Unassociated Document

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

Infinite Conferencing – April 27, 2007 (continued)

At the closing of the Infinite Merger, we entered into a lock-up agreement with the former Infinite shareholders that limited the extent and timing of their sale of the 1,376,622 ONSM shares issued to them and also provided that in the event that the accumulated gross proceeds of the sale of first 50% of those shares was less than $2.0 million, we would pay the difference in registrable ONSM common shares, or cash to the extent required by certain restrictions. On December 27, 2007, the former Infinite shareholders notified us that the first 688,311 shares had been sold by them for $1,041,601, which would have required an additional payment by us in cash or shares of approximately $958,399. We recorded the liability on our financial statements as of that date, which was offset by a reduction in additional paid-in capital, and on March 12, 2008 executed collateralized promissory notes payable to the former Infinite shareholders in final settlement of this obligation – see note 4.

In connection with the Infinite Merger, we 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. As a result of the April 2008 expiration and non-renewal of one of the employment contracts, 50,000 of these options were forfeited. The employment and consulting contracts, all of which had either expired or been terminated at various dates through June 19, 2009, contain non-compete provisions with a minimum term of three years from the merger closing.

The summarized balance sheet of Infinite as of the April 27, 2007 closing of the Infinite Merger is as follows, showing the fair values we assigned to Infinite’s assets and liabilities in accordance with the Business Combinations topic of the ASC and recorded by us at that time.

Accounts receivable	$	893,228
Property and equipment		894,388
Other tangible assets (includes $14,861 cash)		48,817
Identifiable intangible assets		4,583,604
Total assets	$	6,420,037

Accounts payable and accrued liabilities	$	204,395
Shareholder’s equity		6,215,642
Total 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. We are amortizing these assets over useful lives ranging from 3 to 5 years.

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

Infinite Conferencing – April 27, 2007 (continued)

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 our management at the time of the merger. This fair value was primarily based on the discounted projected cash flows related to these assets for the next three to six years immediately following the merger on a stand-alone basis without regard to the Infinite Merger, as projected by our management and Infinite’s management. 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. We are amortizing these assets over useful lives ranging from 3 to 6 years.

Infinite’s accounts payable and accrued liabilities 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.

We 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	$	6,420,037
Goodwill		12,000,887
Acquired assets (at fair value)		18,420,924
Less: 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

The $12,000,887 excess included in the $18,216,529 we paid 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 us as goodwill, subject to regular future valuations and adjustments as required by the Intangibles – Goodwill and Other topic of the ASC. 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.

As discussed in “Testing for Impairment” below, the initially recorded goodwill for Infinite Conferencing of approximately $12.0 million was determined to be impaired as of December 31, 2008 and a $900,000 adjustment was made to reduce the carrying value of that goodwill to approximately $11.1 million as of that date. A similar adjustment of $200,000 was made to reduce the carrying value of certain intangible assets acquired as part of the Infinite Merger. These adjustments, totaling $1.1 million, were included in the aggregate $5.5 million charge for impairment of goodwill and other intangible assets as reflected in our results of operations for the year ended September 30, 2009.

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

Auction Video – March 27, 2007

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 (collectively, “Auction Video”). The Auction Video, Inc. transaction was structured as a purchase of assets and the assumption of certain identified liabilities by our 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 operations of Auction Video are part of the Digital Media Services Group.

On December 5, 2008 we entered into an agreement whereby one of the former owners of Auction Video Japan, Inc. agreed to shut down the Japan office of Auction Video as well as assume all of our outstanding assets and liabilities connected with that operation - see note 5.

We 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 our 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 our customers existing prior to the acquisition were valued at $250,000 and were 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 $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.

Subsequent to the Auction Video acquisition, we began pursuing the final approval of the patent pending application and in March 2008 retained the law firm of Hunton & Williams to assist in expediting the patent approval process and to help protect rights related to our UGV (User Generated Video) technology. In April 2008, we revised the original patent application primarily for the purpose of splitting it into two separate applications, which, while related, were being evaluated separately by the U.S. Patent Office (“USPO”). In August 2008, February 2009 and May 2009, the USPO issued non-final rejections of the claims pending in the first of the two applications. In October 2009 we submitted an amendment to the first of the two applications, which amendment we expect the USPO to respond to within ninety days after the date of our submission. Regardless of this, our management has determined that a final rejection of these claims would not have a material adverse effect on our financial position or results of operations. The USPO has taken no formal action with regard to the second of the two applications. Certain of the former owners of Auction Video, Inc. have an interest in proceeds that we may receive under certain circumstances in connection with these patents.

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

Auction Video – March 27, 2007 (continued)

We 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	$	2,046,996
Goodwill		3,216
Acquired assets (at fair value)		2,050,212
Less: 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, we entered into three consulting contracts with three key Auction Video employees, two of which expired as of February 28, 2008 and the third which expired as of February 28, 2009. The third contract included a 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, which options expired as of February 28, 2009. The consulting contracts contain non-compete provisions with a minimum term of two years from the acquisition closing.

As discussed in “Testing for Impairment” below, the carrying value of the initially recorded identifiable intangible assets acquired as part of the Auction Video Acquisition were determined to be impaired as of December 31, 2008 and a $100,000 adjustment was made to reduce the carrying value of those intangible assets to approximately $200,000 as of that date. This $100,000 adjustment was included in the aggregate $5.5 million charge for impairment of goodwill and other intangible assets as reflected in our results of operations for the year ended September 30, 2009.

Acquired Onstream – December 23, 2004

On December 23, 2004, after approval by a majority of our shareholders in a duly constituted meeting, privately held Onstream Media Corporation (“Acquired Onstream”) was merged with and into our wholly owned subsidiary OSM Acquisition Inc. (the “Onstream Merger”). At that time, all outstanding shares of Acquired Onstream capital stock and options not already owned by us (representing 74% ownership interest) 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. We also issued common stock options to directors and management as additional compensation at the time of and for the Onstream Merger, accounted for in accordance with Accounting Principles Board Opinion Number 25 (which accounting pronouncement has since been superseded by the ASC).

Acquired Onstream was a development stage company founded in 2001 that began working on 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 service was intended to be offered via the Digital Media Services Platform (“DMSP”), which 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.

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

Acquired Onstream – December 23, 2004 (continued)

The summarized balance sheet of Acquired Onstream as of the December 23, 2004 closing of the Onstream Merger is as follows, showing the fair values we assigned to Acquired Onstream’s assets and liabilities in accordance with the Business Combinations topic of the ASC and recorded by us at that time.

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

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

Property and equipment in the above table represents the partially (at the time) completed 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 the Business Combinations topic of the ASC – see note 3. The fair value was primarily based on the discounted projected cash flows related to this asset for the five years immediately following the acquisition on a stand-alone basis without regard to the Onstream Merger, as projected at the time of the acquisition by our management and Acquired Onstream’s management. 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 we paid 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 us as goodwill, subject to regular future valuations and adjustments as required by the Intangibles – Goodwill and Other topic of the ASC.

As discussed in “Testing for Impairment” below, the initially recorded goodwill for Acquired Onstream of approximately $8.4 million was determined to be impaired as of December 31, 2008 and a $4.3 million adjustment was made to reduce the carrying value of that goodwill to approximately $4.1 million as of that date. This adjustment was included in the aggregate $5.5 million charge for impairment of goodwill and other intangible assets as reflected in our results of operations for the year ended September 30, 2009.

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

Testing for Impairment

The Intangibles – Goodwill and Other topic of the ASC, which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition, requires that goodwill be tested for impairment on a periodic basis. There is a two step process for impairment testing of goodwill. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment. We performed impairment tests on Infinite Conferencing as of April 27, 2008, on EDNet as of September 30, 2008 and on Acquired Onstream as of December 31, 2008. We assessed the fair value of the net assets of these reporting units by considering the projected cash flows 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, we concluded that there was no impairment of Infinite Conferencing’s net assets as of April 27, 2008 nor of EDNet’s net assets as of September 30. 2008. Although the first step of the two step testing process of Acquired Onstream’s net assets (which include the DMSP) preliminarily indicated that the fair value of those intangible assets exceeded their recorded carrying value as of December 31, 2008, it was noted that as a result of the then recent substantial volatility in the capital markets, the price of our common stock and our market value had decreased significantly and as of December 31, 2008, our market capitalization, after appropriate adjustments for control premium and other considerations, was determined to be less than our net book value (i.e., stockholders’ equity as reflected in our financial statements). Based on this condition, and in accordance with the provisions of the Intangibles – Goodwill and Other topic of the ASC, we recorded a non-cash expense, for the impairment of our goodwill and other intangible assets, of $5.5 million for the three months ended December 31, 2008. As discussed above, this $5.5 million adjustment was determined to relate to $1.1 million of goodwill and intangible assets of Infinite Conferencing, $100,000 of intangible assets of Auction Video and $4.3 million of goodwill of Acquired Onstream.

