to expend commercially reasonable efforts
        to
        keep the Registration Statement continuously effective. However, in the event
        the Registration Statement or the ability to sell shares thereunder lapses
        for
        any reason for 30 or more consecutive days in any 12 month period or more
        than
        twice in any 12 month period, the purchasers of the 8% Subordinated Convertible
        Debentures may require the Company to redeem (i) any such notes still
        outstanding for 115% of the face value (or 115% of the market value of the
        underlying shares for the previous five days, if greater) plus (ii) any shares
        obtained from the conversion of those notes and still held, for 115% of the
        market value for the previous five days. The same penalty provisions apply
        if
        the Company’s common stock is not listed or quoted, or is suspended from trading
        on an eligible market for a period of 20 or more trading days (which need
        not be
        consecutive). Regardless of the above, the Company believes that the
        applicability of these provisions would be limited by equity and/or by statute
        to a certain timeframe after the original security purchase.
 
 Based
        on
        the Company’s application of EITF 00-19 and SFAS 133 through September 30, 2006,
        it was determined that the requirement, discussed above, that the Company
        file a
        registration statement including the shares underlying the 8%
        Subordinated Convertible Debenture and the
        related $1.50 warrants would require that the amount originally recorded
        as
        equity for the embedded conversion feature in the 8% Subordinated Convertible
        Debentures, as well as the related $1.50 warrants, be reclassified from equity
        to liability. Although the warrants were not exercisable until six months
        after
        their issuance, as discussed above, the Company determined that EITF 00-19
        prohibits equity classification for any provision in a contract that could
        require net-cash settlement and does not appear to contain an exception for
        such
        provisions that are not yet applicable. Even after the registration statement
        was filed by the Company on June 9, 2006, and declared effective by the SEC
        on
        July 26, 2006, the “cashless exercise” option discussed above would also result
        in the continued classification as a liability of the amount recorded for
        the
        $1.50 warrants as of September 30, 2006, although that option only becomes
        available to investors one year after issuance of the warrants and only in
        the
        event there is no effective registration statement. Although the filing of
        the
        registration statement was no longer a basis for recording the embedded
        conversion feature as a liability as of September 30, 2006, the existence
        of
        penalties for lack of an effective registration and/or listing for the Company’s
        shares, as discussed above, would result in the continued classification
        as
        liability at that date of the amount recorded for the embedded conversion
        feature.
 
 Although
        the Company does not believe that payments in connection with these provisions
        is likely, EITF 00-19 requires that accounting for them be done without regard
        to probability. EITF 00-19 also requires that the amount reclassified as
        a
        liability be adjusted to fair value at each reporting period. Accordingly,
        the
        Company reflected a liability of $281,809 on its September 30, 2006 balance
        sheet, $917,917 of such amount representing the initial reclassification
        to
        liability of the $1.50 warrants and the embedded conversion feature in the
        8%
        Subordinated Convertible Debentures and the difference of $636,108 representing
        the adjustment to fair value included as income under the caption “income from
        derivative instruments” in the Company’s statement of operations for the year
        ended September 30, 2006. Effective
        within the year ended September 30, 2007, the Company elected early adoption
        of
        FASB Staff Position (“FSP”) EITF 00-19-2, “ Accounting
        for R egistration
        Payment Arrangements ” ,
        which
        was issued on December 21, 2006 and establishes that contingent obligations
        under registration payment arrangements, as defined in FSP EITF 00-19-2,
        shall
        be recognized and measured separately in accordance with Statement of Financial
        Accounting Standard (“SFAS”) No. 5, “Accounting for Contingencies” and FASB
        Interpretation (“FIN”) No. 14, “Reasonable Estimation of the Amount of a
        Loss”, and not under EITF 00-19.
  F-28
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
 
 8%
        Subordinated Convertible Debentures (Continued)
 
 The
        Company determined that all of the underlying factors that had resulted in
        the
        Company’s previous determination to account for these warrants and conversion
        features as derivatives were registration payment arrangements and as a result
        of its adoption of FSP EITF 00-19-2, these warrants and conversion features
        were
        no longer considered derivatives to be accounted for under EITF 00-19, and
        will
        instead be evaluated and accounted for based on the requirements of SFAS
        5 and
        FIN 14. In accordance with the transitional adoption requirements of FSP
        EITF
        00-19-2, the Company reflected the cumulative effect of this change in
        accounting principle in its September 30, 2007 financial statements as a
        $917,917 increase in its additional paid-in capital and a $636,108 increase
        in
        its accumulated deficit. Such changes were effective at the beginning of
        the
        year then ended.
 
 The
        Company has concluded, based on its satisfactory recent history of maintaining
        the effectiveness of its registration statements and its NASDAQ listing,
        as well
        as a stock price and stockholders’ equity in excess of the NASDAQ listing
        standards as of September 30, 2007, that material payments under these registration
        payment arrangements
        are not probable and therefore no accrual related to them is necessary with
        respect to SFAS 5 and FIN 14 as
        of
        that date. However, the Company’s share price was below $1.00 as of December 7,
        2007, which condition could eventually affect its NASDAQ listing status -
        See
        note 5.
 
 The
        estimated fair value of all warrants given in connection with the 8%
        Subordinated Convertible Debentures plus the value of the 8% Subordinated
        Convertible Debentures’ beneficial conversion feature was $917,917, which was
        calculated 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”) and allocated to additional paid in
        capital and debt discount. The Company’s management calculated the discount
        based on its estimate of the fair value of the warrants and the fair value
        of
        the notes, which were allocated on a pro-rata basis as a percentage of the
        face
        value of the convertible securities, and the intrinsic value of the beneficial
        conversion feature. The fair value of the warrants was calculated using the
        Black-Scholes model including the following assumptions: expected volatility
        of
        56% and risk free interest rate of 6.25%. The estimated fair value of the
        note
        was based on the present value of the expected cash flows, discounted at
        approximately 13% per annum, which Company management determined to be an
        appropriate interest rate for this financing on a stand-alone basis. The
        intrinsic value of the beneficial conversion feature was based on the closing
        price of the stock at the date of issuance, its relationship to the conversion
        price of the instrument and the value of the warrants. The debt discount,
        totaling $1,102,033 after inclusion of other direct costs associated with
        the
        financing, was amortized to interest expense based on the four year term
        of the
        8% Subordinated Convertible Debentures. In addition, the unamortized portion
        of
        the discount related to converted securities was expensed as interest at
        the
        time of the conversion.
 
 8%
        Senior Convertible Debentures
 
 On
        December 23, 2004, the Company sold senior secured convertible notes (“8%
        Convertible Debentures”) to several accredited investors for gross proceeds of
        $4.35 million, which included five-year warrants to purchase 1,522,500 common
        shares of ONSM for $1.65 per share. The 8% Convertible Debentures were
        collateralized by a blanket security interest in the Company’s assets and a
        pledge of the stock of its 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”) had substantially the same terms as the 8% Convertible
        Debentures, although additional warrants were granted to induce the early
        exercise, as discussed below. As of September 30, 2007, all of these 8%
        Convertible Debentures (including the AIR), had been converted into registered
        ONSM common shares, using a $1.00
        per share conversion rate.
  F-29
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
 
 8%
        Senior Convertible Debentures (Continued)
 
 The
        conversion of $46,303 principal amount of 8% Senior Convertible Debentures
        to
        common shares occurred at the Company’s election on January 22, 2007, as a
        result of the automatic conversion provisions contained in those notes. However,
        $400,000 principal amount of 8% Senior Convertible Debentures also eligible
        for
        the automatic conversion were not converted on that date as the debenture
        holder
        had in excess of the 9.99% beneficial ownership threshold cited in those
        debentures. The Company, in consultation with its legal counsel, subsequently
        determined that the waiver of such threshold by the debenture holder was
        sufficient to allow the Company to convert these debentures to common shares.
        This waiver was obtained and the debentures converted during March
        2007.
 
 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 were exercised, the Company would 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. During
        April 2006, the Company issued a five-year warrant to purchase 10,417 common
        shares for $1.65 per share as the result of a single investor’s exercise of a
        warrant for 20,833 common shares at $1.00 per share. Effective September
        13,
        2006, the remaining $1.00 warrants expired without having been exercised.
        See
        Note 8.
 
 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. See Note 8.
 
 The
        interest on the Convertible Debentures of 8% per annum was 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. The Company issued 368,209 common shares in lieu of the $302,206 interest
        accrued during the year ended September 30, 2006, which included 9,589 shares
        issued for $9,589 interest due on conversions during that period. The Company
        issued 54,148 common shares in lieu of the $61,738 interest accrued during
        the
        year ended September 30, 2007, which included 42,472 shares issued for $42,472
        interest due on conversions during that period.
 
 The
        Company included the common shares underlying the 8% Convertible Debentures
        (including the AIR shares), and the related warrants, on a registration
        statement declared effective by the SEC on June 29, 2005. 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 Capital Market for a period of
        3
        trading days (which need not be consecutive) 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). The $1.65 warrants provide that in the
        event the shares are not subject to an effective registration statement on
        the
        date required in relation to the initial and/or subsequent issuance of shares
        under these transactions and at the time of warrant 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. Regardless of the above, the Company believes that the applicability of these
        provisions would be limited by equity and/or by statute to a certain timeframe
        after the original security purchase.
  F-30
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 
 NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
 
 8%
        Senior Convertible Debentures (Continued)
 
 The
        number of shares of ONSM common stock that can be issued upon the exercise
        of
        the $1.65 warrants is limited to the extent necessary to ensure that following
        the exercise the total number of shares of ONSM common stock beneficially
        owned
        by the holder does not exceed 9.999% of the Company’s issued and outstanding
        common stock. However, the Company, in consultation with its legal counsel,
        determined that the waiver of such threshold by the warrant holder was
        sufficient to allow the Company to issue shares upon exercise of that warrant
        by
        a holder exceeding that threshold. Accordingly, the Company obtained such
        waiver
        and in March 2007 issued 118,788 shares to a holder exceeding that
        threshold.
 
