UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-K

(Mark One)

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

For the fiscal year ended September 30, 2011

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

For the transition period from                     to   ________

Commission file number 000-22849

Onstream Media Corporation

(Exact name of registrant as specified in its charter)

                                                                   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)

                   Registrant's telephone number, including area code   954-917-6655             

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

                             Title of each class                                                                                                    Name of each exchange on which registered

                                         None                                                                                                                                         not applicable                                   

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

                                                                                                      (Title of class)

                   Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act     [   ]  Yes    [X]  No

                   Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act     [   ]  Yes    [X]  No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the averaged bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of the common equity held by non-affiliates computed at the closing price of the registrant’s common stock on March 31, 2011 was approximately $15.6 million.

Note – If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of January 6, 2012, 11,859,665 shares of common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

 Not Applicable.
 

A 1-for-6 reverse stock split of the outstanding shares of our common stock was effective on April 5, 2010. Except as otherwise indicated, all related amounts reported in our consolidated financial statements and in this 10-K including common share quantities, convertible debenture conversion prices and exercise prices of options and warrants, have been retroactively adjusted for the effect of this reverse stock split.

CERTAIN CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Certain statements in this annual report on Form 10-K contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, our ability to implement our strategic initiatives (including our ability to successfully complete, produce, market and/or sell the DMSP and/or our ability to eliminate cash flow deficits by increasing our sales), economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors affecting our operations and the fluctuation of our common stock price, and other factors discussed elsewhere in this report and in other documents filed by us with the Securities and Exchange Commission from time to time. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of September 30, 2011, unless otherwise stated. Readers should carefully review this Form 10-K in its entirety, including but not limited to our financial statements and the notes thereto. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. Actual results could differ materially from the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will, in fact, occur. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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

PART I

ITEM 1.                                BUSINESS

Our Business, Products and Services

We are a leading online service provider of live and on-demand Internet video, corporate audio and web communications and content management applications.  We had approximately 93 full time employees as of September 30, 2011, with operations organized in two main operating groups:

·                     Digital Media Services Group

·                     Audio and Web Conferencing Services Group

Products and services provided by each of the groups are:

 Digital Media Services Group 

Our Digital Media Services Group consists of our Webcasting division, our DMSP (“Digital Media Services Platform”) division, our UGC (“User Generated Content”) division and our Smart Encoding division.  This group represented approximately 45.9% and 47.1% of our revenues for the years ended September 30, 2011 and 2010, respectively. These revenues are comprised primarily of fees for hosting/storage, search/retrieval and distribution/streaming of digital assets as well as encoding and production fees.

Our Webcasting division, which operates primarily from Pompano Beach, Florida, provides an array of corporate-oriented, web-based media services to the corporate market including live audio and video webcasting and on-demand audio and video streaming for any business, government or educational entity.  This includes online webcasting services, a cost effective means for corporations to broadcast conference calls live, making them available to the investing public, the media and to anyone worldwide with Internet access. The Webcasting division also has a sales and production support office in New York City as well as additional production and back-up webcasting facilities in our San Francisco office. We market the webcasting services through a direct sales force and through channel partners, also known as resellers.  Each webcast can be heard and/or viewed live, and then archived for replay, 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 DMSP division, which operates primarily from Colorado Springs, Colorado provides an online, subscription based service that includes access to enabling technologies and features for our clients to acquire, store, index, secure, manage, distribute and transform these digital assets into saleable commodities. In December 2004 we completed our acquisition of an entity formerly named Onstream Media Corporation that we now identify as Acquired Onstream. 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 service was the initial version of what became the DMSP, which is comprised of four separate products - encoding, storage, search/retrieval and distribution. Although a limited version of the DMSP was released in November 2005, the first complete version of the DMSP, known as “Store and Stream”, was offered for sale to the general public since October 2006.  In February 2009, we launched “Streaming Publisher”, a second version of the DMSP with additional functionality. Streaming Publisher is a stand-alone product based on a different architecture than Store and Stream and is a primary building block of the recently launched MarketPlace365 platform, which will enable the creation of on-line virtual marketplaces and trade shows utilizing many of our other technologies such as DMSP, webcasting, UGC and conferencing.

Our UGC division, which also operates as Auction Video, provides a video ingestion and flash encoder that can be used by our clients on a stand-alone basis or in conjunction with the DMSP. In March 2007 we completed the acquisition of Auction Video. The primary assets acquired included the video ingestion and flash transcoder as well as related technology and patents pending.

Our Smart Encoding division, which operates primarily from San Francisco, California, provides both automated and manual encoding and editorial services for processing digital media, using a set of coordinated technologies and processes that allow the quick and efficient online search, retrieval and streaming of this media, which can include photos, videos, audio, engineering specs, architectural plans, web pages, and many other pieces of business collateral.  

Audio and Web Conferencing Services Group

Our Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division, which operates primarily from the New York City area and provides “reservationless” and operator-assisted audio and web conferencing services and our EDNet division, which operates primarily from San Francisco, California and provides connectivity within the entertainment and advertising industries through its managed network, which encompasses production and post-production companies, advertisers, producers, directors, and talent. 

This group represented approximately 54.1% and 52.9% of our revenues for the years ended September 30, 2011 and 2010, respectively. These revenues are comprised primarily of network access and usage fees as well as the sale and rental of communication equipment.

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 and may be terminable earlier based on certain contractual provisions.

We have expanded our marketing efforts during the past year to include: targeted e-mail campaigns, trade show participation, advanced search engine optimization, pay-per-click, a public relations byline program and selected trade magazine advertising. We intend to continue these actions during the coming year.

No single customer has represented more than 10% of our consolidated revenues during the years ended September 30, 2011 or 2010.

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 Accordent Technologies (Polycom), BT Conferencing, Intercall, MediaPlatform, Netbriefings, ON24, Premiere Global Services (PGi), PTEK Holdings, Shareholder.com, Sonic Foundry, Talkpoint, Thomson Financial Group, ViaVid, Viewcast, Wall Street Transcripts, WILink and others that offer live webcasts of quarterly earnings conference calls. This list includes entities that are currently active resellers of our services and not in significant competition with us, but could compete with us under certain circumstances. For other webcast production, we compete with other smaller geographically local entities.  Our production services, however, have been in demand by some of our competitors, and from time to time we have provided services to these companies.  The nature of the streaming media sector of the Internet market is highly interdependent while being competitive.

                Competition for audio and web conferencing is primarily segregated between the low-cost, low-service offerings such as FreeConference.Com and other more high-end providers such as BT Conferencing, GoTo Meeting,  Intercall Conferencing, Premiere Global Services (PGi) and WebEx. Our Infinite division services a niche market for audio and web conferencing services primarily for SMB (small to medium size) companies looking for superior customer service at an affordable rate. This division's niche also includes a growing demand for lead generation “webinars” (seminars presented via the Internet), which it addresses by offering a dedicated account manager to coordinate a customized solution for each event.

                Competition for the audio and video networking services provided by our EDNet division is based upon the ability to provide equipment, connectivity and technical support for disparate audio and video communications systems and to provide interoperable compatibility for proprietary and 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 is small and will remain so. Our primary video networking competitors are video and audio appliance dealers that source encoding, decoding and transport hardware.  This division's advantage is the provision of a total solution including system design, isochronous (a data flow type used for streaming audio and video) connection and broadband connection sourcing, and custom software connectivity applications that include a comprehensive digital path for radio and television commercial transport. However, companies that compete in some portion of the audio and video networking services market targeted by us include Ascent Media, Digital Generation (DG) Systems, Pathfire, Savvis, SohoNet, Source Elements and Telestream.

      Government Regulation

            Although existing laws governing issues such as property ownership, export or import restrictions, content, taxation, defamation and privacy may apply to Internet based activities, the majority of such laws was adopted before the widespread use and commercialization of the Internet and, as a result, may not contemplate or address the unique issues of the Internet and related technologies.  Laws and regulations directly applicable to providers of Internet and related technologies cover issues such as broadcast license fees, copyrights, privacy, pricing, sales and other taxes and characteristics and quality of Internet services, but are in many instances unclear or unsettled. Furthermore, it is likely that new laws and regulations will be adopted in the United States and elsewhere that may be applicable to us in the above areas as well as the areas of 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. Any new legislation or regulation or increased 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.

A number of U.S. federal laws, including those referenced below, impact our business. The Digital Millennium Copyright Act (“DMCA”) is intended, in part, to limit the liability of eligible online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights of others. Portions of the Communications Decency Act (“CDA”) are intended to provide statutory protections to online service providers who distribute third-party content. We rely on the protections provided by both the DMCA and the CDA in conducting our business. If these laws or judicial interpretations are changed to narrow their protections, we will be subject to greater risk of liability, our costs of compliance with these regulations or to defend litigation may increase, or our ability to operate certain lines of business may be limited.

Federal, state and international laws and regulations (including “Red Flag” regulations issued by the U.S. Federal Trade Commission in 2007 to curb identity theft) govern the collection, use, retention, sharing and security of data that we receive from and about our customers (and in some cases, their customers). Any failure, or perceived failure, by us to comply with these laws and regulations could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business. Further, failure or perceived failure by us to comply with these laws and regulations could result in a loss of customer confidence in us which could adversely affect our business. In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection issues which could adversely impact our business.

                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.

                Our audio and video networking services are conducted primarily over telephone lines, which are heavily regulated by various Federal and other agencies. Although we believe that the responsibility for compliance with those regulations primarily falls on the local and long distance telephone service providers and not us, the Federal Communications Commission (FCC) issued an order in 2008 that requires conference calling companies to remit Universal Service Fund (USF) contribution payments on customer usage associated with conference calls. This obligation requires Infinite to register as a reporting company with the FCC, as well as to file both quarterly and annual reports regarding the revenues derived from conference calling. In addition, the FCC has recently announced its position that the 2008 order extended to audio bridging services provided using internet protocol (IP) technology.

                To protect our company from certain claims that may relate to the above matters, we maintain general liability (including umbrella coverage), professional liability and employment practices liability insurance. These insurances 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 success depends in part on our ability to protect our intellectual property. To protect our proprietary rights, we rely generally on copyright, trademark and trade secret laws, confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case.

As part of our March 2007 acquisition of Auction Video, a pending United States patent was assigned to us covering certain aspects of uploading live webcam images. A parallel filing was done to protect these patent rights on an international basis, via the filing of a “Patent Cooperation Treaty Request”. We are currently pursuing the final approval of this patent application 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”). With respect to the claims pending in the first of the two applications, the USPO issued non-final rejections in August 2008, February 2009 and May 2009, as well as final rejections in January 2010 and June 2010. Our responses to certain of these rejections included modifications to certain claims made in the original patent application. In response to the latest rejection we filed a Notice of Appeal with the USPO on November 22, 2010 and we filed an appeal brief with the USPO on February 9, 2011. The USPO filed an Examiner's Answer to the Appeal Brief on May 10, 2011, which repeated many of the previous reasons for rejection, and we filed a response to this filing on July 8, 2011. A decision will be made as to our appeal by a three member panel based on these filings, plus oral argument at a hearing which has been requested by us but a time not yet set. The expected timing of this decision is uncertain at this time, but generally would be expected to occur during the timeframe from late 2012 to mid 2013. Regardless of the ultimate outcome of this matter, our management has determined that an adverse decision with respect to this patent application would not have a material adverse effect on our financial position or results of operations.

In December 2011, we learned that the USPO had issued a non-final rejection in June 2011 with regard to the second of the two applications, although we had not received any notice of that action. On December 7, 2011, we filed a request for an extension of time to respond to that non-final rejection, which request the USPO rejected on December 22, 2011 but gave leave for us to provide supplemental information within two months. We provided that supplemental information on January 5, 2012, which is still under consideration by the USPO. Regardless of the ultimate outcome of this matter, our management has determined that an adverse decision with respect to this patent application would not have a material adverse effect on our financial position or results of operations.

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.

                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.

·                     small limited purpose office space in Colorado Springs, Colorado, as well as equipment space at co-location or other equipment housing facilities in South Florida; Atlanta, Georgia; Jersey City, New Jersey; San Francisco, California and Colorado Springs, Colorado.

