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**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**___________________**FORM 10-Q**___________________

**ý                                QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

  

For the quarterly period endedMarch 31, 2008

  

OR

  

** ̈                                TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the transition period from         to

  

Commissionfile number 333-131948  

**DATA CALLTECHNOLOGIES, INC.**(Exact Name Of RegistrantAs Specified In Its Charter)
| Nevada                                   | 30-0062823                           |
|------------------------------------------|--------------------------------------|
| (State of Incorporation)                 | (I.R.S. Employer Identification No.) |
|                                     |                                 |
| 600    Kenrick, Suite B-12, Houston, TX  | 77060                                |
| (Address of Principal Executive Offices) | (ZIP Code)                           |

 Registrant'sTelephone Number, Including Area Code: (832) 230-2376

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x No  ̈Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes  ̈ No x

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.
| Large accelerated    filer  ̈ | Accelerated filer  ̈  | Non-accelerated    filer x |
|----------------------------------|-------------------------------|--------------------------------|

At March 31, 2008,the Registrant had 76,243,100 shares of common stock outstanding.

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**TABLE OF CONTENTS**
| Item                                  |                          | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   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| **PART I - FINANCIAL    INFORMATION** |
|                                  |
| ITEM 1.                               |      |    FINANCIAL    STATEMENTS.
    3  
ITEM 2.
    
   MANAGEMENT'S    DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION.
    3   ITEM 3.   QUANTITATIVE    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK6
ITEM 4.
    
   CONTROLS    AND PROCEDURES.
    6     
**PART II - OTHER    INFORMATION**
  
ITEM 1.
    
   LEGAL    PROCEEDINGS.
    6  ITEM 1A.   RISK FACTORS6
ITEM 2.
    
   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF    PROCEEDS
    6   
ITEM 3.
    
   DEFAULT    UPON SENIOR SECURITIES.
    6   
ITEM 4.
    
   SUBMISSION    OF MATERS TO A VOTE OF SECURITY HOLDERS.
    6   
ITEM 5.
    
   OTHER    INFORMATION.
    6   ITEM 6.   EXHIBITS.6
 
****
**PART I - FINANCIAL INFORMATION**

ITEM1. FINANCIAL STATEMENTS****Back toTable of Contents

The Registrant's unaudited interim financial statementsare attached hereto. UnauditedInterim Financial Statements

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONBack to Table ofContents

Some of the statements contained in this quarterlyreport of Data Call Technologies, Inc., Nevada corporation (hereinafter referred to as"we", "us", "our", "Company" and the"Registrant") discuss future expectations, contain projections of our plan ofoperation or financial condition or state other forward-looking information.Forward-looking statements give our current expectations or forecasts of future events.You can identify these statements by the fact that they do not relate strictly tohistorical or current facts. They use of words such as "anticipate,""estimate," "expect," "project," "intend,""plan," "believe," and other words and terms of similar meaning inconnection with any discussion of future operating or financial performance. From time totime, we also may provide forward-looking statements in other materials we release to thepublic.
**RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements.

Since our filing of our annual report, we have implemented numerous cost managementmeasurements to reduce monthly expenditures. Our current rate of monthly cash expendituresare now averaging approximately $60,000.00 per month, compared to an approximate monthlyaverage of $113,000.00 for Q1 of 2007. This represents a 47% reduction in expenses over Q1of the previous year. Furthermore, this is a 6% reduction from the previous quarter. Wewill continue to maintain these efforts to streamline operations, as we focus onincreasing sales and gross revenues over the next 12 months. We currently have no initialplans to increase the number of employees we employ. However, as new opportunities presentthemselves, we may find it necessary to bring human resources on staff to accommodate thepreparations for those opportunities.

Recent partner, marketing and/or customer agreements have allowed us to expand ourproduct line into the Public Access Broadcast arena (i.e. Leightronix), as well asproviding our product line to an industry leader in the ad-revenue based model of digitalsignage (i.e., AdTek Media). Additionally, we recently engaged Lamar Advertising, toprovide Data Call content to their digital billboard solutions being implementedthroughout the country. Moving forward, we feel these three vertical market opportunitieswill provide strong positive growth over the next 36 months. 

Assuming we have sufficient working capital moving forward, we plan to continue to growour business and market our Direct Lynk System to potential customers over the course ofthe next twelve months by marketing our technology to digital signage manufacturers, trademagazines, trade shows and call centers. We will also continue, on a limited basis, ourpractice of providing potential customers free trials of the Direct Lynk System, for whichwe will receive no revenue, in an attempt to build both product awareness for the DirectLynk System and to potentially drive sales in the future, which in the opinion ofmanagement, has been successful in building brand awareness for the Direct Lynk System andin bringing in new clients for subscriptions.

We are planning and negotiating with current vendors and partners, to expand ouroffering to cell phone subscribers. Hardware, software, and sales processes are currentlybeing modified and/or developed so we may pilot this model in Quarter 3 of 2008. Uponcompletion of a successful pilot, and subsequent deployment of the model, this opportunityshall provide yet another ad-revenue based vertical market which should produce stronggross revenues for the company. Additionally, we are negotiating with a national broadcastnews group to provide localized and repurposed video clips, through a Data CallTechnologies licensing agreement, to the digital signage space. We will begin to pilotthis initiative during this upcoming quarter.

Projected revenue for Q2-2008 is $78,250.00. This represents an 11% over the previousquarter. Projected cash expenses for Q2-2008 is $210,000.00. This is an increase ofapproximately $29,000.00 from Q1-2007, and represents an increase of 16%. The increase inexpenses are mainly attributed to licensing & commissions required to be paid toproviders, subsequent to our substantial increase in customer subscriptions. Projectedrevenue for the next twelve (12) months of operations is $714,000.00, with projectedexpenses of $941,000.00. With additional equity investment into Data Call to coveroperational expenses, the company’s operations are projected to enter a cash flowpositive position in the 4th quarter of 2008.
**THREE-MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE-MONTHS ENDED MARCH 31, 2007

We had $70,627 in revenues during the three-month period ended March 31, 2008, comparedto revenues of $8,040 during the same priod in the prior year, an increase in revenues of$62,587. We generate revenues through subscription fees received in connection with ourDirect Lynk System. 

We had total costs of sales during the three-months ended March 31, 2008 of $13,917compared to costs of sales of $6,745 during the three-month period ended March 31, 2007,which resulted in a gross margin of $56,710 for the three month period ended March 31,2008, compared to a gross margin of $1,295 for the three months ended March 31, 2007, anincrease in gross margin of $55,415 from the period in the prior year, which increase wasdue to increased sales of our subscription based product.

Cost of sales as a percentage of sales was 19.7% for the three-months ended March 31,2008, compared to 83.89% for the three-months ended March 31, 2007. As we gain morecustomers and enter into more service agreements, we anticipate our cost of sales willdecrease further as we expect to take advantage of economies of scale and because the netcost to us of adding additional subscribers and fees is minimal.

We had total expenses of $284,706 during the three-months ended March 31, 2008,compared to total expenses of $600,575 during the three-months ended March 31, 2007, adecrease in expenses of $315,869 or 52.59% from the prior period. The decrease in expenseswas mainly due to an decreased employee compensation, legal fees, travel expenses andproduct dvelopment costs. 

We had a net loss of $227,996 for the three months ended March 31, 2008, compared to anet loss of $599,290 during the three months ended March 31, 2007, a significant decreaseto the prior period. 
**LIQUIDITY AND CAPITAL RESOURCES

We had current assets of $62,838 as of March 31, 2008, which consisted of cash of$20,706 and accounts receivable of $42,132, compared to total current assets of $51,057consisting mainly of cash and receivable as of December 31, 2007, an increase of $11,781in current assets from December 31, 2007, which increase in current assets was mainly dueto increased accounts receivable.

We had total assets of $116,846 as of March 31, 2008, which consisted of current assetsof $62,838; total property and equipment (net of accumulated depreciation) of $48,753,which included high end flat screen televisions, computers and software equipmentresponsible for running our Direct Lynk System which is stored in our Houston and Dallasoffices; and other assets of $5,255, which included our deposit on our Houston and Dallasoffice space.

We had total liabilities of $337,701 as of March 31, 2008, consisting of currentliabilities of $133,301 and non-current liabilities consisting of redeemable common stockof $204,400 as of March 31, 2008. Current liabilities consisted of accounts payable of$51,630 and $81,671 in accrued salaries and related liabilities. Redeemable common stockconsisted of shares of common stock sold to certain investors from 2003-2006, whichinvestors may have ongoing rescission rights, even though those investors previouslyrejected our rescission offer to them to return their shares of our common stock for theiroriginal subscription cost plus statutory interest. While we are obligated to carry the$204,400 in redeemable common stock on our balance sheet as a liability, we believe thatthe likelihood of any of the shareholders who hold those shares exercising their remainingrescission rights, if any, is very small.

We had a negative working capital of $70,463 and an accumulated deficit of $7,987,291as of March 31, 2008.

We used $149,707 of cash in our operating activities during the three months endedMarch 31, 2008, which was mainly due to a net loss of $227,996, an increase in accountsreceivable of $21,488, decrease in accounts payable of $17,443, offset by non-cashcompensation of $27,250, which shares were issued to our consultants and employees inconnection with services rendered, $12,665 in compensation for stock options and warrants,accrued salaries of $29,121 and amortization of deferred compensation of $41,833.

We had no investing activities during the three months ended March 31, 2008 and 2007.

We received $140,000 from financing activities during the three-month period endedMarch 31, 2008, representing proceeds from the sale of our common stock pursuant to aprivate placement offering.

Due to our limited cash position, we believe that we have to raise additinal funds tocontinue our operations for approximately the next three months. We believe we willrequire approximately $500,000 to maintain our operations for the next twelve months. Weplan to raise additional capital through the sale of debt and/or equity, which sales maycause dilution to our then existing shareholders, moving forward if needed to support ourongoing operations and expenses. There can be no assurances that we will be able to raiseadditional capital in the future, and/or that such sales of securities will not be onunfavorable terms.

Although we hope to generate meaningful revenues sufficient to support our operationsin the next eight to twelve months, if we are unsuccessful in generating such revenues, wewill likely need to take steps to raise equity capital or to borrow additional funds, tocontinue our operations and meet our upcoming liabilities, as described above. We have nocommitments from officers, Directors or affiliates to provide funding. Our failure toobtain adequate additional financing may require us to delay, curtail or scale back someor all of our operations.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKBack to Table ofContents

We have not enteredinto, and do not expect to enter into, financial instruments for trading or hedgingpurposes.

ITEM 4.CONTROLS AND PROCEDURES****Back to Table ofContents

*Evaluation of disclosure controls andprocedures.* As of March 31, 2008, the Company's chief executive officer and chieffinancial officer conducted an evaluation regarding the effectiveness of the Company'sdisclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) underthe  Exchange Act. Based upon the evaluation of these controls and procedures, ourchief executive officer and chief financial officer concluded that our disclosure controlsand procedures were effective as of the end of the period covered by this report.

*Changes in internal controls.*During the quarterly period covered by this report, no changes occurred in our internalcontrol over financial reporting that materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II - OTHER INFORMATION**

ITEM 1. LEGALPROCEEDINGS****  Back to Table ofContents

None.

ITEM 1A.RISK FACTORS

In addition to the otherinformation set forth in this report, you should carefully consider the factors discussedin Part I, “Item 1. Description of Business, subheading Risk Factors” inour Annual Report on Form 10-KSB for the year ended December 31, 2007, whichcould materially affect our business, financial condition or future results. The risksdescribed in our Annual Report on Form 10-KSB are not the only risks facing ourcompany. Additional risks and uncertainties not currently known to us or that we currentlydeem to be immaterial also may materially adversely affect our business, financialcondition and/or operating results. 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSBack to Table ofContents

None.

ITEM3. DEFAULTS UPON SENIOR SECURITIES****Back to Table ofContents

None.

ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSBack to Table ofContents

None.

ITEM5. OTHER INFORMATION****Back to Table ofContents

None.

ITEM6. EXHIBITS****Back to Table ofContents

(a) The following documentsare filed as exhibits to this report on Form 10-Q or incorporated by reference herein. Anydocument incorporated by reference is identified by a parenthetical reference to the SECfiling that included such document.

Exhibit    No.Description31.1Certification of CEO pursuant    to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the    Sarbanes-Oxley Act of 2002.31.2Certification of CFO pursuant    to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the    Sarbanes-Oxley Act of 2002.32.1Certification of CEO pursuant    to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of    2002.32.2Certification of CFO pursuant    to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of    2002.
SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and on the dateindicated.

/s/ James AmmonsJames Ammons   *CEO and Chairman**   Dated: May 20, 2008*

/s/ Larry MosleyLarry Mosley   *CFO**   Dated: May 20, 2008*

**Unaudited Interim Financial    Statements**Back to    Table of Contents  **DATA    CALL TECHNOLOGIES, INC.**(A Development Stage Company)**Balance Sheets**March 31, 2008 (Unaudited) and December 31, 2007 (Audited)  
Assets  **March 31, 2008**
**December    31, 2007 (Audited)**Current assets:   Cash$20,706$30,413   Accounts receivable42,13220,644     Total current    assets62,83851,057  Property and equipment118,304118,304   Less accumulated    depreciation and amortization69,55163,200     Net property and    equipment48,75355,104  Other assets5,2555,255          Total assets$116,846$111,416  
Liabilities and Stockholders' Equity  Current liabilities:   Accounts payable 51,63069,073  Accrued salaries and related liabilities81,67152,550     Total current    liabilities133,301121,623Redeemable common stock204,400204,400       Total liabilities337,701326,023  Stockholders' equity:   Preferred stock, $.001 par value. Authorized    10,000,000 shares: None issued- -    Common stock, $.001    par value. Authorized 200,000,000 shares:     76,243,100 shares issued and outstanding at March 31, 2008,     73,068,100 shares issued and outstanding at December 31, 200776,24373,068   Additional paid-in capital7,921,3057,744,565      Deficit    accumulated during the development stage(7,987,291)(7,759,295)  10,25758,338      Deferred    stock compensation(231,112)(272,945)     Total stockholders' equity    (deficit)(220,855)(214,607)       Total liabilities and    stockholders' equity $116,846$111,416  The accompanying notes are an integral part of these    financial statements.**DATA CALL TECHNOLOGIES, INC.**(A Development Stage Company)**Statements of Operations**Three Months Ended March 31, 2008 and 2007 (Unaudited)** ****Cumulative****Three Months****Three Months****totals from****Ended****Ended****inception to****March 31, 2008****March 31, 2007****March 31, 2008**Revenues   Sales$70,627$8,040$275,169   Cost of sales13,9176,745114,614     Gross margin56,7101,295160,555  Operating expenses:   Employee    compensation150,049387,4814,592,656   Contractual    services-28,650916,074   Legal and accounting36,21587,365833,816   Product development    costs2,57819,361409,493   Travel9,28446,622400,862   Office and    equipment rental11,54710,415149,618   Office supplies and    expenses7001,643173,478   Telephone5,6268,018113,002   Advertising52,899-362,822   Other9,4574,442126,474   Depreciation expense6,3516,57869,551     Total operating    expenses284,706600,5758,147,846            Net loss    before income taxes(227,996)(599,280)(7,987,291)  Provision for income taxes- - -        Net loss$(227,996)$(599,280)$(7,987,291)Net loss per common share - basic and diluted: Net loss applicable to common shareholders$(0.00)$(0.01)    Weighted average common shares:    Basic and Diluted74,639,85060,688,100  The accompanying notes are an integral part of these    financial statements.**DATA CALL TECHNOLOGIES INC.**(A Development Stage Company)**Statements of Cash Flows**Three Months Ended March 31, 2008 and 2007 (Unaudited)** ****Cumulative****Three    Months****Three    Months****totals from****Ended****Ended****inception to****March 31, 2008****March 31, 2007****March 31, 2008**Cash flows from operating activities:   Net loss$(227,996)$(599,280)$(7,987,291)      Adjustments to reconcile net loss to net cash used in operating activities:    Depreciation6,3516,57869,551    Common stock issued for services27,250100,0003,434,832    Stock options and warrants issued for    services12,665144,408168,266    Amortization of    deferred compensation41,8334,167224,888   (Increase) decrease in operating    assets:     Accounts receivable(21,488)2,390(42,132)    Other assets- - (5,255)   Increase (decrease)    in operating liabilities:     Accounts payable(17,443)11,80851,630     Accrued salaries and related    liabilities29,1213,75081,671       Net cash used in    operating activities (149,707)(326,179)(4,003,840)  Cash flows from investing activities   Purchase of property and equipment- -(118,304)       Net cash used in    investing activities- -(118,304)  Cash flows from financing activities:   Proceeds from issuance of common shares under    private placement140,000300,0003,888,450   Proceeds from issuance of redeemable common    shares under private placement- - 204,400  Proceeds from short-term borrowing from shareholder- -50,000       Net cash provided by    financing activities140,000300,0004,142,850         Net increase    (decrease) in cash (9,707)(26,179)20,706Cash at beginning of year30,413281,699- Cash at end of year$20,706$255,520$20,706  Supplemental schedule of    cash flow information:   Non-cash    financing transactions:     Issuance of 500,000    common shares for conversion of short-term note payable to shareholder$-$50,000$50,000The accompanying notes are an integral part of these    financial statements.
**DATA CALL TECHNOLOGIES, INC.**(A Development Stage Company)**Notes to Financial Statements**March 31, 2008

 **(1) General**
Data Call Technologies, Inc. (the "Company") was incorporatedunder the laws of the State of Nevada in 2002. The Company's mission is to integratecutting-edge information delivery solutions that are currently deployed by the media, andput them within the control of retail and commercial enterprises. The Company's softwareand services put its clients in control of real-time advertising, news, and other content,including emergency alerts, within one building or 10,000, local or thousands of milesaway. The Company is as development stage company.

The accompanying unaudited financial statements have been prepared inaccordance with U. S. generally accepted accounting principles (“GAAP”) forinterim financial information and with the instructions to Form 10-QSB. Accordingly, theydo not include all of the information and footnotes required by GAAP for completefinancial statements. In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have been included.Operating results for the three months period ended March 31, 2008 are not indicative ofthe results that may be expected for the year ending December 31, 2008.

As contemplated by the Securities and Exchange Commission (SEC) underRules of Regulation S-B, the accompanying financial statements and related footnotes havebeen condensed and do not contain certain information that will be included in theCompany's annual financial statements and footnotes thereto. For further information,refer to the Company's audited consolidated financial statements and related footnotesthereto included in the Company's annual report on Form 10-KSB for the year ended December31, 2007.
**(2) Use of Estimates**
The preparation of financial statements in conformity with U. S. GAAPrequires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expenses during thereporting period. Actual results could vary from those estimates.
**(3) Recent Accounting Pronouncements**
In February 2007, the FASB issued SFAS No. 159, *“TheFair Value Option for Financial Assets and Financial Liabilities – Including anamendment of FASB Statement No. 115,”* which is effective for fiscal yearsbeginning after November 15, 2007. This statement permits entities to choose to measuremany financial instruments and certain other items at fair value. This statement alsoestablishes presentation and disclosure requirements designed to facilitate comparisonsbetween entities that choose different measurement attributes for similar types of assetsand liabilities. Unrealized gains and losses on items for which the fair value option iselected would be reported in earnings.
In December 2007, the FASB issued SFAS No. 141R, *"BusinessCombinations"*. SFAS 141R requires the acquiring entity in a businesscombination to record all assets acquired and liabilities assumed at their respectiveacquisition-date fair values, changes the recognition of assets acquired and liabilitiesassumed arising from contingencies, changes the recognition and measurement of contingentconsideration, and requires the expensing of acquisition-related costs as incurred.SFAS 141R also requires additional disclosure of information surrounding a businesscombination, such that users of the entity's financial statements can fully understand thenature and financial impact of the business combination. SFAS 141R appliesprospectively to business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15, 2008. Anentity may not apply it before that date.

In December 2007, the FASB issued SFAS No. 160. *“NoncontrollingInterests in Consolidated Financial Statements-and Amendment of ARB No. 51.”* SFAS160 establishes accounting and reporting standards pertaining to ownership interests insubsidiaries held by parties other than the parent, the amount of net income attributableto the parent and to the noncontrolling interest, changes in a parent’s ownershipinterest, and the valuation of any retained noncontrolling equity investment when asubsidiary is deconsolidated. This statement also establishes disclosure requirements thatclearly identify and distinguish between the interests of the parent and the interests ofthe noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or afterDecember 15, 2008.

Management has reviewed these new standards and believes that they haveno impact on the financial statements of the Company at this time; however, they may applyin the future.
**(4) Capital Stock, Options and Warrants**
The Company is authorized to issue up to 10,000,000 shares of PreferredStock, $.001 par value per share, of which none are presently outstanding. The PreferredStock may be issued in one or more series, the terms of which may be determined at thetime of issuance by the Board of Directors, without further action by stockholders, andmay include voting rights (including the right to vote as a series on particular matters),preferences as to dividends and liquidation, conversion, redemption rights and sinkingfund provisions.

The Company is authorized to issue up to 200,000,000 shares of CommonStock, of which 76,243,100 shares were issued and outstanding at March 31, 2008, and17,600,000 shares were reserved for issuance pursuant to the exercise of outstanding stockoptions and warrants as of March 31, 2008.

In addition to the amount of common shares issued and outstanding asnoted above, 2,044,000 shares were issued and are in the hands of shareholders at March31, 2008; however, these shares are not included in the Company’s permanent equity atMarch 31, 2008. These shares are considered “Redeemable Common Stock” and areincluded in the financial statements as a long-term liability.

The following table summarizes information about options and warrantsoutstanding at March 31, 2008 and 2007:

**Shares**
**Weighted Average Exercise Price March 31, 2008**
**Shares**
**Weighted Average Exercise Price March 31, 2008**
Outstanding at beginning of period
17,600,000
$
.10
3,500,000
$
.10
Granted
-
.10
9,000,000
.10
Exercised
-
-
-
-
Canceled
-
-
-
-
Outstanding at end of period
17,600,000
$
.10
12,500,000
$
.10
Weighted average fair value of options and warrants granted    during the period
.10
.10
None
$
.10Exercisable at end    of period
17,600,000
$
.10
12,500,000
.10
Stock-based compensation is composed of the following for thethree-months ended March 31, 2008 and 2007:

**2008**
**2007**
Stock-based compensation at fair value
$
77,250
$
100,000
Cancellation of previously issued shares
(50,000)
-
Options and warrants
12,665
144,408
Amortization of deferred stock compensation
41,833
4,167
Total stock-based compensation expense
$
81,748
$
248,575****** |