 Based
        on
        the Company’s application of EITF 00-19 and SFAS 133 through September 30, 2006,
        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 the amount
        originally recorded as equity for the $1.00 warrants, the $1.65 warrants
        and the
        embedded conversion feature in the 8% Convertible Debenture and Additional
        8%
        Convertible Debenture be classified as a liability. Although the Company
        does
        not believe that the assessment of these penalties is likely, EITF 00-19
        requires that accounting for them be done without regard to probability.
        EITF
        00-19 requires that the amount recorded as a liability be adjusted to fair
        value
        at each reporting period. These
        amounts were also subject to accounting for a potential rescission through
        May
        23, 2006, during which time the Company did not reflect the effect of such
        adjustments in its statement of operations. Accordingly, the Company reflected a liability of $834,125 on its September
        30,
        2006 balance sheet, $1,498,974 of such amount representing the valuation
        of the
        $1.65 warrants and the embedded conversion feature in the 8% Convertible
        Debentures as of May 23, 2006 (the last day of the potential rescission period)
        and the difference of $664,849 representing the adjustment to fair value
        included as income under the caption “income from derivative instruments” in the
        Company’s statement of operations for the year ended September 30, 2006.
 
 Effective
        within the year ended September 30, 2007, the Company elected early adoption
        of
        FASB Staff Position (“FSP”) EITF 00-19-2, “ Accounting
        for R egistration
        Payment Arrangements ” ,
        which
        was issued on December 21, 2006 and establishes that contingent obligations
        under registration payment arrangements, as defined in FSP EITF 00-19-2,
        shall
        be recognized and measured separately in accordance with Statement of Financial
        Accounting Standard (“SFAS”) No. 5, “Accounting for Contingencies” and FASB
        Interpretation (“FIN”) No. 14, “Reasonable Estimation of the Amount of a
        Loss”, and not under EITF 00-19. The Company determined that all of the
        underlying factors that had resulted in the Company’s previous determination to
        account for these warrants and conversion features as derivatives were
        registration payment arrangements and as a result of its adoption of FSP
        EITF
        00-19-2, these warrants and conversion features were no longer considered
        derivatives to be accounted for under EITF 00-19, and will instead be evaluated
        and accounted for based on the requirements of SFAS 5 and FIN 14. In accordance
        with the transitional adoption requirements of FSP EITF 00-19-2, the Company
        reflected the cumulative effect of this change in accounting principle in
        its
        September 30, 2007 financial statements as a $1,498,974 increase in its
        additional paid-in capital and a $664,849 increase in its accumulated deficit.
        Such changes were effective at the beginning of the year then
        ended.
 
 The
        Company has concluded, based on its satisfactory recent history of maintaining
        the effectiveness of its registration statements and its NASDAQ listing,
        as well
        as a stock price and stockholders’ equity in excess of the NASDAQ listing
        standards as of September 30, 2007, that material payments under these registration
        payment arrangements
        are not probable and therefore no accrual related to them is necessary with
        respect to SFAS 5 and FIN 14 as
        of
that date. However, the Company’s share price was below $1.00 as of December 7,
        2007, which condition could eventually affect its NASDAQ listing status -
        See
        note 5.
  F-31
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
 
 8%
        Senior Convertible Debentures (Continued)
 
 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, was amortized to interest expense based on the four year term
        of the
        8% Convertible Debentures. In addition, the unamortized portion of the discount
        related to converted securities was 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 was amortized
        to
        interest expense based on the four year term of the Additional 8% Convertible
        Debentures. In addition, the unamortized portion of the discount related
        to
        converted securities was expensed as interest at the time of the
        conversion.
 
 Notes
        Payable
 
 Notes
        payable consist of the following as of September 30, 2007 and 2006:
 
 September
                  30,
                2007
              
              September
                  30, 2006Note
                  payable to third party, with original funding in August 2006. Principal
                  paid in monthly installments from November 2006 through January
                  2007.
              
              $
              -
              
              $
              350,000Note
                  payable to a major Company shareholder, with original funding in
                  September
                  and October 2005 and additional funding in December 2006 and March
                  2007,
                  for total funding of $1.5 million. Converted to common stock at
                  $1.00 per
                  share in March 2007.
              
              
              -
              
              
              450,000Note
                  payable to an affiliate of a Company director, funded in June 2006.
                  Converted to common stock at $1.22 per share in March
                  2007.
              
              
              -
              
              
              300,000Note
                  payable to a major Company shareholder, with original funding in
                  September
                  2006. Converted to common stock at $1.00 per share in March
                  2007.
              
              
              -
              
              
              300,000Capitalized
                  software and equipment leases
              
              
              393,958
              
              
              114,355Total
                  notes payable
              
              
              393,958
              
              
              1,514,355Less:
                  discounts on notes payable
              
              
              -
              
              
              (
                  88,565
              )Notes
                  payable, net of discount
              
              
              393,958
              
              
              1,425,790Less:
                  current portion
              
              
              (
                  138,629
              )
              
              (
                  892,032
              )Long
                  term notes payable, net of discount and current portion
              
              $
              255,329
              
              $
              533,758
  F-32
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
 
 Notes
        Payable (Continued)
 
 As
        part
        of the Onstream Merger, the Company assumed a capital lease for software,
        which
        had an outstanding principal balance of $63,237 as of September 30, 2007.
        The
        balance is payable in equal monthly payments of $3,366 through May 2009,
        which
        includes interest at approximately 7% per annum. Accounts payable at September
        30, 2007 includes $38,786 of past due payments related to this lease. See
        Notes
        2 and 5.
 
 During
        July 2007, the Company entered into a capital lease for audio conferencing
        equipment, which had an outstanding principal balance of $330,721 as of
        September 30, 2007. The balance is payable in equal monthly payments of $10,172
        through August 2010, which includes interest at approximately 5% per annum,
        plus
        an optional final payment based on fair value, but not to exceed
        $16,974.
 
 During
        August 2006, the Company borrowed $350,000 from Platinum Credit Group, LLC,
        collateralized by a secondary lien on up to $350,000 of the Company’s tangible
        equipment. In addition, the Company dedicated certain receivables proceeds
        to
        pay $100,000 principal installments, which were paid when due on November
        15 and
        December 15, 2006 as well as the $150,000 principal balance paid when due
        on
        January 12, 2007. At the time of the borrowing, the Company paid related
        fees
        totaling $50,000 in cash and prepaid interest in the form of 80,000 shares
        of
        ONSM common stock, which was recorded as a discount and amortized to interest
        expense over the term of the loan. The Company granted Platinum Credit piggyback
        registration rights for these 80,000 shares, which were included in a
        registration statement declared effective by the SEC on June 15,
        2007.
 
 On
        October 11, 2005, the Company entered into a five-year note with Neil Berman,
        a
        major shareholder, in the aggregate principal amount of $750,000, collateralized by hardware and software. Interest, at 10.85% per annum, was payable upon maturity. At the Company's
        option, and with the consent of required security holders, both interest
        and
        principal could be paid with Series A-10 Preferred Stock. The Company received
        $300,000 of the note amount as of September 30, 2005 and an additional $150,000
        in October 2005, resulting in a notes payable balance of $450,000 as of
        September 30, 2006. The Company received the remaining $300,000 in December
        2006. Following Board of Director approval of the modified terms on October
        25,
        2006, the note was formally modified in January 2007 to increase  the
        principal amount to $1,500,000, adjust the remaining term to four years,
        increase the interest rate to 17.75% (which the lender could request prepayment
        of in common shares at $1.00 per share) and modify the note priority to
        unsecured and subordinated to all other debt. In addition, the new terms
        allowed
        the Company or the lender to convert the loan balance to restricted common
        stock
        at $1.00 per share at any time. The Company received $100,000 of the increased
        note amount in December 2006, $50,000 in January 2007 and the $600,000 balance
        in March 2007.
 
 During
        March 2007, Mr. Berman exercised his option to require prepayment of interest
        and fees in shares and also converted this note to common stock. Accordingly,
        the Company issued an aggregate of 2,789,592 unregistered common shares for
        conversion of the note and the related interest and fees due. The portion
        of
        these shares representing interest and fees were valued at $3,416,477 based
        on
        their fair value at date of issuance. $48,825 of this amount had been accrued
        as
        a liability and recognized as interest expense through September 30, 2006,
        with
        the balance reflected as interest expense for the year ended September 30,
        2007.
  F-33
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
 
 Notes
        Payable (Continued)
 
 The
        Company has granted Mr. Berman demand registration rights, effective six
        months
        from the date of the modified note, for any unregistered common shares issuable
        thereunder. Upon such demand, the Company will have 60 days to file a
        registration statement and shall
        use its best efforts to obtain promptly the effectiveness of such registration
        statement. 784,592 of the 2,789,592 shares were included in a registration
        statement declared effective by the SEC on June 15, 2007 and as of December
        7,
        2007 the Company has not received any demand for the registration of the
        balance. As the note does not provide for damages or penalties in the event
        the
        Company does not comply with these registration rights, the Company has
        concluded that these rights do not constitute registration payment arrangements
        under FSP EITF 00-19-2. In any event, the Company has determined that material
        payments in relation to these rights are not probable and therefore no accrual
        related to them is necessary with respect to SFAS 5 and FIN 14.
 