ITEM 3.                                LEGAL PROCEEDINGS

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

ITEM 4.                                REMOVED AND RESERVED

PART II

ITEM 5.                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

                Our common stock is listed for trading on The NASDAQ Capital Market, under the symbol "ONSM." The following table sets forth the high and low closing sale prices for our common stock as reported on The NASDAQ Capital Market for the period from October 1, 2009 through January 6, 2012. These prices do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions. A 1-for-6 reverse stock split of the outstanding shares of our common stock was effective on April 5, 2010. All prices in the following table have been retroactively adjusted for the effect of this reverse stock split.

On January 6, 2012, the last reported sale price of the common stock on The NASDAQ Capital Market was $0.75 per share.   As of January 6, 2012 there were approximately 531 shareholders of record of the common stock.

NASDAQ Listing Issues

Dividend Policy

We have never declared or paid any cash dividends on our common stock.  We currently expect to retain future earnings, if any, to finance the growth and development of our business. Dividends related to the Series A-13 Convertible Preferred are cumulative and must be fully paid by us prior to the payment of any dividend on our common stock. There are no further dividends payable in connection with the Series A-14 Convertible Preferred.

Recent Sales of Unregistered Securities

During the period from August 6, 2011 through September 30, 2011, we recorded the issuance of 10,000 unregistered shares of common stock for financial consulting and advisory and legal services. The services are being provided over a period of eight months, and will result in a professional fees expense of approximately $8,000 over the service period. None of these shares were issued to our directors or officers.

During the period from August 6, 2011 through September 30, 2011, we recorded the issuance of 41,073 unregistered shares of common stock under the Plan. These shares were issued to one of our Named Executive Officers, in satisfaction of previously accrued compensation expense of approximately $32,000. See Item 11 – Executive Compensation.

During the period from October 1, 2011 through January 6, 2012, we recorded the issuance of 25,113 unregistered shares of common stock under the Plan for consulting, advisory and other services. The services were provided over a period of three to four months and resulted in a professional fees expense of approximately $15,000 over the service period. None of these shares were issued to our directors or officers.

On October 11, 2011, we issued 51,531 unregistered shares of common stock for interest for the period from November 2010 through September 2011 on the remaining outstanding portion of our convertible debentures issued in 2008. The shares were in satisfaction of interest expense of approximately $48,883 recognized over that period. None of these shares were issued to our directors or officers, although 3,432 of these shares were issued to CCJ Trust (“CCJ”), which is a trust for the adult children of Mr. Charles Johnston, one of our directors, who disclaims any beneficial ownership interest in CCJ. 

On November 21, 2011, we issued 3,500 unregistered common shares to CCJ, in payment of $7,000 in Series A-13 dividends for the third quarter of calendar 2011, using a conversion rate of $2.00 per share.

All of the above securities were offered and sold without such offers and sales being registered under the Securities Act of 1933, as amended (together with the rules and regulations of the Securities and Exchange Commission (the "SEC") promulgated thereunder, the "Securities Act"), in reliance on exemptions therefrom as provided by Section 4(2) of the Securities Act of 1933, for securities issued in private transactions. The recipients were accredited investors and the certificates evidencing the shares that were issued contained a legend restricting their transferability absent registration under the Securities Act of 1933 or the availability of an applicable exemption therefrom. The purchasers had access to business and financial information concerning our company. Each purchaser represented that he or she was acquiring the shares for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws.

Securities Authorized for Issuance Under Equity Compensation Plans

                The following table sets forth securities authorized for issuance under equity compensation plans, including our 1996 Stock Option Plan, our 2007 Equity Incentive Plan, individual compensation arrangements and any other compensation plans as of September 30, 2011.

1)       On February 9, 1997, our Board of Directors and a majority of our shareholders adopted the 1996 Stock Option Plan (the "1996 Plan"), which, including the effect of subsequent amendments to the 1996 Plan, authorized up to 750,000 shares available for issuance as options and up to another 333,333 shares available for stock grants. Since the provisions of the 1996 Plan call for its termination 10 years from the date of its adoption, as of February 9, 2007 the 1996 Plan terminated and we may no longer issue additional options or stock grants under the 1996 Plan. However, the termination of the 1996 Plan did not affect the validity of any Plan Options previously granted thereunder.

5)      On January 14, 2011 our Compensation Committee awarded 983,700 four-year options under the provisions of the 2007 Plan. These options were issued to our directors, employees and consultants, vest over two years and are exercisable at $1.23 per share, fair market value on the date of the grant. In January 2011, our Compensation Committee approved (subject to our shareholders’ approval in the annual shareholder meeting on June 13, 2011 of sufficient additional authorized Plan shares, which approval was received) augmenting the above grant by an equal number of options issued to the same recipients, using the same strike price as the above grant, to the extent permitted by applicable law and subject to shareholder and/or any other required regulatory approvals. The Compensation Committee is in the process of finalizing this grant, which grant when finalized would reduce the 2,046,326 shares shown as available above.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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

Overview

We are a leading online service provider of live and on-demand corporate audio and web communications, virtual event technology and social media marketing, provided primarily to corporate (including large as well as small to medium sized businesses), education and government customers.  We had approximately 94 full time employees as of January 6, 2012, with operations organized in two main operating groups:

·                     Digital Media Services Group

·                     Audio and Web Conferencing Services Group

Our Digital Media Services Group consists primarily of our Webcasting division, our DMSP (“Digital Media Services Platform”) division and our MP365 (“MarketPlace365”) division. The DMSP division includes the related UGC (“User Generated Content”) and Smart Encoding divisions.

Our Webcasting division, which operates primarily from Pompano Beach, Florida and has its main sales facility in New York City, provides an array of corporate-oriented, web-based media services to the corporate market including live audio and video webcasting and on-demand audio and video streaming for any business, government or educational entity.  Our DMSP division, which operates primarily from Colorado Springs, Colorado, provides an online, subscription based service that includes access to enabling technologies and features for our clients to acquire, store, index, secure, manage, distribute and transform these digital assets into saleable commodities. Our UGC division, which also operates as Auction Video and operates primarily from Colorado Springs, Colorado, provides a video ingestion and flash encoder that can be used by our clients on a stand-alone basis or in conjunction with the DMSP. Our Smart Encoding division, which operates primarily from San Francisco, California, provides both automated and manual encoding and editorial services for processing digital media. This division also provides hosting, storage and streaming services for digital media, which are provided via the DMSP.

Our Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division and our EDNet division. Our Infinite division operates primarily from the New York City area and provides “reservationless” and operator-assisted audio and web conferencing services. Our EDNet division, which operates primarily from San Francisco, California, provides connectivity (in the form of high quality audio, compressed video and multimedia data communications) within the entertainment and advertising industries through its managed network, which encompasses production and post-production companies, advertisers, producers, directors, and talent.

Recent Developments

A 1-for-6 reverse stock split of the outstanding shares of our common stock was effective on April 5, 2010. Except as otherwise indicated, all related amounts reported in our consolidated financial statements and in this 10-K, including common share quantities, convertible debenture conversion prices and exercise prices of options and warrants, have been retroactively adjusted for the effect of this reverse stock split.

On September 17, 2010, we entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), whereby LPC agreed to purchase our common and preferred shares. On September 24, 2010, we received approximately $824,000 net proceeds (after deducting fees and out-of-pocket costs incurred by us) related to our issuance to LPC under that Purchase Agreement of the equivalent of 770,000 common shares (including those issuable upon conversion of the preferred shares). During the year ended September 30, 2011, we sold an additional 1,530,000 shares of our common stock to LPC under that Purchase Agreement for net proceeds of approximately $1.4 million. LPC has also committed to purchase, at our sole discretion, up to an additional 1.8 million shares of our common stock in installments over the remaining term of the Purchase Agreement, generally at prevailing market prices, but subject to the specific restrictions and conditions in the Purchase Agreement, including but not limited to a minimum market price of $0.75 per share. Our most recent sale of shares to LPC was on August 30, 2011. The closing market price of our common stock has been less than $0.75 per share for a large majority of the trading days since September 30, 2011 and although the closing market price was $0.75 per share on January 6, 2012, the lowest sales price on that date was $0.65 per share. Accordingly, we are not currently able to sell additional common shares to LPC under that Purchase Agreement.

As of September 30, 2010 we were obligated for an aggregate of $1.0 million that we had borrowed in 2008 from seven accredited individuals and other entities (the “Investors”), under a software and equipment financing arrangement. The related notes that we had issued to those Investors (the “Equipment Notes”) had an original maturity date of June 3, 2011. At various times from April 4, 2011 to July 20, 2011, $550,000 of the outstanding balance of those notes was converted to our common shares, using conversion prices from $0.90 to $1.20 per share. As a result of those conversions, as well as cash repayments aggregating $65,000, the remaining outstanding principal balance under the Equipment Notes was $385,000 as of September 30, 2011. Effective October 1, 2011, $350,000 of those Equipment Notes were amended to provide for an October 15, 2012 maturity date and a $0.70 per common share conversion rate (at the Investors’ option). In addition, the payment terms were amended so that 50% of the principal would be paid in eleven equal monthly installments commencing November 15, 2011 and 50% of the principal would be payable on the revised maturity date. These Equipment Notes were assigned by the applicable Investors to three accredited entities in October 2011 and that time it was agreed that the first six monthly payments would be deferred and added to the final balloon payment. The remaining $35,000 of the balance outstanding under the Equipment Notes as of September 30, 2011 was not renegotiated and thus is now due, although it is also now convertible at the holder’s option to our common shares at a conversion price of $4.80 per share.

As of September 30, 2010 we were obligated for $200,000 under the CCJ Note, which was amended in January 2011 to prospectively increase the interest rate to 10% per annum, payable quarterly, and to require two principal payments of $100,000 each on December 31, 2011 and December 31, 2012, respectively. On July 22, 2011, in order to reduce our near-term cash requirements, we agreed to convert $90,000 of the $100,000 December 31, 2011 principal payment to 100,000 common shares, leaving a remaining balance outstanding under the CCJ Note of $110,000, of which $10,000 was repaid in January 2012.

In January 2012, as part of a transaction under which J&C Resources issued a Funding Letter whereby they would lend us $550,000 under certain conditions through December 31, 2012, we agreed to reimburse CCJ in cash the shortfall from their resale of shares received upon their conversion, after effecting a reduction of the conversion price agreed to by us, of 17,500 shares of Series A-13. Based on the estimated shortfall plus (i) the increased value of the underlying common stock related to a second tranche of 17,500 shares of Series A-13 owned by CCJ and (ii) the Black-Scholes value of adjustments to warrants held by Lincoln Park Capital arising from certain anti-dilution provisions, we estimate that the total cost of this Funding Letter will be approximately $118,000, which we will recognize as expense over a one year period. See Liquidity and Capital Resources.

Revenue Recognition

We include the DMSP and UGC divisions’ revenues, along with the Smart Encoding division’s revenues from hosting, storage and streaming, in the DMSP and Hosting revenue caption. We include the EDNet division’s revenues from equipment sales and rentals and the Smart Encoding division’s revenues from encoding and editorial services in the Other Revenue caption.

We add to our customer billings for certain services an amount to recover USF contributions which we have determined that we will be obligated to pay to the FCC, related to those particular services. This additional billing to our customers is not reflected as revenue by us, but rather is recorded as a liability on our books, which liability is relieved upon our remittance of USF contributions as they are billed to us by USAC, an administrative and collection agency of the FCC.

Results of Operations

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

Revenues and Gross Margin

Audio and Web Conferencing Services Group revenues were approximately $9.6 million for the year ended September 30, 2011, an increase of approximately $745,000 (8.4%) from the prior fiscal year. This increase was primarily a result of increased audio conferencing revenues in the Infinite division.