As part of the second step of the two step process for testing impairment as of December 31, 2008, the April 27, 2008 testing of Infinite Conferencing and the September 30, 2008 testing of EDNet were updated through December 31, 2008. Accordingly, none of our reporting units with significant goodwill or intangible assets were scheduled for a recurring annual impairment review during the September 30, 2009 quarter and as of September 30, 2009, we had noted no business or other conditions that would indicate the necessity for interim “step one” testing of individual reporting units for impairment. Therefore, the comparison of our market capitalization to its net book value as of September 30, 2009 was not considered to be relevant at that date. However, if the price of our common stock and our market value continue at the December 24, 2009 levels ($0.28 per share) or decline further, such condition may result in future non-cash impairment charges to our results of operations related to our goodwill and other intangible assets arising from our next scheduled recurring annual impairment review, which will be as of December 31, 2009.

The valuations of Infinite Conferencing, EDNet and Acquired Onstream incorporate our management’s estimates of future sales and operating income, which estimates in the cases of Infinite Conferencing and Acquired Onstream are dependent on products (audio and web conferencing and the DMSP, respectively) from which significant sales increases may be required to support that valuation. We are 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.

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 3: PROPERTY AND EQUIPMENT

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

	September 30, 2009							September 30, 2008
	Historical Cost		Accumulated Depreciation and Amortization			Net Book Value		Historical Cost		Accumulated Depreciation and Amortization			Net Book Value		Useful Lives (Yrs)
Equipment and software	$	10,442,539	$	(9,079,681	)	$	1,362,858	$	10,096,433	$	(8,022,265	)	$	2,074,168		1-5
DMSP		5,719,979		(4,791,517	)		928,462		5,256,575		(3,918,607	)		1,337,968		3-5
Travel video library		1,368,112		(1,368,112	)		-		1,368,112		(1,368,112	)		-		N/A
Other capitalized internal use software		1,215,401		(448,218	)		767,183		771,485		(177,544	)		593,941		3-5
Furniture, fixtures and leasehold improvements		475,857		(451,264	)		24,593		475,857		(425,164	)		50,693		2-7

Totals	$	19,221,888	$	(16,138,792	)	$	3,083,096	$	17,968,462	$	(13,911,692	)	$	4,056,770

Depreciation and amortization expense for property and equipment was approximately $2,227,000 and $2,816,000 for the years ended September 30, 2009 and 2008, respectively.

The DMSP is comprised of four separate “products”, which are transcoding, storage, search/retrieval and distribution. A limited version of the DMSP, with three of the four products, was first placed in service with third-party customers in November 2005. This initial version of the DMSP offered for sale to the general public since October 2006 is known as the “Store and Stream” version. In connection with the development of a second version of the DMSP with additional functionality known as “Streaming Publisher”, we have capitalized as part of the DMSP’s carrying cost approximately $608,000 of employee compensation, payments to contract programmers and related costs as of September 30, 2009, including $422,000 capitalized during the year then ended and the remainder capitalized in the previous year.

On March 27, 2007 we 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 DMSP as of the date of the acquisition. Based on our 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.

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 3: PROPERTY AND EQUIPMENT (Continued)

On March 31, 2008 we agreed to pay $300,000 for a perpetual license for certain digital asset management software, which we currently utilize to provide our automatic meta-tagging services, in addition to and in accordance with a limited term license that we purchased in 2007 for $281,250 - see note 5 for additional terms of this perpetual license and possible limits on its future use. Although we continue to use this software to provide our automatic meta-tagging services, we recently expanded our use of this software in providing our core DMSP services. Therefore, we recorded a portion of this 2008 purchase, as well as a portion of the remaining unamortized amount of the 2007 purchase, as an aggregate $243,750 increase in the DMSP’s carrying cost as reflected above, which additional cost is being depreciated over a five-year life commencing April 2008.

Other capitalized internal use software as of September 30, 2009 includes (i) approximately $501,000 of employee compensation and other costs related to the development of iEncode webcasting software, including $288,000 capitalized during the year then ended and the remainder capitalized in the previous year and (ii) approximately $156,000 of employee compensation, payments to contract programmers and other costs related to the development of the MarketPlace365 (MP365) platform, all capitalized during the year then ended. iEncode is a self-administered, webcasting appliance that can be used anywhere to produce a live video webcast. The MP365 platform will enable the creation of on-line virtual marketplaces, trade shows and social communities utilizing almost all of our other technologies including DMSP, webcasting, UGC and conferencing.

NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE

Convertible Debentures

During the period from June 3, 2008 through July 8, 2008 we received an aggregate of $1.0 million from seven accredited individuals and other entities (the “Investors”), under a software and equipment financing arrangement. We issued notes to those Investors (the “Equipment Notes”), which are collateralized by specifically designated software and equipment owned by us with a cost basis of approximately $1.5 million, as well as a subordinated lien on certain other of our assets to the extent that the designated software and equipment, or other software and equipment added to the collateral at a later date, is not considered sufficient security for the loan. Under this arrangement, the Investors received 10,000 restricted ONSM common shares for each $100,000 lent to us, and also receive interest at 12% per annum. Interest is payable every 6 months in cash or, at our option, in restricted ONSM common shares, based on a conversion price equal to seventy-five percent (75%) of the average ONSM closing price for the thirty (30) trading days prior to the date the applicable payment is due. On November 11, 2008, we elected to issue 158,000 unregistered shares of our common stock to the Investors in lieu of $48,740 cash interest on these Equipment Notes for the period from June 2008 through October 2008, which was recorded as interest expense of $69,520 on our books, based on the fair value of those shares on the issuance date. On May 21, 2009, we elected to issue 294,589 unregistered shares of our common stock to the Investors in lieu of $60,000 cash interest on these Equipment Notes for the period from November 2008 through April 2009, which was recorded as interest expense of $67,756 on our books, based on the fair value of those shares on the issuance date. On November 11, 2009, we elected to issue 209,500 unregistered shares of our common stock to the Investors in lieu of $60,493 cash interest on these Equipment Notes for the period from May 2009 through October 2009, which was recorded as interest expense of $77,515 on our books, based on the fair value of those shares on the issuance date. The next interest due date is April 30, 2010.

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

Convertible Debentures (continued)

We may prepay the Equipment Notes, which mature June 3, 2011, at any time upon ten (10) days' prior written notice to the Investors during which time any or all of the Investors may choose to convert the Equipment Notes held by them. In the event of such repayment, all interest accrued and due for the remaining unexpired loan period is due and payable and may be paid in cash or restricted ONSM common shares in accordance with the above formula.

The outstanding principal is due on demand in the event a payment default is uncured ten (10) business days after written notice. Investors holding in excess of 50% of the outstanding principal amount of the Equipment Notes may declare a default and may take steps to amend or otherwise modify the terms of the Equipment Notes and related security agreement.

The Equipment Notes may be converted to restricted ONSM common shares at any time prior to their maturity date, at the Investors’ option, based on a conversion price equal to seventy-five percent (75%) of the average ONSM closing price for the thirty (30) trading days prior to the date of conversion, but in no event may the conversion price be less than $0.80 per share. In the event the Equipment Notes are converted prior to maturity, interest on the Equipment Notes for the remaining unexpired loan period will be due and payable in additional restricted ONSM common shares in accordance with the same formula for interest payments as described above.

Fees were paid to placement agents and finders for their services in connection with the Equipment Notes in aggregate of 101,250 restricted ONSM common shares and $31,500 paid in cash. These 101,250 shares, plus the 100,000 shares issued to the investors (as discussed above) had a fair market value of approximately $186,513. The value of these 201,250 shares, plus the $31,500 cash fees and $9,160 paid for legal fees and other issuance costs related to the Equipment Notes, were reflected as a $227,173 discount against the Equipment Notes and are being amortized as interest expense over the three year term of the Equipment Notes. The effective interest rate of the Equipment Notes is approximately 19.5% per annum, excluding the potential effect of a premium to market prices if payment is made in common shares instead of cash. The unamortized portion of this discount was $130,607 and $204,069 at September 30, 2009 and 2008, respectively.

Although the minimum conversion price was established in the Equipment Notes at $0.80 per ONSM share, the quoted market price was approximately $0.93 per ONSM share at the time the material portion of the proceeds ($950,000 out of $1 million total) were received by us (including releases of funds previously placed in escrow) and the related Equipment Notes were issued (June 3-5, 2008). However, the quoted market price per ONSM share was $0.81 on April 30, 2008, $0.84 on May 20, 2008 and back to $0.80 by June 27, 2008, less than one month after the issuance of the related Equipment Notes. Therefore, we have determined that the $0.80 per share conversion price in the Equipment Notes was materially equivalent to fair value at the date of issuance, which was the intent of all parties when the deal was originally discussed between them in late April and early May 2008. Accordingly, we determined that there was not a beneficial conversion feature included in the Equipment Notes and did not record additional discount in that respect.

A portion of the Rockridge Note ($375,000 face value, which is $240,190 net, after deducting the applicable discount) is also convertible into ONSM common shares, as discussed below, and classified under Convertible Debentures, net of discount, on our September 30, 2009 balance sheet.