 On
        June
        1, 2006 the Company borrowed $300,000 from J&C Resources, LLC, whose
        President, Chairman and CEO is a member of the Company’s board of directors. The
        principal balance was due one year after the borrowing date or three days
        after
        receipt of funding, including exercise of warrants, in excess of $1.0 million,
        whichever occurred first. Total interest, origination and legal fess totaling
        $21,000 cash and 21,000 common shares were due on maturity. Finders fees
        of
        $9,000 cash and 9,000 common shares were payable at loan maturity to Asset
        Factoring Ltd, a related entity. In January and February 2007, all fees due
        upon
        maturity were paid in cash and stock, as applicable. Following Board of Director
        approval of the modified terms on December 20, 2006, the note was formally
        modified in January 2007 to be convertible into common shares at $1.22 per
        share
        and to bear interest at 14.67% per annum, non-compounding, which the Company
        could settle in shares at $1.22 per share.
 
 During
        March 2007, the Company exercised its option to force early conversion of
        this
        note to common stock, and as a result was required to pay interest (in shares)
        for the entire original term of the note. Accordingly, the Company issued
        an
        aggregate of 300,000 unregistered common shares for conversion of the note
        and
        the related interest due. The portion of these shares representing interest,
        as
        well as the shares issued in February 2007 for interest and fees related
        to the
        predecessor loan, were valued at $187,860 based on their fair value at date
        of
        issuance. $7,562 of this amount had been accrued as a liability and recognized
        as interest expense through September 30, 2006, with the balance reflected
        as
        interest expense for the year ended September 30, 2007.
 
 The
        Company granted J&C
        Resources piggyback registration rights for these 330,000 shares, which were
        included in a registration statement declared effective by the SEC on June
        15,
        2007.
  F-34
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
 
 Notes
        Payable (Continued)
 
 In
        accordance with APB 26, “Early Extinguishment of Debt”, and EITF 96-19,
“Debtor’s Accounting for a Modification or Exchange of Debt Instruments”, new
        debt instruments are to be recorded at fair value at the date of modification
        and that fair value is to be compared to the carrying value of the previous
        debt
        instrument in order to determine the debt extinguishment gain or loss, if
        any.
        This accounting treatment was applied to certain of the above transactions
        as
        follows:
 
 (i)
        The
        fair value of the renegotiated Berman note was determined to be materially
        equal
        to the carrying value of the previous Berman note, since the 6.9% per annum
        increase in the interest rate was considered a reasonable market reflection
        of
        the reduced payment priority and lack of collateral under the new note terms.
        The addition of a conversion feature of $1.00 included in the new note was
        determined to have no effect on its fair value, based on the market value
        of
        $0.75 per ONSM share on the date of Board approval of the terms of the new
        note.
        Therefore, there was no debt extinguishment gain or loss associated with
        the
        Berman note modifications.
 
 (ii)
        The
        renegotiated J&C note was recorded at a gross amount of $435,000, equivalent
        to the market value of the 245,902 shares that would be received upon its
        conversion. This value was based on the market value of $1.77 per ONSM share,
        which was the most recent daily closing price as of the date of Board approval
        of the terms of the new note, although the $1.22 conversion rate was based
        on
        negotiations that occurred with J&C only two weeks earlier when the market
        value was approximately $1.20 per ONSM share. The valuation based on the
        date of
        Board approval resulted in a debt extinguishment loss of $135,000, the
        difference between the $435,000 fair value and the $300,000 face value of
        the
        note, and such non-cash loss was reflected in the Company’s results of
        operations for the year ended September 30, 2007. The gross carrying value
        of
        the new note was offset by the $135,000 value of the conversion feature,
        which
        was reflected by an increase to additional paid-in capital and resulted in
        the
        net carrying value of the note, prior to its conversion to common stock,
        being
        equal to its $300,000 face value. There was no material difference between
        the
        effective interest rates of the old and new J&C notes.
 
 On
        September 14, 2006, the Company borrowed $300,000 from Lewis Opportunity
        Fund
        LP, a major shareholder. Cash interest of 10% was paid in advance. The
        principal, plus additional interest of 90,000 common shares, was due on
        September 14, 2007. The Company could prepay all or any part of the principal
        after April 15, 2007 and before maturity without penalty, provided the Company
        gave the lender five days notice before repayment to allow the lender
        opportunity to exercise rights of conversion. In the event of early repayment
        or
        transfer to another financing all cash interest for the entire term of the
        loan
        would be deemed earned but the interest shares would be partially earned
        on the
        following basis - prepayment within eight months - 60,000 shares; thereafter
        -
        90,000 shares. The note was convertible at the lender’s option at any time after
        April 15, 2007, to unregistered common stock at the rate of $1.00 per common
        share, which exceeded the fair market value at the time of the loan. In the
        event of such a conversion of the entire principal amount, all cash and interest
        shares for the entire term of the loan would be fully earned. The Company
        granted the lender a secondary lien on certain equipment.
 
 During
        March 2007, the Company exercised its option to force early conversion of
        this
        note to common stock, and as a result was required to pay interest (in shares)
        for the entire original term of the loan. Accordingly, the Company issued
        an
        aggregate of 390,000 unregistered common shares for conversion of the note
        and
        the related interest due. These interest shares were valued at $191,263 based
        on
        their fair value at date of issuance. $3,945 of this amount had been accrued
        as
        a liability and recognized as interest expense through September 30, 2006,
        with
        the balance reflected as interest expense for the year ended September 30,
        2007.
        There are no registration rights associated with this transaction and as
        of
        December 7, 2007 the related shares have not been included in a registration
        statement.
  F-35
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        4:
        CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
 
 Notes
        Payable (Continued)
 
 On
        October 27, 2006 the Company entered into a four-year promissory note in
        the
        aggregate principal amount of $1.0 million, which was funded in installments
        through December 2006. The note was unsecured and subordinate to all other
        liabilities of the Company. The note‘s interest rate was 17.75% per annum,
        payable in cash quarterly in arrears or, at the Company’s option, in
        unregistered ONSM common stock valued at $1.00 per share. Interest paid in
        shares was required to be prepaid on a non-compounding, non-refundable basis
        for
        the entire remaining term of the loan. The Company elected to prepay all
        interest with the aggregate issuance of 694,495 unregistered common shares
        during November and December 2006, which were valued at $1,077,824 based
        on the
        fair market value of the shares on the dates of issuance.
 
 In
        connection with the above, the Company agreed to pay a finder’s fee to another
        individual not affiliated with the lending entity and not a director or officer
        of the Company, but who had greater than a 5% beneficial ownership in the
        Company. This finder’s fee was payable as 100,000 shares of the Company’s common
        stock, which the Company issued in November 2006, plus immediately exercisable
        four-year options to purchase 50,000 shares of the Company’s common stock at
        $1.00 per share, which was greater than the fair value of those shares at
        the
        option grant date. The shares and options were valued at $121,008, based
        on the
        fair market value of the shares at the date of the issuance, and in the case
        of
        the options, using the Black-Scholes model with a volatility of 75% and a
        risk-free interest rate of 6.25%. The Company granted piggyback registration
        rights for these shares and options, which were included in a registration
        statement declared effective by the SEC on June 15, 2007.
 
 The
        Company recorded the above shares and options issued for interest and fees,
        totaling $1,198,832, similarly to a debt discount and was initially amortizing
        that amount into interest expense over the term of the loan. Although the
        fair
        market value of ONSM common stock ranged from $0.95 to $2.12 per share during
        the approximately two-month period over which this loan was funded, as compared
        to the $1.00 conversion price, the Company has concluded that no beneficial
        conversion feature existed with respect to this note, since the fair market
        value of the ONSM common stock of $0.80 per share as of the October 27, 2006
        loan commitment date was less than the $1.00 conversion price.
 
 At
        any
        time after April 27, 2007, or earlier if agreed to by the Company, the lending
        entity, at its option, could begin converting the outstanding principal to
        the
        Company’s unregistered common stock at the rate of $1.00 per share through
        October 25, 2009, and at the rate of $2.00 per share thereafter. The Company
        allowed the note to be converted into 1.0 million unregistered common shares
        on
        January 10, 2007, at which time the remaining unamortized discount was written
        off to interest expense. The Company has granted the lending entity demand
        registration rights, effective six months from the date of the note, for
        any
        unregistered common shares issuable thereunder. Upon such demand, the Company
        will have 60 days to file a registration statement and shall use its best
        efforts to obtain promptly the effectiveness of such registration statement.
        1,000,000 of the 1,694,495 total principal and interest shares were included
        in
        a registration statement declared effective by the SEC on June 15, 2007 and
        as
        of December 7, 2007 the Company has not received any demand for the registration
        of the balance. As the note does not provide for damages or penalties in
        the
        event the Company does not comply with these registration rights, the Company
        has concluded that these rights do not constitute registration payment
        arrangements under FSP EITF 00-19-2. In any event, the Company has determined
        that material payments in relation to these rights are not probable and
        therefore no accrual related to them is necessary with respect to SFAS 5
        and FIN
        14. See Note 5 regarding a consulting contract entered into by the Company
        with
        the principal and beneficial owner of the lending entity.
 