Infinite division revenues increased by approximately $764,000 (11.2%) for the year ended September 30, 2011 as compared to the prior fiscal year. The number of minutes billed by the Infinite division was approximately 105.2 million for the year ended September 30, 2011, as compared to approximately 89.6 million minutes billed for the prior fiscal year. However, the average revenue per minute was approximately 7.3 cents for the year ended September 30, 2011, as compared to approximately 7.7 cents for the prior fiscal year. The average revenue per minute statistic includes auxiliary services and fees that are not billed to the customer on a per minute basis. The average revenue per minute also includes conferencing revenue rebilled to our third party customers by another Onstream division and thus included in that other division’s reported revenues.

For some time the Infinite division sales force has been focusing on entering into agreements with organizations with resources to provide Infinite’s audio and web conferencing services to certain targeted groups. This included agreements with Proforma, a leading provider of graphic communications solutions, a reseller agreement with Copper Conferencing, a leading, carrier-class conferencing services provider for small and medium-sized businesses, a master agency agreement with Presidio Networked Solutions, a systems integrator and a collaboration with PeerPort to launch WebMeet Community, an integrated suite of virtual collaboration services. In March 2010 we announced the expansion of Infinite’s alliance with BT Conferencing by providing a jointly developed conferencing platform to Infinite’s reservationless client base. Although these relationships and initiatives are important as a basis for building future sales, in some cases we expect a lead time of a year or longer before they are reflected in actual recorded sales. We believe that the current levels of Infinite division revenues are a reflection of these and other sales initiatives.

We expect the above trend to continue and accordingly we expect the fiscal 2012 revenues of the Audio and Web Conferencing Services Group, as well as its Infinite division, to exceed the respective fiscal 2011 amounts for the year as a whole, although this cannot be assured.

Digital Media Services Group revenues were approximately $8.1 million for the year ended September 30, 2011, an increase of approximately $262,000 (3.3%) from the prior fiscal year, due to an increase in webcasting division revenues.

Webcasting revenues increased by approximately $348,000 (6.1%) for the year ended September 30, 2011 as compared to the prior fiscal year. This was primarily due to increased revenues from providing webcasting services to the following governmental entities: the State of California, the California State Department of Technology Services (DTS), the California State Board of Equalization (BOE), the United States Nuclear Regulatory Commission (NRC) and the Internal Revenue Service (IRS). We recognized aggregate revenues from these contracts of approximately $727,000 and $509,000 for the years ended September 30, 2011 and 2010, respectively, representing an increase of $218,000, or approximately 42.8%. Our financial statements for these periods include revenues from providing webcasting services to other governmental entities not publicly announced by us and therefore not listed above.

The average revenue per webcast event of approximately $855 for the year ended September 30, 2011 was approximately $69, or 8.8%, higher than the prior fiscal year. However, we produced approximately 7,300 webcasts during the year ended September 30, 2011, an decrease of approximately 170 webcasts as compared to the prior fiscal year. The number of webcasts reported, as well as the resulting calculation of the average revenue per webcast event, does not include any webcast events attributed with $100 or less revenue, based on our determination that excluding such low-priced or even no-charge events increases the usefulness of this statistic. The average revenue per webcast also includes webcasting revenue rebilled to our third party customers by another Onstream division and thus included in that other division’s reported revenues.

We expect the above trend to continue and accordingly we expect the fiscal 2012 revenues of the Digital Media Services Group, as well as its Webcasting division, to exceed the respective fiscal 2011 amounts for the year as a whole, although this cannot be assured.

During fiscal 2009, we began the development of the MarketPlace365^® (MP365) platform, which enables the creation of on-line virtual marketplaces, trade shows and social communities, with a goal of generating business leads for our customers, the MP365 site promoters. As a key element of our sales and marketing program, we have entered into several MP365 agent agreements, including a December 2009 agreement with the Tarsus Group plc (“Tarsus”), for them to market MP365 to Tarsus' more than 19,000 trade shows and 2,000 suppliers that are part of their Trade Show News Network (“TSNN”), a leading online resource for the trade show, exhibition and event industry and a February 2010 agreement with the Trade Show Exhibitors Association (“TSEA”) for them to market MP365 to TSEA’s members, vendors and sponsors. We also signed an April 2010 agent agreement with AMC Institute, a May 2010 agent agreement with Conventions.net, a March 2011 agent agreement with Smart Source, a May 2011 agent agreement with WebiMax and several others.

The first MP365 site was launched in July 2010. There are currently ten active MP365 promoter sites and we have signed MP365 promoter contracts for another 22 marketplaces (which does not include promoter contracts signed but then later cancelled by us for non-performance). Although we expect several of these 22 marketplaces to eventually launch and become active, some of these promoters have done little or no site development activity to date and thus may not ultimately launch an active marketplace. In general, the promoter of an active marketplace is expected to pay us a monthly fee based on the number of exhibitors within their MP365 marketplace, as well as a share of the revenue from advertising in their MP365 marketplace. However, special pricing and payment terms have been granted to MP365 promoters during the current initial stage of introducing the MP365 platform, and may continue to be granted. The attainment of any revenue from a MP365 marketplace or promoter contract is subject to various factors, including the implementation of the MP365 product by the promoter/purchaser, including the sales of booths to exhibitors and related advertising, which amount and timing cannot be assured. We expect to eventually recognize additional revenue beyond exhibitor and advertising fees since MP365 will integrate with and utilize almost all of our other technologies including DMSP, webcasting, UGC and conferencing.

Consistent with our expectations that the fiscal 2012 revenues of both the Audio and Web Conferencing Services Group and the Digital Media Services Group will exceed the respective corresponding fiscal 2011 amounts for the year as a whole, as discussed above, we expect consolidated gross margin (in dollars) for fiscal year 2012 to exceed the corresponding fiscal 2011 amount, although this cannot be assured. Consolidated gross margin for fiscal year 2012 may exceed the corresponding fiscal 2011 amount as a percentage of the corresponding revenues, although this also cannot be assured.

Operating Expenses

The decrease in depreciation and amortization expense for the year ended September 30, 2011 of approximately $434,000 was 22.6% of that expense for the prior fiscal year. This decrease was due to (i) an approximately $330,000 reduction of depreciation expense related to certain equipment and purchased software reaching the end of the useful lives assigned to them for book depreciation purposes, (ii) an approximately $111,000 reduction of amortization expense related to certain intangible assets as a result of the impairment losses we recorded during the year ended September 30, 2010, which were recorded as a reduction of the historical depreciable cost basis of those assets as of those dates, as well as certain intangible assets reaching the end of the lives assigned to them for book amortization purposes and (iii) an approximately $115,000 reduction of depreciation expense related to the DMSP as a result of certain DMSP components reaching the end of the useful lives assigned to them for book depreciation purposes. These decreases were partially offset by an approximately $122,000 increase in depreciation expense for internally developed software, including iEncode and MP365, recently placed into service.

Excluding the impact, if any, arising from fiscal 2012 goodwill impairment charges as compared to those costs in fiscal 2011, as well as increased general and administrative expenses related to any increased revenues, we expect our consolidated operating expenses for fiscal year 2012 to be less than the corresponding fiscal 2011 amount for the year as a whole, although this cannot be assured.

Other Expense

Other expense of approximately $941,000 for the year ended September 30, 2011 represented an approximately $284,000 (23.2%) decrease as compared to the prior fiscal year. This decrease arose from an approximately $198,000 gain from the adjustment of a derivative liability to fair value and an approximately $106,000 decrease in interest expense.

The approximately $106,000 decrease in interest expense for the year ended September 30, 2011, as compared to the prior year, was attributable to approximately $313,000 greater interest expense in the prior year on borrowings aggregating $1.0 million during fiscal 2010 ($250,000 under the Greenberg Note in January 2010, $500,000 under the Wilmington Notes in February 2010 and $250,000 under the Lehmann Note in May 2010). Those borrowings had effective interest rates ranging from 50.7% to 83.9% per annum, with a weighted average rate of 73.9% per annum and a substantial portion was fully repaid on October 1, 2010 with the balance repaid in January 2011. This $313,000 decrease in interest was partially offset by an approximately $167,000 increase in interest expense recognized for the Equipment Notes for the year ended September 30, 2011, as compared to the prior year, which in turn was primarily the result of our issuance of an aggregate of 513,889 common shares for the conversion of $550,000 of the principal outstanding under the Equipment Notes. The aggregate market value of these shares at the times of their respective issuances exceeded the carrying value of the related Equipment Notes by approximately $218,000, which excess was recognized as non-cash interest expense for the year ended September 30, 2011.

Our financial statements for the year ended September 30, 2011 reflect a net loss of approximately $5.2 million and cash provided by operating activities for that period of approximately $35,000. Although we had cash of approximately $291,000 at September 30, 2011, our working capital was a deficit of approximately $1.7 million at that date.

During the year ended September 30, 2011, we obtained financing primarily from the sale of our common stock under the terms of the LPC Purchase Agreement, discussed in more detail below and which resulted in net cash proceeds of approximately $1.4 million during the period. Amounts outstanding under certain convertible debentures (excluding the convertible portion of the Rockridge note) decreased by approximately $1.4 million during the period, as a result of approximately $502,000 in aggregate cash repayments plus issuance of common shares for the balance, as discussed in more detail below. The amount outstanding under the Rockridge Note (including the convertible portion) decreased by approximately $289,000 as a result of monthly installments of principal and interest paid by us during the period. The amount outstanding under the Line, which is subject to the amount and aging of our accounts receivable, decreased by approximately $111,000 as a result of the excess of the principal repayments required during the period over our borrowings.

On September 17, 2010, we entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), whereby LPC agreed to purchase our common and preferred shares. On September 24, 2010, we received approximately $824,000 net proceeds (after deducting fees and out-of-pocket costs incurred by us) related to our issuance to LPC under that Purchase Agreement of the equivalent of 770,000 common shares (including those issuable upon conversion of the preferred shares). During the year ended September 30, 2011, we sold an additional 1,530,000 shares of our common stock to LPC under that Purchase Agreement for net proceeds of approximately $1.4 million. LPC has also committed to purchase, at our sole discretion, up to an additional 1.8 million shares of our common stock in installments over the remaining term of the Purchase Agreement, generally at prevailing market prices, but subject to the specific restrictions and conditions in the Purchase Agreement.

We are obligated under a Note (the “Rockridge Note”) issued to Rockridge Capital Holdings, LLC (“Rockridge”), an entity controlled by one of our largest shareholders, which had an outstanding principal balance of approximately $1.2 million at September 30, 2011. The Rockridge Note is secured 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 is repayable in equal monthly installments of $41,409 extending through August 14, 2013 (the “Maturity Date”), which installments include principal (allowing for a $500,000 balloon payable at the Maturity Date) plus interest (at 12% per annum) on the remaining unpaid balance. Upon notice from Rockridge at any time and from time to time prior to the Maturity Date, all or part of the outstanding principal amount  of the Rockridge Note may be converted into a number of restricted shares of ONSM common stock. These 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 $2.40 per share. 

The effective interest rate of the Rockridge Note is approximately 28.0% per annum. This rate excludes the potential effect of a premium to market prices if any portion of the principal 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.

Although the expiration of the Line was December 28, 2011, we and the Lender have been actively working together to complete the documentation for the renewal of that Line and on January 9, 2012 we received a letter from the Lender confirming that they will be renewing the Line through December 27, 2013 in accordance with terms materially equivalent to, and in some cases more favorable than, than the previous Line. 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, 2011.

The maximum allowable borrowing amount under the Line is now $2.0 million, subject to certain formulas with respect to the amount and aging of the underlying receivables. The outstanding balance (approximately $1.6 million as of January 6, 2012) bears interest at 13.5% per annum, adjustable based on changes in prime after December 28, 2009, plus a weekly monitoring fee of one twentieth of a percent (0.05%) of the borrowing limit. In addition, from March 16, 2011 through May 16, 2011, we paid additional interest related to the Lender’s waiver of a debt covenant, as discussed in more detail below. The outstanding principal under the Line may be repaid at any time, and the term 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.