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

Notes Payable

Notes payable consist of the following as of September 30, 2009 and 2008:

	September 30, 2009			September 30, 2008
Note payable to a financial institution, collateralized by accounts receivable and certain other related assets, interest payable monthly at 13.5% per annum. Revolving line of credit expiring December 2011.	$	1,382,015		$	1,200,000
Note payable to an entity controlled by a major shareholder, collateralized by first priority lien on all our assets, subordinated only to extent of higher priority liens on certain receivables and equipment, principal and interest (at 12% per annum) payable in equal monthly installments through August 2013. Balance shown excludes $375,000 balloon payment, which is due on maturity but also convertible into ONSM common shares at holder’s option.		989,187			-
Notes payable to former Infinite shareholders		-			458,399
Capitalized software and equipment leases		142,924			248,809
Total notes payable		2,514,126			1,907,208
Less: discount on notes payable		(393,174	)		(23,793	)
Notes payable, net of discount		2,120,952			1,883,415
Less: current portion, net of discount		(1,615,891	)		(1,774,264	)
Long term notes payable, net of current portion	$	505,061		$	109,151

Line of Credit Arrangement

In December 2007, we entered into a line of credit arrangement (the “Line”) with a financial institution (the “Lender”) under which we could borrow up to an aggregate of $1.0 million for working capital, collateralized by our accounts receivable and certain other related assets. In August 2008 the maximum allowable borrowing amount under the Line was increased to $1.6 million and in December 2009 this amount was again increased to $2.0 million. The outstanding balance bears interest at 13.5% per annum, adjustable based on changes in prime after December 28, 2009 (was prime plus 8% per annum through December 2, 2008 and prime plus 11% from that date through December 28, 2009), payable monthly in arrears. Effective December 28, 2009, we also incur a weekly monitoring fee of one twentieth of a percent (0.05%) of the borrowing limit, payable monthly in arrears. We paid initial origination and commitment fees in December 2007 aggregating $20,015, an additional commitment fee in August 2008 of $6,000 related to the increase in the lending limit for the remainder of the year, a commitment fee of $16,000 in December 2008 related to the continuation of the increased Line for an additional year and a commitment fee of $20,000 in December 2009 related to the continuation of the Line for an additional year as well as an increase in the lending limit. An additional commitment fee of one percent (1%) of the maximum allowable borrowing amount will be due for any subsequent annual renewal after December 28, 2010. These origination and commitment fees (plus other fees paid to Lender) are recorded by us as debt discount and amortized as interest expense over the remaining term of the loan. The unamortized portion of this discount was $37,082 and $19,954 as of September 30, 2009 and 2008, respectively.

Mr. Leon Nowalsky, a member of our Board of Directors, is also a founder and board member of the Lender.

F-31

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

Notes Payable (continued)

Line of Credit Arrangement (continued)

The outstanding principal balance due under the Line may be repaid by us at any time, but no later than December 28, 2011, which may be extended by us for an extra year, subject to compliance with all loan terms, including no material adverse change, as well as concurrence of the Lender. We will incur a charge equal to two percent (2%) of the borrowing limit if we terminate the Line before June 28, 2011 and a charge equal to one percent (1%) of the borrowing limit if we terminate the Line after that date but before December 28, 2011. The outstanding principal is due on demand in the event a payment default is uncured five (5) days after written notice.

The Line is also subject to us maintaining an adequate level of receivables, based on certain formulas, as well as our compliance, starting with the quarter ending September 30, 2010, with a quarterly debt service coverage covenant. We were also subject to compliance with the debt service coverage covenant up to and including the June 30, 2009 quarter as well as compliance with a minimum tangible net worth covenant through June 30, 2009. We received waivers from the Lender with respect to lack of compliance with the tangible net worth covenant from March 31, 2008 through June 30, 2009, as well as with respect to lack of compliance with the debt service to cash flow covenant from the quarter ended June 30, 2008 through the quarter ended June 30, 2009. Although the balance outstanding under the Line was in excess of the allowable borrowing amount from time to time during 2009 based on the formulas discussed above, subsequent principal payments reduced the outstanding balance so that it no longer exceeded the allowable borrowing amount. Prior to December 7, 2009, the terms of the Line did not specify the allowable time period to repay borrowings in excess of the allowable borrowing amount, but the Lender has waived any breach related to these past overages.

The Lender must approve any additional debt incurred by us, other than debt incurred in the ordinary course of business (which includes equipment financing). Accordingly the Lender has approved the Infinite Notes issued by us in March 2008 with an initial amount of $858,399 as discussed below, the $1.0 million aggregate debt for Equipment Notes we issued in June and July 2008, as discussed above, our December 2008 issuance of the Series A-12 Redeemable Convertible Preferred Stock with a stated value of $800,000, as discussed in note 6, our April 2009 issuance of the Rockridge Note, as well as its September 2009 amendment, for a face value of up to $2.0 million, as discussed below and our December 2009 issuance of the CCJ Note for a face value of $200,000, as discussed in note 9.

Rockridge Note

In April 2009 we received $750,000 from Rockridge Capital Holdings, LLC (“Rockridge”), an entity controlled by one of our largest shareholders, in accordance with the terms of a Note and Stock Purchase Agreement (the “Rockridge Agreement”) that we entered into with Rockridge dated April 14, 2009. In June 2009, we received an additional $250,000 from Rockridge in accordance with the Rockridge Agreement, for total borrowings thereunder of $1.0 million. On September 14, 2009, we entered into Amendment Number 1 to the Agreement (the “Amendment”), as well as an Allonge to the Note (the “Allonge”), which allowed us to borrow up to an additional $1.0 million from Rockridge, resulting in cumulative allowable borrowings of up to $2.0 million. We borrowed $500,000 of the additional $1.0 million on September 18, 2009 and the remaining $500,000 on October 20, 2009.

F-32

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

Notes Payable (continued)

Rockridge Note (continued)

In connection with this transaction, we issued a Note (the “Rockridge Note”), which is collateralized by a first priority lien on all of our assets, such lien subordinated only to the extent higher priority liens on assets, primarily accounts receivable and certain designated software and equipment, are held by certain of our other lenders. We also entered into a Security Agreement with Rockridge that contains certain covenants and other restrictions with respect to the collateral.

The Rockridge Note, after giving effect to all borrowings under the Amendment and the Allonge, is repayable in equal monthly installments of $45,202 extending through August 14, 2013 (the “Maturity Date”), which installments include principal (except for a $500,000 balloon payable on the Maturity Date) plus interest (at 12% per annum) on the remaining unpaid balance. The Rockridge Agreement, as amended, also provides that Rockridge may receive an origination fee upon not less than sixty-one (61) days written notice to us, payable by our issuance of 2,200,000 restricted ONSM common shares (the “Shares”).

The Rockridge Agreement provides that on the Maturity Date we shall pay Rockridge up to a maximum of $75,000, based on the sum of (i) the cash difference between the per share value of $0.20 (the “Minimum Per Share Value”) and the average sale price for all previously sold Shares (whether such number is positive or negative) multiplied by the number of sold Shares and (ii) for the Shares which were not previously sold by Rockridge, the cash difference between the Minimum Per Share Value and the market value of the Shares at the Maturity Date (whether such number is positive or negative) multiplied by the number of unsold Shares, up to a maximum shortfall amount of $75,000 in the aggregate for items (i) and (ii). The closing ONSM share price was $0.28 per share on December 24, 2009.

Legal fees totaling $46,929 were paid or accrued by us as of September 30, 2009 in connection with the Rockridge Agreement. 1,950,000 of the 2,200,000 Shares discussed above were earned by Rockridge as of September 30, 2009 and had a fair market value of approximately $531,000 at the date of the Rockridge Agreement or the Amendment, as applicable. The value of these Shares plus the legal fees paid or accrued were reflected as a $577,929 discount against the Rockridge Note (as well as a corresponding increase in additional paid-in capital for the value of the Shares) and are being amortized as interest expense over the term of the Rockridge Note. The effective interest rate of the Rockridge Note was approximately 44.3% per annum, until the September 2009 amendment, at which time it was reduced to approximately 28.0% per annum. These rates exclude the potential effect of a premium to market prices if the balloon payment is satisfied in common shares instead of cash as well as the potential effect of any appreciation in the value of the Shares at the time of issuance beyond their value at the date of the Rockridge Agreement or the Amendment, as applicable. The unamortized portion of this discount was $490,902 as of September 30, 2009.

F-33

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

Notes Payable (continued)

Rockridge Note (continued)

Upon notice from Rockridge at any time and from time to time prior to the Maturity Date up to $500,000, (representing the current balloon payment of the outstanding principal of the Rockridge Note and which balloon payment was $375,000 as of September 30, 2009) may be converted into a number of restricted shares of ONSM common stock. Upon notice from Rockridge at any time after September 4, 2010 and prior to the Maturity Date, up to fifty percent (50%) of the outstanding principal amount of the Rockridge Note (excluding the balloon payment subject to conversion per the previous sentence) may be converted into a number of restricted shares of ONSM common stock. If we sell all or substantially all of our assets, or at any time after September 4, 2011 and prior to the Maturity Date, the remaining outstanding principal amount of the Rockridge Note may be converted by Rockridge into a number of restricted shares of ONSM common stock.