 Interest
        expense to related parties (including amortization of debt discount) for
        all
        debentures and notes was approximately $6.3 million and $1.3 million for
        the years ended September 30, 2007 and 2006, respectively. Related parties
        include Company directors, employees and persons reported as beneficially
        owning
        more than 5% of the Company’s outstanding stock at any time during the two years
        ended September 30, 2007, as well as affiliates.
  F-36
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        5:
        COMMITMENTS AND CONTINGENCIES
 
 Infinite
        Merger price adjustment - As
        more fully discussed in Note 2, the
        Company agreed to pay any difference between $2.0 million and the proceeds
        of
        the sale of first 688,311 shares issued to the former shareholders of Infinite
        Conferencing. As of December 7, 2007, those former Infinite shareholders
        had
        sold 635,000 shares at an average price which, if applied to the entire 688,311
        shares, would result in the Company’s payment of approximately $923,000 (in cash
        or, subject to certain restrictions, in shares).
 
 Consulting
        agreements - In
        November 2006, the Company entered into a three-year consulting contract
        with
        the principal and beneficial owner of an entity which loaned the Company
        $1.0
        million in October 2006, as discussed in Note 4. The contract, for the provision
        of international business development and financial advice, is cancellable
        upon
        thirty days notice after the first year and originally called for the issuance
        of 60,000 restricted common shares in advance every six months. The first
        two
        tranches under this contract (60,000 shares each) were issued in January
        and May
        2007, valued based on fair market value as of the date of issuance and expensed
        under SFAS 123 as
        professional fees expense. This contract was amended in July 2007 for some
        additional short-term services, resulting in issuance of an additional 15,000
        shares plus $22,425 for cash reimbursement of related travel expenses. This
        contract was amended again in October 2007, which resulted in the issuance
        of
        the remaining 240,000 restricted common shares, in exchange for the extension
        of
        the remaining term of the contract from two years to three years. These shares
        will be valued based on fair market value as of the date of issuance and expensed
        under SFAS 123 ratably over the
        contract term as professional fees expense.
 
 In
        addition to the above, the Company is obligated under agreements to issue
        approximately 83,500 common shares and options to purchase approximately
        317,500
        shares (at exercise prices of $1.73, $1.83 and $2.46 per share) for financial
        consulting services subsequent to September 30, 2007, 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 $92,000. The
        closing ONSM share price was $0.94 per share on December 7, 2007. None of
        these
        contracts are with Company directors or officers. The Company currently
        anticipates that consulting agreements with an equity component will be entered
        into on a very limited basis, if at all, in the future.
 
 Employment
        Contracts and Severance - On
        September 27, 2007, the Company’s Compensation Committee and Board of Directors
        approved three-year employment agreements with Messrs. Randy Selman (President
        and CEO), Alan Saperstein (COO and Treasurer), Robert Tomlinson (Chief Financial
        Officer), Clifford
        Friedland (Senior Vice President Business Development) and David Glassman
        (Senior Vice President Marketing), collectively referred to as “the
        Executives” . Other
        than the extended term of the new agreements, the following salary, raise
        and
        benefit payments are substantially the same as the Executives would have
        received under the employment agreements previously in place that
        would have expired December 27, 2008. The new agreements provide annual base
        salaries of $253,000 for Mr. Selman, $230,000 for Mr. Saperstein, $207,230
        for
        Mr. Tomlinson and $197,230 for Messrs. Friedland and Glassman, and allow
        for 10%
        annual increases through December 27, 2008 and 5% per year thereafter. In
        addition, each of the Executives receives an auto allowance payment of $1,000
        per month, a “retirement savings” payment of $1,500 per month, and an annual
        $5,000 allowance for the reimbursement of dues or charitable donations. The
        Company also pays insurance premiums for the Executives, including medical,
        life
        and disability coverage.
  F-37
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        5:
        COMMITMENTS AND CONTINGENCIES (Continued)
 
 As
        part
        of the above employment agreements, and in accordance with the terms of the
        “2007 Equity Incentive Plan” approved by the Company’s shareholders in their
        September 18, 2007 annual meeting, the Company’s Compensation Committee and
        Board of Directors g ranted
        each of the Executives options (“Plan Options”) to purchase an aggregate of
        400,000 shares of ONSM common stock at an exercise price of $1.73 per share,
        the
        fair market value at the date of the grant, which shall be exercisable for
        a
        period of four (4) years from the date of vesting. The options vest in
        installments of 100,000 per year, starting on September 27, 2008, and they
        automatically vest upon the happening of the following events on a date more
        than six (6) months after the date of the agreement: (i) change of control
        (ii)
        constructive termination, and (iii) termination other than for cause, each
        as
        defined in the employment agreements. Unvested options automatically terminate
        upon (i) termination for cause or (ii) voluntary termination. In the event
        the
        agreement is not renewed or the Executive is terminated other than for cause,
        the Executives shall be entitled to require the Company to register the
        options.
 
 As
        part
        of the above employment agreements, the
        Executives will be eligible for a performance bonus, based on meeting revenue
        and cash flow objectives. In
        connection with this bonus program, the Company’s Compensation Committee and
        Board of Directors g ranted
        each of the Executives Plan Options to purchase an aggregate of 220,000 shares
        of ONSM common stock at an exercise price of $1.73 per share, the fair market
        value at the date of the grant, which shall be exercisable for a period of
        four
        (4) years from the date of vesting. Up to one-half of these shares will be
        eligible for vesting on a quarterly basis and the rest annually, with the
        total
        grant allocated over a two-year period starting October 1, 2007. Vesting
        of the
        quarterly portion is subject to achievement of increased revenues over the
        prior
        quarter as well as positive and increased net cash flow per share (defined
        as
        cash provided by operating activities per the Company’s statement of cash flow,
        measured before changes in working capital components and not including
        investing or financing activities) for that quarter. Vesting of the annual
        portion is subject to meeting the above cash flow requirements on a
        year-over-year basis, plus a revenue growth rate of at least 30% for the
        fiscal
        year over the prior year. In the event of quarter to quarter decreases in
        revenues and or cash flow, the options shall not vest for that quarter but
        the
        unvested quarterly options shall be added to the available options for the
        year,
        vested subject to achievement of the applicable annual goal. In the event
        options do not vest based on the quarterly or annual goals, they shall
        immediately expire. In the event the agreement is not renewed or the Executive
        is terminated other than for cause, the Executives shall be entitled to require
        the Company to register the vested options. The Company has also agreed that
        this bonus program will continue after the initial two-year period, with
        the
        specific bonus parameters to be negotiated in good faith between the parties
        at
        least ninety (90) days before the expiration of the program then in
        place.
 
 Under
        the
        terms of the above employment agreements, upon a termination subsequent to
        a
        change of control, termination without cause or constructive termination,
        each
        as defined in the agreements, the Company would be obligated to pay each
        of the
        Executives an amount equal to three times the Executive’s base salary plus full
        benefits for a period of the lesser of (i) three years from the date of
        termination or (ii) the date of termination until a date one year after the
        end
        of the initial employment contract term. The Company may defer the payment
        of
        all or part of this obligation for up to six months, to the extent required
        by
        Internal Revenue Code Section 409A. In addition, if the five day average
        closing
        price of the common stock is greater than or equal to $2.50 per share on
        the
        date of any termination or change in control, all options previously granted
        the
        Executive(s) will be cancelled, with all underlying shares (vested or unvested)
        issued to the executive, and the Company will pay all taxes for the
        Executive(s). If the five-day average closing price of the common stock is
        less
        than $2.50 per share on the date of any termination or change in control,
        the
        options will remain exercisable under the original terms.
  F-38
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        5:
        COMMITMENTS AND CONTINGENCIES (Continued)
 
 As
        part
        of the above employment agreements, and i n
        consideration for the provision in the new employment agreements that change
        of
        control benefits would not be paid related to any merger and any related
        financing occurring within six months of entering into the new agreements, the
        Company’s Compensation Committee and Board of Directors agreed
        that the Company would grant each of the Executives fully vested four-year
        options for shares equivalent to one percent (1%) of the total number of
        shares
        issued in connection with any such merger and/or any related financing. If
        the
        Company enters into a definitive merger agreement during that six month period,
        the number of options will be determined and granted at the time of signing
        that
        definitive merger agreement and will have an exercise price equal to the
        fair
        value at the date of grant. The Company agreed to register these and all
        other
        shares or options held by the Executives with or simultaneously to any shares
        registered in connection with such a merger and/or any related
        financing.
 
 Under
        the
        terms of the above employment agreements, the Company may terminate an
        Executive’s employment upon his death or disability or with or without cause. To
        the extent that an Executive is terminated for cause, no severance benefits
        are
        due him. If an employment agreement is terminated as a result of the Executive’s
        death, his estate will receive one year base salary plus any bonus or other
        compensation amount or benefit then payable or that would have been otherwise
        considered vested or earned under the agreement during the one-year period
        subsequent to the time of his death. If an employment agreement is terminated
        as
        a result of the Executive’s disability, as defined in the agreement, he is
        entitled to compensation in accordance with the Company’s disability
        compensation for senior executives to include compensation for at least 180
        days, plus any bonus or other compensation amount or benefit then payable
        or
        that would have been otherwise considered vested or earned under the agreement
        during the one-year period subsequent to the time of his disability. These
        employment agreements contain certain non-disclosure and non-competition
        provisions and the Company has agreed to indemnify the Executives in certain
        circumstances.
 