The Line is also subject to us maintaining an adequate level of receivables, based on certain formulas, as well as our compliance with a quarterly debt service coverage covenant (the “Covenant”), effective with the September 30, 2010 quarter. The Covenant, as defined in the applicable loan documents, requires that our net income or loss, adjusted to remove all non-cash expenses as well as cash interest expense, be equal to or greater than that same cash interest expense. We were in compliance with this Covenant for the September 30, 2010 quarter. The Lender waived the Covenant requirement for the December 31, 2010 quarter, but charged us additional interest of 3% per annum from the March 16, 2011 waiver date through May 16, 2011, when we demonstrated that we were in compliance with the Covenant for the March 31, 2011 quarter. We were also in compliance with this Covenant for the June 30 and September 30, 2011 quarters.

We are obligated under convertible Equipment Notes with a current outstanding principal balance of $385,000. These Equipment Notes are collateralized by specifically designated software and equipment owned by us, 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. Effective October 1, 2011 a portion of these Equipment Notes in the aggregate amount of $350,000 were amended to provide for an October 15, 2012 maturity date and a $0.70 per common share conversion rate (at the holders’ option). In addition, the payment terms were amended so that 50% of the principal would be paid in eleven equal monthly installments commencing November 15, 2011 and 50% of the principal would be payable on the new maturity date. These Equipment Notes were assigned by the previous holders to three accredited entities in October 2011 and that time it was agreed that the first six monthly payments would be deferred and added to the final balloon payment.

The remaining $35,000 outstanding under the Equipment Notes was not amended to provide for a maturity date other than the original date of June 3, 2011 and remains unpaid, pending the conclusion of certain administrative matters with the holder. This note is convertible to our common shares using 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 $4.80 per share.

Interest on the Equipment Notes is 12% per annum, payable 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. The following interest payments were made by the issuance of shares during fiscal 2011 and fiscal 2012 to date:

Certain 2011 amendments to the Equipment Notes resulted in a minimum conversion rate of $1.20 per common share for the July 21, and a portion of the October 11, interest payments.

We are obligated under an unsecured subordinated note payable note (the “CCJ Note”) issued to CCJ Trust (“CCJ”), with an outstanding balance of $100,000. The CCJ Note, with an initial balance of $200,000, originally bore interest at 8% per annum and was payable in equal monthly installments of principal and interest for 48 months plus a $100,000 principal balloon at maturity (the “CCJ Note”) although none of those payments were made by us. To resolve this payment default, the CCJ Note was amended in January 2011 to prospectively increase the interest rate to 10% per annum, payable quarterly, and to require two principal payments of $100,000 each on December 31, 2011 and December 31, 2012, respectively. On July 22, 2011, in order to reduce our near-term cash requirements, we agreed to convert $90,000 of the $100,000 December 31, 2011 principal payment to 100,000 restricted common shares. An additional $10,000 principal was paid in cash in January 2012. The remaining principal balance of this note may be converted at any time into our common shares at the greater of (i) the previous 30 day market value or (ii) $2.00 per share (which was $3.00 per share prior to the January 2011 renegotiation).

The effective interest rate of the CCJ Note prior to the January 2011 amendment was approximately 47.4% per annum, including the Black-Scholes value of warrants given plus the value of an increase granted in the number of common shares underlying the Series A-13 shares versus the Series A-12 shares that were exchanged for them. The effective rate of 47.4% per annum also included 11.2% per annum related to dividends that would have accrued to CCJ as a result of the later mandatory conversion date of the Series A-13 shares versus the mandatory conversion date of the Series A-12 shares. Following the January 2011 amendment, the effective interest rate of the CCJ Note increased to approximately 78.5% per annum, to reflect the value of the increased value of common shares underlying the Series A-13 shares as a result of the modified terms (which resulted in an increase in the number of underlying common shares upon conversion from 116,667 to 175,000) as well as the increase in the periodic cash interest rate from 8% to 10% per annum. The effective rate of 78.5% per annum also includes 9.3% per annum related to dividends that could accrue to CCJ as a result of the later mandatory conversion date of the Series A-13 shares as a result of the modified terms.

In January 2012, as part of a transaction under which J&C Resources issued a Funding Letter whereby they would lend us $550,000 under certain conditions through December 31, 2012, we agreed to reimburse CCJ in cash the shortfall, as compared to minimum guaranteed net proceeds of $139,000, from their resale of 101,744 shares CCJ will receive upon their conversion of 17,500 shares of Series A-13 and after effecting our agreement as part of the same transaction to reduce the conversion rate on all Series A-13 shares from $2.00 per common share to $1.72 per common share. We currently estimate this shortfall to be $84,000, which we will pay in monthly installments over a one year period commencing January 31, 2012.

Projected capital expenditures for the twelve months ending September 30, 2012 total approximately $900,000, which includes software and hardware upgrades to the DMSP, the webcasting system (including iEncode) and the audio and web conferencing infrastructure, as well as costs of software development and hardware costs in connection with the MarketPlace365 platform. Some of these projected capital expenditures may be financed, deferred past the twelve month period or cancelled entirely, depending on our other cash flow considerations.

During March and April 2011, we reduced our compensation and other expenses by approximately $75,000 for the third quarter of fiscal 2011 and by another approximately $25,000 for the fourth quarter of fiscal 2011, with such savings continuing thereafter. During October and November 2011, we took actions which we expect will reduce our compensation, cost of sales and other expenses by approximately $140,000 for the first quarter of fiscal 2012 and by another approximately $35,000 for the second quarter of fiscal 2012, with such savings continuing thereafter. Based on our results for the year ended September 30, 2011, and these expected expense reductions, we estimate that future revenues at existing levels would adequately fund all but approximately $515,000 of our anticipated ongoing cash expenditures through September 30, 2012.

If we achieve future revenue in excess of the levels experienced in fiscal 2011 and the first quarter of fiscal 2012 to date, or if any of the holders of the Equipment Notes, the Rockridge Note or the CCJ Note elect to convert a portion of the existing debt to equity as allowed for under the terms, the cash shortfall could be less than this $515,000. However, if we do not maintain the current revenue level, or if our ongoing cash expenditures are higher than anticipated, the cash shortfall could be greater than this $515,000.

We have implemented and continue to implement specific actions geared towards achieving revenue in excess of the levels experienced in fiscal 2011 and the first quarter of fiscal 2012 to date. The costs associated with these actions were contemplated in the above calculations.  However, in the event we are unable to achieve revenue increases, we believe that a combination of identified decreases in our current level of expenditures that we would implement and the raising of additional capital in the form of debt and/or equity that we believe we could obtain from identified sources would be sufficient to allow us to operate through September 30, 2012. We will closely monitor our revenue and other business activity to determine if and when further cost reductions, the raising of additional capital, or other activity is considered necessary.

A prospectus allowing us to offer and sell up to $6.6 million of our registered common shares (“Shelf Registration”) was declared effective by the SEC on April 30, 2010. On September 17, 2010, we entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), whereby LPC agreed to purchase our common and preferred shares, and 1.6 million common shares (including those issuable upon conversion of the preferred shares we sold to them) were included in a prospectus supplement filed by us with the SEC in connection with a takedown under the Shelf Registration. The Purchase Agreement was amended in April 2011 to increase the number of common shares that LPC agreed to purchase (at our option) and an additional 2.5 million common shares were included in a second prospectus supplement filed by us with the SEC in connection with a takedown under the Shelf Registration. LPC is committed to purchase, at our sole discretion, up to an additional 1.8 million shares of our common stock in installments over the remaining term of the Purchase Agreement, generally at prevailing market prices, but subject to the specific restrictions and conditions in the Purchase Agreement, including but not limited to a minimum market price of $0.75 per share. The closing market price of our common stock has been less than $0.75 per share for a large majority of the trading days since September 30, 2011 and although the closing market price was $0.75 per share on January 6, 2012, the lowest sales price on that date was $0.65 per share. Accordingly, there is no assurance that we will sell additional shares to LPC under the Purchase Agreement or that we will sell additional shares under the Shelf Registration, or if we do make such sales what the timing or proceeds will be. In addition, we may incur fees in connection with such sales. Furthermore, sales under the Shelf Registration that exceed in aggregate twenty percent (20%) of our outstanding shares would be subject to prior shareholder approval, which in the case of LPC has been obtained but would need to be requested with respect to any other purchaser.

On January 10, 2012, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice given on or before December 31, 2012, aggregate cash funding of up to $550,000, which may be requested in multiple tranches. Mr. Charles Johnston, one of our directors, is the president of J&C. This Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but does not represent any obligation to accept such funding on these terms and is not expected by us to be exercised. Cash provided under the Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 1, 2013 and (b) our issuance of 2.3 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of an equivalent amount in dollars of investment from any other source after the date of this Funding Letter, other than funding received in connection with the LPC Purchase Agreement, this Funding Letter will be terminated.

Our continued existence is dependent upon our ability to raise capital and to market and sell our services successfully. However, there are no assurances whatsoever that we will be able to sell additional common shares or other forms of equity under the LPC Purchase Agreement, the Shelf Registration or otherwise and/or that we will be able to borrow further funds under the Line, the Funding Letter or otherwise and/or that we will increase our revenues and/or control our expenses to a level sufficient to provide positive cash flow.

Cash provided by financing activities was approximately $452,000 for the year ended September 30, 2011 as compared to approximately $1.8 million for the prior fiscal year. Current year financing activities primarily related to proceeds from the sale of common stock and proceeds from notes payable, partially offset by repayments of notes and leases payable and convertible debentures.  Prior year financing activities primarily related to net proceeds from notes payable and convertible debentures, net of repayments.

Critical Accounting Policies and Estimates

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

Our prior acquisitions of several businesses, including the Onstream Merger and the Infinite Merger, have resulted in significant increases in goodwill and other intangible assets. Goodwill and other unamortized intangible assets, which include acquired customer lists, were approximately $11.5 million at September 30, 2011, representing approximately 65% of our total assets and approximately 101% of the book value of shareholder equity. In addition, property and equipment as of September 30, 2011 includes approximately $2.2 million (net of depreciation) related to the capitalized development costs of the DMSP, MP365 and iEncode platforms, representing approximately 12% of our total assets and approximately 19% of the book value of shareholder equity.

In accordance with the Intangibles – Goodwill and Other topic of the ASC, goodwill is reviewed annually (or more frequently if impairment indicators arise) for impairment and is tested using a two step process. However, during our fourth fiscal quarter ended September 30, 2011, we elected early adoption of the provisions of a recent ASC update to the above accounting standards that allow us to forego the two step testing process, based on certain qualitative evaluation.

In the event that after qualitative evaluation the two step process is still required, the first step 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, including a comparison and reconciliation of the carrying value of all of our reporting units to our market capitalization, after appropriate adjustments for control premium and other considerations. If our market capitalization, after appropriate adjustments for control premium and other considerations, is determined to be less than our net book value (i.e., stockholders’ equity as reflected in our financial statements), that condition might indicate an impairment 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.

 See Item 14.

Management’s report on disclosure controls and procedures:

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by the annual report, being September 30, 2011, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's President along with our company's Chief Financial Officer. Based upon that evaluation, our company's President along with our company's Chief Financial Officer concluded that our company's disclosure controls and procedures are effective.

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

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Selman should currently serve as a director, in light of our business and structure, are as follows: executive management, sales and software development industry experience with SKTC and executive management and public and investor relations experience with Onstream.

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

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

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Friedland should currently serve as a director, in light of our business and structure, are as follows: Internet and digital media industry experience (Acquired Onstream, TelePlace, Inc., and Action Pay-Per-View), telecommunications industry experience (Long Distance International, Inc., Long Distance America, United States Satellite Systems, Inc. and United Satellite Communications, Inc.) and executive management experience with Onstream.

David Glassman.  Mr. Glassman has served as our Chief Marketing Officer since December 2004. He served as Vice Chairman, President and co-founder of Acquired Onstream from June 2001 until joining our company. Mr. Glassman was Vice President of Marketing and co-founder of TelePlace, Inc., a developer and owner of internet data centers and central offices from December 1999 to May 2001. Mr. Glassman was co-founder, Vice Chairman and Co-CEO of Long Distance International, Inc., one of the first competitive European telephone operators from May 1993 to December 1999. Mr. Glassman was an independent technology consultant from January 1988 to April 1993, with a client list that included Action Pay Per View. Mr. Glassman was President and co-founder of Long Distance America, one of the first competitive long distance operators after the breakup of AT&T from January 1984 to December 1987. Mr. Glassman was a communications consultant from January 1981 to January 1984 providing services to United States Satellite Systems Inc. and United Satellite Communications Inc. Mr. Glassman was co-founder and director of All American Hero, Inc., a fast food franchisor, from January 1981 until December 1986.