The above conversions are subject to a minimum of one month between conversion notices (unless such conversion amount exceeds $25,000) and will use a conversion price of eighty percent (80%) of the fair market value of the average closing bid price for ONSM common stock for the twenty (20) days of trading on the NASDAQ Capital Market (or such other exchange or market on which ONSM common shares are trading) prior to such Rockridge notice, but such conversion price will not be less than $0.40 per share. We will not effect any conversion of the Rockridge Note, to the extent Rockridge and Frederick DeLuca, after giving effect to such conversion, would beneficially own in excess of 9.9% of our outstanding common stock (the “Beneficial Ownership Limitation”). The Beneficial Ownership Limitation may be waived by Rockridge upon not less than sixty-one (61) days prior written notice to us unless such waiver would result in a violation of the NASDAQ shareholder approval rules. Since the market value of an ONSM common share was $0.23 as of the date of the Rockridge Agreement and $0.39 as of the date of the Amendment, we determined that the above provisions did not constitute a beneficial conversion feature for purposes of calculating the related discount recorded by us.

Furthermore, in the event of any conversions of principal to ONSM shares by Rockridge (i) the $500,000 balloon payment will be reduced by the amount of any such conversions and (ii) the interest portion of the monthly payments under the Rockridge Note for the remaining months after any such conversion will be adjusted to reflect the outstanding principal being immediately reduced for amount of the conversion. We may prepay the Rockridge Note at any time. The outstanding principal is due on demand in the event a payment default is uncured ten (10) business days after Rockridge’s written notice to us.

Infinite Notes

At the time of the April 27, 2007 Infinite Merger (see note 2), we entered into a lock-up agreement with the former Infinite shareholders (the "Infinite Shareholders") that provided that in the event the accumulated gross proceeds of the sale of certain shares issued to them in connection with that merger were less than a contractually defined amount, we would pay the difference. On December 27, 2007, the Infinite Shareholders notified us that those shares had been sold by them for proceeds which under the lock-up agreement would require us to pay an additional $958,399.

F-34

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 4: CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)

Notes Payable (continued)

Infinite Notes (continued)

On February 14, 2008, we paid $100,000 against the above obligation. On March 12, 2008, we executed promissory notes (the “Infinite Notes”) payable to the Infinite Shareholders for the remaining aggregate balance due of $858,399 plus interest accruing at 12% per annum on the outstanding balance from February 15, 2008 until the July 10, 2009 maturity. Note payments were made of (i) $100,000 (one hundred thousand dollars) on March 15, 2008, (ii) $50,000 (fifty thousand dollars) per month from April 2008 through June 2009 and (iii) $8,399 during July 2009.

Capitalized Software and Equipment Leases

During July 2007, we entered into a capital lease for audio conferencing equipment, which had an outstanding principal balance of $109,151 and $222,688 as of September 30, 2009 and 2008, respectively. 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 January 2009, we entered into a capital lease for telephone equipment, which had an outstanding principal balance of $33,773 as of September 30, 2009. The balance is payable in equal monthly payments of $828 through January 2014, which includes interest at approximately 11% per annum.

As part of the Onstream Merger, we assumed a capital lease for software, which had no outstanding balance included in notes payable as of September 30, 2009 and a $26,121 notes payable balance as of September 30, 2008. However, accounts payable includes $109,674 and $79,692 of past due payments related to this lease at September 30, 2009 and 2008, respectively. See note 2.

NOTE 5: COMMITMENTS AND CONTINGENCIES

Narrowstep acquisition termination and litigation – On May 29, 2008, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire Narrowstep, Inc. (“Narrowstep”), which Merger Agreement was amended twice (on August 13, 2008 and on September 15, 2008). The terms of the Merger Agreement, as amended, allowed that if the acquisition did not close on or prior to November 30, 2008, the Merger Agreement could be terminated by either us or Narrowstep at any time after that date provided that the terminating party was not responsible for the delay. On March 18, 2009, we terminated the Merger Agreement and the acquisition of Narrowstep.

As a result of this termination, we recorded the write-off of certain acquisition-related costs in our operating results for the year ended September 30, 2009 (see note 1 – Effects of Recent Accounting Pronouncements). In addition, we may incur additional future costs and expenses not included in this write-off, as follows: (i) satisfaction of a claim by Narrowstep for certain equipment alleged to be in our custody and (ii) satisfaction of certain other damages asserted by Narrowstep. These items are discussed below.

F-35

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 5: COMMITMENTS AND CONTINGENCIES (continued)

Narrowstep acquisition termination and litigation (continued) - In November 2008 Narrowstep invoiced us approximately $372,000 for their equipment alleged to be in our custody as of that date and in June 2009 a letter issued by their counsel demanded that we pay $400,000 related to this matter. Although we acknowledged possession of at least some of this equipment, we have not agreed to a payment for that equipment and believe that if a payment were made it would be substantially less than the Narrowstep demand. Accordingly, this matter is not reflected as a liability on our financial statements, nor have we included any related assets on our financial statements. However, we received approximately $32,000 in merchandise credit for certain of this equipment, which was recorded as a reduction of our acquisition cost write-off for the year ended September 30, 2009 and is considered to be a valid offset to amounts included in that write-off but that we believe should have been paid by Narrowstep. In addition to these costs, we believe that we could seek reimbursement from Narrowstep of certain general and administrative costs reflected in our operating expenses for the years ended September 30, 2009 and 2008 (i.e., not segregated as part of the specific write-off of acquisition costs), since they were incurred in direct support of Narrowstep operations.

On April 16, 2009 Narrowstep issued a press release announcing that it was seeking $14 million and other damages (including the above matter) from us, as a result of our alleged actions in connection with the termination of the agreement to acquire Narrowstep. This demand was made in the form of a letter issued at about the same time by Narrowstep’s counsel. After reviewing the demand letter issued by Narrowstep’s counsel, we determined that Narrowstep had no basis in fact or in law for any claim and accordingly, this matter was not reflected as a liability on our financial statements.

On December 1, 2009, Narrowstep filed a complaint against us in the Court of Chancery of the State of Delaware, alleging breach of contract, fraud and three additional counts and is seeking (i) $14 million in damages, (ii) reimbursement of an unspecified amount for all of its costs associated with the negotiation and drafting of the Merger Agreement, including but not limited to attorney and consulting fees, (iii) the return of Narrowstep’s equipment alleged to be in our possession, (iv) reimbursement of an unspecified amount for all of its attorneys fees, costs and interest associated with this action and (v) any further relief determined as fair by the court. After reviewing the complaint document, we have again determined that Narrowstep has no basis in fact or in law for any claim and accordingly, this matter has not been reflected as a liability on our financial statements. On December 18, 2009, we were served with a summons and we intend to file the required response on or before the required deadline and to vigorously defend against all claims. Furthermore, we do not expect the ultimate resolution of this matter to have a material impact on our financial position or results of operations.

Other legal proceedings – On May 26, 2009, we were served with a summons and complaint filed in Broward County, Florida, containing a breach of contract claim against us by a firm seeking compensation for legal services allegedly rendered to us, plus court costs, in the amount of approximately $383,000. We have accrued approximately $115,000 related to this matter on our financial statements as of September 30, 2009, which was included in the write-off of certain acquisition-related costs included in our operating results for the year then ended (see note 1 – Effects of Recent Accounting Pronouncements). Certain discovery activities by the parties are in process, mediation has been set for January 26, 2010 and trial has been set for March 8, 2010. We believe that the ultimate resolution of the matter will not have a material adverse effect on our financial position or results of operations.

F-36

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)

Other legal proceedings (continued) – We are involved in other 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 our management that the resolution of these outstanding claims will not have a material adverse effect on our financial position or results of operations.

NASDAQ letter regarding minimum share price listing requirement – We received a letter from NASDAQ dated January 4, 2008 indicating that we had 180 calendar days, or until July 2, 2008, to regain compliance with what is now Listing Rule 5550(a)(2) – formerly Marketplace Rule 4310(c)(4) (the “Rule”), which is necessary in order to be eligible for continued listing on the NASDAQ Capital Market. The NASDAQ letter indicated that our non-compliance with the Rule was as a result of the bid price of ONSM common stock closing below $1.00 per share for the preceding thirty consecutive business days. On July 3, 2008, we received a letter from NASDAQ stating that we were not considered compliant with the Rule as of that date, but because we met all other initial NASDAQ listing criteria, we were granted an additional 180 calendar days, or until December 30, 2008, to regain compliance with the Rule. On October 22, 2008, we received a letter from NASDAQ stating that NASDAQ had suspended enforcement of the bid price listing requirement through January 19, 2009, which suspension NASDAQ extended several more times. Since we were in a bid price compliance period at the time of the initial suspension, we remained at the same stage of the process we were in when the NASDAQ first announced the suspension until that suspension was terminated on July 31, 2009. Accordingly, we were subsequently notified by NASDAQ that as a result of the termination of the suspension, we had until October 16, 2009 to regain compliance with the Rule. On October 19, 2009, we received a letter from NASDAQ stating that since we had not regained compliance with the Rule as of October 16, 2009, our common stock was subject to delisting. However, such delisting would not occur if we requested a hearing with the NASDAQ Listing Qualifications Panel (“the “Panel”) and pending the Panel’s decision subsequent to that hearing.

We requested such a hearing with the Panel, which we attended on December 3, 2009, and at which time we presented our plan for regaining compliance with the Rule and requested that our securities be allowed to remain listed pending the completion of that plan. Based on the Panel’s consideration of that plan, as well as any other relevant factors, the Panel has the ability to grant us a period of up to 180 days (counting from the date of the October 19, 2009 letter) to regain compliance with the Rule. As of December 29, 2009, the Panel had not informed us of their decision and there can be no assurance that the Panel will grant our request for continued listing.

We might be considered compliant with the Rule, subject to the NASDAQ staff’s discretion, our common stock closes at $1.00 per share or more for a minimum of ten consecutive business days. The closing ONSM share price was $0.28 per share on December 24, 2009. Although we have not decided on such action, we have been advised that as a Florida corporation we may implement a reverse split of our common shares without shareholder approval, provided a proportionate reduction is made in the number of our authorized common shares and we provide appropriate advance notice to NASDAQ and other applicable authorities.

The terms of the 8% Senior Convertible Debentures and the 8% Subordinated Convertible Debentures (and the related warrants), which we issued from December 2004 through April 2006, as well as the common shares we issued in connection with the April 2007 Infinite Merger, contain penalty clauses if our common stock is not traded on NASDAQ or a similar national exchange – see further discussion below.

F-37

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)

Registration payment arrangements – We included the 8% Subordinated Convertible Debentures and the related $1.50 warrants on a registration statement which was declared effective by the SEC on July 26, 2006. We are 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 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. The same penalty provisions apply if 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). Due to the fact that that there is no established mechanism for reporting to us changes in the ownership of these shares after they are originally issued, we are unable to quantify how many of these shares are still held by the original recipient and thus subject to the above provisions. Regardless of the above, 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. All of these debentures were converted to common shares on or before March 31, 2007.

The $1.50 warrants provide that, starting one year after issuance, 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 we would issue shares equal in value to the excess of the market price at the time of the exercise over the warrant exercise price. 403,650 of these warrants were still outstanding as of September 30, 2009, and will expire in March and April of 2011 – see note 8.

We included the common shares underlying the 8% Senior Convertible Debentures, including the Additional 8% Convertible Debentures (AIR), and the related $1.65 warrants, on a registration statement declared effective by the SEC on June 29, 2005. These debentures provide cash penalties of 1% of the original purchase price for each month that (a) our 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 Rule 144(k). Regardless of the above, 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 - all of these debentures were converted to common shares on or before March 31, 2007.

The $1.65 warrants provide that if 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 the related transactions and at the time of warrant exercise, the holder could elect a “cashless exercise” whereby we would issue shares equal in value to the excess of the market price at the time of the exercise over the warrant exercise price. Although 1,128,530 of these warrants were still outstanding as of September 30, 2009, 737,114 of that total expired on December 23, 2009 and the remainder will expire on February 15, 2010 – see note 8.

F-38

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)

Registration payment arrangements (continued) – During March and April 2007, we 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 us to partially fund the Infinite Merger – see note 2. These shares were included in a registration statement declared effective by the SEC on June 15, 2007. We are 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 (including our delivery of a new certificate or other evidence of ownership for such securities not bearing a restrictive legend) 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 opinion of our counsel). 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 we are 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, 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.

We have concluded that the arrangements discussed in the preceding five paragraphs are registration payment arrangements, as that term is defined in the Derivatives and Hedging topic (Contracts in Entity’s own Entity subtopic) of the ASC. Based on our satisfactory recent history of maintaining the effectiveness of our registration statements and our NASDAQ listing, as well as stockholders’ equity in excess of the NASDAQ listing standards as of September 30, 2009, we have concluded that material payments under these registration payment arrangements are not probable and that no accrual related to them is necessary under the requirements of the Contingencies topic of the ASC. However, the $0.28 quoted market price price of our common shares was below the $1.00 NASDAQ requirement as of December 24, 2009, which condition could eventually affect our NASDAQ listing status, as discussed above.

Registration rights - We granted a major shareholder demand registration rights, effective six months from the January 2007 modification date of a certain convertible note, for any unregistered common shares issuable thereunder. Upon such demand, we would have 60 days to file a registration statement, using our best efforts to promptly obtain the effectiveness of such registration statement. 784,592 of the 2,789,592 shares issued in March 2007 and subject to these rights were included in a registration statement declared effective by the SEC on June 15, 2007 and as of December 24, 2009 we have not received any demand for the registration of the balance. As the note does not provide for damages or penalties in the event we do not comply with these registration rights, we have concluded that these rights do not constitute registration payment arrangements. Furthermore, since the unregistered shares were originally issued in March 2007, they may be saleable, in whole or in part, under Rule 144. In any event, we have determined that material payments in relation to these rights are not probable and therefore no accrual related to them is necessary under the requirements of the Contingencies topic of the ASC.

F-39

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)

Registration rights (continued) – We granted demand registration rights, effective six months from the date of a certain October 2006 convertible note, for any unregistered common shares issuable thereunder. Upon such demand, we would have 60 days to file a registration statement, using our best efforts to promptly obtain the effectiveness of such registration statement. 1,000,000 of the 1,694,495 total principal and interest shares subject to these rights were included in a registration statement declared effective by the SEC on June 15, 2007 and as of December 24, 2009 we have not received any demand for the registration of the balance. As the note does not provide for damages or penalties in the event we do not comply with these registration rights, we have concluded that these rights do not constitute registration payment arrangements. Furthermore, since the unregistered shares were originally issued in November and December 2006, they may be saleable, in whole or in part, under Rule 144. In any event, we have determined that material payments in relation to these rights are not probable and therefore no accrual related to them is necessary under the requirements of the Contingencies topic of the ASC.

We granted piggyback registration rights in connection with 100,000 shares and 220,000 options issued to consultants prior to June 15, 2007, which shares and options were not included on the registration statement declared effective by the SEC on that date. As these options and shares do not provide for damages or penalties in the event we do not comply with these registration rights, we have concluded that these rights do not constitute registration payment arrangements. In any event, we have determined that material payments in relation to these rights are not probable and therefore no accrual related to them is necessary under the requirements of the Contingencies topic of the ASC.

We granted piggyback registration rights in connection with 285,000 shares and 350,000 options issued to consultants subsequent to June 15, 2007. We have not filed a registration statement with the SEC since that date. As the 285,000 shares do not provide for damages or penalties in the event we do not comply with these registration rights, we have concluded that these rights do not constitute registration payment arrangements. Although 150,000 of the 350,000 options include cashless exercise rights until they are registered, and therefore do constitute registration payment arrangements, since the exercise price of $1.73 per share is significantly in excess of the market price of $0.41 per share as of September 30, 2009, we have concluded that no accrual related to these rights is necessary as of that date under the requirements of the Contingencies topic of the ASC. Although 200,000 of the 350,000 options include cashless exercise rights starting one year after issuance until they are registered, and therefore do constitute registration payment arrangements, since the exercise prices of $0.50, $0.75 and $1.00 per share are significantly in excess of the market price of $0.41 per share as of September 30, 2009, we have concluded that no accrual related to these rights is necessary as of that date under the requirements of the Contingencies topic of the ASC.

Employment contracts and severance – On September 27, 2007, our 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”. On May 15, 2008 and August 11, 2009 our Compensation Committee and Board approved certain corrections and modifications to those agreements, which are reflected in the discussion of the terms of those agreements below.

F-40

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)

Employment contracts and severance (continued) – The agreements provide initial 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. These employment agreements contain certain non-disclosure and non-competition provisions and we have agreed to indemnify the Executives in certain circumstances.

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, our Compensation Committee and Board of Directors granted Plan Options to each of the Executives 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 us to register the vested options.

As part of the above employment agreements, the Executives were eligible for a performance bonus, based on meeting revenue and cash flow objectives. In connection with this bonus program, our Compensation Committee and Board of Directors granted Plan Options to each of the Executives 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 were eligible for vesting on a quarterly basis and the rest annually, with the total grant allocable over a two-year period ending September 30, 2009. Vesting of the quarterly portion was 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 our 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 was 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 did not vest for that quarter but the unvested quarterly options were added to the available options for the year, vested subject to achievement of the applicable annual goal. In the event options did not vest based on the quarterly or annual goals, they immediately expired. 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.