 As
        part
        of the above employment agreements, the Company’s Compensation Committee and
        Board of Directors agreed that i n
        the
        event the Company is sold for a Company Sale Price in excess of the Current
        Capitalization during the term of the agreements, both terms as defined below,
        and the Company Sale Price represents at least $2.50 per share (adjusted
        for
        recapitalization including but not limited to splits and reverse splits),
        the
        Executives and certain other employees, will receive, as a group, cash
        compensation of twelve and one-half percent (12.5%) of the excess of the
        Company
        Sale Price over the Current Capitalization, payable in immediately available
        funds at the time of closing such transaction. The Current Capitalization
        is
        defined as the sum of (i) the number of common shares issued and outstanding,
        (ii) the common stock equivalent shares related to paid for but not converted
        preferred shares and (iii) the number of common shares underlying “in-the-money”
warrants and options, such sum multiplied by the market price per share and
        then
        reduced by the proceeds payable upon exercise of the “in-the-money” warrants and
        options, all determined as of the date of the above employment agreements
        but
        the market price per share used for this purpose to be no less than $2.00.
        The
        Company Sale Price is defined as the number of common shares outstanding
        at the
        time the Company is sold multiplied by the price per share paid in such Company
        Sale transaction. The 12.5% was allocated in the new employment agreements
        as
        two and one-half percent (2.5%) each to Messrs. Selman, Saperstein, Friedland
        and Glassman and one and one-half percent (1.5%) to Mr. Tomlinson. The remaining
        one percent (1.0%) will be allocated by the Board and the Company’s management
        at a later date, which will be primarily to compensate other Company executives
        not having employment contracts, but may also include additional allocation
        to
        some or all of these five senior Executives.
 
 Annual
        Long Distance Purchase Commitment -
        Effective January 15, 2006, EDNet entered into a two-year long distance
        telephone rate agreement with a national telecommunications company, which
        included a telephone services purchase commitment of approximately $120,000
        (before taxes) per year. Effective September 13, 2007, this agreement was
        extended to add another two years to the original term, for a total term
        of four
        years. The Company is in compliance with this agreement.
 
 F-39
 
 ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        5:
        COMMITMENTS AND CONTINGENCIES (Continued)
  NASDAQ
        share price requirement - As of
        December 7, 2007, the closing bid price for ONSM common stock was $0.94 per
        share, which represented the fourteenth consecutive business day under $1.00.
        Per NASDAQ Marketplace Rule 4310(c)(4), maintenance of a $1.00 closing bid
        price
        is necessary in order to be eligible for continued listing on the NASDAQ
        Capital
        Market. If the closing bid price stays below $1.00 for thirty consecutive
        business days, the NASDAQ can be expected to issue a letter to the Company
        establishing a 180 calendar day deadline for the Company to become compliant
        with the minimum bid price. The Company may be considered compliant, subject
        to
        the NASDAQ staff's discretion, if its common stock closes at $1.00 per share
        or
        more for a minimum of ten consecutive business days before the 180-day deadline.
        If the Company is not considered compliant by the 180-day deadline, but meets
        all other initial listing criteria for the NASDAQ Capital Market, NASDAQ
        may
        extend the initial deadline by an additional 180 calendar days.  The
        terms
        of the 8% Senior Convertible Debentures and the 8% Subordinated Convertible
        Debentures (and the related warrants), as well as the common shares issued
        in
        connection with the Infinite Merger, contain penalty clauses in the event
        the
        Company’s common stock is not traded on NASDAQ or a similar national exchange -
        See Notes 4 and 6.
  The
        Company received a letter from NASDAQ dated August 2, 2006 indicating that
        the
        Company was not in compliance with Marketplace Rule 4310(c)(4) as a result
        of
        the bid price of its common stock closing below $1.00 per share for the
        preceding thirty consecutive business days.  The
        Company received a letter from NASDAQ dated December 4, 2006, stating that
        the
        Company had regained compliance with NASDAQ Marketplace Rule 4310(c)(4) as
        of
        that date, by having met the $1.00 per share or greater minimum closing bid
        price requirement for a minimum of 10 consecutive business days.
 
 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") with SAIC, 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 them, 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. 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
        original term of the BOA ran from June 12, 2003 through December 31, 2006
        and as
        part of a November 2006 agreement between the Company and SAIC, the contract
        term was extended through June 30, 2008, rescinding all previous contractual
        extension options. As part of this November 2006 agreement, SAIC’s previous
        option to cancel the contract if the Company’s minimum expenditures did not
        reach a certain level, was rescinded. 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 is otherwise in material breach of its
        obligations, including timely payments of amounts due. Cancellation of the
        contract among other things releases SAIC to offer the Onstream Media Solution
        directly or indirectly to third parties.
 
 Contemporaneously
        with the BOA, Acquired Onstream and SAIC entered into a Stock Issuance
        Agreement, whereby Acquired Onstream, at its option, could pay up to 20%
        of
        $1,250,000 of invoices for services with its common stock, 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.
  F-40
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        5: COMMITMENTS AND CONTINGENCIES (Continued)
 
 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 Acquired Onstream
        to
        another entity, SAIC had the right to terminate the Stock Issuance Agreement.
        SAIC did not terminate the Agreement as a result of the Onstream Merger 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, 2006, 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.
 
 As
        of
        September 30, 2006, SAIC had been paid approximately $1,786,000 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 $112,000, which is included in accounts payable on the Company’s
        balance sheet at that date. As part of the November 2006 agreement between
        the
        Company and SAIC, this balance was settled by the payment of $50,000 cash
        and
        the issuance of 59,615 unregistered ONSM common shares, which had piggyback
        registration rights and were included in a registration statement declared
        effective by the SEC on June 15 ,2007.
 
 Lease
        Commitments - The
        Company is obligated under operating leases for its four offices (one each
        in
        Pompano Beach, Florida and San Francisco, California and two in the New York
        City area), which call for monthly payments totaling approximately $53,700.
        The
        leases, with expiration dates ranging from 2008 to 2010, provide for renewal
        options and annual increases. Future minimum lease payments required under
        these
        non-cancelable leases as of September 30, 2007, excluding the capital lease
        obligations discussed in Note 4, total approximately $1,209,000.
 
 In
        September 2007, the Company entered into a three-year operating lease for
        its
        principal executive offices in Pompano Beach, Florida. The monthly base rental
        is currently approximately $20,400 (including the Company's share of property
        taxes and common area expenses) with annual five percent (5%) increases.
        The
        lease provides for one two-year renewal option with 5% annual increases.
        Approximately $57,000 and $159,000 is included in accounts payable at September
        30, 2007 and 2006, respectively, related to amounts due under this lease
        and the
        predecessor lease with the same landlord for this property. Payments under
        this
        lease were generally current as of September 30, 2007.
 
 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 (including month-to-month parking)
        is
        approximately $17,200 with annual increases up to five percent (5%).
 
 In
        December 2007, the Company extended its annual operating lease for office
        space
        in New York City, through December 31, 2008. The monthly base rental is
        approximately $6,600.
 
 The
        lease
        for the Company’s Infinite Conferencing location in New Jersey expires July 31,
        2008. The monthly base rental is approximately $6,500.
  F-41
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        5: COMMITMENTS AND CONTINGENCIES (Continued)
 
 Future
        minimum lease payments required under the non-cancelable leases, plus the
        capital leases included in Notes Payable and more fully discussed in Note
        4, are
        as follows:
  Operating
                
                Capital
                
                AllYear
                    Ending September 30:
                
                Leases
                
                Leases
                
                Leases2008
                
                $
                524,491
                
                $
                162,453
                
                $
                686,9442009
                
                
                391,593
                
                
                148,989
                
                
                540,5822010
                
                
                256,488
                
                
                111,888
                
                
                368,376Total
                    minimum lease payments
                
                $
                1,172,572
                
                $
                423,330
                
                $
                1,595,902Less:
                    amount representing interest
                
                
                
                
                
                29,372Present
                    value of net minimum lease payments
                
                
                
                
                $
                393,958Less:
                    current portion
                
                
                
                
                
                138,629Long-term
                    portion
                
                
                
                
                $
                255,329
  Total
        rental expense for all operating leases was approximately $636,000 and $467,000
        for the years ended September 30, 2007 and 2006, respectively.
  Legal
        Proceedings - the
        Company is involved in litigation and regulatory investigations arising in
        the
        ordinary course of business. While the ultimate outcome of these matters
        is not
        presently determinable, it is the opinion of management that the resolution
        of
        these outstanding claims will not have a material adverse effect on the
        Company’s financial position or results of operations.
 
 NOTE
        6:
        CAPITAL STOCK
 
 Common
        Stock
 
 During
        the year ended September 30, 2006, the Company issued (i) 906,506 ONSM common
        shares as a result of six investors’ conversion of $895,000 of 8% Convertible
        Debentures, plus accrued interest and (ii) 188,740 ONSM common shares as
        a
        result of five investors’ conversion of 18,874 shares of Series A-10 Preferred -
        see Note 5 and below.
 
 During
        the year ended September 30, 2006, the Company issued 1,092,715 shares of
        common
        stock for equipment and consulting, financial, advisory and other services,
        as
        follows:
 
 686,143
        shares valued at approximately $606,000 and recognized as professional fees
        expense over various service periods of up to 6 months. None of these shares
        were issued to Company directors or officers. However, 135,000 of these shares
        were issued under a consulting agreement with an individual having greater
        than
        5% beneficial ownership in the Company as of September 30, 2005 and 2006.
        See
        Note 5 regarding the Company’s obligation to issue additional shares under such
        agreements.
 
 406,572
        common shares as satisfaction for equipment purchases of approximately $252,000
        included in accounts payable at September 30, 2005, plus another $75,000
        of
        equipment purchases to be received after that date.
  F-42
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        6:
        CAPITAL STOCK (Continued)
 
 Common
        Stock (Continued)
 
 During
        the year ended September 30, 2006, the Company issued options to purchase
        its
        common shares, in exchange for consulting and financial advisory services,
        such
        options valued at approximately $517,000. As a result of previously granted
        or
        issued options, warrants or shares for consulting expenses, the Company had
        approximately $258,000 in deferred equity compensation expense at September
        30,
        2006, which was amortized over the remaining periods of service for these
        issuances, which range from two to 12 months. The deferred equity compensation
        expense is included in the balance sheet caption prepaid expenses.
 