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

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Johnston should currently serve as a director, in light of our business and structure, are as follows: management and board experience at public technology-oriented companies (ADAT, ICCA, MCDT, Grumman, Teleglobe) and management experience in other technology-oriented firms (Ventex, Inshore).

Carl Silva.  Mr. Silva, who has been a member of our Board of Directors since July 2006, serves on our Audit, Compensation (as Chairman), Governance and Nominating and Finance Committees. Mr. Silva has over 25 years of experience in the telecommunications and high tech industry, and he has held a variety of positions in business development, sales, marketing, software engineering, and systems engineering during this time. During 2011, Mr. Silva cofounded Smalltell and is currently its Chief Technology Officer.  Smalltell focuses on social commerce solutions, such as mobile payment technologies, user-generated content, wireless broadband devices, and nationwide data plans. Prior to Smalltell, Mr. Silva was Chief Scientist and VP of Technology for Nexaira Wireless, Inc. (NXWI.OB), a 3G/4G Router company, starting there in 2008. Prior to this Mr. Silva was CEO of Conigen Business Systems, Inc. (NASDAQ: CNGW), a managed service provider for small to mid-size businesses for Voice over IP and high speed Internet. In May 2003, Mr. Silva started Anza Borrego Partners (ABP) as a management consulting firm designed to support entrepreneurs in the growth of their businesses.  Mr. Silva was Senior Vice-President for SAIC’s Converged Network Professional services organization from July 1998 to May 2003.  From September 1994 to June 1998, he was with Telcordia Technologies (formerly Bell Communications Research, or Bellcore), where he implemented the first VoIP softswitch in the cable industry.

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Silva should currently serve as a director, in light of our business and structure, are as follows: over 25 years of experience in the telecommunications and high tech industry, most notably at Nexaira, Conigen and SAIC.

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

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Nowalsky should currently serve as a director, in light of our business and structure, are as follows: over 20 years experience in the field of telecommunications law and regulation, most notably at TMC and ATC, as well his currently active private law practice specializing in telecommunications regulatory matters, mergers and acquisitions and corporate law.

Robert D. (“RD”) Whitney.  Mr. Whitney was appointed a member of our Board of Directors in April 2011 and serves on our Audit Committee. Mr. Whitney has been a partner since January 2011 with Greenhaven Partners (“Greenhaven”), a private-equity firm focusing on investments in specialty information and digital media oriented businesses, and in connection with that role is Chief Operating Officer of three Greenhaven owned entities - Management Networks, LLC (including the Institute of Finance and Management), Chief Executive Group, LLC and Exchange Networks, LLC (a MarketPlace365 promoter). From 2008 through 2010, Mr. Whitney was CEO of the online media division of the Tarsus Group, PLC, a London-based B2B conference and event producer (TRS.L) and in this position he was also associated with Onstream in various roles during the development and commercial introduction phases of MarketPlace365. From 1997 through 2005, and again in 2006 through 2008, he served in various roles (including Vice President of Operations and General Manager) with Kennedy Information, a firm specializing in delivering market intelligence through multiple media. During this time, Mr. Whitney was instrumental in the sale of Kennedy Information to its current parent company, BNA, which is the largest independent publisher of information and analysis products for professionals in business and government. He also has held positions at Kluwer Law International (a division of Wolters Kluwer), the Thompson Publishing Group, Yankee Publishing, Vicon Publishing and Connell Communications (a division of IDG). Mr. Whitney holds an MBA from Fitchburg State College and a BS from Bentley University.

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Whitney should currently serve as a director, in light of our business and structure, are as follows: over 20 years management-level experience in marketing and publishing (including Tarsus Group and Kennedy Information) as well as extensive experience in creating strategy for both B2B and B2C marketplaces and in management of major conferences, executive forums, and events (Tarsus Group), all of which we believe will provide valuable insight with respect to the proper focus of our development and sales efforts with respect to MarketPlace365 and our other products.

Rule 5605(b)(1) of the NASDAQ Listing Rules to which we are subject requires that a majority of the members of our board of directors are independent as defined in Rule 5605((a)(2) of the NASDAQ Listing Rules. Our Board of Directors has determined that the following directors satisfy the independence requirements of the NASDAQ Listing Rules: Charles Johnston, Carl Silva, Leon Nowalsky and Robert D. (“RD”) Whitney. 

4)         In addition to the options to purchase 100,000 common shares issued during the fiscal year ended September 30, 2011 and held by various Board members as discussed above, options granted in previous years were still held as of September 30, 2011 by members of our Board of Directors (excluding those who are Named Executive Officers), as follows:

Mr. Johnston holds immediately exercisable five-year Plan options to purchase 16,667 shares of our common stock with an exercise price of $9.42 per share (above fair market value on the date of issuance), issued to him in August and December 2009.

Mr. Nowalsky holds immediately exercisable four-year Plan options to purchase 8,333 shares of our common stock with an exercise price of $6.00 per share (above fair market value on the date of issuance), granted to him in December 2007 to upon his initial appointment to our Board of Directors.

5)         In addition to the allocation of a percentage of the Company Sale Price to the Executives, as discussed in Item 11 - Executive Compensation below, on August 11, 2009 our Compensation Committee determined that an additional two percent (2.0%) of the Company Sale Price would be allocated, on the same terms, to the then four outside members of our Board of Directors (0.5% each), as a supplement to provide appropriate compensation for ongoing services as a director and as a termination fee. On June 5, 2010, one of the four outside Directors passed away and on April 18, 2011, Mr. Whitney was appointed to fill that outside director seat. The status of this item, both with respect to the deceased outside director and/or the new outside director, has not been further addressed by the Compensation Committee to date.

6)         The above table excludes compensation to Mr. Johnston and/or certain entities affiliated with Mr. Johnston related to financing activities – see Item 13 – Certain Relationships and Related Transactions, and Director Independence.

Board of Directors Meetings and Committees

The Board of Directors meets regularly (in-person and/or by telephone conference) during the year to review matters affecting us and to act on matters requiring Board approval and it also holds special meetings whenever circumstances require. In addition, it may act by written consent. During the fiscal year ended September 30, 2011, there were five meetings of the Board, and the Board took action eighteen times by written consent. The Board of Directors has four standing committees as discussed below and may, from time to time, establish additional committees.

Board leadership structure and role in risk oversight

The Board’s leadership structure combines the positions of chairman and CEO, which we have determined to be appropriate, given our specific characteristics and circumstances. In particular, our chairman and CEO is able to utilize the in-depth focus and perspective as a company co-founder and his practical experience gained during several years of running the company since its founding to effectively and efficiently guide the Board. The Board has not designated a lead independent director, since it has determined that our chairman closely interacts with the other members of the Board, particularly the independent directors, in fulfilling his responsibilities as chairman and CEO. Although it is management’s responsibility to assess and manage the various risks we face, it is the Board’s responsibility to oversee management in this effort. The Board administers its risk oversight function by appropriate discussions with the CEO, CFO and other members of management during meetings of the Board and at other times.

Audit Committee

The Audit Committee of the Board of Directors is responsible for the engagement of our independent public accountants, approves services rendered by our accountants, reviews the activities and recommendations of our internal audit department, and reviews and evaluates our accounting systems, financial controls and financial personnel. The Board has previously adopted a charter for the Audit Committee. Pursuant to the requirements of the Securities and Exchange Commission which requires that we provide our shareholders with a copy of the Audit Committee Charter at least once every three years, we have included a copy of the Audit Committee Charter as Appendix C to our proxy statement for our 2010 Annual Meeting filed with the SEC on February 19, 2010.

The Audit Committee is presently composed of Messrs. Johnston (chairman), Silva and Whitney. Each member of the Audit Committee is independent, as independence for audit committee members is defined in the listing standards of the NASDAQ Stock Market and they are “audit committee financial experts” within the meaning of the applicable regulations of the Securities and Exchange Commission promulgated pursuant to the Sarbanes-Oxley Act of 2002. The Audit Committee met (in-person and/or by telephone conference) four times in fiscal 2011.

Compensation Committee

The Compensation Committee establishes and administers our executive and director compensation practices and policies, including the review of the individual elements of total compensation for executive officers and directors and recommendation of adjustments to the Board of Directors.  In addition, the Compensation Committee administers our 1996 Stock Option Plan and our 2007 Equity Incentive Plan and determines the number of performance shares and other equity incentives awarded to executives and directors (as well as all other employees) and the terms and conditions of which they are granted and  recommends plans and plan amendments to the Board.  The Compensation Committee is presently composed of Messrs. Silva (chairman), Johnston and Nowalsky. The Compensation Committee met (in-person and/or by telephone conference) one time in fiscal 2011.

The Compensation Committee has the responsibility to review, recommend, and approve all executive officer compensation arrangements. The Compensation Committee has the specific responsibility and authority to (i) review and approve corporate goals and objectives relevant to the compensation of our Chief Executive Officer (“CEO”), (ii) evaluate the performance of our CEO in light of those goals and objectives, and (iii) determine and approve the compensation level of our CEO based upon that evaluation. The Compensation Committee also has the responsibility to annually review the compensation of our other executive officers and to determine whether such compensation is reasonable under existing facts and circumstances. In making such determinations, the Compensation Committee seeks to ensure that the compensation of our executive officers aligns the executives’ interests with the interests of our shareholders. The Compensation Committee must also review and approve all forms of incentive compensation, including stock option grants, stock grants, and other forms of incentive compensation granted to our executive officers. The Compensation Committee takes into account the recommendations of our CEO in reviewing and approving the overall compensation of the other executive officers.

We believe that the quality, skills, and dedication of our executive officers are critical factors affecting our long-term value and success. Thus, one of our primary executive compensation goals is to attract, motivate, and retain qualified executive officers. We seek to accomplish this goal by rewarding past performance, providing an incentive for future performance, and aligning our executive officers’ long-term interests with those of our shareholders. Our compensation program is specifically designed to reward our executive officers for individual performance, years of experience, contributions to our financial success, and creation of shareholder value. Our compensation philosophy is to provide overall compensation levels that (i) attract and retain talented executives and motivate those executives to achieve superior results, (ii) align executives’ interests with our corporate strategies, our business objectives, and the long-term interests of our shareholders, and (iii) enhance executives’ incentives to increase our stock price and maximize shareholder value. In addition, we strive to ensure that our compensation, particularly salary compensation, is consistent with our constant focus on controlling costs. Our primary strategy for building senior management depth is to develop personnel from within our company to ensure that our executive team as a whole remains dedicated to our customs, practices, and culture, recognizing, however, that we may gain talent and new perspectives from external sources.

Our compensation program for executive officers generally consists of the following five elements: (i) base salary, (ii) performance-based annual bonus (currently equity based) determined primarily by reference to objective financial and operating criteria, (iii) long-term equity incentives in the form of stock options and other stock-based awards or grants, (iv) specified perquisites and (v) benefits that are generally available to all of our employees.

The Compensation Committee has the responsibility to make and approve changes in the total compensation of our executive officers, including the mix of compensation elements. In making decisions regarding an executive’s total compensation, the Compensation Committee considers whether the total compensation is (i) fair and reasonable, (ii) internally appropriate based upon our culture and the compensation of our other employees, and (iii) within a reasonable range of the compensation afforded by other opportunities. The Compensation Committee also bases its decisions regarding compensation upon its assessment of the executive’s leadership, individual performance, years of experience, skill set, level of commitment and responsibility required in the position, contributions to our financial success, the creation of shareholder value, and current and past compensation. In determining the mix of compensation elements, the Compensation Committee considers the effect of each element in relation to total compensation. Consistent with our desired culture of industry leading performance and cost control, the Compensation Committee has attempted to keep base salaries at moderate levels for companies within our market and total capitalization and weight overall compensation toward incentive cash and equity-based compensation. The Compensation Committee specifically considers whether each particular element provides an appropriate incentive and reward for performance that sustains and enhances long-term shareholder value. In determining whether to increase or decrease an element of compensation, we rely upon the Compensation Committee’s judgment concerning the contributions of each executive and, with respect to executives other than the CEO, we consider the recommendations of the CEO. We generally do not rely on rigid formulas (other than performance measures under our annual cash bonus program) or short-term changes in business performance when setting compensation.

