Our Business, Products and Services

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

Our operations are organized in two main operating groups:

·     
Digital Asset Management Group

·     
Webcasting Group

Products and services provided by each of the groups are:

Digital Asset Management Group

Our Digital Asset Management Group, which operates primarily from facilities in San Francisco, California, provides digital asset management and audio and video networking services that represented approximately 55.0% and 54.9% of our revenues for the years ended September 30, 2006 and 2005, respectively. These revenues are comprised primarily of network access and usage fees, the sale and rental of communication equipment, and fees for encoding, storage, search and retrieval and distribution of digital assets.

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

  In addition, the Digital Asset Management Group services include providing connectivity within the entertainment and advertising industries through a private wide-area network managed by it, which encompasses production and post-production companies, advertisers, producers, directors, and talent. The network enables high-speed exchange of high quality audio, compressed video and multimedia data communications, utilizing long distance carriers, regional phone companies, satellite operators, and major Internet service providers. The global network has approximately 500 active access locations in cities throughout the United States, Canada, Mexico, Europe, and the Pacific Rim.

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

The DMSP was 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) and is actually comprised of four separate products - encoding, storage, search and retrieval and distribution. A limited version of the DMSP, with three of the four products accessible, was first placed in service with third-party customers in November 2005. The fourth product was made available to our DMSP customers as of October 2006.

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

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

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

Webcasting Group

The Webcasting Group provides corporate-oriented, web-based media services including live audio and video webcasting and on-demand audio and video streaming and represented approximately 45.0% and 45.1% of our revenues for the years ended September 30, 2006 and 2005, respectively. These revenues are comprised primarily of production and distribution fees.

Our Webcasting Group, which operates primarily from facilities in Pompano Beach, Florida and a sales office in New York City, provides online webcasting services, a cost effective means for corporations to broadcast conference calls live, making them available to the investing public, the media and to anyone worldwide with Internet access. We market the webcasting services through a direct sales force and through channel partners, also known as resellers. Each webcast can be heard and/or viewed live, and then archived for replay for an additional fee with an option for accessing the archived material through a company's own web site. These webcasts primarily communicate corporate earnings and other financial information; product launches and other marketing information; training, emergency or other information directed to employees; and corporate or other special events.

 

Our Webcasting Group also includes our travel production and distribution operations. These operations primarily include the production, storage and Internet streaming of two to four minute multi-media videos for clients such as hotel, resort, golf facility, travel destination and time-shares. In May 2005 we agreed to sell our travel production and distribution operations and the related assets. However, in September 2005 the buyer filed a legal action against us alleging that we did not deliver these assets as agreed and seeking return of the $50,000 deposit plus reimbursement of due diligence expenses alleged to be approximately $354,000 plus attorney fees and interest. On December 4, 2005, we filed a response objecting to all claims by the buyer, which we believe are without merit. As of January 10, 2007 both we and the buyer are continuing to conduct our respective discovery and a trial date has been set for March 2007. The Company believes that the ultimate resolution of this legal action will not have a material impact on its financial condition or results of operations and, pending such resolution, the Company continues these travel production and distribution operations.

 

 

Sales and Marketing

We use a variety of marketing methods, including our internal sales force and channel partners, also known as resellers, to market our products and services. One key element of our marketing strategy has been to enter into distribution agreements with recognized leaders in each of the markets for our products and services. By offering our products and services in conjunction with the distributors’ products, we believe these distribution agreements enable us to take advantage of the particular distributors' existing marketing programs, sales forces and business relationships. Contracts with these distributors generally range from one to two years.

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

For the years ended September 30, 2006 and 2005, we provided webcasting services to one significant customer, Thomson/CCBN, under a contract that can be terminated upon a 30-day notification. Revenues from sales to this customer were approximately $331,000, or approximately 4%, and approximately $1.4 million, or approximately 17%, of total consolidated revenue for the years ended September 30, 2006 and 2005, respectively. These revenues represented approximately 9% and 38% of Webcasting Group revenues for the same periods.