 During
        the year ended September 30, 2006, the Company issued (i) 368,209 common
        shares
        in lieu of the $302,206 interest accrued and due through September 30, 2006
        on
        the 8% Convertible Debentures and the Additional 8% Convertible Debentures
        (which included 9,589 shares issued for $9,589 interest due on conversions
        during that period), (ii) 165,068 common shares in lieu of the $93,284 interest
        accrued and due through September 30, 2006 on the 8% Subordinated Convertible
        Debentures (which included 1,917 shares issued for $1,917 interest due on
        conversions during that period), (iii) 44,444 common shares as prepaid interest
        and 15,000 common shares as late payment penalty on $300,000 borrowed from
        Platinum Credit Group, LLC - see Note 4, (iv) 80,000 common shares as prepaid
        interest on $350,000 borrowed from Platinum Credit Group, LLC - see Note
        4, (v)
        35,000 common shares as partial interest on an aggregate $350,000 borrowed
        from
        David Namoff and Lewis Opportunity Fund LP in February 2006 - see Note 4
        and
        (vi) 31,243 common shares as interest to various vendors.
 
 During
        the year ended September 30, 2006, the Company issued 20,833 common shares
        as a
        result of the exercise of warrants at $1.00 per share - see Notes 5 and
        8.
 
 During
        the year ended September 30, 2007, the Company issued an aggregate of 9,232,833
        registered common shares as a result of conversions by several investors
        of 8%
        Senior and Subordinated Convertible Debentures (see Note 4) and Series A-10
        Preferred, as follows:
 
 (i)
              3,042,472
                  ONSM common shares for the conversion of $3.0 million of 8% Senior
                  Convertible Debentures, plus accrued
                  interest,
 
 (ii)
              2,256,681
                  ONSM common shares for the conversion of $2.225 million of 8% Subordinated
                  Convertible Debentures, plus accrued
                  interest,
 
 (iii)
              3,933,680
                  ONSM common shares for the conversion of 393,368 shares of Series
                  A-10
                  Preferred, including accrued
                  dividends.
 
 During
        the year ended September 30, 2007, the Company received approximately $6.9
        million from the exercise of previously issued warrants and options, resulting
        in its issuance of 4,547,154 registered and 5,000 unregistered common shares.
        These warrants and options had exercise prices ranging from $0.71 to $2.50
        per
        share. See Note 8.
  F-43
  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        6:
        CAPITAL STOCK (Continued)
 
 Common
        Stock (continued)
 
 During
        March and April 2007, the Company sold an aggregate of 4,888,889 restricted
        common shares at $2.25 per share for total gross proceeds of approximately
        $11.0
        million. This private equity financing was arranged by the Company to partially
        fund the Infinite Merger. The Company paid $770,000 as the cash portion of
        the
        finders and/or placement fees, equal to 7% of the gross proceeds related
        to the
        above sale, which was reflected as a reduction of paid-in capital. After
        deducting these fees, as well as legal fees and other issuance costs, the
        net
        proceeds to the Company were $10,207,026. As additional placement fees related
        to this sale, the Company issued 342,222 five-year warrants exercisable at
        $2.70
        per share, which it valued at $518,445 using Black-Scholes methodology. These
        shares and warrants were included in a registration statement declared effective
        by the SEC on June 15, 2007. See Notes 2 and 8.
 
 The
        Company is required to maintain the effectiveness of this registration statement
        until the earlier of the date that (i) all of the shares have been sold,
        (ii)
        all the shares have been transferred to persons who may trade such shares
        without restriction or (iii) all of the shares may be sold at any time, without
        volume or manner of sale limitations pursuant to Rule 144(k) or any similar
        provision. In the event such effectiveness is not maintained or trading in
        the
        shares is suspended or if the shares are delisted for more than five (5)
        consecutive trading days then the Company is liable for a compensatory payment
        (pro rated on a daily basis) of one and one-half percent (1.5%) per month
        until
        the situation is cured, such payment based on the purchase price of the shares
        still held and provided that such payments may not exceed ten percent (10%)
        of
        the initial purchase price of the shares with respect to any one purchaser.
        Regardless of the above, the Company believes that the applicability of these
        provisions would be limited by equity and/or by statute to a certain timeframe
        after the original security purchase.
 
 Effective
        within the year ended September 30, 2007, the Company elected early adoption
        of
        FSP EITF 00-19-2, “ Accounting
        for R egistration
        Payment Arrangements ” ,
        which
        was issued on December 21, 2006 and establishes that contingent obligations
        under registration payment arrangements, as defined in FSP EITF 00-19-2,
        shall
        be recognized and measured separately in accordance with SFAS 5, “Accounting for
        Contingencies” and FIN 14, “Reasonable Estimation of the Amount of a Loss”.
        The Company determined that the above terms constitute a registration payment
        arrangement and has further concluded, based on its satisfactory recent history of maintaining the
        effectiveness of its registration statements and its NASDAQ listing, as well
        as
        a stock price and stockholders’ equity in excess of the NASDAQ listing standards
        as of September 30, 2007, that material payments under this registration
        payment arrangement
        are not probable and therefore no accrual related to it is necessary with
        respect to SFAS 5 and FIN 14 as
        of
        that date. However, the Company’s share price was below $1.00 as of December 7,
        2007, which condition could eventually affect its NASDAQ listing status -
        See
        note 5.
 
 During
        April 2007, the Company issued 1,376,622 restricted common shares to certain
        of
        the Infinite sellers - see
        Note 2.
  During
        March 2007, the Company issued 467,290 restricted common shares as in exchange
        for 100% of the issued and outstanding capital stock of Auction Video Japan,
        Inc. - see Note 2. There are no registration rights associated with this
        transaction and as of December 7, 2007 the related shares have not been included
        in a registration statement.
  F-44
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        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        6:
        CAPITAL STOCK (Continued)
 
 Common
        Stock (continued)
 
 During
        the year ended September 30, 2007, the Company issued 910,608 shares of common
        stock for consulting, financial, advisory and other services, as
        follows:
 
 790,993
        unregistered shares valued at approximately $1,530,000 and recognized as
        professional fees expense for financial consulting and advisory services
        over
        various service periods of up to 21 months. None of these shares were issued
        to
        Company directors or officers. See Note 5 regarding the Company’s obligation to
        issue additional shares under such agreements.
 
 59,615
        unregistered shares of common stock to SAIC as payment for services previously
        capitalized by the Company at $62,000 and included in accounts payable at
        September 30, 2006. See Note 5.
 
 60,000
        unregistered shares of common stock as payment for equipment purchased and
        capitalized for approximately $65,000 by the Company as of June 30, 2007.
 
 During
        the year ended September 30, 2007, the Company issued options to purchase
        its
        common shares, in exchange for financial consulting and advisory services,
        such
        options valued at approximately $852,000. Professional fee expenses arising
        from
        these and prior issuances of shares and options for financial consulting
        and
        advisory services were approximately $2,261,000 and $1,398,000 for the years
        ended September 30, 2007 and 2006, respectively. As a result of previously
        issued shares and options for financial consulting and advisory services,
        the
        Company has approximately $384,000 in deferred equity compensation expense
        at
        September 30, 2007, to be amortized over the remaining periods of service
        of up
        to 18 months. The deferred equity compensation expense is included in the
        balance sheet caption prepaid expenses.
 
 During
        the year ended September 30, 2007, the Company issued (i) 3,045,902 restricted
        common shares as the result of the conversion of four promissory notes having
        an
        aggregate face value of $3.1 million and (ii) 2,258,185 restricted common
        shares
        for payment of interest and fees incurred in connection with those promissory
        notes. See Note 5.
 
 During
        the year ended September 30, 2007, the Company issued 95,125 common shares
        in
        lieu of the $112,686 interest accrued and due on the 8% Convertible Debentures
        and the 8% Subordinated Convertible Debentures (which included 74,154 shares
        issued for $74,154 interest due on conversions during that period).
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        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        6:
        CAPITAL STOCK (Continued)
 
 Preferred
        Stock
 
 *Series
        A-10 Convertible Preferred Stock*
 
 As
        of
        September 30, 2007 and 2006, the only preferred stock outstanding is Series
        A-10
        Convertible Preferred Stock (“Series A-10”).
 
 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. Series A-10 dividends are cumulative and
        must be
        fully paid by the Company prior to the payment of any dividend on its common
        shares. 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 in aggregate, and excluding
        trade and purchase money payables, 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. Except as
        explicitly required by applicable law, the holders of Series A-10 shall not
        be
        entitled to vote on any matters as to which holders of the Company’s common
        shares are entitled to vote. 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.
 