Pursuant to the requirements of the Securities and Exchange Commission which requires that we provide our shareholders with a copy of the Compensation Committee Charter at least once every three years, we have included a copy of the Committee Charter as Appendix D to our proxy statement for our 2010 Annual Meeting filed with the SEC on February 19, 2010.

Finance Committee

                The Finance Committee reviews and makes recommendations concerning:

·                     proposed dividend actions, stock splits and repurchases,

·                     current and projected capital requirements,

·                     issuance of debt or equity securities,

·                     strategic plans and transactions, including mergers, acquisitions, divestitures, joint ventures and other equity investments,

·                     customer financing activities, business and related customer finance business and funding plans of Onstream and its subsidiaries,

·                     overall company risk management program and major insurance programs, and

·                     investment policies, administration and performance of the trust investments of our employee benefit plans.

                Mr.  Silva is currently the sole member of the Finance Committee. The Finance Committee met in fiscal 2011 in conjunction with meetings of the full Board of Directors.

Governance and Nominating Committee

While we have not adopted a formal charter for the Governance and Nominating Committee, in June 2003 our Board of Directors adopted Corporate Governance and Nominating Committee Principles.  An updated copy of our Corporate Governance and Nominating Committee Principles was included as Appendix A to the proxy statement for our 2008 and 2009 Annual Meeting of Stockholders filed with the SEC on January 28, 2009. 

                The Governance and Nominating Committee reviews and makes recommendations to the Board of Directors with respect to:

·                     the responsibilities and functions of the Board and Board committees and with respect to Board compensation,

·                     the composition and governance of the Board, including recommending candidates to fill vacancies on, or to be elected or re-elected to, the Board,

·                     candidates for election as Chief Executive Officer and other corporate officers, and

·                     monitoring the performance of the Chief Executive Officer and our plans for senior management succession.

The Governance and Nominating Committee has not yet had the occasion to, but will, consider properly submitted proposed nominations by stockholders who are not one of our directors, officers, or employees. These nominations will be evaluated on the same basis as candidates proposed by any other person. A stockholder may nominate a person for election as a director at an annual meeting of the stockholders only if such stockholder gives written notice to our Corporate Secretary as described in the applicable proxy statement for the previous year’s annual meeting of stockholders. Each written notice must set forth, as to each person whom the stockholder proposes to nominate for election as a director, (i) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or that is otherwise required, in each case pursuant to and in accordance with Regulation 14A under the Securities Exchange Act of 1934, as amended, and (ii) such person’s written consent to being named in the proxy statement as a nominee and to serve as a director if elected. Each written notice must also set forth, as to the stockholder making such nomination, (i) the name and address of such stockholder, as they appear on our books, (ii) the class and number of shares of our stock which are owned by such stockholder, (iii) a representation that the stockholder is a holder of record of our stock entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such nomination, and (iv) a representation whether the stockholder intends or is a part of a group which intends (y) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of our outstanding capital stock required to elect the nominee and/or (z) otherwise to solicit proxies from stockholders in support of such nomination. We will evaluate the suitability of potential candidates nominated by stockholders in the same manner as other candidates identified to the Governance and Nominating Committee, including the specific minimum qualifications described below.

In considering possible candidates for election as an outside director, the Governance and Nominating Committee and other directors should be guided by the foregoing general guidelines and by the following criteria:

·                     Each director should be an individual of the highest character and integrity, have experience at (or demonstrated understanding of) strategy/policy-setting and a reputation for working constructively with others.

                The Governance and Nominating Committee is presently composed of Messrs. Nowalsky (chairman), Johnston and Silva, who are each "independent" as independence for nominating committee members is defined within the NASDAQ Listing Rules. The Governance and Nominating Committee met (in-person and/or by telephone conference) two times in fiscal 2011.

Randy Selman, our CEO and Chairman of the Board, Alan Saperstein, our COO and one of our directors, Robert Tomlinson, our CFO, Clifford Friedland, our Senior Vice President Business Development and one of our directors and David Glassman, our Senior Vice President and Chief Marketing Officer, have not filed a Form 4 on a timely basis related to 90,000 options granted each of them on January 14, 2011 (See Item 11 – Executive Compensation). Messrs. Selman, Saperstein, Tomlinson, Friedland and Glassman have represented to us that they will file these forms as soon as practicable.

Charles Johnston, Carl Silva and Leon Nowalsky, directors, have not filed a Form 4 on a timely basis related to 25,000 options granted each of them on January 14, 2011 (See Item 10 – Director Compensation table). Messrs. Johnston, Silva and Nowalsky have represented to us that they will file these forms as soon as practicable.

Robert D. (“RD”) Whitney, director, has not filed a Form 4 on a timely basis related to 25,000 options granted to him on June 13, 2011 (See Item 10 – Director Compensation table). Mr. Whitney has represented to us that he will file this form as soon as practicable.

ITEM 11.              EXECUTIVE COMPENSATION       

SUMMARY COMPENSATION TABLE

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. The agreements provide that the initial term shall automatically be extended for successive one (1) year terms thereafter unless (a) the parties mutually agree in writing to alter the terms of the agreement; or (b) one or both of the parties exercises their right, pursuant to various provisions of the agreement, to terminate the employment relationship.   

Under the terms of the above employment agreements, we may terminate an Executive’s employment upon his death or disability or with or without cause. To the extent that an Executive is terminated for cause, no severance benefits are due him. If an employment agreement is terminated as a result of the Executive’s death, his estate will receive one year base salary plus any bonus or other compensation amount or benefit then payable or that would have been otherwise considered vested or earned under the agreement during the one-year period subsequent to the time of his death. If an employment agreement is terminated as a result of the Executive’s disability, as defined in the agreement, he is entitled to compensation in accordance with our disability compensation for senior executives to include compensation for at least 180 days, plus any bonus or other compensation amount or benefit then payable or that would have been otherwise considered vested or earned under the agreement during the one-year period subsequent to the time of his disability.

The above employment agreements also provide that in the event we are sold for a Company Sale Price that represents at least $6.00 per share (adjusted for recapitalization including but not limited to splits and reverse splits), the Executives will receive, as a group, cash compensation of twelve percent (12.0%) of the Company Sale Price, payable in immediately available funds at the time of closing such transaction. The Company Sale Price is defined as the number of Equivalent Common Shares outstanding at the time we are sold multiplied by the price per share paid in such Company Sale transaction. The Equivalent Common Shares are defined as the sum of (i) the number of common shares issued and outstanding, (ii) the common stock equivalent shares related to paid for but not converted preferred shares or other convertible securities and (iii) the number of common shares underlying “in-the-money” warrants and options, such sum multiplied by the market price per share and then reduced by the proceeds payable upon exercise of the “in-the-money” warrants and options, all determined as of the date of the above employment agreements but the market price per share used for this purpose to be no less than $6.00. The 12.0% is allocated in the employment agreements as two and one-half percent (2.5%) each to Messrs. Selman, Saperstein, Friedland and Glassman and two percent (2.0%) to Mr. Tomlinson.

On January 14, 2011 our Compensation Committee agreed that it would approve amendments to the executive employment agreements, as well as amending the same terms as applicable to the Board members (see below), allowing for all or part of such compensation to be paid in shares at the recipient’s option, at any time if our stock is trading above $6.00 per share, without requiring that we be sold. The issuance of such shares would be to the extent permitted by applicable law and subject to shareholder and/or any other required regulatory approvals.

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

Outstanding Equity Awards at Fiscal Year-End Table

                The following table contains information regarding beneficial ownership of our common stock as of January 6, 2012 held by:

·                     persons who own beneficially more than 5% of our outstanding common stock,

·                     our directors,

·                     named executive officers, and

·                     all of our directors and officers as a group.

                Unless otherwise indicated, the address of each of the listed beneficial owners identified is c/o Onstream Media Corporation, 1291 SW 29^th Avenue, Pompano Beach, Florida 33069. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all shares of our common stock beneficially owned by them.  A person is deemed to be the beneficial owner of securities that can be acquired by such a person within 60 days from January 6, 2012 upon exercise of options, warrants, convertible securities or other rights to receive our common shares. Each beneficial owner's percentage of ownership is determined by assuming that options, warrants, convertible securities or other rights to receive our common shares that are held by such a person (but not those held by any other person) and are exercisable within 60 days from the date hereof (unless otherwise indicated below) have been exercised. All information is based upon a record list of stockholders received from our transfer agent as of January 6, 2012. At that date, approximately 84% of our outstanding shares were held by CEDE & Co., which is accounted for as a single shareholder of record for multiple beneficial owners. CEDE & Co. is a nominee of the Depository Trust Company (DTC), with respect to securities deposited by participants with DTC, e.g., mutual funds, brokerage firms, banks, and other financial organizations.  Shares held by CEDE & Co. are not reflected in the following table.

(1)           Includes 1,660 shares of our common stock presently outstanding, options to acquire 45,000 common shares at $1.23 per share that will vest on January 14, 2012, vested options to acquire 75,000 common shares at $9.42 per share, vested options to acquire 71,250 common shares at $10.38 per share and vested options to acquire 66,667 common shares at $15.00 per share. Excludes unvested options to acquire 45,000 common shares at $1.23 per share, unvested options to acquire 75,486 common shares at $0.97 per share and options to purchase 90,000 common shares approved for issuance by the Compensation Committee in January 2011 pending a sufficient increase in the  Plan shares, for which shareholder approval was requested and received in June 2011 but the options have not yet been formally granted or issued.

 (2)          Includes 1,973 shares of our common stock presently outstanding, options to acquire 45,000 common shares at $1.23 per share that will vest on January 14, 2012, vested options to acquire 75,000 common shares at $9.42 per share, vested options to acquire 71,250 common shares at $10.38 per share and vested options to acquire 66,667 common shares at $15.00 per share. Excludes unvested options to acquire 45,000 common shares at $1.23 per share, unvested options to acquire 68,624 common shares at $0.97 per share and options to purchase 90,000 common shares approved for issuance by the Compensation Committee in January 2011 pending a sufficient increase in the Plan shares, for which shareholder approval was requested and received in June 2011 but the options have not yet been formally granted or issued.

 (3)          Includes 74,538 shares of our common stock presently outstanding, 24,684 shares of our common stock held by Titan Trust, 24,684 shares of our common stock held by Dorado Trust, options to acquire 45,000 common shares at $1.23 per share that will vest on January 14, 2012, vested options to acquire 71,250 common shares at $10.38 per share and vested options to acquire 14,810 common shares at $20.26 per share. Excludes unvested options to acquire 45,000 common shares at $1.23 per share, unvested options to acquire 60,982 common shares at $0.97 per share and options to purchase 90,000 common shares approved for issuance by the Compensation Committee in January 2011 pending a sufficient increase in the Plan shares, for which shareholder approval was requested and received in June 2011 but the options have not yet been formally granted or issued. Mr. Friedland is the control person and beneficial owner of both Titan Trust and Dorado Trust and exercises sole voting and dispositive powers over these shares.

 (4)          Includes 74,510 shares of our common stock presently outstanding, 24,684 shares of our common stock held by JMI Trust, 24,684 shares of our common stock held by Europa Trust, options to acquire 45,000 common shares at $1.23 per share that will vest on January 14, 2012, vested options to acquire 71,250 common shares at $10.38 per share and vested options to acquire 14,810 common shares at $20.26 per share. Excludes unvested options to acquire 45,000 common shares at $1.23 per share, unvested options to acquire 60,982 common shares at $0.97 per share and options to purchase 90,000 common shares approved for issuance by the Compensation Committee in January 2011 pending a sufficient increase in the Plan shares, for which shareholder approval was requested and received in June 2011 but the options have not yet been formally granted or issued. Mr. Glassman is the control person and beneficial owner of both JMI Trust and Europa Trust and exercises sole voting and dispositive powers over these shares.