For the years ended September 30, 2006 and 2005 the Company provided digital asset management services to another significant customer, America Online, Inc., under a contract that can be terminated upon a 30-day notification. Revenues from sales to this customer were approximately $911,000, or approximately 11%, and approximately $1.2 million, or approximately 15%, of total consolidated revenue for the years ended September 30, 2006 and 2005, respectively. These revenues represented approximately 20% and 26% of Digital Asset Management Group revenues for the same periods.

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

Competition

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

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

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

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

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

-         end-user software products.

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

During fiscal 2006, our Webcasting Group experienced a revenue increase of approximately 3.0%, or approximately 4.3% before considering a decline in travel production and distribution revenues. Although the competitive pressures that reduced the number of audio-only webcasts in fiscal 2004 continued in fiscal 2005 and 2006, this declining trend was offset during fiscal 2005 and 2006 by sales growth from higher priced video webcasts.

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

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

 

Government Regulation

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

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

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

Intellectual Property

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

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

Employees

At December 31, 2006 we had 64 full time employees, of whom 30 were design, production and technical personnel, 12 were sales and marketing personnel and 22 were general, administrative and executive management personnel. None of the employees are covered by a collective bargaining agreement and our management considers relations with our employees to be good.

General

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

RISK FACTORS

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

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

We have incurred losses since our inception, and have an accumulated deficit of approximately $77.9 million as of September 30, 2006. For the year ended September 30, 2006, we had a net loss of approximately $6.5 million and cash used in operations was approximately $1.5 million. We had approximately $223,000 of cash as of September 30, 2006, although we received significant additional cash after that date from debt and equity transactions, as discussed in Liquidity and Capital Resources.

We have projected capital expenditures for the next twelve months of approximately $900,000, which includes ongoing upgrades to both our Digital Services Media Platform (“DMSP”) as well as our webcasting software and hardware infrastructure. We also anticipate additional operating expenses in the coming year related to the continued expansion of our marketing programs, although we cannot guarantee that this continued expansion will be implemented or that our marketing efforts will be successful. Although we may experience increases in our operating expenses during the next year arising from our program for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, we may be able to defer these expenses based on the status of regulatory changes in this area.

We cannot assure that our revenues will continue to increase, nor can we assure that they will not decrease. The DMSP was first placed in service with third-party customers in November 2005, but related revenues to date have been minimal and we cannot assure what the future sales activity will be. As long as our cash flow from operations remains insufficient to completely fund operations, we will continue depleting our cash and other financial resources. As a result of the uncertainty as to the ability of our operations to generate working capital, we may be required to delay or cancel certain of the projected capital expenditures, some of the planned marketing expenditures, or other planned expenses, which could adversely affect our ability to expand our business and operations during fiscal 2007.

Our operations have historically been financed primarily through the issuance of equity and debt. Our future working capital requirements depend primarily on the rate at which we can decrease our use of cash to fund operations, which is in turn dependent on an increase in our revenues. Cash used for operations will be affected by numerous known and unknown risks and uncertainties including, but not limited to, our ability to successfully sell the DMSP, market our other existing products and services, the degree to which competitive products and services are introduced to the market, and our ability to control overhead expenses as we grow. We are constantly evaluating our cash needs and existing burn rate, in order to make appropriate adjustments in operating expenses. If our current burn rate continues or increases, we will need to eventually raise additional working capital, which we cannot assure will be successfully raised.   If we raise additional capital through the issuance of debt, this will result in increased interest expense. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing shareholders will be reduced and those shareholders may experience significant dilution. No assurances can be given that we will be successful in obtaining additional capital, or that such capital will be available on terms acceptable to us. If we are unable to raise additional working capital if and when needed, we may be required to curtail some of our operations.

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

In December 2004 through April 2005, we sold $6.525 million principal amount of 8% senior secured convertible notes. Following the conversion to common shares by several of these note holders, the current remaining outstanding principal balance is approximately $630,000. In March 2006, we sold $2.3 million principal amount of 8% subordinated secured convertible notes, of which approximately $750,000 is still currently outstanding. The notes are collateralized by a blanket security interest in our assets and a pledge of the stock of our subsidiaries. If we should default under the payment of interest when due, the funding of redemptions as required, or other provisions of the notes, the holders could seek to foreclose on our primary assets. If the holders were successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected.

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

We are dependent upon contracts with our clients, including America Online, Inc. Revenues from sales to America Online, Inc. were approximately $911,000, or 11%, and $1.2 million, or 15%, of our consolidated revenue for the years ended September 30, 2006 and 2005, respectively. These revenues represented approximately 20% and 26% of the Digital Asset Management Group's revenues for the same periods. This contract can be terminated upon a 30-day notification. Because of the significant nature of the revenues from this contract to our consolidated results of operations, its termination could have a material adverse effect on our financial condition and results of operations.

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

Our December 2004 purchase of Acquired Onstream included approximately $2.7 million capitalized by Acquired Onstream prior to that date for licensed software and development work by SAIC, Virage and other third parties related to the partially completed Digital Media Services Platform (“DMSP”). Subsequent to the acquisition, we have spent approximately $1.4 million to complete the platform in a commercially viable form, including computer equipment used in its development and initial operation. Although we believe there is a market for the DMSP and as of November 2005 have placed a limited version of it in service with some third-party customers, there have only been limited sales for the DMSP to date and we do not know when, if ever, that we will generate any significant revenues from this product. In addition there is no assurance that we will be able to sell the DMSP on a profitable basis. Our inability to successfully market and/or sell the DMSP could have a material adverse effect on our financial condition and results of operations.

Unamortized goodwill from the Onstream Merger was approximately $8.4 million at September 30, 2006 and property and equipment as of September 30, 2006 included approximately $3.2 million (net of depreciation) related to the DMSP.

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

Our prior acquisitions of several businesses, including the Onstream Merger, have resulted in significant increases in goodwill and other intangible assets. Unamortized goodwill and other intangible assets, which includes acquired customer lists, were approximately $9.9 million at September 30, 2006, representing approximately 58% of our total assets and 118% of the book value of shareholder equity. In addition, property and equipment as of September 30, 2006 includes approximately $3.2 million (net of depreciation) related to the DMSP.

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

We may continue to experience volatility in our stock price, which has recently been below $1.00 per share (although the closing price was $2.88 on January 10, 2007) .

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

 
-

the announcement or introduction of new services and products by us and our competitors;
        - our ability to upgrade and develop our systems in a timely and effective manner;

 
-

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

 
-

the level of use of the Internet and online services and the rate of market acceptance of the Internet and other online services for transacting business;
        - technical difficulties, system downtime, or Internet brownouts;

 
-

the amount and timing of operating costs and capital expenditures relating to expansion of our business and operations;
        - government regulation; and         - general economic conditions and economic conditions specific to the Internet.
 

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

The Company received a letter from NASDAQ dated August 2, 2006 indicating that the Company had 180 calendar days, or until January 29, 2007, to regain compliance with Marketplace Rule 4310(c)(4), which is necessary in order to be eligible for continued listing on the NASDAQ Capital Market. The letter from NASDAQ indicated that the Company’s non-compliance with that rule was as a result of the bid price of its common stock closing below $1.00 per share for the preceding thirty consecutive business days.   The Company received a letter from NASDAQ dated December 4, 2006, stating that the Company had regained compliance with NASDAQ Marketplace Rule 4310(c)(4) as of that date, by having met the $1.00 per share or greater minimum closing bid price requirement for a minimum of 10 consecutive business days. T he closing ONSM share price was $2.88 per share on January 10, 2007.

 

In the event our common stock is not listed or quoted, or is suspended from trading on an eligible market for a period of 20 or more trading days (which need not be consecutive), the purchasers of the 8% Senior Convertible Debentures and the 8% Subordinated Convertible Debentures may require us to redeem (i) any such notes still outstanding for 115% of the face value (or 115% of the market value of the underlying shares for the previous five days, if greater) plus (ii) any shares obtained from the conversion of those notes and still held, for 115% of the market value for the previous five days. In addition to the above, the 8% Convertible Debentures and the Additional 8% Convertible Debentures provide cash penalties of 1% of the original purchase price per month, for each month that the common stock underlying those securities and the related warrants is not listed on the NASDAQ Capital Market.

 

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

It is possible that the selling security holders listed in our recent registration statements on Form S-3 (declared effective in June 2005 and July 2006) will offer all of the shares for sale. Further, because it is possible that a significant number of shares could be sold at the same time hereunder, the sales, or the possibility thereof, may have a depressive effect on the market price of our common stock.

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

As of September 30, 2006 there were outstanding options and warrants to purchase a total of 15,212,431 shares of our common stock, with an average exercise price of $1.60 per share and approximately 76% exercisable between $0.71 and $1.65 per share. During December 2006 and January 2007 to date, we received approximately $3.1 million from the exercise of previously issued warrants and options, resulting in our issuance of 2,076,479 registered common shares. These warrants and options had exercise prices ranging from $1.00 to $2.00 per share.

In addition, as of September 30, 2006 there were 430,983 shares of our Series A-10 Convertible Preferred Stock outstanding, which are convertible at $1.00 per share into 4,309,830 shares of our common stock, as well as $3,000,000 principal amount 8% senior secured convertible notes and $2,225,000 principal amount 8% subordinated secured convertible notes which are in aggregate convertible at $1.00 per share into 5,225,000 shares of our common stock.

During November and December 2006 and January 2007 to date, we issued an aggregate of 4,812,982 registered common shares as a result of conversions by several investors of 8% Senior and Subordinated Convertible Debentures and Series A-10 Preferred, as follows:

(i)     
2,404,887 ONSM common shares for the conversion of $2,369,855 of 8% Senior Convertible Debentures, plus accrued interest,

(ii)     
1,500,405 ONSM common shares for the conversion of $1,475,000 of 8% Subordinated Convertible Debentures, plus accrued interest,

(iii)     
907,690 ONSM common shares for the conversion of 90,769 shares of Series A-10 Preferred, including accrued dividends.

 

The closing ONSM share price was $2.88 per share on January 10, 2007.

 

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

We are required to record the fair value of warrants issued in conjunction with the Financing Transactions, plus the potential value arising from a beneficial conversion feature included in the terms of the financing, as a discount to the stated financing amount. The unamortized portions of these discounts which were reflected on our balance sheet at September 30, 2006 were approximately $1.4 million for the Series A-10 Convertible Preferred, approximately $1.4 million for the 8% senior secured convertible notes, and approximately $930,000 for the 8% subordinated secured convertible notes. These non-cash amounts will be amortized to dividend and interest expense over the remainder of the original four year financing terms, although any unamortized portion will be immediately expensed at the time of a conversion or redemption occurring before the end of those terms. Accordingly, conversions of approximately $3.8 million of our debentures occurring after September 30, 2006 will result in the write-off to expense of approximately $1.5 million unamortized debt discount during the three months ending December 31, 2006 and another approximately $100,000 during the three months ending March 31, 2007.

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

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company's internal controls over financial reporting in their annual reports, including Form 10-KSB. In addition, the independent registered public accounting firm auditing a company's financial statements must also attest to and report on management's assessment of the effectiveness of the company's internal controls over financial reporting as well as the operating effectiveness of the company's internal controls. We were not subject to these requirements for the fiscal year ended September 30, 2006 and do not expect to be subject to them for the fiscal year ended September 30, 2007. We are evaluating our internal control systems in order to allow our management to report on our internal controls, as a required part of our Annual Report on Form 10-KSB beginning with our report for the fiscal year ended September 30, 2008. Our independent registered public accounting firm will be required to attest to management’s report on our internal controls, as a required part of our Annual Report on Form 10-KSB beginning with our report for the fiscal year ended September 30, 2008.

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

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

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

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

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

In addition, our articles of incorporation authorize the issuance of up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our board of directors, of which 430,983 shares of our Series A-10 Convertible Preferred Stock were issued and outstanding at September 30, 2006. Our board of directors may, without shareholder approval, issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.