F-41

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

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

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

	High		Low
FISCAL YEAR 2008
First Quarter	$	1.66	$	0.80
Second Quarter	$	1.03	$	0.62
Third Quarter	$	0.99	$	0.66
Fourth Quarter	$	0.83	$	0.29

FISCAL YEAR 2009
First Quarter	$	0.47	$	0.22
Second Quarter	$	0.32	$	0.14
Third Quarter	$	0.33	$	0.23
Fourth Quarter	$	0.59	$	0.27

FISCAL YEAR 2010
First Quarter (to Dec 24)	$	0.44	$	0.27

Plan Category	Number of securities to be issued upon exercise 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)		3,740,000	$1.10	None
2007 Equity Incentive Plan (2)		5,298,750	$1.47		526,250
Equity compensation plans approved by shareholders (3)		1,102,928	$1.99	None
Equity compensation plans not approved by shareholders (4)		1,619,346	$1.54		910,000

Securities registered under Section 12(g) of the Act:	common stock
	(Title of class)

Issuance period	Number of options		Exercise price per share		Expiration Date

Year ended September 30, 2009		350,000		$0.50 - $1.00	Aug - Sept 2013
Year ended September 30, 2008		250,000		$1.73 - $1.83	Oct 2011
Year ended September 30, 2007		626,184		$1.00 - $2.48	Oct 2010 – Mar 2012
Year ended September 30, 2006		380,750		$1.00 - $1.05	Oct 2009 – Mar 2011
Year ended September 30, 2005		12,412		$1.65 - $3.376	Dec 2009 – Mar 2010

Total Non-Plan consultant options as of September 30, 2009		1,619,346

	Years Ended September 30,
	2009			2008
Revenue:

DMSP and hosting		10.1	%		8.2	%
Webcasting		33.5			33.7
Audio and web conferencing		41.9			41.3
Network usage		11.8			12.7
Other		2.7			4.1
Total revenue		100.0	%		100.0	%

Cost of revenue:

DMSP and hosting		3.3	%		3.5	%
Webcasting		9.9			12.1
Audio and web conferencing		11.4			8.4
Network usage		5.1			5.3
Other		2.8			3.7
Total costs of revenue		32.5	%		33.0	%

Gross margin		67.5	%		67.0	%

Operating expenses:
Compensation		57.9	%		52.6	%
Professional fees		7.5			11.2
Write off deferred acquisition costs		3.0			-
Impairment loss on goodwill and other intangible assets		32.5			-
Other general and administrative		14.4			15.6
Depreciation and amortization		18.9			24.0
Total operating expenses		134.2	%		103.4	%

Loss from operations		(66.7	)%		(36.4	)%

Other expense, net:
Interest expense		(3.9	)%		(1.3	)%
Other income, net		0.6			0.4
Total other expense, net		(3.3	)%		(0.9	)%

Net loss		(70.0	)%		(37.3	)%

	For the years ended September 30,						Increase (Decrease)
	2009			2008			Amount			Percent

Total revenue	$	16,926,953		$	17,587,223		$	(660,270	)		(3.8	)%
Total costs of revenue		5,493,533			5,811,025			(317,492	)		(5.5	)%
Gross margin		11,433,420			11,776,198			(342,778	)		(2.9	)%

General and administrative expenses		13,507,867			13,963,452			(455,585	)		(3.3	)%
Write off deferred acquisition costs		504,738			-			504,738			-
Impairment loss on goodwill and other intangible assets		5,500,000			-			5,500,000			-
Depreciation and amortization		3,195,291			4,215,669			(1,020,378	)		(24.2	)%
Total operating expenses		22,707,896			18,179,121			4,528,775			24.9	%

Loss from operations		(11,274,476	)		(6,402,923	)		4,871,553			76.1	%

Other expense, net		(556,309	)		(158,535	)		397,774			250.9	%

Net loss	$	(11,830,785	)	$	(6,561,458	)	$	5,269,327			80.3	%

Name	Age	Position

Randy S. Selman	53	Chairman of the Board, President and Chief Executive Officer
Clifford Friedland	58	Vice Chairman of the Board, Senior Vice President Business Development
Alan M. Saperstein	50	Director, Chief Operating Officer and Treasurer
David Glassman	58	Senior Vice President and Chief Marketing Officer
Robert E. Tomlinson	52	Senior Vice President and Chief Financial Officer
Robert J. Wussler (1)(2)(3)(4)	73	Director
Charles C. Johnston (1)(2)(3)	74	Director
Carl L. Silva (1)(2)(3)(4)	46	Director
Leon Nowalsky (2)(3)	48	Director

										CHANGE IN
										PENSION VALUE
	FEES EARNED							NON-EQUITY		AND NONQUALIFIED
	OR PAID IN		STOCK		OPTION			INCENTIVE PLAN		DEFERRED		ALL OTHER		TOTAL
	CASH		AWARDS		AWARDS			COMPENSATION		COMPENSATION		COMPENSATION		COMPENSATION
NAME	($) (1)		($)		($) (3)			($)		EARNINGS ($)		($)		($)

Robert J. Wussler (4)	$	15,000		-0-	$	7,037	(2)		-0-		-0-		-0-	$	22,037
Charles C. Johnston (4)	$	15,000		-0-	$	6,380	(2)		-0-		-0-		-0-	$	21,380
Carl L. Silva (4)	$	15,000		-0-		-0-			-0-		-0-		-0-	$	15,000
Leon Nowalsky (4)	$	15,000		-0-		-0-			-0-		-0-		-0-	$	15,000

						STOCK		OPTION			SECURITIES		ALL OTHER			TOTAL
NAME AND	FISCAL			BONUS		AWARDS		AWARDS			UNDERLYING		COMPENSATION			COMPENSATION
PRINCIPAL POSITION	YEAR	SALARY ($)		($)		($)		($)			OPTIONS (#)		($) (14)			($)(15)

Randy S. Selman	2009	$	287,687		-0-		-0-	$	225,226	(11)(12)		-0-	$	55,421	(1)	$	568,334
President, Chief	2008	$	263,695		-0-		-0-	$	141,417	(11)		-0-	$	51,502	(2)	$	456,614
Executive Officer
and Director

Alan Saperstein	2009	$	261,534		-0-		-0-	$	225,226	(11)(12)		-0-	$	59,591	(3)	$	546,351
Chief Operating	2008	$	238,695		-0-		-0-	$	141,417	(11)		-0-	$	56,942	(4)	$	437,054
Officer, Treasurer
and Director

Clifford Friedland	2009	$	232,410		-0-		-0-	$	141,417	(11)		-0-	$	62,934	(5)	$	436,761
Senior VP - Busi-	2008	$	212,358		-0-		-0-	$	141,417	(11)		-0-	$	59,050	(6)	$	412,825
ness Development
and Director

David Glassman	2009	$	232,410		-0-		-0-	$	141,417	(11)		-0-	$	55,722	(7)	$	429,549
Senior VP -	2008	$	212,358		-0-		-0-	$	141,417	(11)		-0-	$	52,155	(8)	$	405,930
Marketing

Robert Tomlinson	2009	$	244,194		-0-		-0-	$	169,579	(11)(13)		-0-	$	62,642	(9)	$	476,415
Chief Financial	2008	$	223,125		-0-		-0-	$	141,417	(11)		-0-	$	63,742	(10)	$	428,284
Officer

	Total Compensation		Non-Cash Compensation		Cash Compensation
	(including non-cash)
Randy S. Selman	$	568,334	$	225,226	$	343,108
Alan Saperstein	$	546,351	$	225,226	$	321,125
Clifford Friedland	$	436,761	$	141,417	$	295,344
David Glassman	$	429,549	$	141,417	$	288,132
Robert Tomlinson	$	476,415	$	169,579	$	306,836

	NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS (#)						EQUITY INCENTIVE PLAN AWARDS: NUMBER OF SECURITIES UNDERLYING UNEXERCISED UNEARNED	OPTION EXERCISE		OPTION EXPIRATION
NAME	EXERCISABLE			UNEXERCISABLE			OPTIONS (#)	PRICE ($)		DATE
Randy Selman (6)		100,000						$	0.71	9/29/2011
		450,000						$	1.12	7/6/2010
		269,750	(5)					$	1.57	12/27/2009
		180,250	(3)					$	1.57	8/11/2014
		400,000	(3)					$	2.50	8/11/2014
		200,000	(1)		200,000	(1)		$	1.73	9/28/2012– 9/28/2015
		27,500	(2)					$	1.73	12/31/2011–6/30/2013
Alan Saperstein (6)		100,000						$	0.71	9/29/2011
		450,000						$	1.12	7/6/2010
		269,750	(5)					$	1.57	12/27/2009
		180,250	(3)					$	1.57	8/11/2014
		400,000	(3)					$	2.50	8/11/2014
		200,000	(1)		200,000	(1)		$	1.73	9/28/2012– 9/28/2015
		27,500	(2)					$	1.73	12/31/2011–6/30/2013
Cliff Friedland (6)		100,000						$	0.71	9/29/2011
		88,860						$	3.376	7/1/2012
		200,000	(1)		200,000	(1)		$	1.73	9/28/2012– 9/28/2015
		27,500	(2)					$	1.73	12/31/2011–6/30/2013
David Glassman (6)		100,000						$	0.71	9/29/2011
		88,860						$	3.376	7/1/2012
		200,000	(1)		200,000	(1)		$	1.73	9/28/2012– 9/28/2015
		27,500	(2)					$	1.73	12/31/2011–6/30/2013
Robert Tomlinson (6)		100,000						$	0.71	9/29/2011
		100,000						$	1.12	7/6/2010
		150,000	(4)					$	1.21	8/11/2014
		200,000	(1)		200,000	(1)		$	1.73	9/28/2012– 9/28/2015
		27,500	(2)					$	1.73	12/31/2011–6/30/2013

	Shares of Common Stock Beneficially Owned
Name and Address of Beneficial Owner	Number		Percentage

Randy S. Selman (1)		1,637,452		3.5	%
Alan M. Saperstein (2)		1,639,320		3.5	%
Clifford Friedland (3)		1,159,776		2.6	%
David Glassman (4)		1,159,609		2.6	%
Robert E. Tomlinson (5)		577,500		1.3	%
Robert Wussler (6)		256,171		0.6	%
Charles C. Johnston (7)		698,828		1.6	%
Carl L. Silva (8)		50,000		0.1	%
Leon Nowalsky (9)		50,000		0.1	%
All directors and officers as a group (nine persons) (10)		7,228,656		14.5	%
Austin Lewis (11)		5,694,799		12.7	%

Number		Description

2.1		Agreement and Plan of Merger dated as of October 22, 2003 by and between Visual Data Corporation, OSM, Inc., a subsidiary of Visual Data Corporation, and Onstream Media Corporation (11)
2.2		Amendment #1 to Agreement and Plan of Merger dated as of October 15, 2004 by and between Visual Data Corporation, OSM, Inc., a subsidiary of Visual Data Corporation, and Onstream Media Corporation (13)
2.3		Agreement and Plan of Merger dated June 4, 2001 among Entertainment Digital Network, Inc., Visual Data Corporation and Visual Data San Francisco, Inc. (6)
2.4		Agreement and Plan of Reorganization between Visual Data Corporation, Media on Demand, Inc. and Charles Saracino (7)
2.5		Infinite Conferencing Merger Agreement dated March 26, 2007 (22)
2.6.1		Narrowstep Merger Agreement dated May 29, 2008 (25)
2.6.2		First Amendment to Narrowstep Merger Agreement dated May 29, 2008 (27)
2.6.2		Second Amendment to Narrowstep Merger Agreement dated May 29, 2008 (28)
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)
3.1.17		Articles of Amendment dated January 7, 2009 with regard to the designations for Series A-12 Redeemable Convertible Preferred Stock (24)
3.1.18		Articles of Amendment dated December 23, 2009 with regard to the designations for Series A-13 Convertible Preferred Stock
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)
4.7		Form of Subordinated Secured Convertible Note (21)
4.8		Form of $1.50 Warrant for Subordinated Secured Convertible Notes (21)
4.9		Form of 12% Convertible Secured Note (26)
4.10		12% Convertible Secured Note - Rockridge (19)
4.11		Allonge to 12% Convertible Secured Note – Rockridge (30)
4.12		Form of Promissory Note – Thermo Credit
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 (Amended) dated August 11, 2009 between Onstream Media Corporation and Randy S. Selman
10.4		Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Alan Saperstein
10.5		Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Clifford Friedland
10.6		Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and David Glassman
10.7		Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Robert Tomlinson
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 Agreement for Subordinated Secured Convertible Notes (21)
10.17		Form of Security Agreement for Subordinated Secured Convertible Notes (21)
10.18		Amendment and Waiver Agreement, dated as of May 29, 2008, among Narrowstep Inc. and the investors party thereto (25)
10.19		Form of Narrowstep Voting Agreement, dated as of May 29, 2008 (25)
10.20		Form of Onstream Voting Agreement, dated as of May 29, 2008 (25)
10.21		Form of Subscription Agreement, dated as of May 29, 2008, by and between Narrowstep Inc. and the investors party thereto (25)
10.22		Form of Subscription Agreement, dated as of August 13, 2008, by and between Narrowstep Inc. and the investors party thereto (27)
10.23		Form of Subscription Agreement for 12% Convertible Secured Notes (26)
10.24		Form of Security Agreement for 12% Convertible Secured Notes (26)
10.25		Note and Stock Purchase Agreement for 12% Convertible Secured Note - Rockridge (19)
10.26		Security Agreement for 12% Convertible Secured Note - Rockridge (19)
10.27		First Amendment to Note and Stock Purchase Agreement for 12% Convertible Secured Note - Rockridge (30)
10.28		Commercial Business Loan Agreement – Thermo Credit
10.29		Amendment to Agreements – Thermo Credit
10.30		Second Amendment to Commercial Business Loan Agreement – Thermo Credit
10.31		Security Agreement – Thermo Credit
14.1		Code of Business Conduct and Ethics (12)
14.2		Corporate Governance and Nominating Committee Principles (30)
14.3		Audit Committee Charter (23)
21.1		Subsidiaries of the registrant
23.1		Consent of Independent Registered Public Accounting Firm

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1		Section 906 Certification of Chief Executive Officer
32.2		Section 906 Certification of Chief Financial Officer

Onstream Media Corporation (Registrant)

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

Date: December 29, 2009

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

Date: December 29, 2009

Signature	Title	Date

By: /s/ Randy S. Selman	Director, President,	December 29, 2009
Randy S. Selman	Chief Executive Officer

By: /s/ Robert E. Tomlinson	Chief Financial Officer and
Robert E. Tomlinson	Principal Accounting Officer	December 29, 2009

By: /s/ Alan Saperstein	Director and Chief	December 29, 2009
Alan Saperstein	Operating Officer

By: /s/ Clifford Friedland	Director and Senior VP	December 29, 2009
Clifford Friedland	Business Development

By: /s/ Charles C. Johnston	Director	December 29, 2009
Charles C. Johnston

By: /s/ Robert J. Wussler	Director	December 29, 2009
Robert J. Wussler

By: /s/ Carl Silva	Director	December 29, 2009
Carl Silva

By: /s/ Leon Nowalsky	Director	December 29, 2009
Leon Nowalsky

	September 30, 2009		September 30, 2008
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	541,206	$	674,492
Accounts receivable, net of allowance for doubtful accounts of $241,298 and $30,492, respectively		2,189,252		2,545,450
Prepaid expenses		356,963		328,090
Inventories and other current assets		198,960		172,111
Total current assets		3,286,381		3,720,143

PROPERTY AND EQUIPMENT, net		3,083,096		4,056,770
INTANGIBLE ASSETS, net		2,499,150		3,731,586
GOODWILL, net		16,496,948		21,696,948
OTHER NON-CURRENT ASSETS		118,398		639,101

Total assets	$	25,483,973	$	33,844,548


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities	$	3,704,676		$	3,059,376
Amounts due to shareholders and officers		109,419			109,419
Deferred revenue		163,198			128,715
Notes and leases payable – current portion, net of discount		1,615,891			1,774,264
Series A-12 Redeemable Convertible Preferred stock – redeemable portion, net of discount		98,000			-
Total current liabilities		5,691,184			5,071,774

Notes and leases payable, net of current portion and discount		505,061			109,151
Convertible debentures, net of discount		1,109,583			795,931

Total liabilities		7,305,828			5,976,856

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Series A-10 Convertible Preferred stock, par value $.0001 per share, authorized 700,000 shares, -0- and 74,841 issued and outstanding, respectively		-			8
Series A-12 Redeemable Convertible Preferred stock, par value $.0001 per share, authorized 100,000 shares, 70,000 and -0- issued and outstanding, respectively		7			-
Common stock, par value $.0001 per share; authorized 75,000,000 shares, 44,332,699 and 42,625,627 issued and outstanding, respectively		4,433			4,262
Additional paid-in capital		132,295,895			130,078,354
Unamortized discount		(12,000	)		(20,292	)
Accumulated deficit		(114,110,190	)		(102,194,640	)
Total stockholders’ equity		18,178,145			27,867,692

Total liabilities and stockholders’ equity	$	25,483,973		$	33,844,548

	Years Ended September 30,
	2009			2008
REVENUE:
DMSP and hosting	$	1,705,697		$	1,440,584
Webcasting		5,670,364			5,924,507
Audio and web conferencing		7,098,993			7,262,685
Network usage		1,992,935			2,235,078
Other		458,964			724,369
Total revenue		16,926,953			17,587,223

COSTS OF REVENUE:
DMSP and hosting		557,652			606,947
Webcasting		1,676,937			2,134,765
Audio and web conferencing		1,928,103			1,476,575
Network usage		863,621			938,487
Other		467,220			654,251
Total costs of revenue		5,493,533			5,811,025

GROSS MARGIN		11,433,420			11,776,198

OPERATING EXPENSES:
General and administrative:
Compensation		9,803,158			9,257,629
Professional fees		1,268,608			1,970,007
Write off deferred acquisition costs		504,738			-
Impairment loss on goodwill and other intangible assets		5,500,000			-
Other general and administrative		2,436,101			2,735,816
Depreciation and amortization		3,195,291			4,215,669
Total operating expenses		22,707,896			18,179,121

Loss from operations		(11,274,476	)		(6,402,923	)

OTHER EXPENSE, NET:
Interest income		-			1,781
Interest expense		(651,464	)		(244,678	)
Other income, net		95,155			84,362

Total other expense, net		(556,309	)		(158,535	)

Net loss	$	(11,830,785	)	$	(6,561,458	)

Loss per share – basic and diluted:

Net loss per share	$	(0.27	)	$	(0.16	)

Weighted average shares of common stock outstanding – basic and diluted		43,476,478			42,329,391

	Series A- 10 Preferred Stock				Common Stock				Additional Paid-in Capital						Accumulated
	Shares		Amount		Shares		Amount		Gross			Discount			Deficit			Total

Balance, September 30, 2007		69,196	$	7		41,880,707	$	4,188	$	129,090,403		$	(98,491	)	$	(95,497,362	)	$	33,498,745
Issuance of shares, warrants and options for consultant services		-		-		543,670		54		821,151			-			-			821,205
Issuance of shares and options for employee services		-		-		-		-		882,242			-			-			882,242
Common shares issued for interest and fees on convertible debentures		-		-		201,250		20		186,492			-			-			186,512
Obligation for shortfall in proceeds from sales of common shares issued for acquisition of Infinite Conferencing		-		-		-		-		(958,399	)		-			-			(958,399	)
Dividends accrued or paid on Series A-10 preferred		5,645		1		-		-		56,465			78,199			(135,820	)		(1,155	)
Net loss		-		-		-		-		-			-			(6,561,458	)		(6,561,458	)

Balance, September 30, 2008		74,841	$	8		42,625,627	$	4,262	$	130,078,354		$	(20,292	)	$	(102,194,640	)	$	27,867,692

	Series A- 10 Preferred Stock						Series A- 12 Preferred Stock						Common Stock				Additional Paid-in Capital						Accumulated
	Shares			Amount			Shares			Amount			Shares		Amount		Gross			Discount			Deficit			Total

Balance, September 30, 2008		74,841		$	8			-		$	-			42,625,627	$	4,262	$	130,078,354		$	(20,292	)	$	(102,194,640	)	$	27,867,692
Issuance of shares, warrants and options for consultant services		-			-			-			-			832,871		83		319,639			-			-			319,722
Issuance of options for employee services		-			-			-			-			-		-		1,127,819			-			-			1,127,819
Issuance of Series A-12 preferred		-			-			80,000			8			-		-		199,998			-			-			200,006
Redemption of Series A-12 preferred		-			-			(10,000	)		(1	)		-		-		(99,999	)		-			-			(100,000	)
Surrender of Series A-10 preferred for Series A-12 preferred		(60,000	)		(6	)		-			-			-		-		-			-			-			(6	)
Reclassification of redeemable portion of Series A-12 preferred as a liability		-			-			-			-			-		-		(100,000	)		16,000			(14,000	)		(98,000	)
Common shares issued for interest and fees on convertible debentures		-			-			-			-			452,589		45		137,230			-			-			137,275
Issuance of right to obtain common shares for financing fees		-			-			-			-			-		-		531,000			-			-			531,000
Dividends accrued or paid on Series A-10 preferred		2,994			-			-			-			7,957		1		37,894			20,292			(34,765	)		23,422
Conversion of Series A-10 preferred to common shares		(17,835	)		(2	)		-			-			178,361		18		(16	)		-			-			-
Dividends accrued or paid on Series A-12 preferred														235,294		24		63,976			(28,000	)		(36,000	)		-
Net loss		-			-			-			-			-		-		-			-			(11,830,785	)		(11,830,785	)

Balance, September 30, 2009		-		$	-			70,000		$	7			44,332,699	$	4,433	$	132,295,895		$	(12,000	)	$	(114,110,190	)	$	18,178,145

	September 30, 2009							September 30, 2008
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Goodwill:
Infinite Conferencing	$	11,100,887	$	-		$	11,100,887	$	12,000,887	$	-		$	12,000,887
Acquired Onstream		4,121,401		-			4,121,401		8,421,401		-			8,421,401
EDNet		1,271,444		-			1,271,444		1,271,444		-			1,271,444
Auction Video		3,216		-			3,216		3,216		-			3,216
Total goodwill		16,496,948		-			16,496,948		21,696,948		-			21,696,948

Acquisition-related intangible assets:
Infinite Conferencing - customer lists, trademarks, URLs, supplier terms and consulting/non- competes		4,383,604		(2,061,105	)		2,322,499		4,583,604		(1,275,000	)		3,308,604
Auction Video - customer lists, patent pending and consulting/non- competes		1,110,671		(934,020	)		176,651		1,174,827		(751,845	)		422,982
Total intangible assets		5,494,275		(2,995,125	)		2,499,150		5,758,431		(2,026,845	)		3,731,586

Total goodwill and other acquisition-related intangible assets	$	21,991,223	$	(2,995,125	)	$	18,996,098	$	27,455,379	$	(2,026,845	)	$	25,428,534

	Operating		Capital			All
Year Ending September 30:	Leases		Leases			Leases
2010	$	616,093	$	121,825		$	737,918
2011		197,715		9,938			207,653
2012		142,615		9,938			152,553
2013		11,932		9,938			21,870
2014		-		3,313			3,313
Total minimum lease payments	$	968,355	$	154,952		$	1,123,307
Less: amount representing interest				(12,028	)
Present value of net minimum lease payments			$	142,924
Less: current portion				(115,635	)
Long-term portion			$	27,289

	For the years ended September 30,
	2009			2008
Revenue:
Digital Media Services Group	$	7,740,355		$	7,851,243
Audio and Web Conferencing Services Group		9,186,598			9,735,980
Total consolidated revenue	$	16,926,953		$	17,587,223

Segment operating income (loss):
Digital Media Services Group		1,155,918			(82,455	)
Audio and Web Conferencing Services Group		2,535,433			3,675,654
Total segment operating income		3,691,351			3,593,199

Depreciation and amortization		(3,195,291	)		(4,215,669	)
Corporate and unallocated shared expenses		(5,765,798	)		(5,780,453	)
Write off deferred acquisition costs		(504,738	)		-
Impairment loss on goodwill and other intangible assets		(5,500,000	)		-
Other expense, net		(556,309	)		(158,535	)
Net loss	$	(11,830,785	)	$	(6,561,458	)

	September 30,
	2009		2008
Assets:
Digital Media Services Group	$	7,747,921	$	13,215,981
Audio and Web Conferencing Services Group		16,796,925		18,986,117
Corporate and unallocated		939,127		1,642,450
Total assets	$	25,483,973	$	33,844,548

	September 30, 2009				September 30, 2008
	Number of Shares			Weighted Average Exercise Price	Number of Shares			Weighted Average Exercise Price

Balance, beginning of period		8,103,000		$1.31		7,471,332		$1.43
Granted during the period		2,781,250		$1.42		960,000		$1.00
Expired or forfeited during the period		(1,845,500	)	$1.46		( 328,332	)	$3.37
Balance, end of the period		9,038,750		$1.32		8,103,000		$1.31

Exercisable at end of the period		6,852,083		$1.36		4,544,250		$1.11

Grant date	Description	Total number of options outstanding		Vested portion of options outstanding		Exercise price per share	Expiration date

Dec 2004	Senior management		150,000		150,000	$1.21	Aug 2014
July 2005	Directors and senior management		1,400,000		1,400,000	$1.12	July 2010
July 2005	Employees excluding senior management		884,000		884,000	$1.12	July 2010
July 2006	Carl Silva – new director		50,000		50,000	$0.88	July 2010
Sept 2006	Directors and senior management		650,000		650,000	$0.71	Sept 2011
Sept 2006	Employees excluding senior management		606,000		606,000	$0.71	Sept 2011
March 2007	Employees excluding senior management		25,000		25,000	$2.28	March 2011
April 2007	Infinite Merger – see note 2		150,000		150,000	$2.50	April 2012
Sept 2007	Senior management employment contracts – see note 5		2,137,500		1,137,500	$1.73	Sept 2012 – Sept 2016
Dec 2007	Leon Nowalsky – new director		50,000		50,000	$1.00	Dec 2011
Dec 2007	Employees excluding senior management		10,000		3,333	$1.00	Dec 2011
April 2008	Employees excluding senior management		15,000		5,000	$1.00	April 2012
May 2008	Infinite management consultant – see note 5		100,000		100,000	$1.00	May 2013
Aug 2008	Employees excluding senior management		405,000		235,000	$1.00	Aug 2012
Dec 2008	Employees excluding senior management		300,000	None		$1.00	Dec 2012
May 2009	Infinite management consultant – see note 5		400,000	None		$0.50	Jun 2014 – Jun 2018
May 2009	Employees excluding senior management		400,000		100,000	$0.50	May 2013 – Jul 2015
Aug 2009	Directors and senior management		800,000		800,000	$2.50	Aug 2014
Aug 2009	Directors and senior management		500,695		500,695	$1.57	Aug 2014
Aug 2009	Director		5,555		5,555	$3.376	Aug 2014
	Total Plan Options as of September 30, 2009		9,038,750		6,852,083

Description of transaction	Number of warrants		Exercise price per share	Expiration Date

Placement fees – common share offering – March and April 2007		342,222	$2.70	March and April 2012
8% Subordinated Convertible Debentures – March and April 2006		403,650	$1.50	March and April 2011
Additional 8% Convertible Debentures - February and April 2005		391,416	$1.65	February and April 2010
8% Convertible Debentures – December 2004		737,114	$1.65	December 2009
Series A-10 Preferred – December 2004		909,083	$1.50	December 2009

Total warrants as of September 30, 2009		2,783,485

ONSTREAM MEDIA CORPORATION

By:	/s/ Randy Selman
Randy S. Selman
Chief Executive Officer

Borrowers:		Lender:

Onstream Media Corporation		Thermo Credit LLC
1291 SW 29 Avenue		639 Loyola Avenue
Pompano Beach, FL 33069		Suite 2565
______________________________		New Orleans, LA 70113

Principal Amount:	Maturity Date of Note:	Date of Note:
U.S. $1,000,000.00	December 28, 2009	December 28, 2007