 (5)          Includes options to acquire 45,000 common shares at $1.23 per share that will vest on January 14, 2012, vested options to acquire 25,000 common shares at $7.26 per share and vested options to acquire 71,250 common shares at $10.38 per share. Excludes 41,073 restricted common shares that may not be transacted by Mr. Tomlinson for any reason whatsoever prior to Board approval, which has not been granted, unvested options to acquire 45,000 common shares at $1.23 per share and options to purchase 90,000 common shares approved for issuance by the Compensation Committee in January 2011 pending a sufficient increase in the Plan shares, for which shareholder approval was requested and received in June 2011 but the options have not yet been formally granted or issued.

 (6)          Includes 34,686 shares of our common stock presently outstanding, 73,203 shares of our common stock held by J&C Resources, LLC, 103 shares of our common stock held by Asset Factoring, Ltd., options to acquire 12,500 common shares at $1.23 per share that will vest on January 14, 2012 and vested options to acquire 16,667 Onstream common shares at $9.42 per share. Excludes unvested options to acquire 12,500 common shares at $1.23 per share and options to purchase 25,000 common shares approved for issuance by the Compensation Committee in January 2011 pending a sufficient increase in the Plan shares, for which shareholder approval was requested and received in June 2011 but the options have not yet been formally granted or issued. Mr. Johnston is the control person of J&C Resources, LLC and Asset Factoring, Ltd. and exercises sole voting and dispositive powers over these shares.  Mr. Johnston's holdings exclude our securities owned by CCJ Trust. CCJ Trust is a trust for Mr. Johnston's adult children and he disclaims any beneficial ownership interest in CCJ Trust.

 (7)          Includes options to acquire 12,500 common shares at $1.23 per share that will vest on January 14, 2012. Excludes unvested options to acquire 12,500 common shares at $1.23 per share and options to purchase 25,000 common shares approved for issuance by the Compensation Committee in January 2011 pending a sufficient increase in the Plan shares, for which shareholder approval was requested and received in June 2011 but the options have not yet been formally granted or issued. 

 (8)          Includes options to acquire 12,500 common shares at $1.23 per share that will vest on January 14, 2012 and vested options to acquire 8,333 Onstream common shares at $6.00 per share. Excludes unvested options to acquire 12,500 common shares at $1.23 per share and options to purchase 25,000 common shares approved for issuance by the Compensation Committee in January 2011 pending a sufficient increase in the Plan shares, for which shareholder approval was requested and received in June 2011 but the options have not yet been formally granted or issued. 

 (9)          Includes vested options to acquire 25,000 common shares at $1.00 per share.

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

 (11)        Includes 944,758 shares of our common stock presently outstanding. These shares of common stock are as reported on a Form 13G/A filed by Lewis Asset Management on January 5, 2009 and attributing beneficial ownership of 777,508 shares to Lewis Opportunity Fund and beneficial ownership of 167,250 shares to LAM Opportunity Fund, Ltd. These numbers are after adjustment of the reported shares to reflect the 1-for-6 reverse split of our common stock that was effective on April 5, 2010. As of January 6, 2012 Lewis Asset Management has not filed any update to this information and we have not undertaken to request an update from them. Mr. Lewis is the control person and beneficial owner of these entities and exercises sole voting and dispositive powers over these shares.

Mr. Fred Deluca has beneficial ownership of 482,176 shares as of January 6, 2012, issuable upon conversion of a note (the “Rockridge Note”) held by Rockridge Capital Holdings, LLC (“Rockridge”). Mr. Deluca is the control person and beneficial owner of Rockridge and exercises sole voting and dispositive powers over these shares. These 482,176 shares represent approximately 3.9% beneficial ownership, which is less than the 5% threshold for inclusion of Mr. Deluca in the beneficial ownership table above. However, in connection with the transaction giving rise to the Rockridge Note, Rockridge may also receive an origination fee upon not less than sixty-one (61) days written notice to us, payable by our issuance of 366,667 restricted Onstream common shares. Based on the 60 day threshold discussed above, these shares are not considered to be beneficially owned by Rockridge or Mr. Deluca as of January 6, 2012. However, if these 366,667 shares were added to the 482,176 which are considered beneficially owned by Mr. Deluca as of that date, the combined total of 848,843 shares would represent 6.7% beneficial ownership.

Upon notice from Rockridge at any time and from time to time prior to the Maturity Date, the outstanding balance of the Rockridge Note may be converted into a number of restricted shares of Onstream common stock. The conversion will use a conversion price of eighty percent (80%) of the fair market value of the average closing bid price for Onstream common stock for the twenty (20) days of trading on The NASDAQ Capital Market (or such other exchange or market on which Onstream common shares are trading) prior to such Rockridge notice, but such conversion price will not be less than $2.40 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. The minimum conversion price of $2.40 per share would result in the issuance of 482,176 common shares upon the conversion of the remaining outstanding balance of the Rockridge Note as of January 6, 2012, which was $1,157,223.

Securities Authorized for Issuance Under Equity Compensation Plans - See Item 5 - Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities.

ITEM 13.              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 

Certain relationships and related transactions

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, 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 and a commitment fee of $20,000 in December 2010 related to the continuation of the Line for an additional year. Although the expiration of the Line was December 28, 2011, we and the Lender have been actively working together to complete the documentation for the renewal of that Line and on January 9, 2012 we received a letter from the Lender confirming that they will be renewing the Line through December 27, 2013 in accordance with terms materially equivalent to, and in some cases more favorable than, than the previous Line. 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, 2011. Mr. Leon Nowalsky, a member of our Board of Directors, is also a founder and board member of the Lender.

On December 29, 2009, we entered into an agreement with CCJ Trust (“CCJ”) whereby accrued interest on a previous $200,000 cash advance through that date of $5,808 was paid by us in cash and the $200,000 advance was converted to an unsecured subordinated note payable (the “CCJ Note”) at a rate of 8% interest per annum in equal monthly installments of principal and interest for 48 months plus a $100,000 principal balloon at maturity, although none of those payments were subsequently made by us. CCJ is a trust for the adult children of Mr. Charles Johnston, one of our directors, and he disclaims any beneficial ownership interest in CCJ. To resolve the payment default, the CCJ Note was amended in January 2011 to prospectively increase the interest rate to 10% per annum, payable quarterly, and to require two principal payments of $100,000 each on December 31, 2011 and December 31, 2012, respectively. This amendment also called for our cash payment of the previously accrued interest in the amount of $16,263 on or before January 31, 2011. The remaining principal balance of the CCJ Note may be converted at any time into our common shares at the greater of (i) the previous 30 day market value or (ii) $2.00 per share (which was $3.00 per share prior to the January 2011 renegotiation). On July 22, 2011, in order to reduce our near-term cash requirements, we agreed to convert $90,000 of the $100,000 December 31, 2011 principal payment to 100,000 common shares, leaving a remaining balance outstanding under the CCJ Note of $110,000, of which $10,000 was paid in January 2012.

In conjunction with and in consideration of the December 2009 note transaction, the 35,000 shares of Series A-12 (with a stated value of $10.00 per share and convertible into common at $6.00 per share) held by CCJ at that date were exchanged for 35,000 shares of Series A-13 (with a stated value of $10.00 per share and convertible into common at $3.00 per share) plus four-year warrants for the purchase of 29,167 Onstream common shares at $3.00 per share. In conjunction with and in consideration of January 2011 note transaction entered into by us with CCJ, it was agreed that certain terms of the 35,000 shares of Series A-13 held by CCJ at that date would be modified as follows -  the conversion rate to common shares, as well as the minimum conversion rate for payment of dividends in common shares, will be $2.00 per share, the maturity date will be December 31, 2012 and dividends will be paid quarterly, in cash or, at our option, in unregistered shares. In addition it was agreed that $28,000 in A-13 dividends for calendar 2010 would be immediately paid by issuance of 14,000 unregistered common shares, using the minimum conversion rate of $2.00 per share.

On January 4, 2011, we received a funding commitment letter (the “2011 Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice given on or before December 31, 2011, aggregate cash funding of up to $500,000, which could be requested in multiple tranches. Mr. Charles Johnston, one of our directors, is the president of J&C. The 2011 Funding Letter was obtained by us solely to demonstrate our ability to obtain short-term funds in the event other funding sources were not available, but did not represent any obligation on our part to accept such funding on those terms, was not expected by us to be exercised and was not exercised. The cash provided under the 2011 Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 1, 2012 and (b) our issuance of 1 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of an equivalent amount in dollars of investment from any other source after the date of the 2011 Funding Letter, other than funding received in connection with the LPC Facility, this Funding Letter would be terminated.

On January 10, 2012, we received a funding commitment letter (the “Funding Letter”) from J&C, agreeing to provide us, within twenty (20) days after our notice given on or before December 31, 2012, aggregate cash funding of up to $550,000, which may be requested in multiple tranches. This Funding Letter was obtained by us solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but does not represent any obligation on our part to accept such funding on these terms and is not expected by us to be exercised. The cash provided under the Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 1, 2013 and (b) our issuance of 2.3 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of an equivalent amount in dollars of investment from any other source after the date of this Funding Letter, other than funding received in connection with the LPC Facility, this Funding Letter will be terminated.

In January 2012, as part of the transaction under which J&C issued the Funding Letter, we agreed to reimburse CCJ in cash the shortfall, as compared to minimum guaranteed net proceeds of $139,000, from their resale of 101,744 shares. CCJ will receive these shares upon their conversion of 17,500 shares of Series A-13 and after effecting our agreement as part of the same transaction to reduce the conversion rate on all Series A-13 shares from $2.00 per common share to $1.72 per common share. Based on the estimated shortfall plus (i) the increased value, resulting from this decreased conversion rate, of the underlying common stock related to a second tranche of 17,500 shares of Series A-13 owned by CCJ and (ii) the Black-Scholes value of the issuance of additional warrants and a lower conversion price on all warrants held by Lincoln Park Capital arising from anti-dilution provisions in those warrants, we estimate that the total cost of this Funding Letter will be approximately $118,000, which we will recognize as expense over a one year period commencing January 2012.

J&C has agreed to stand by to extend the Funding Letter for a second year (i.e., through December 31, 2013), to the extent needed by us at that time and subject to terms agreeable to J&C based on the market and other relevant conditions at the time. We have agreed that if the Funding Letter is extended for a second year, we will reimburse the shortfall from the sale of common shares received by CCJ upon conversion of the second tranche of 17,500 shares of Series A-13 now held by CCJ, on the same terms agreed to with respect to the first tranche of 17,500 shares. We have also agreed that in the event that Mr. Johnston is unable to serve as audit committee chairman for fiscal 2013 as a result of his disability or death, and to the extent that there is a shortfall between the proceeds from the resale of the common shares versus the assigned value of the second tranche of 17,500 shares of Series A-13, that the lesser of $36,000 or the shortfall will be paid to him or his estate.

During 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. This included $50,000 received on July 8, 2008 from CCJ Trust (“CCJ”). We issued notes to those Investors (the “Equipment Notes”), which had an original maturity date of June 3, 2011 and were 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. The Equipment Notes were originally convertible 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 $4.80 per share. On April 4, 2011 we offered to amend the Equipment Notes, which offer was accepted by certain of those Investors including CCJ, to allow the conversion of 25% of the outstanding principal using a conversion price of $1.20 per share. On April 28, 2011 we offered to amend the Equipment Notes, which offer was accepted by certain of those Investors including CCJ, to allow the conversion of 25% of the outstanding principal using a conversion price of $1.00 per share. Effective October 1, 2011 certain of these Equipment Notes, including $25,000 due to CCJ, were further amended to provide for an October 15, 2012 maturity date and a $0.70 per common share conversion rate (at the Investors’ option). In addition, the payment terms were amended so that 50% of the principal would be paid in eleven equal monthly installments commencing November 15, 2011 and 50% of the principal would be payable on the Maturity Date. In October 2011, CCJ’s note was assigned to a third party unrelated to CCJ, Mr. Johnston or Onstream Media Corporation.