 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. 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 - see Note 8. 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 Preferred 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. The Company also issued
        814 Series A-10 shares in lieu of $8,140 dividends due on conversions during
        the
        year ended September 30, 2005. The Company’s Board declared (i) 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 and (ii) a dividend payable on May 15, 2006 to Series A-10
        shareholders of record as of May 10, 2006 of 16,701 Series A-10 preferred
        shares, in lieu of a $167,014 cash payment. The Company also issued 484 Series
        A-10 shares in lieu of $4,840 dividends due on conversions during the year
        ended
        September 30, 2006. The Company’s Board declared (i) a dividend payable on
        November 15, 2006 to Series A-10 shareholders of record as of November 10,
        2006
        of 17,239 Series A-10 preferred shares, in lieu of a $172,394 cash payment
        and
        (ii) a dividend payable on May 15, 2007 to Series A-10 shareholders of record
        as
        of May 10, 2007 of 9,787 Series A-10 preferred shares, in lieu of a $97,871
        cash
        payment. The Company also issued 4,555 Series A-10 shares in lieu of $45,550
        dividends due on conversions during the year ended September 30, 2007. See
        Note
        9 regarding dividend payments occurring after September 30, 2007.
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 NOTES
        TO
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 SEPTEMBER
        30, 2007
 
 
 NOTE
        6:
        CAPITAL STOCK (Continued)
 
 As
        of
        September 30, 2007, the Company had issued 4,742,110 ONSM common shares as
        a
        result of several investors converting a total of 474,211 shares of Series
        A-10
        preferred shares, which included 5,853 Series A-10 shares issued for accrued
        dividends through the respective conversion dates.
 
 The
        above
        transactions are summarized as follows through September 30, 2007:
  Initial
                    number of Series A-10 shares issued
                
                
                454,650Plus:
                    A-10 shares issued for regular interest and dividends
                
                
                82,904Plus:
                    A-10 shares issued for conversion dividends
                
                
                5,853Less:
                    A-10 shares converted to common shares
                
                
                (474,211
                )Number
                    of Series A-10 shares outstanding
                
                
                69,196
  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 - see Note 8.
 
 The
        estimated fair value of all warrants given in connection with the Series
        A-10
        plus the Series A-10’s beneficial conversion feature, was $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.
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 NOTES
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 SEPTEMBER
        30, 2007
  NOTE
        7:
        SEGMENT INFORMATION
 
 The
        Company's operations are currently comprised of two groups, Digital Media
        Services and Web Communications Services, both managed from Pompano Beach,
        Florida. The primary operating activities of Digital Media Services are in
        San
        Francisco and the primary operating activities of Web Communications Services
        are in Pompano Beach and the New York City area. All material balances related
        to Company sales, primary business activities, and location of property and
        equipment are within the United States.
 
 For
        the
        years ended September 30, 2007 and 2006 the Company provided smart encoding
        services to a significant customer, America Online, Inc., under a contract
        that
        can be terminated upon a 30-day notification. Revenues from sales to this
        customer were approximately $461,000, or approximately 4%, and $911,000,
        or
        approximately 11%, of total consolidated revenue for the years ended September
        30, 2007 and 2006, respectively. These revenues represented approximately
        11%
        and 20% of Digital Media Services Group revenues for the same periods.
 
 Detailed
        below are the results of operations by segment for the years ended September
        30,
        2007 and 2006, and total assets by segment as of those dates.
  For
                  the years ended
                September
                  30,2007
              
              2006Revenue:Digital
                  Media Services Group
              
              $
              4,013,572
              
              $
              4,631,360Web
                  Communications Services Group
              
              
              8,101,473
              
              
              3,788,091Total
                  consolidated revenue
              
              $
              12,115,045
              
              $
              8,419,451Segment
                  operating income (loss):Digital
                  Media Services Group
              
              
              (260,623
              )
              
              1,051,743Web
                  Communications Services Group
              
              
              1,940,906
              
              
              145,559Total
                  operating income
              
              
              1,680,283
              
              
              1,197,302Depreciation
                  and amortization
              
              
              (
                  3,099,940
              )
              
              (
                  2,121,161
              )Corporate
                  and unallocated shared expenses
              
              
              (
                  6,092,200
              )
              
              (
                  4,933,140
              )Other
                  (expense) income, net
              
              
              (
                  7,246,196
              )
              
              (
                  609,214
              )Net
                  loss
              
              $
              (
                  14,758,053
              )
              $
              (
                  6,466,213
              )
 
 September
                  30, 2007
              
              September
                  30, 2006Assets:Digital
                  Media Services Group
              
              $
              15,092,360
              
              $
              14,789,639Web
                  Communications Services Group
              
              
              20,058,947
              
              
              1,408,488Corporate
                  and unallocated
              
              
              1,332,349
              
              
              968,085Total
                  assets
              
              $
              36,483,656
              
              $
              17,166,212
 
 Depreciation
        and amortization are not utilized by the Company’s primary decision makers for
        making decisions with regard to resource allocation or performance
        evaluation.
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 NOTES
        TO
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 SEPTEMBER
        30, 2007
  NOTE
        8:
        STOCK OPTIONS AND WARRANTS
 
 As
        of
        September 30, 2007, the Company had issued and outstanding options and warrants
        to purchase up to 14,636,231 ONSM common shares, including 7,471,332 Plan
        Options; 2,431,390 Non-Plan Options to employees and directors; 1,753,674
        Non-Plan Options to financial consultants; and 2,979,835 warrants issued
        in
        connection with various financings and other transactions.
 
 On
        February 9, 1997, the Board of Directors and a majority of the Company's
        shareholders adopted the 1996 Stock Option Plan (the "Plan"), which, including
        the effect of subsequent amendments to the Plan, authorized up to 4,500,000
        shares available for issuance as options and up to another 2,000,000 shares
        available for stock grants. On September 18, 2007, the Company’s Board of
        Directors and a majority of the Company's shareholders adopted the 2007 Equity
        Incentive Plan (the “New Plan”), which authorized the issuance of up to
        6,000,000 shares of ONSM common stock pursuant to stock options, stock purchase
        rights, stock appreciation rights and/or stock awards for employees, directors
        and consultants. The options and stock grants authorized for issuance under
        the
        New Plan were in addition to those already issued under the Plan, although
        the
        Company may no longer issue additional options or stock grants under the
        Plan.
 
 As
        of
        September 30, 2007 there are 7,471,332 outstanding options granted to
        management, employees and directors under the Plan and the New Plan, which
        all
        have exercise prices equal to or greater than the fair market value at the
        date
        of grant. The initial terms of these options were generally four to five
        years
        and they were fully vested as of September 30, 2007, except 3,335,000 of
        these
        options issued in fiscal 2007 and detailed later in this note.
 
 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 $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 201,110 of the
        Plan
        Options subject to this cancellation and re-issue had expired as of December
        7,
        2007.
 
 In
        December 2004 the Company issued four-year Plan options to purchase 50,000
        common shares to General Ronald Yates upon his initial appointment to the
        Company's Board of Directors, immediately exercisable at an exercise price
        of
        $1.57 per share, which was the fair market value on the date of grant. In
        December 2004, the Company's Board of Directors granted an aggregate
        of 300,000 four-year Plan options exercisable at an exercise price of $1.21
        per share, which was the fair market value on the date of grant, to two
        executives. The Board later accelerated the vesting of 150,000 of these options
        to the first executive, as discussed below, and the remaining 150,000 options
        expired unexercised as a result of termination of the second executive's
        employment.
 
 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.
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 NOTES
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 SEPTEMBER
        30, 2007
  NOTE
        8:
        STOCK OPTIONS AND WARRANTS (Continued)
 
 During
        July 2006, the Company issued four-year Plan options to purchase 50,000 common
        shares to Mr. Carl L. Silva upon his initial appointment to the Company’s Board
        of Directors, immediately exercisable at an exercise price of $0.88 per share
        (fair market value on the date of grant). In September 2006 the Company’s Board
        of Directors granted 1,500,000 five-year Plan options, exercisable at $0.71
        per
        share, which was the fair market value on the date of grant. These options
        were
        fully vested, with 700,000 issued to Company directors (other than Mr. Silva)
        and senior management and the balance issued to other Company
        employees.
 
 During
        the year ended September 30, 2007, the Company issued 3,360,000 Plan options-
        (i) 35,000
        two-year options in connection with the Auction Video acquisition - see note
        2,
        (ii) 200,000 five-year Plan options in connection with the Infinite Merger
        - see
        note 2, (iii) 25,000 four-year Plan Options exercisable at $2.28 per share
        to a
        non-executive employee and (iv) 3,100,000 four-year (from vesting) New Plan
        options in connection with executive employment contracts - see note 4. None
        of
        these options except the 25,000 exercisable at $2.28 were vested as of September
        30, 2007. See Note 9 regarding New Plan shares and options issued after
        September 30, 2007.
 
 Detail
        of
        Plan Option activity for the years ended September 30, 2007 and 2006 is as
        follows:
 
 September
                  30, 2007
              
              September
                  30, 2006Number
                  of Shares
              
              Weighted
                  Average Exercise Price
              
              Number
                  of Shares
              
              Weighted
                  Average Exercise PriceBalance,
                  beginning of period
              
              
              4,388,891
              
              $
              1.28
              
              
              2,940,895
              
              $
              1.89Granted
                  during the period
              
              
              3,360,000
              
              
              1.79
              
              
              1,550,000
              
              
              0.71Exercised
                  during the period
              
              
              (
                  5,000
              )
              
              0.71
              
              
              -
              
              
              N/AExpired
                  or forfeited during the period
              
              
              (
                  272,559
              )
              
              3.28
              
              
              (
                  102,004
              )
              
              8.62Balance,
                  end of the period
              
              
              7,471,332
              
              $
              1.43
              
              
              4,388,891
              
              $
              1.28Exercisable
                  at end of the period
              
              
              4,136,332
              
              $
              1.15
              
              
              4,388,891
              
              $
              1.28
  The
        Company’s 4,103,000 outstanding exercisable Plan Options at September 30, 2007
        not subject to the cancellation and re-grant discussed above have a remaining
        life of approximately 3.2 years and exercise prices ranging from $0.71 to
        $2.28
        per share. The Company’s 33,332 outstanding exercisable Plan Options subject to
        this cancellation and re-grant have a remaining life of less than 1 year
        and
        exercise prices ranging from $11.25 to $22.50 per share.
 
 As
        of
        September 30, 2007, the Company had 2,431,390 outstanding Non Plan options
        issued to employees and directors, which 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 ONSM common stock at $1.57
        per share (fair market value at date of grant); five-year options to certain
        executives, fully-vested as of September 30, 2005, for the purchase of 800,000
        shares of ONSM common stock at $2.50 per share (greater than the $1.57 fair
        market value at date of grant); and 281,390 options at an exercise price
        of
        $3.376 per share, issued in conjunction with the Onstream Merger.
  F-50
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        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  As
        of
        September 30, 2007, the Company had 1,753,674 outstanding Non Plan options
        issued to financial consultants, as follows:
 
 Issuance
                  period
              
              Numberof
                  options
              
              Exercise
                  priceper
                  share
              
              Expiration
                DateOctober
                  - December 2006
              
              
              75,000
              
              $
              1.00
              
              
              Oct
                  - Dec 2010December
                  2006
              
              
              40,000
              
              $
              1.50
              
              
              December
                  2010January
                  - June 2007
              
              
              422,500
              
              $
              2.46
              
              
              Oct
                  2010 - Jan 2011March
                  2007
              
              
              21,184
              
              $
              2.48
              
              
              March
                  2012Year
                  ended September 30, 2007
              
              
              558,684October
                  2005 - August 2006
              
              
              295,000
              
              $
              1.00
              
              
              Oct
                  2009 - Aug 2010March
                  - September 2006
              
              
              85,750
              
              $
              1.05
              
              
              March
                  2011Year
                  ended September 30, 2006
              
              
              380,750July
                  - September 2005
              
              
              225,000
              
              $
              1.10
              
              
              July
                  - Sept 2009January
                  - March 2005
              
              
              215,000
              
              $
              1.65
              
              
              Jan
                  - Feb 2009January
                  2005
              
              
              30,000
              
              $
              2.50
              
              
              January
                  2009January
                  2005
              
              
              50,000
              
              $
              3.50
              
              
              January
                  2009December
                  2004
              
              
              59,240
              
              $
              3.376
              
              
              Mar
                  2008 - Dec 2009Year
                  ended September 30, 2005
              
              
              579,240May
                  2004
              
              
              35,000
              
              $
              2.25
              
              
              May
                  2009June
                  2004
              
              
              200,000
              
              $
              2.50
              
              
              June
                  2008Year
                  ended September 30, 2004
              
              
              235,000Total
                  Non Plan consultant optionsas
                  of September 30, 2007
              
              
              1,753,674
  210,000
        of the above options were not vested as of September 30, 2007, including
        125,000
        $2.50 options issued during the year ended September 30, 2004 and which are
        not
        expected to vest prior to expiration due to termination of the underlying
        contract. The balance of the unvested options were issued during the year
        ended
        September 30, 2007. See Note 5 related to commitments for future issuance
        of
        financial consultant options.
 
 255,000
        of the above options (plus 100,000 shares) were granted with piggyback
        registration rights but were not included on the registration statement declared
        effective by the SEC on June 15, 2007. As the options (or shares) do not
        provide
        for damages or penalties in the event the Company does not comply with these
        registration rights, the Company has concluded that these rights do not
        constitute registration payment arrangements under FSP EITF 00-19-2. In any
        event, the Company has determined that material payments in relation to these
        rights are not probable and therefore no accrual related to them is necessary
        with respect to SFAS 5 and FIN 14.
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 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        8:
        STOCK OPTIONS AND WARRANTS (Continued)
 
 As
        of
        September 30, 2007, the Company had outstanding vested warrants to purchase
        an
        aggregate of 2,979,835 shares of common stock, inclusive of warrants issued
        in
        connection with various financings, as follows:
 
 Description
                  of transaction
              
              Number
                  ofwarrants
              
              Exercise
                  priceper
                  share
              
              Expiration
                DatePlacement
                  fees - common share offering -
                March
                  and April 2007
              
              
              342,222
              
              $
              2.70
              
              
              March
                  and April 20128%
                  Subordinated Convertible Debentures -
                March
                  and April 2006
              
              
              403,650
              
              $
              1.50
              
              
              March
                  and April 2011Additional
                  8% Convertible Debentures -
                February
                  and April 2005
              
              
              391,416
              
              $
              1.65
              
              
              February
                  and April 20108%
                  Convertible Debentures - December 2004
              
              
              737,114
              
              $
              1.65
              
              
              December
                  2009Series
                  A-10 Preferred - December 2004
              
              
              909,083
              
              $
              1.50
              
              
              December
                  2009Onstream
                  Merger - December 2004
              
              
              74,050
              
              $
              3.376
              
              
              April
                  2008Series
                  A-9 Preferred
              
              
              40,000
              
              $
              3.00
              
              
              October
                  2007Common
                  share offering
              
              
              82,300
              
              $
              3.00
              
              
              October
                  2007Total
                  warrants as of September 30, 2007
              
              
              2,979,835
  See
        Note
        4 related
        to certain terms of the above warrants issued in connection with the 8%
        Convertible Debentures, the Additional 8% Convertible Debentures and the
        8%
        Subordinated Convertible Debentures, including registration rights and cashless
        exercise.
 
 In
        addition to the warrants listed above, the Additional 8% Convertible Debentures
        included 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. The one-year warrants provided for the issuance of 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. During April
        2006,
        the Company issued a five-year warrant to purchase 10,417 common shares for
        $1.65 per share as the result of a single investor’s exercise of a warrant for
        20,833 common shares at $1.00 per share. Effective September 13, 2006, the
        remaining $1.00 warrants expired without having been exercised. See Note
        4.
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  ONSTREAM
        MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
  NOTE
        9:
        SUBSEQUENT EVENTS - FINANCING AND EQUITY TRANSACTIONS
 
 During
        August 2007, the Company entered into an agreement with ASPA-Japan Co., Ltd.
        (“ASPA”) a leading video application service provider, whereby ASPA was to serve
        as the exclusive sales agent in certain Middle Eastern countries for all
        of the
        Company’s products and services and was to have been paid commissions on all
        sales made by them in the region. In exchange for this exclusivity, which
        had an
        initial term of five years, ASPA was to pay the Company a fee of $1.0 million,
        of which $50,000 was paid in advance and the balance was due on or before
        September 30, 2007. As of December 7, 2007, the balance was not paid, although
        an additional $50,000 was paid by ASPA during November 2007. The Company
        continues discussions with ASPA in the hopes of resolving this matter, although
        no formal contract amendment or extension has been agreed to. Once the full
        contract price has been paid, and if the previous contract is mutually
        reinstated, the fee (net of 25% commission payable by the Company to the
        former
        Auction Video shareholders) will be amortized as revenue over approximately
        six
        years, based on the initial contract term plus a one-year termination period.
        If
        the Company formally discontinues its discussions with ASPA and/or the previous
        contract is not mutually reinstated or a similar contract is not entered
        into,
        the Company will retain the amounts paid and recognize them as income at
        that
        time.
 
 In
        December 2007, pursuant to approval of the Company’s Compensation Committee and
        Board of Directors, the Company issued 25,000
        restricted shares of its common stock to Mr. Charles Johnston, director,
        as
        compensation for services to be rendered by him for the fiscal year ended
        September 30, 2008, in connection with his recent appointment as Chairman
        of the
        Audit Committee.
 
 During
        the period from October 1, 2007 through December 7, 2007, the Company issued
        245,085 unregistered shares of common stock (including 240,000 shares discussed
        in note 5), as well as options to purchase 250,000 common shares at exercise
        prices ranging from $1.73 to $1.83 per share, at or above the fair market
        value
        on the date the options were approved, for financial consulting and advisory
        services. The Company also entered into agreements to issue approximately
        40,000
        additional unregistered shares for such services. The services are being
        provided over periods ranging up to three years, and will result in a
        professional fees expense of approximately $639,000 over the service period.
        None of these shares or options were issued to Company directors or officers.
 
 The
        Company’s Board declared a dividend payable on November 15, 2007 to Series A-10
        shareholders of record as of November 10, 2007 of 2,767 Series A-10 preferred
        shares, in lieu of a $27,679 cash payment.
 
 In
        December 2007, the Company issued immediately exercisable four-year Plan
        options
        to purchase 50,000 ONSM common shares at $1.00 per share (above fair market
        value on the date of issuance) granted to Mr. Leon Nowalsky upon his initial
        appointment to the Company’s Board of Directors.
 
 In
        December 2007, the Company entered into a equipment financing line of credit
        arrangement with several individuals under which it can borrow up to an
        aggregate of $1.5 million for equipment purchases, including purchases made
        and
        paid for by the Company during the twelve (12) months prior to the date of
        the
        agreement. The Company has agreed to grant the lenders a security interest
        in
        the equipment purchased with the proceeds of the line. The outstanding balance
        bears interest at 12% per annum, payable monthly in cash or restricted stock,
        at
        the Company’s option. An origination fee of $150,000 is payable within ten (10)
        days of the initial funding under the arrangement, in a single issuance of
        restricted stock or in ten equal monthly cash installments, at the Company’s
        option. Principal may be repaid at any time, but no later than three (3)
        years
        after the date of the agreement and may be paid in cash or restricted stock,
        at
        the Company’s option. All payments in restricted stock are priced at
        seventy-five percent (75%) of the average ONSM closing price for the twenty
        (20)
        trading days prior to the date the applicable payment is due. The outstanding
        principal is due on demand in the event a payment default is uncured ten
        (10)
        business days after written notice. As of December 7, 2007, the Company had
        not
        received any funding under this arrangement.
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