Review, approval or ratification of transactions with related persons

Prior to us entering into any related  person transaction, our Board of Directors reviews the terms of the proposed transaction to ensure that they are fair and reasonable, on market terms and on an arms-length basis. Legal or other counsel is consulted as appropriate.

If a related  party transaction involves compensation or is otherwise related  to an employment relationship with us, the related party transaction will be reviewed by the Compensation Committee. Related party transactions are reported to the Audit Committee for their review and approval of the related disclosure.

With respect to transactions in which a director or executive officer or immediate family member may have a direct or indirect material interest, only disinterested members of the Board of Directors, the Compensation Committee and/or the Audit Committee may vote on whether to approve the transaction.

Director independence

                Rule 5605(b)(1) of the NASDAQ Listing Rules to which we are subject requires that a majority of the members of our board of directors are independent as defined in Rule 5605(a)(2) of the NASDAQ Listing Rules. Our independent directors are Messrs. Johnston, Silva, Nowalsky and Whitney.

ITEM 14.              PRINCIPAL ACCOUNTING FEES AND SERVICES

Change in Independent Accountants

Goldstein Lewin & Co. (“Goldstein Lewin”) served as our independent certifying accountants since July 2002. Effective January 1, 2010, Goldstein Lewin consummated a sale of its attest practice to Mayer Hoffman McCann P.C. (“MHM”).  As a result, the Audit Committee of our Board of Directors engaged MHM to serve as our new independent certifying accountants, commencing with our fiscal year ended September 30, 2010.

Audit Fees

The audit fees billed to us by MHM for professional services rendered during the fiscal year ended September 30, 2011 were $217,000 for the audit of our annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 as well as the review of our quarterly financial statements included in our quarterly reports on Form 10-Q for the quarters ended December 31, 2010, and March 31 and June 30, 2011.

The aggregate audit fees billed to us by Goldstein Lewin and MHM for professional services rendered during the fiscal year ended September 30, 2010 were $221,707, $126,707 by Goldstein Lewin for the audit of our annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 and the balance by MHM for the review of our quarterly financial statements included in our quarterly reports on Form 10-Q for the quarters ended December 31, 2009, and March 31 and June 30, 2010.

Audit Related Fees

The aggregate fees billed to us by MHM for assurance and related services relating to the performance of the audit of our financial statements which are not reported under the caption "Audit Fees" above were $5,750 and $23,202 for the fiscal years ended September 30, 2011 and 2010, respectively. These amounts were primarily for MHM’s services rendered in connection with our Form S-3/Shelf Registration first filed with the SEC on March 5, 2010, declared effective by the SEC on April 30, 2010 and subsequently amended with a supplement to the prospectus filed on September 24, 2010.

Tax Fees

The aggregate tax fees billed to us by Goldstein Lewin were none and $5,500 for the fiscal years ended September 30, 2011 and 2010, respectively. Tax fees include the preparation of federal and state corporate income tax returns as well as tax compliance, tax advice and tax planning.

All Other Fees

                Other than fees relating to the services described above under “Audit Fees,” “Audit-Related Fees” and “Tax Fees,” there were no additional fees billed to us by Goldstein Lewin or MHM for services rendered for the fiscal years ended September 30, 2011 or 2010.

Audit Committee Policies

PART IV

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

Number                                Description

2.1                          Agreement and Plan of Merger dated as of October 22, 2003 by and between Visual Data Corporation, OSM, Inc., a subsidiary of Visual Data Corporation, and Onstream Media Corporation (11)

2.2                          Amendment #1 to Agreement and Plan of Merger dated as of October 15, 2004 by and between Visual Data Corporation, OSM, Inc., a subsidiary of Visual Data Corporation, and Onstream Media Corporation (13)

2.3                          Agreement and Plan of Merger dated June 4, 2001 among Entertainment Digital Network, Inc., Visual Data Corporation and Visual Data San Francisco, Inc. (6)

2.4                          Agreement and Plan of Reorganization between Visual Data Corporation, Media on Demand, Inc. and Charles Saracino (7)

2.5                          Infinite Conferencing Merger Agreement dated March 26, 2007 (22)

3.1.1                       Articles of Incorporation (1)

3.1.2                       Articles of Amendment dated July 26, 1993 (1)

3.1.3                       Articles of Amendment dated January 17, 1994 (1)

3.1.4                       Articles of Amendment dated October 11, 1994 (1)

3.1.5                       Articles of Amendment dated March 25, 1995 (1)

3.1.6                       Articles of Amendment dated October 31, 1995 (1)

3.1.7                       Articles of Amendment dated May 23, 1996 (1)

3.1.8                       Articles of Amendment dated May 5, 1998 (5)

3.1.9                       Articles of Amendment dated August 11, 1998 (2)

3.1.10                     Articles of Amendment dated June 13, 2000 (4)

3.1.11                     Articles of Amendment dated April 11, 2002 (8)

3.1.12                     Articles of Amendment dated June 24, 2003, with regard to Series A-9 Convertible Preferred Stock (9)

3.1.13                     Articles of Amendment dated June 20, 2003, with regard to reverse stock split (10)

3.1.14                     Articles of Amendment dated December 23, 2004, with regard to the designations for Series A-10 Convertible Preferred Stock (15)

3.1.15                     Articles of Amendment dated December 30, 2004, with regard to corporate name change (14)

3.1.16                     Articles of Amendment dated February 7, 2005 with regard to the designations for Series A-10 Convertible Preferred Stock (16)

3.1.17                     Articles of Amendment dated January 7, 2009 with regard to the designations for Series A-12 Redeemable Convertible Preferred Stock (21)

3.1.18                     Articles of Amendment dated December 23, 2009 with regard to the designations for Series A-13 Convertible Preferred Stock (28)

3.1.19                     Articles of Amendment dated April 5, 2010 with regard to reverse stock split (29)

3.1.20                     Articles of Amendment dated June 17, 2010 with regard to the number of authorized shares (30)

3.1.21                     Articles of Amendment dated September 22, 2010 with regard to the designations for Series A-14 Convertible Preferred Stock (31)

3.1.22                     Articles of Amendment dated March 2, 2011 with regard to the designations for Series A-13 Convertible Preferred Stock (25)

3.2                          By-laws (1)

4.1                          Specimen Common Stock Certificate (1)

4.2                          Form of $1.50 Warrant for Subordinated Secured Convertible Notes (21)

4.3                          Form of 12% Convertible Secured Note (23)

4.4                          12% Convertible Secured Note - Rockridge (17)

4.5                          Allonge to 12% Convertible Secured Note – Rockridge (27)

4.6                          Form of Promissory Note – Thermo Credit (28)

10.1                        Form of 1996 Stock Option Plan and Amendment thereto (1)(3)

10.2                        Form of 2007 Equity Incentive Plan

10.3                        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Randy S. Selman (28)

10.4                        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Alan Saperstein (28)

10.5                        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Clifford Friedland (28)

10.6                        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and David Glassman (28)

10.7                        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Robert Tomlinson (28)

10.8                        Form of Subscription Agreement used for sale of $11.0 million common shares - March 2007 (19)

10.9                        Form of Subscription Agreement for 12% Convertible Secured Notes (23)

10.10                      Form of Security Agreement for 12% Convertible Secured Notes (23)

10.11                      Note and Stock Purchase Agreement for 12% Convertible Secured Note - Rockridge (17)

10.12                      Security Agreement for 12% Convertible Secured Note - Rockridge (17)

10.13                      First Amendment to Note and Stock Purchase Agreement for 12% Convertible Secured Note - Rockridge (27)

10.14                      Commercial Business Loan Agreement – Thermo Credit (28)

10.15                      Amendment to Agreements – Thermo Credit (28)

10.16                      Second Amendment to Commercial Business Loan Agreement – Thermo Credit (28)

10.17                      Security Agreement – Thermo Credit (28)

10.18                      Purchase Agreement, dated as of September 17, 2010, by and between the Company and Lincoln Park Capital Fund, LLC (31)

10.19                      Registration Rights Agreement, dated as of September 17, 2010, by and between the Company and Lincoln Park Capital Fund, LLC (31)

10.20                      Form of Warrant to be issued to Lincoln Park Capital Fund, LLC (31)

10.21                      Amendment dated April 28, 2011 to September 17, 2010 Purchase Agreement by and between the Company and Lincoln Park Capital Fund, LLC (32)

14.1                        Code of Business Conduct and Ethics (12)

14.2                                    Corporate Governance and Nominating Committee Principles (27)

14.3                                    Audit Committee Charter (20)

14.4                                    Compensation Committee Charter (20)

21.1                        Subsidiaries of the registrant

23.1                        Consent of Independent Registered Public Accounting Firm - MHM

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

101                                     Interactive data files pursuant to Rule 405 Regulation S-T, as follows:

                                101.INS - XBRL Instance Document

                        101.SCH - XBRL Taxonomy Extension Schema Document

NOTE: The XBRL (Extensible Business Reporting Language) information in Exhibit 101 and its subparts, as listed above, is furnished and not filed, is not part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(5)           Incorporated by reference to the registrant’s Annual Report on Form 10-KSB for the year ended September 30, 2000.

(6)                 Incorporated by reference to the registrant’s current report on Form 8-K filed on June 12, 2001.

(7)           Incorporated by reference to the registrant’s current report on Form 8-K filed on February 5, 2002.

(8)                 Incorporated by reference to exhibit 3.1 to the registrant's registration statement on Form S-3, file number 333-89042, declared effective on June 7, 2002.

(9)                 Incorporated by reference to the registrant's current report on Form 8-K filed July 2, 2003.

(10)             Incorporated by reference to the registrant's Quarterly Report on Form 10-QSB for the period ended June 30, 2003.

(11)             Incorporated by reference to the registrant's current report on Form 8-K filed October 28, 2003.

(12)             Incorporated by reference to the registrant’s Annual Report on Form 10-KSB for the year ended September 30, 2003.

(13)             Incorporated by reference to the registrant’s Annual Report on Form 10-KSB for the year ended September 30, 2004.

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

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

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

(17)             Incorporated by reference to the registrant's current report on Form 8-K filed April 20, 2009.

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

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

(20)             Incorporated by reference to the registrant’s proxy statement for the 2010 Annual Meeting filed with the SEC on February 19, 2010.

(21)             Incorporated by reference to the registrant's current report on Form 8-K filed January 7, 2009.

(22)             Incorporated by reference to the registrant's current report on Form 8-K filed June 2, 2008.

(23)             Incorporated by reference to the registrant's current report on Form 8-K filed June 6, 2008.

(24)             Incorporated by reference to the registrant's current report on Form 8-K filed August 15, 2008.

(25)             Incorporated by reference to the registrant's current report on Form 8-K filed March 4, 2011.

(26)             Incorporated by reference to the registrant's Proxy Statement for the 2008 and 2009 Annual Shareholders Meeting filed on January 28, 2009.

(27)             Incorporated by reference to the registrant's current report on Form 8-K filed September 18, 2009.

(28)             Incorporated by reference to the registrant’s Annual Report on Form 10-K for the year ended September 30, 2009.

(29)             Incorporated by reference to the registrant's current report on Form 8-K filed April 6, 2010.

(30)             Incorporated by reference to the registrant's current report on Form 8-K filed June 18, 2010.

(31)             Incorporated by reference to the registrant's current report on Form 8-K filed September 23, 2010.

(32)         Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2011 and filed on May 16, 2011.

SIGNATURES

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

            Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Onstream Media Corporation

Pompano Beach, Florida

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United State s).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Onstream Media Corporation and subsidiaries as of September 30, 2011 and 2010 and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ Mayer Hoffman McCann P.C.

MAYER HOFFMAN MCCANN P.C.

Certified Public Accountants

Boca Raton, Florida

January 13, 2012

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS