**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-KSB/A**


**(Amendment
      No. 2)**


(Mark
      One)




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




For
      the
      fiscal year ended December 31, 2005




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




For
      the
      transition period ____________to____________




*Commission
      file number 000-28985*




**VOIP,
      INC.**


(Name
      of
      small business issuer in its charter)




Texas
              (State
                or other jurisdiction of incorporation or organization)
              151
                South Wymore Rd, Suite 3000
              Altamonte
                Springs, Florida
              (Address
                of principal executive offices)
            75-2785941
              (I.R.S.
                Employer Identification No.)
              
              32714
              (Zip
                Code)


Issuer's
      telephone number, including area code: (407) 389-3232




**Securities
      registered pursuant to Section 12(b) of the Act: None.**




**Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, par value
      $0.001.**




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
      for
      such shorter period that the issuer was required to file such reports), and
      (2)
      has been subject to such filing requirements for the past 90 days. YES x NO o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained herein, and none will 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-KSB or any amendment
      to
      this Form 10-KSB. x




Indicate
      by a check mark whether the registrant is a shell company (as defined by
      Rule12b-2 of the Exchange Act). YES o NOx




The
      issuer's revenues for its most recent fiscal year were $
      15,507,145.




The
      aggregate market value of the voting and non-voting common stock held by
      non-affiliates of the issuer, based on the average bid and asked price of such
      stock, was $90,522,977 at March 22, 2006. At March 22, 2006, the registrant
      had
      outstanding 68,838,766 shares of par value $.001 common stock.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




None.




Transitional
      Small Business Disclosure Format (Check one): Yes o ; No x





**Explanatory
      Note**




VoIP,
      Inc. (the “Company”) is filing this Amendment No. 2 to its Annual Report on
      Form 10-KSB for the fiscal year ended December 31, 2005 (the “2005 10-KSB”),
      which was originally filed on April 17, 2006 and first amended on June 6, 2006.
      This Amendment No. 2 is being filed to include in the 2005 10-KSB the
      re-audited financial statements of WQN, Inc., which was acquired by the
      Company on October 5, 2005.




This
      Amendment does not reflect events occurring after the filing of the 2005 10-KSB,
      and does not update or modify the disclosures therein in any way other than
      as
      required to reflect the amendments described above.




**ITEM
      7. FINANCIAL STATEMENTS**




The
      financial statements of the Company begin at Page F-1 hereof.







REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the
      Board of Directors


VoIP,
      Inc. and Subsidiaries


Ft.
      Lauderdale, Florida




We
      have
      audited the accompanying consolidated balance sheets of VoIP, Inc. and
      Subsidiaries (“the Company”) as of December 31, 2005 and 2004, and the related
      consolidated statements of operations, stockholders’ equity, and cash flows for
      the years then ended. These financial statements are the responsibility of
      the
      Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits 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 also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, 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 financial statements referred to above present fairly, in all
      material respects, the financial position of VoIP, Inc. and Subsidiaries (“the
      Company”) as of December 31, 2005 and 2004, and the results of its operations
      and its cash flows for the years then ended in conformity with accounting
      principles generally accepted in the United States of America.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note K to the financial
      statements, the Company’s dependence on outside financing, lack of sufficient
      working capital, and recurring losses raise substantial doubt about the
      Company’s ability to continue as a going concern. Management’s plans are
      described in Note K to the financial statements. The financial statements do
      not
      include any adjustments that might result from the outcome of this uncertainty.






/s/
      Berkovits, Lago & Company, LLP




Fort
      Lauderdale, Florida


April
      12,
      2006




F-1




**VoIP,
        Inc.**
 **Consolidated
        Balance Sheets**
  **December
                  31**
              ********
              ****
              ****
              **2005******
              
              
              **2004**ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              3,228,745
              
              $
              1,141,137Accounts
                  receivable, net of allowance of$177,489
                  and $136,795 respectively
              
              
              1,320,062
              
              
              166,239Due
                  from related parties
              
              
              161,530
              
              
              245,402Inventory
              
              
              797,074
              
              
              324,185Assets
                  from discontinued operations lessvaluation
                  allowance of $392,000 in 2005
              
              
              -
              
              
              412,419Other
                  current assets
              
              
              936,520
              
              
              -Total
                  current assets
              
              
              6,443,931
              
              
              2,289,382Property
                  and equipment, net
              
              
              10,155,507
              
              
              419,868Goodwill
                  and other intangible assets
              
              
              39,441,372
              
              
              6,923,854Other
                  assets
              
              
              349,205
              
              
              23,579TOTAL
                  ASSETS
              
              $
              56,390,015
              
              $
              9,656,683LIABILITIES
                  AND SHAREHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable and accrued expenses
              
              $
              13,304,915
              
              $
              1,148,833Loans
                  payable
              
              
              4,685,236
              
              
              200,000Convertible
                  notes payable
              
              
              3,399,798
              
              
              -Advances
                  from investors
              
              
              3,000,000
              
              
              -Due
                  to related parties
              
              
              1,572,894
              
              
              560,000Other
                  current liabilities
              
              
              956,004
              
              
              103,030Total
                  current liabilities
              
              
              26,918,847
              
              
              2,011,863Other
                  liabilities
              
              
              245,248
              
              
              -TOTAL
                  LIABILITIES
              
              
              27,164,095
              
              
              2,011,863Shareholders'
                  equity:Common
                  stock - $0.001 par value;100,000,000
                  shares authorized;61,523,397
                  and 24,258,982 sharesissued
                  and outstanding, respectively
              
              
              61,523
              
              
              24,259Additional
                  paid-in capital
              
              
              63,964,497
              
              
              14,107,328Accumulated
                  deficit
              
              
              (34,800,100
              )
              
              (6,486,768
              )Total
                  shareholders' equity
              
              
              29,225,920
              
              
              7,644,820TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY
              
              $
              56,390,015
              
              $
              9,656,683
  The
        accompanying notes are an integral part of these consolidated financial
        statements.


F-2




**VoIP
        Inc.** **Consolidated
          Statements of Operations**
  **Year
                  Ended December 31**
              ********
              ****
              ****
              **2005**
              
              
              **2004**Revenues
              
              $
              15,507,145
              
              $
              1,828,193Cost
                  of sales
              
              
              16,331,663
              
              
              1,372,146Gross
                  profit (loss)
              
              
              (824,518
              )
              
              456,047Operating
                  expensesCompensation
                  and related expenses
              
              
              7,730,795
              
              
              4,254,477Commissions
                  and fees to third parties
              
              
              4,949,612
              
              
              407,498Professional
                  and legal
              
              
              1,868,263
              
              
              430,432Depreciation
                  and amortization
              
              
              3,140,401
              
              
              82,832General
                  and administrative expenses
              
              
              4,193,987
              
              
              1,288,239Impairment
                  of goodwill
              
              
              4,173,452
              
              
              -Loss
                  from operations
              
              
              (26,881,028
              )
              
              (6,007,431
              )Interest
                  expense
              
              
              1,638,489
              
              
              -Gain
                  on sale of fixed assets
              
              
              (206,184
              )
              
              -Net
                  loss before discontinued operations
              
              
              (28,313,333
              )
              
              (6,007,431
              )Income
                  from discontinued operations,net
                  of income taxes
              
              
              -
              
              
              145,311Net
                  loss
              
              $
              (28,313,333
              )
              $
              (5,862,120
              )Basic
                  and diluted loss per share:Loss
                  before discontinued operations
              
              $
              (0.67
              )
              $
              (0.41
              )Income
                  from discontinued operations,net
                  of income taxes
              
              
              -
              
              
              0.01Net
                  loss per share
              
              $
              (0.67
              )
              $
              (0.40
              )Weighted
                  average number of shares outstanding
              
              
              42,022,906
              
              
              14,597,312




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-3


**VoIP,
        Inc.**
 **Consolidated
        Statements of Cash Flows**
  **Year
                  Ended December 31****2005**
              
              
              **2004**Cash
                  flows from operating activities:Continuing
                  operations:Net
                  loss
              
              $
              (28,313,333
              )
              $
              (6,007,431
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              3,140,401
              
              
              82,832Goodwill
                  impairment
              
              
              4,173,452
              
              
              -Amortization
                  of debt discounts
              
              
              416,175
              
              
              -Common
                  shares issued for services
              
              
              3,380,474
              
              
              599,166Options
                  and warrants issued for services and compensation
              
              
              2,181,350
              
              
              3,320,763Changes
                  in operating assets and liabilities, net of assets & liabilities
                  acquired:Accounts
                  receivable
              
              
              (17,368
              )
              
              233,620Due
                  from related parties
              
              
              83,872
              
              
              (245,402
              )Inventory
              
              
              100,080
              
              
              8,179Other
                  current assets
              
              
              (582,685
              )
              
              52,233Accounts
                  payable
              
              
              (4,549,404
              )
              
              (372,446
              )Due
                  to related parties
              
              
              812,894
              
              
              -Other
                  current liabilities
              
              
              852,974
              
              
              (335,696
              )Net
                  cash used in continuing operating activities
              
              
              (18,321,118
              )
              
              (2,664,182
              )Discontinued
                  operations:Income
                  (loss) from discontinued operations
              
              
              -
              
              
              145,311Changes
                  in assets, liabilities, and net results
              
              
              412,419
              
              
              (408,000
              )Net
                  cash provided by (used in) discontinued operating
                  activities
              
              
              412,419
              
              
              (262,689
              )Net
                  cash used in operating activities
              
              
              (17,908,699
              )
              
              (2,926,871
              )Cash
                  flows from investing activities:Cash
                  from acquisitions
              
              
              -
              
              
              104,872Purchase
                  of property and equipment
              
              
              (2,566,122
              )
              
              (157,881
              )Acquisition
                  of Caerus and WQN (Note K)
              
              
              (1,290,727
              )
              
              -Purchase
                  of other assets
              
              
              267,940
              
              
              (71,100
              )Net
                  cash used in investing activities
              
              
              (3,588,909
              )
              
              (124,109
              )Cash
                  flows from financing activities:Proceeds
                  from issuance of notes payable
              
              
              9,616,104
              
              
              560,000Proceeds
                  from sales of common stock
              
              
              11,719,614
              
              
              3,628,618Issuance
                  of stock for note conversions
              
              
              2,465,286
              
              
              -Repayment
                  of notes payable
              
              
              (215,788
              )
              
              -Net
                  cash provided by financing activities
              
              
              23,585,216
              
              
              4,188,618Net
                  increase in cash
              
              
              2,087,608
              
              
              1,137,638Cash
                  and cash equivalents at beginning of year
              
              
              1,141,137
              
              
              3,499Cash
                  and cash equivalents at end of year
              
              $
              3,228,745
              
              $
              1,141,137
 The
          accompanying notes are an integral part of these consolidated financial
          statements.


F-4
 **VoIP,
            Inc.**
 **Consolidated
            Statements of Changes in Shareholders' Equity**
 **Years
            Ended December 31, 2005 and 2004**
 
 **Common
                        Stock**
                      **Shares**
                  
                  
                  **Common
                      Stock Amount**
                  
                  
                  **Additional
                      Paid-**
                    **in
                      Capital**
                  
                  
                  **Accumulated**
                    **Deficit**
                  
                  
                  **Total**Balance
                      as of December 31, 2003
                  
                  
                  1,730,939
                  
                  $
                  1,731
                  
                  $
                  731,208
                  
                  $
                  (624,647
                  )
                  $
                  108,292Common
                      stock issued
                  
                  
                  12,500,000
                  
                  
                  12,500
                  
                  
                  -
                  
                  
                  -
                  
                  
                  12,500Common
                      stock issued to investors for cash received
                  
                  
                  5,520,566
                  
                  
                  5,521
                  
                  
                  3,610,598
                  
                  
                  -
                  
                  
                  3,616,119Common
                      stock issued for services
                  
                  
                  907,477
                  
                  
                  907
                  
                  
                  493,259
                  
                  
                  -
                  
                  
                  494,166Common
                      Stock issued for acquisition of DTNet Tech.
                  
                  
                  2,500,000
                  
                  
                  2,500
                  
                  
                  4,747,500
                  
                  
                  -
                  
                  
                  4,750,000Common
                      Stock issued for acquisition of VoipAmericas
                  
                  
                  1,000,000
                  
                  
                  1,000
                  
                  
                  1,099,000
                  
                  
                  -
                  
                  
                  1,100,000Warrants
                      issued to two company officers
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,320,763
                  
                  
                  -
                  
                  
                  3,320,763Warrants
                      issued for intellectual property
                  
                  
                  100,000
                  
                  
                  100
                  
                  
                  105,000
                  
                  
                  -
                  
                  
                  105,100Loss
                      for the year
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (5,862,120
                  )
                  
                  (5,862,120
                  )Balance
                      December 31, 2004
                  
                  
                  24,258,982
                  
                  
                  24,259
                  
                  
                  14,107,328
                  
                  
                  (6,486,767
                  )
                  
                  7,644,820Common
                      Stock issued for services
                  
                  
                  2,994,592
                  
                  
                  2,995
                  
                  
                  3,377,479
                  
                  
                  -
                  
                  
                  3,380,474Common
                      stock issued to investors for cash received
                  
                  
                  6,740,038
                  
                  
                  6,740
                  
                  
                  8,022,598
                  
                  
                  -
                  
                  
                  8,029,338Common
                      stock issued for cash received, pursuant toexercise
                      of warrants
                  
                  
                  3,292,778
                  
                  
                  3,293
                  
                  
                  3,919,360
                  
                  
                  -
                  
                  
                  3,922,653Common
                      stock issued for debt conversions
                  
                  
                  4,054,536
                  
                  
                  4,054
                  
                  
                  2,461,232
                  
                  
                  -
                  
                  
                  2,465,286Common
                      Stock issued for acquisition of Caerus, Inc.
                  
                  
                  18,932,471
                  
                  
                  18,932
                  
                  
                  19,956,068
                  
                  
                  -
                  
                  
                  19,975,000Options
                      issued for acquisition of Caerus, Inc.
                  
                  
                  -
                  
                  
                  -
                  
                  
                  355,000
                  
                  
                  -
                  
                  
                  355,000Common
                      Stock issued for acquisition of WQN
                  
                  
                  1,250,000
                  
                  
                  1,250
                  
                  
                  1,298,250
                  
                  
                  -
                  
                  
                  1,299,500Value
                      of warrants issued for acquisition of WQN
                  
                  
                  -
                  
                  
                  -
                  
                  
                  5,200,000
                  
                  
                  -
                  
                  
                  5,200,000Value
                      of warrants and conversion features of debt issued
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,085,832
                  
                  
                  -
                  
                  
                  3,085,832Stock
                      compensation - amortization
                  
                  
                  -
                  
                  
                  -
                  
                  
                  242,101
                  
                  
                  
                  
                  
                  242,101Option
                      and warrant compensation - amortization
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,939,249
                  
                  
                  -
                  
                  
                  1,939,249Loss
                      for the year
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (28,313,333
                  )
                  
                  (28,313,333
                  )Balance
                      December 31, 2005
                  
                  
                  61,523,397
                  
                  $
                  61,523
                  
                  $
                  63,964,497
                  
                  $
                  (34,800,100
                  )
                  $
                  29,225,920
  The accompanying notes are an integral part of these
            consolidated financial statements.
  F-5




**VoIP,
      Inc.**


**Notes
      to Consolidated Financial Statements**




**NOTE
      A - ORGANIZATION AND DESCRIPTION OF BUSINESS**




VoIP,
      Inc. (the "Company") was incorporated on August 3, 1998 under its original
      name
      of Millennia Tea Masters under the laws of the State of Texas. In February
      2004
      the Company exchanged 12,500,000 shares for the common stock of two start-up
      telecommunication businesses, eGlobalphone, Inc. and VoIP Solutions, Inc. The
      Company changed its name to VoIP, Inc. in April 2004 and acquired VCS
      Technologies, Inc. d/b/a DT Net Technologies, a hardware supplier, and VoIP
      Americas, Inc., a VoIP related company, in June and September, respectively,
      of
      2004. The Company decided to exit its former tea business in December 2004
      and
      focus its efforts and resources in the Voice over Internet Protocol
      telecommunications industry. In May 2005 the Company acquired Caerus, Inc.,
      a
      VoIP carrier and service provider. In October 2005 the Company purchased
      substantially all of the assets of WQN Inc.'s voice over internet protocol
      business.




The
      Company is an emerging global provider of advanced communications services
      utilizing Voice over Internet Protocol (VoIP) technology. Internet Protocol
      telephony is the real time transmission of voice communications in the form
      of
      digitized "packets" of information over the Internet or a private network,
      similar to the way in which e-mail and other data is transmitted. VoIP services
      are expected to allow consumers and businesses to communicate in the future
      at
      dramatically reduced costs compared to traditional telephony networks.




The
      Company owns its network and its technology and offers the ability to provide
      complete product and service solutions, including wholesale carrier services
      for
      call routing and termination, outsourced customer service and hardware
      fulfillment. The Company is a certified Competitive Local Exchange Carrier
      (CLEC) and Interexchange Carrier (IXC.) The Company provides a portfolio of
      advanced telecommunications technologies, enhanced service solutions, and
      broadband products to the VoIP industry. Current and targeted customers include
      RBOCs, CLECs, IXCs, wireless carriers, resellers, internet service providers,
      cable multiple system operators and other providers of telephony
      services.




The
      Company's operations consist of three segments, as follows: Telecommunication
      Services, Hardware Sales and Calling Cards.




F-6





**NOTE B
      - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Principles
      of Consolidation**




The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries, Caerus, Inc., eGlobalphone, Inc., VoIP Solutions,
      Inc., DTNet Technologies, and VoIP Americas, Inc. from their respective dates
      of
      acquisition. All significant intercompany balances and transactions have been
      eliminated in consolidation.




**Use
      of Estimates**




The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities; disclosure of contingent
      assets and liabilities at the date of the financial statements; and the reported
      amounts of revenues and expenses. Actual results could differ from those
      estimates.




**Cash
      and cash equivalents**




For
      purposes of reporting cash flows, the Company considers all cash on hand, in
      banks, including amounts in book overdraft positions, certificates of deposit
      and other highly liquid debt instruments with a maturity of three months or
      less
      at the date of purchase to be cash and cash equivalents. Cash overdraft
      positions may occur from time to time due to the timing of making bank deposits
      and releasing checks, in accordance with the Company's cash management policies.




**Accounts
      Receivable**




Accounts
      receivable are stated at the amount management expects to collect from
      outstanding balances. Management provides for probable uncollectible amounts
      based on its assessment of the current status of the individual receivables
      and
      after using reasonable collection efforts. As of December 31, 2005 and 2004
      the
      balance of the allowance for uncollectible accounts amounted to $177,489 and
      $136,795 respectively.




**Inventory**




Inventory
      consists of finished goods and is valued at the lower of cost or market using
      the first-in, first-out method.




F-7





**Convertible
      Debt**




Convertible
      debt with beneficial conversion features, whereby the conversion feature is
“in
      the money” are accounted for in accordance with guidance supplied by Emerging
      Issues Task Force (“EITF”) No. 98-5 "Accounting for Convertible Securities with
      Beneficial Conversion Features or Contingently Adjustable Conversion Ratios"
      and
      EITF No. 00-27 "Application of Issue 98-5 to Certain Convertible Instruments."
      The relative fair value of the warrants and the Beneficial Conversion Feature
      has been recorded as a discount against the debt and is amortized over the
      term
      of the debt.




**Income
      Taxes**




The
      Company follows Statement of Financial Accounting Standards No. 109 “Accounting
      for Income Taxes” (“SFAS No. 109”). Under the asset and liability method of SFAS
      No. 109, deferred tax assets and liabilities are recognized for the future
      tax
      consequences attributed to differences between the financial statements carrying
      amounts of existing assets and liabilities and their respective tax base.
      Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. Under SFAS No. 109, the
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in the results of operations in the period that includes the
      enactment date. If it is more likely than not that some portion of a deferred
      tax asset will not be realized, a valuation allowance is recognized




**Earnings
      (Loss) Per Share**




Basic
      earnings (loss) per share is computed by dividing the net income (loss) for
      the
      year by the weighted-average number of shares of common stock outstanding.
      The
      calculation of fully diluted earnings per share assumes the dilutive effect
      of
      all potential outstanding common shares attributable to outstanding options,
      warrants, and convertible notes. Potential outstanding shares are not included
      in the computation of fully diluted loss per share as their effect is
      anti-dilutive.




**Fair
      Value of Financial Instruments**




The
      carrying amount of cash, accounts receivable, accounts payable and notes
      payable, as applicable, approximates fair value due to the short term nature
      of
      these items and/or the current interest rates payable in relation to current
      market conditions.




**Revenue
      Recognition**




Revenues
      are primarily derived from fees charged to terminate voice services over the
      Company’s network and from monthly recurring charges associated with internet
      services and from sales of hardware product and calling cards.




Variable
      revenue is earned based on the number of minutes during a call and is recognized
      upon completion of a call. Revenue for each customer is calculated from
      information received through the Company’s network switches. The Company tracks
      the information received from the switch and analyzes the call detail records
      and applies the respective revenue rate for each call.




Fixed
      revenue is earned from monthly recurring services provided to customers that
      are
      fixed and recurring in nature, and are connected for a specified period of
      time.
      Revenue recognition commences after the provisioning, testing, and acceptance
      of
      the service by the customer. Revenues are recognized as the services are
      provided and continue until the expiration of the contract or until cancellation
      of the service by the customer.




Revenues
      from hardware product sales and calling cards are recognized when persuasive
      evidence of an arrangement exists, delivery to the customer has occurred, the
      sales price is fixed and determinable, and collectibility of the related
      receivable is considered probable.




F-8




**Property,
      Plant, and Equipment**




Property,
      plant, and equipment are stated at cost. Depreciation is provided over the
      estimated useful lives of the related assets using the straight line method.
      The
      useful life of assets ranges from three to five years. The leasehold
      improvements are amortized over the life of the related leases.




**Business
      Combinations**




The
      Company accounts for business combinations in accordance with Statement of
      Financial Accounting Standard No. 141, “Business Combinations” (SFAS No. 141).
      SFAS No. 141 requires that the purchase method of accounting be used for all
      business combinations. SFAS No. 141 requires that goodwill and intangible assets
      with indefinite useful lives no longer be amortized, but instead be tested
      for
      impairment at least annually by comparing carrying value to the respective
      fair
      value in accordance with the provisions of Statement of Financial Accounting
      Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). This
      pronouncement also requires that the intangible assets with estimated useful
      lives be amortized over their respective estimated useful lives.




**Impairment
      of Long-Lived Assets**




VoIP,
      Inc. reviews the recoverability of its long-lived assets, such as plant,
      equipment and intangibles when events or changes in circumstances occur that
      indicate that the carrying value of the asset group may not be recoverable.
      The
      assessment of possible impairment is based on the Company's ability to recover
      the carrying value of the asset or asset group from the expected future pre-tax
      cash flows (undiscounted and without interest charges) of the related
      operations. If these cash flows are less than the carrying value of such asset,
      an impairment loss is recognized for the difference between estimated fair
      value
      and carrying value. The measurement of impairment requires management to
      estimate future cash flows and the fair value of long-lived assets.




**Goodwill
      and Other Intangible Assets**




In
      accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
      and Other Intangible Assets," the Company tests its goodwill and
      intangible assets for impairment at least annually by comparing the fair values
      of these assets to their carrying values, and the Company may be
      required to record impairment charges for these assets if in the future their
      carrying values exceed their fair values. During the year ended December 31,
      2005 the Company recorded an impairment charge of $4,173,452 relating to
      goodwill recorded as a result of a prior acquisition. The Company may be
      required to record additional impairment charges in the future.




**Stock
      Based Compensation**




The
      Company applies the fair value method of Statement of Financial Accounting
      Standards No. 123R, "Accounting for Stock Based Compensation" ("SFAS No. 123R")
      in accounting for its stock options. This standard states that compensation
      cost
      is measured at the grant date based on the value of the award and is recognized
      over the service period, which is usually the vesting period. The fair value
      for
      each option granted is estimated on the date of the grant using the
      Black-Scholes option pricing model. The fair value of all vested options granted
      has been charged to salaries, wages, and benefits in accordance with SFAS No.
      123.




**Reclassifications**




Certain
      reclassifications have been made to the 2004 financial statements to conform
      to
      the 2005 presentation.







**Recent
      Accounting Pronouncements**




In
      November 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4."
      Statement No. 151 requires that abnormal amounts of costs, including idle
      facility expense, freight, handling costs and spoilage, should be recognized
      as
      current period charges. The provisions of this Statement are effective for
      inventory costs incurred during fiscal years beginning after June 15, 2005.
      The
      Company does not expect the adoption of this Statement to have a material impact
      on its financial statements.




F-9




In
      December 2004, FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets
      -
      an amendment of Accounting Principles Board ("APB") Opinion No. 29." Statement
      No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary
      exchanges of similar productive assets and replaces it with a general exception
      for exchanges of nonmonetary assets that do not have a commercial substance.
      A
      nonmonetary exchange has commercial substance if the future cash flows of the
      entity are expected to change significantly as a result of the exchange. The
      provisions of this Statement are effective for nonmonetary exchanges occurring
      in fiscal periods beginning after June 15, 2005. The Company does not expect
      the
      adoption of this Statement to have a material impact on its financial
      statements.




In
      May 2005, FASB issued SFAS No. 154, Accounting Changes and Error
      Corrections or SFAS 154, which supersedes APB Opinion No. 20, Accounting
      Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial
      Statements. SFAS 154 changes the requirements for the accounting for and
      reporting of changes in accounting principle. The statement requires the
      retroactive application to prior periods’ financial statements of changes in
      accounting principles, unless it is impracticable to determine either the period
      specific effects or the cumulative effect of the change. SFAS 154 does not
      change the guidance for reporting the correction of an error in previously
      issued financial statements or the change in an accounting estimate. SFAS 154
      is
      effective for accounting changes and corrections or errors made in fiscal years
      beginning after December 15, 2005. We do not expect the adoption of SFAS
      154 to have a material impact on our consolidated results of operations or
      financial condition.




**NOTE C
      - BUSINESS SEGMENT INFORMATION**




The
      Company has three reportable segments: telecommunication services, hardware
      sales, and calling cards. The telecommunications services segment terminates
      wholesale and retail, local and long distance calls placed on our network.
      Such
      termination is either on our network or through other telecommunication
      providers. This segment is also in the early stages of implementing wholesale
      VOIP services. The hardware sales segment supplies broadband components and
      VOIP
      hardware to broadband service providers. The calling card segment sells prepaid
      telephone calling cards that we purchase from other carriers through a network
      of private distributors located primarily in southern California.




The
      accounting policies of the segments are the same as those described in the
      summary of significant accounting policies. Information about operations by
      business segment, as of and for the years ended December 31, 2005 and 2004,
      is
      as follows:




F-10




2005
              
              
              **Telecommunication**
                  **Services**
              
              
              **Hardware**
                  **Sales**
              
              
              **Calling**
                  **Cards**
              
              
              **Corporate**
                  **and**
                  **Eliminations**
              
              
              **Consolidated**Revenues
              
              $
              8,198,587
              
              $
              2,376,329
              
              $
              4,932,229
              
              $
              -
              
              $
              15,507,145Interest
                  expense
              
              $
              560,351
              
              $
              -
              
              $
              -
              
              $
              1,078,138
              
              $
              1,638,489Depreciation
                  and amortization
              
              $
              2,916,380
              
              $
              161,047
              
              $
              -
              
              $
              62,974
              
              $
              3,140,401Net
                  income (loss)
              
              $
              (9,247,515
              )
              $
              (4,674,514
              )
              $
              6,348
              
              $
              (14,397,652
              )
              $
              (28,313,333
              )Capital
                  expenditures
              
              $
              2,403,902
              
              $
              13,572
              
              $
              -
              
              $
              148,648
              
              $
              2,566,122Identifiable
                  assets
              
              $
              11,979,115
              
              $
              562,576
              
              $
              1,448,236
              
              $
              2,958,716
              
              $
              16,948,643Goodwill
              
              $
              23,306,341
              
              $
              1,037,101
              
              $
              -
              
              $
              -
              
              $
              24,343,442Other
                  intangible assets, net
              
              $
              14,792,930
              
              $
              -
              
              $
              -
              
              $
              305,000
              
              $
              15,097,9302004Revenues
              
              $
              649,230
              
              $
              1,178,963
              
              $
              -
              
              $
              -
              
              $
              1,828,193Interest
                  expense
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Depreciation
                  and amortization
              
              $
              55,221
              
              $
              19,164
              
              $
              -
              
              $
              8,447
              
              $
              82,832Net
                  income (loss)
              
              $
              (385,067
              )
              $
              (775,199
              )
              $
              -
              
              $
              (4,701,853
              )
              $
              (5,862,120
              )Capital
                  expenditures
              
              $
              39,931
              
              $
              15,427
              
              $
              -
              
              $
              102,523
              
              $
              157,881Identifiable
                  assets
              
              $
              414,042
              
              $
              891,020
              
              $
              -
              
              $
              1,427,768
              
              $
              2,732,831Goodwill
              
              $
              1,408,301
              
              $
              5,210,553
              
              $
              -
              
              $
              -
              
              $
              6,618,854Other
                  intangible assets, net
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              305,000
              
              $
              305,000




**NOTE D
      - PROPERTY AND EQUIPMENT, NET**




As
      of
      December 31, 2005 and 2004, property and equipment consists of the following:




**2005**
              
              **2004**Equipment
              
              $
              9,381,372
              
              $
              519,810Furniture
                  & Fixtures
              
              
              216,402
              
              
              56,748Software
              
              
              1,667,864
              
              
              -Vehicles
              
              
              15,269
              
              
              4,769Leasehold
                  improvements
              
              
              248,952
              
              
              4,562Total
              
              
              11,529,859
              
              
              585,889Less
                  accumulated depreciation
              
              
              (1,374,352
              )
              
              (166,021
              )Total
              
              $
              10,155,507
              
              $
              419,868




Depreciation
        expense for 2005 and 2004 amounted to $1,208,331 and $82,832
        respectively.





F-11


**NOTE E
      - GOODWILL AND OTHER INTANGIBLE ASSETS**




Goodwill,
                  by segment:
              
              **2005**
              
              **2004**Telecommunications
                  services
              
              $
              23,306,341
              
              $
              1,408,301Hardware
                  sales
              
              
              1,037,101
              
              
              5,210,553Calling
                  cards
              
              
              -
              
              
              -Corporate
                  and other
              
              
              -
              
              
              -Subtotal,
                  goodwill
              
              
              24,343,442
              
              
              6,618,854




Other
      intangible assets:


**Useful
                  Life (Years)**Technology
              
              
              4.0
              
              $
              6,000,000
              
              $
              -Customer
                  relationships
              
              
              5.0
                  - 6.0
              
              
              8,325,000
              
              
              -Trade
                  names
              
              
              9.0
              
              
              1,300,000
              
              
              -Non-compete
                  agreement
              
              
              1.0
              
              
              500,000
              
              
              -Other
                  intangible assets
              
              
              Indefinite
              
              
              600,000
              
              
              305,000Subtotal
              
              
              
              
              
              16,725,000
              
              
              305,000Accumulated
                  amortization
              
              
              
              
              
              (1,627,070
              )
              
              -Other
                  intangible assets, net
              
              
              
              
              
              15,097,930
              
              
              305,000Total
                  goodwill and other intangible assets
              
              
              
              
              $
              39,441,372
              
              $
              6,923,854




In
      accordance with SFAS No. 142 the Company performs an evaluation of the fair
      values of our operating segments at least annually. During this evaluation
      for
      2005 the Company determined, based upon market conditions, projected discounted
      cash flows, and other factors, that the carrying value of our hardware sales
      operating segment exceeded its fair value at December 31, 2005. Accordingly
      the
      Company recorded an impairment charge of $4,173,452 in our 2005 statement of
      operations and reduced goodwill for this segment by that amount.




**NOTE F
      - ACCOUNTS PAYABLES AND ACCRUED EXPENSES**




As
      of
      December 31, 2005 and 2004 accounts payables and accrued expenses consisted
      of
      the following:





**2005**
              
              **2004**Accounts
                  payable-trade
              
              $
              11,155,401
              
              $
              912,674Accrued
                  expenses
              
              
              2,149,514
              
              
              233,711Other
              
              
              -
              
              
              2,448Total
              
              $
              13,304,915
              
              $
              1,148,833




See
      Note
      S for a discussion of litigation with two vendors, certain amounts for which
      are
      included in accounts payable - trade.




**NOTE G
      - LOANS PAYABLE**




As
      of
      December 31, 2005 loans payable consisted of a loan payable to a lending
      institution. These borrowings are repayable over a three-year period and bear
      interest at 12.5% per annum. Additional borrowings under this facility are
      contingent upon, among other things, the Company raising certain levels of
      additional equity financing. Interest paid under this debt facility during
      the
      year ended December 31, 2005, was $399,551.




F-12


This
      loan
      agreement contains customary covenants and restrictions and provides the lender
      the right to a perfected first-priority, secured interest in all of the
      Company’s assets, as well as rights to preferred stock warrants. The Company was
      in violation of certain requirements of this debt facility at December 31,
      2005,
      and, while the lending institution has not declared the loan in default, the
      full amount of the note at December 31, 2005 has been classified as current.




As
      of
      December 31, 2004, loans payable consisted of a revolving line of credit at
      prime plus 1.0% and a promissory note bearing interest at 7.5%. These loans
      were
      collateralized by receivables, inventory and equipment, and both these loans
      were fully paid in January 2005.




**NOTE H
      - CONVERTIBLE NOTES PAYABLE**




As
      of
      December 31, 2005, convertible notes payable consisted of the
      following:


Payable
                  to WQN, Inc.
              
              $
              3,700,000Payable
                  to accredited investors
              
              
              1,496,804Subtotal,
                  principal
              
              
              5,196,804Less
                  discount
              
              
              (1,797,006
              )Total
              
              $
              3,399,798




During
      2005, the Company issued and sold $3,085,832 principal amount of convertible
      notes to accredited investors at a discount, receiving net proceeds of
      $2,520,320. These notes are immediately convertible at the option of the note
      holders into 3,857,290 shares of common stock. These note holders also received
      five-year warrants to purchase 3,857,290 shares of common stock for prices
      ranging from $1.38 to $1.65 per share. These notes are secured by a subordinated
      lien on the Company’s assets, and the notes bear interest at an effective rate
      of approximately 20%. Half of these notes are repayable beginning in October
      2005, and the other half beginning in January 2006 (3 months following their
      respective issuances), in 21 equal monthly principal payments, plus interest,
      until the notes are either repaid or converted.




The
      fair
      market value of the conversion feature and the warrants, calculated using the
      Black-Scholes pricing model, was $3,085,832, which was recognized as a debt
      discount and an addition to paid-in capital. Interest expense at the dates
      of
      issuance was recognized for the difference between the principal value of the
      notes and their related net proceeds (original issue discount). The debt
      discount is being amortized to interest expense over the notes’ 24-month contact
      terms.




The
      Black-Scholes pricing calculations were made using volatilities at either
      one-year or three-year, monthly or weekly, trailing measures, as appropriate,
      and risk-free rates as determined by the nearest maturity Treasury yield as
      of
      respective valuation dates.




No
      interest was paid under these debt facilities during the year ended December
      31,
      2005.




**NOTE I
      - ADVANCE FROM INVESTORS**




The
      unsecured advance of $3,000,000 at December 31, 2005 represents funds deposited
      with the Company in anticipation of the issuance of convertible notes payable,
      which were issued in January 2006, (see NOTE S). The advance is not interest
      bearing, and is unsecured.




F-13




**NOTE J
      - ACQUISITIONS**




On
      May
      31, 2005 the Company acquired 100 percent of Caerus, Inc. and its wholly owned
      subsidiaries Volo Communications, Inc., Caerus Networks, Inc., and Caerus
      Billing, Inc. in exchange for approximately 16.9 million of the Company's common
      shares (plus 2.0 million escrowed shares).




The
      goodwill, intangible assets and property recorded for the acquisition of Caerus,
      Inc. (Caerus) represent the fair market value of liabilities as of the date
      of
      acquisition, plus approximately $18.3 million which represents the value of
      the
      Company's common stock and options issued pursuant to the acquisition.




On
      October 5, 2005 the Company acquired substantially all of the operating assets
      and liabilities of WQN, Inc., for a total purchase price of $9.8 million. The
      acquisition was financed with the issuance of $3.2 million of convertible debt,
      1.3 million shares of the Company’s common stock, and 5.0 million warrants to
      purchase the Company’s common stock at $0.001 per share.




Condensed
      balance sheets of the Caerus and WQN acquisitions, reflecting the net fair
      value
      amounts assigned to each major asset and liability, as of their respective
      acquisition dates are as follows:




**Caerus,
                  Inc.**
              
              **WQN,
                  Inc**.Current
                  assets
              
              $
              617,000
              
              $
              3,775,000Property
                  and equipment, net
              
              
              7,869,000
              
              
              508,000Other
                  assets
              
              
              131,000
              
              
              463,000Accounts
                  payable and other current liabilities
              
              
              (14,674,000
              )
              
              (2,031,000
              )Note
                  payable
              
              
              (4,832,000
              )
              
              -Net
                  liabilities assumed
              
              
              (10,889,000
              )
              
              2,715,000Goodwill
              
              
              17,778,000
              
              
              4,120,000Intangible
                  assets - other
              
              
              13,800,000
              
              
              2,925,000Intangible
                  assets
              
              
              31,578,000
              
              
              7,045,000Net
                  fair value assets acquired
              
              $
              20,689,000
              
              $
              9,760,000





**NOTE K
      - LIQUIDITY AND CAPITAL RESOURCES**




The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplates continuation of the Company as a going concern.




The
      Company has incurred operating losses and negative cash flows from operations
      since inception of its business in 2004 and has been dependent on issuances
      of
      debt and equity instruments to fund its operations and capital expenditures.




At
      December 31, 2005 the Company's contractual obligations for debt, leases and
      capital expenditures totaled approximately $11.5 million. Included in this
      amount is approximately $4.7 million due on a loan from a lending institution.
      The Company was not in compliance with certain covenants under the loan
      agreement for this debt.




In
      January and February, 2006, the Company issued and sold $11,959,666 principal
      amount of Convertible Notes to nine accredited investors, for net proceeds
      of
      $9,879,400 (at a 12.121% original issue discount) in a private placement. The
      investors also received five-year warrants to purchase a total of 4,537,053
      shares for an exercise price of $1.46 per share, and one-year warrants to
      purchase 4,537,053 shares for an exercise price of $1.59 per share.




Of
      the
      convertible notes approximately $7.6 million are secured by a subordinated
      lien
      on our assets, and of all these notes bear interest at an effective rate of
      20%,
      are payable over two years beginning 90 to 180 days after closing in cash or
      at
      the option of the Company in registered common stock at the lesser of $1.40
      per
      share or 85% of the weighted average price of the stock on the OTCBB. The
      holders may at their election convert all or part of the notes into shares
      of
      common stock at the conversion rate of $1.32 per share.




F-14




The
      subscription agreements for the sale of these convertible notes contain
      provisions that could impact the Company’s future capital raising efforts and
      its capital structure, including:




·
            In
                February 2006, the Company filed a registration statement to register
                200%
                of the shares issuable upon conversion of these notes and all of
                the
                shares issuable upon exercise of the warrants (the “Notes Registration
                Statement”). If the Notes Registration Statement is not declared effective
                by late April 2006, the Company is liable for liquidated damages
                each
                month at a rate of 1.5% of the outstanding note principal until the
                Registration Statement is declared effective.




·
            Unless
                consent is obtained from the note holders, the Company may not file
                any
                new registration statements or amend any existing registrations until
                the
                sooner of (i) 60 days following the effective date of the Note
                Registration Statement or (ii) all the notes have been converted
                into
                shares and such shares and the warrant shares have been sold by the
                note
                holders.




·
            Until
                the Notes Registration Statement has been effective for 365 days
                the note
                holders must be given the right of first refusal to purchase any
                proposed
                sale of the Company’s common stock or debt
                obligations.




·
            Unless
                we consent is obtained from the note holders for so long as 20% or
                more of
                the note principal, warrants or common stock issued or issuable for
                the
                notes remains outstanding, the Company may not issue any new shares
                of
                common stock, convertible securities or warrants at a price per share,
                conversion price per share or exercise price per share that is lower
                than
                those prices in effect for the notes and warrants without issuing
                the note
                holders sufficient additional shares or warrants at prices such that
                their
                warrant exercise price or per share price on average is equal to
                that for
                the proposed securities to be
                issued.




The
      Company will need to continue to raise additional debt or equity capital to
      provide the funds necessary to restructure or repay its $4.7 million loan,
      meet
      its other contractual commitments, and continue its operations. The Company
      is
      actively seeking to raise this additional capital but may not be successful
      in
      obtaining further debt or equity financing. The accompanying financial
      statements do not include any adjustments relating to the recoverability and
      classification of asset amounts or the amounts and classification of liabilities
      that might be necessary should the Company be unable to continue as a going
      concern.




The
      Company’s authorized shares of stock consist of 100,000,000 shares of common
      stock. As of April 2006, 68,838,766 common shares issued and outstanding, and
      there are approximately 45 million additional shares that may become outstanding
      upon the exercise or conversion of outstanding stock options, warrants and
      convertible securities. A proxy statement has been filed in connection with
      annual meeting of shareholders at which a proposal will be submitted to increase
      the authorized shares of capital stock to 250,000,000 shares of common stock
      and
      25,000,000 shares of “blank check” preferred stock. If such proposal is not
      approved, the Company will be unable to satisfy the contractual obligations
      it
      has undertaken to issue future shares of common stock.




**NOTE L
      - STOCK BASED COMPENSATION**




A
      total
      of 4,000,000 shares of common stock have been reserved for issuance under the
      Company's 2004 Employee Stock Option Plan. The activity in this 2004 Option
      Plan
      for the year ended December 31, 2005 is as follows:




F-15




**Number**
              
              
              **Exercise
                    Price****Range**
              
              
              **Wtd.
                    Avg.****Exercise
                  Price**Options
                  outstanding at December 31, 2004
              
              
              3,650,000
              
              $
              0.85
                  - $1.56
              
              $
              1.14Options
                  returned to the plan dueto
                  employee terminations
              
              
              (528,438
              )
              $
              0.85
                  - $1.10
              
              $
              0.95Options
                  granted
              
              
              625,000
              
              $
              1.01
                  - $1.53
              
              $
              1.37Options
                  outstanding at December 31, 2005
              
              
              3,746,562
              
              $
              0.85
                  - $1.56
              
              $
              1.21




In
      addition to options issued under the 2004 option plan, the Company granted
      800,000 options during 2005 to two executive officers at an exercise price
      of
      $1.56, all of which remain outstanding at December 31, 2005




The
      Company recorded compensation expense of $894,333 and $1,103,309 for the years
      ended December 31, 2005 and 2004 respectively in connection with stock options
      granted. As of December 31, 2005, approximately $1,994,000 in total compensation
      cost related to nonvested options remains to be expensed in future periods.




During
      the years ended December 31, 2005 and 2004, the Company issued to employees
      and
      a financial services firm warrants to purchase 3,300,000 and 4,800,000 shares,
      respectively, of common stock for prices ranging from $0.93 to $1.07 per share.
      During year ended December 31, 2005 the Company issued 2,025,630 shares of
      common stock in exchange for related warrants. The Company recognized $1,044,917
      and $2,217,600 in 2005 and 2004, respectively, in expense in connection with
      the
      issuance of these warrants.




On
      December 7, 2005, the Company’s Board of Directors approved, subject to
      shareholder approval, the Company’s 2006 Equity Incentive Plan (the “2006
      Plan”). The 2006 Plan provides that key employees, consultants and non-employee
      directors of the Company or an affiliate may be granted: (1) options to acquire
      shares of the Company’s common stock, (2) shares of restricted common stock, (3)
      stock appreciation rights, (4) performance-based awards, (5) “Dividend
      Equivalents”, and (6) other stock-based awards. The Company is seeking
      shareholder approval at its 2006 shareholders’ meeting for the future issuance
      of options under the 2006 Plan to allow its participants to acquire up to
      10,000,000 shares of our common stock.




**NOTE M
      - WARRANTS**




A
      summary
      of the Company's warrants as of December, 31 2005 and 2004 is presented below:




**2005**
            
            
            **2004****Warrants**
            
            
            **Weighted****average****exercise
                price**
            
            
            **Warrants**
            
            
            **Weighted****average****exercise
                price**Warrants
                outstanding at beginning or year
            
            
            4,800,000
            
            $
            1.06
            
            
            -
            
            $
            -Granted
                to company officers
            
            
            2,450,000
            
            $
            1.51
            
            
            4,400,000
            
            $
            1.00Granted
                to a third party
            
            
            850,000
            
            $
            1.60
            
            
            400,000
            
            $
            1.75Expired
            
            
            -
            
            $
            -
            
            
            -
            
            $
            -Exercised
            
            
            (4,400,000
            )
            $
            1.00
            
            
            -
            
            $
            -Warrants
                outstanding at end of year
            
            
            3,700,000
            
            $
            1.55
            
            
            4,800,000
            
            $
            1.06




The
      value
      of warrants was estimated using the Black-Scholes option pricing model. (See
      Note I for Black-Scholes pricing assumptions).


F-16


**NOTE N
      - COMMITMENTS**




The
      Company is obligated under non-cancelable operating leases for its office
      facilities and two apartments used by its employees. Future minimum lease
      payments under the Company's non-cancelable operating leases as of December
      31,
      2005 are as follows:







Year
                ending Dec 312006
            
            $
            386,8462007
            
            
            320,848Total
            
            $
            707,694




During
      the years ended December 31, 2005 and 2004, $285,993 and $41,957, respectively,
      were charged to operations for rent expense related to these operating leases.




**NOTE O
      - RELATED PARTY TRANSACTIONS**




As
      of
      December 31, 2005 and 2004 the amount due from (to) related parties consisted
      of
      the following:




**2005**
              
              
              **2004**DTNet,
                  Inc. (1)
              
              $
              -
              
              $
              134,317DTNet
                  International (1)
              
              
              -
              
              
              119,974WQN,
                  Inc.
              
              
              161,530
              
              
              -Mozart
                  Communication
              
              
              -
              
              
              21,794Com
                  Laser
              
              
              -
              
              
              5,850Other
              
              
              -
              
              
              (36,533
              )Total
              
              $
              161,530
              
              $
              245,402




(1)
      The
      above entities are related to a shareholder of the Company. These advances
      are
      unsecured, due upon demand and non-interest bearing. However, $250,000 of these
      amounts was written off as uncollectible in 2005.




In
      December 2004 the Company issued a $560,000 note payable to a shareholder,
      bearing interest at 3.75%, with an original maturity date of December 2005.
      In
      January 2005 the Company added another note payable for $1,040,000 to the same
      shareholder under similar terms. At December 31, 2005 and 2004, the outstanding
      balance of these notes was $1,572,894 and $560,000, respectively. The notes
      are
      currently due on demand.




Interest
      paid under these notes was $50,613 during the year ended December 31, 2005.




**NOTE P
      - INCOME TAXES**




The
      components of the Company's consolidated income tax provision are as follows:




**Year
                  ended December****31,****2005**
              
              
              **2004**Current
                  benefit
              
              $
              7,479,000
              
              $
              2,040,000Deferred
                  benefit
              
              
              1,051,000
              
              
              -Subtotal
              
              $
              8,530,000
              
              $
              2,040,000Less
                  valuation allowances
              
              
              (8,530,000
              )
              
              (2,040,000
              )Net
              
              $
              -
              
              $
              -




The
      reconciliation of the income tax provision at the statutory rate to the reported
      income tax expense is as follows:




F-17




**Year
                  ended December 31,****2005**
              
              **2004**Computed
                  at statutory rate
              
              
              34
              %
              
              34
              %Value
                  of options and warrants expensed,not
                  deductible for tax purposes
              
              
              (4
              %)
              
              -Valuation
                  allowance
              
              
              (30
              %)
              
              (34
              %)Total
              
              
              -
              
              
              -




At
      December 31, 2005 the Company’s net deferred tax assets consisted of the
      following:


Net
                  operating loss carryforwards
              
              $
              9,519,000Excess
                  of goodwill impairment charge overtax
                  basis amortization
              
              
              773,000Amortization
                  of intangible assets
              
              
              278,000Subtotal
              
              
              10,570,000Less
                  valuation allowances
              
              
              (10,570,000
              )Total
              
              $
              -




The
      Company’s net operating loss carryforwards for
      federal income tax purposes were approximately $28 million as of December 31,
      2005. These carryforwards expire in 2018 ($6,000,000) and 2019
      ($22,000,000).




**NOTE Q
      - DISCONTINUED OPERATIONS**




In
      December 2004, the Company decided to exit the tea business and sold its entire
      tea inventory, therefore, those transactions have been presented as discontinued
      operations for the year ended December 31, 2004.




Assets,
      liabilities, and results of the discontinued tea operations of the Millennia
      Tea
      Master division for 2004 are as follows:


Assets
                  from discontinued operations:Cash
              
              $
              4,419Notes
                  receivable from purchaser of tea (non-interest bearingdue
                  in four equal installments through December 31, 2005)
              
              
              408,000Tea
                  inventory at net realizable value
              
              
              -Other
                  assets
              
              
              -Total
              
              $
              412,419Liabilities
                  from discontinued operations:Due
                  to related parties
              
              $
              -Total
              
              $
              -Results
                  from discontinued operations:Revenues
              
              $
              408,613Cost
                  of sales
              
              
              263,302Gross
                  Profit
              
              
              145,311Other
                  expenses
              
              
              -Income
                  (loss) from discontinued operations
              
              $
              145,311


F-18





**NOTE R
      - LEGAL PROCEEDINGS**




MCI




On
      April
      8, 2005, Volo Communications, Inc. ("Volo") (a wholly-owned subsidiary of
      Caerus) filed suit against MCI WorldCom Network Services, Inc. d/b/a UUNET
      ("MCI
      WorldCom"). Volo alleges that MCI WorldCom engaged in a pattern and practice
      of
      over-billing Volo for the telecommunications services it provided pursuant
      to
      the parties' Services Agreement, and that MCI WorldCom refused to negotiate
      such
      overcharges in good faith. Volo also seeks damages arising out of MCI WorldCom's
      fraudulent practice of submitting false bills by, among other things, re-routing
      long distance calls over local trunks to avoid access charges, and then billing
      Volo for access charges that were never incurred.




On
      April
      4, 2005, MCI WorldCom declared Volo in default of its obligations under the
      Services Agreement, claiming that Volo owes a past due amount of $8,365,980,
      and
      threatening to terminate all services to Volo within 5 days. By this action
      Volo
      alleges claims for (1) breach of contract; (2) fraud in the inducement; (3)
      primary estoppel; and (4) deceptive and unfair trade practices. Volo also seeks
      a declaratory judgment that (1) MCI WorldCom is in breach of the Services
      Agreement; (2) $8,365,980 billed by MCI WorldCom is not "due and payable" under
      that agreement; and (3) MCI WorldCom's default letter to Volo is in violation
      of
      the Services Agreement. Volo seeks direct, indirect and punitive damages in
      an
      amount to be determined at trial.




On
      May
      26, 2005, MCI WorldCom filed an Answer, Affirmative Defenses, Counterclaim
      and
      Third-Party Complaint naming Caerus as a third-party defendant. MCI WorldCom
      asserts a breach of contract claim against Volo, a breach of guarantee claim
      against Caerus, and a claim for unjust enrichment against both parties, seeking
      an amount to be determined at trial. On July 11, 2005, Volo and Caerus answered
      the counterclaim and third-party complaint, and filed a third-party counterclaim
      against MCI WorldCom for declaratory judgment, fraud in the inducement, and
      breach of implied duty of good faith and fair dealing. Volo and Caerus seek
      direct, indirect and punitive damages in an amount to be determined at trial.




On
      August
      1, 2005, MCI WorldCom moved to strike most of Volo's and Caerus' affirmative
      defenses and demand for attorney's fees, and to dismiss Caerus' counterclaims.
      On October 6, 2005, the Court denied the motions in part, granted them in part
      with leave to amend, and deferred ruling on the motions in part. On October
      13,
      2005, Volo and Caerus filed amended affirmative defenses, and Caerus filed
      amended counterclaims.




Discovery
      is in progress. MCI WorldCom has served requests for documents and for
      admissions and interrogatories on Volo and Caerus, to which Volo and Caerus
      have
      responded. Document production is ongoing. Volo has served document requests
      and
      interrogatories on MCI WorldCom. Volo has also initiated third party discovery.
      The Court on March 9, 2006 granted in part and denied in part motions to compel
      disclosures brought by Volo and MCI WorldCom. A pretrial conference is set
      for
      May 2, 2006. The Court has not issued a scheduling order or set a trial date.
      The Company is currently unable to assess the likelihood of a favorable or
      unfavorable outcome for this litigation.




Netrake




The
      Company and its subsidiaries Caerus and Volo are involved in pending disputes
      with Netrake Communications (“Netrake”) arising from an equipment purchase
      contract under which Volo agreed to purchase approximately $2,000,000 worth
      in
      Netrake telephonic equipment and software. The Company has paid approximately
      $200,000 on the contract but has withheld further payments due to
      dissatisfaction with the performance of the equipment. In arbitration pending
      in
      Dallas, Texas, Netrake has brought claim against the Company and its
      subsidiaries for (1) breach of contract in the amount of $1.8 million plus
      interest, (2) business disparagement, (3) misappropriation of trade secrets,
      (4)
      tortuous interference with prospective business relations and (5) conversion.
      Netrake also seeks to recover its attorneys’ fees. Within this same arbitration
      Volo and Caerus seek damages against Netrake for breach of contract and breach
      of warranty claiming that the Netrake product did not perform in accordance
      with
      agreed upon specifications and warranties.




F-19




Volo
      and
      Caerus have initiated litigation in Broward County, Florida claiming damages
      and
      recession against Netrake for alleged fraudulent misrepresentations, negligent
      misrepresentations, violation of Florida’s Deceptive and Unfair Trade Practices
      Act and seeking declaratory relief. Netrake claims all of these claims fall
      within the arbitration clause of the equipment purchase contract, and has
      removed the action to arbitrate in Dallas.




The
      Company is presently unable to determine what impact, if any, this arbitration
      and litigation will have on its financial condition or results of operations.




F-20


**VOIP,
      INC. AND SUBSIDIARIES**


**UNAUDITED
      PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS**




The
      Following unaudited pro forma condensed combined financial statements are
      derived from and should be read in conjunction with the historical consolidated
      financial statements and related notes of VOIP, INC. ("VOIP" or the "Company"),
      CAERUS, INC. ("CAERUS"), and WQN, Inc. (“WQN”).




On
      June
      1, 2005, the Company, and Caerus announced the closing of the merger of Volo
      Acquisition Corp., a wholly-owned subsidiary of the Company with and into
      Caerus, with Caerus as the surviving corporation (the "Merger"). The Merger
      was
      completed pursuant to an Agreement and Plan of Merger (the "Merger Agreement'),
      executed on May 31, 2005.




On
      October 6, 2005, the Company purchased substantially all of the assets of WQN,
      Inc. relating to WQN’s “Voice over Internet Protocol” business. Such assets
      consist of WQN’s properties and infrastructure for its services platform for
      both retail and wholesale voice over internet business.




The
      unaudited pro forma condensed combined statements of operation for the year
      ended December 31, 2005 assumes that the mergers of Caerus, WQN and the Company
      were consummated at the beginning of the respective periods.




The
      unaudited pro forma condensed combined statements of operations has been
      prepared based on currently available information and assumptions that are
      deemed appropriate by the Company's management. The pro forma information is
      for
      informational purposes only and is not intended to be indicative of the actual
      consolidated results that would have been reported had the transactions occurred
      on the dates indicated, nor does the information represent a forecast of the
      consolidated financial position at any future date or the combined financial
      results of the Company, Caerus and WQN for any future period.


F-21




**VoIP,
        Inc**
 **Proforma
        Condensed Combined Statement of Operations (Unaudited)**
 **Year
        Ended December 31, 2005**
 
 
 **VoIP,
                  Inc**
              
              **Caerus,
                  Inc**
              
              **WQN,
                  Inc**
              
              **Adjustments**
              
              **Consolidated**Revenues
              
              $
              3,277,323
              
              $
              11,307,620
              
              $
              31,790,296
              
              $
              -
              
              $
              46,375,239Cost
                  of sales
              
              
              2,754,073
              
              
              14,814,907
              
              
              30,397,628
              
              
              -
              
              
              47,966,608Gross
                  profit
              
              
              523,250
              
              
              (3,507,287
              )
              
              1,392,668
              
              
              -
              
              
              (1,591,369
              )Operating
                  expenses
              
              
              19,393,232
              
              
              6,558,373
              
              
              5,024,616
              
              
              3,968,437
              
              
              34,944,658Loss
                  from operations
              
              
              (18,869,982
              )
              
              (10,065,660
              )
              
              (3,631,948
              )
              
              (3,968,437
              )
              
              (36,536,027
              )Interest
                  expense
              
              
              1,078,138
              
              
              786,390
              
              
              -
              
              
              643,200
              
              
              2,507,728Gain
                  on sale of fixed assets
              
              
              (206,184
              )
              
              -
              
              
              (148,236
              )
              
              -
              
              
              (354,420
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss before discontinued operations
              
              
              (19,741,936
              )
              
              (10,852,050
              )
              
              (3,483,712
              )
              
              (4,611,637
              )
              
              ($38,689,335
              )Income
                  from discontinued operations,net
                  of income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  Loss
              
              $
              (19,741,936
              )
              $
              (10,852,050
              )
              $
              (3,483,712
              )
              $
              (4,611,637
              )
              $
              (38,689,335
              )Basic
                  and diluted loss per share:
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (0.79
              )Weighted
                  average number of shares outstanding
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              48,870,602
 
 The
        accompanying notes are an integral part of this pro forma condensed combined
        statement of operations.





F-22


**VOIP,
      INC. AND SUBSIDIARIES**


**NOTES
      TO UNAUDITED PRO FORMA CONDENSED COMBINED**


**FINANCIAL
      STATEMENTS**




(1)  VoIP,
      INC. Basis of Presentation




Historical
      financial information for VoIP, Inc. for the year ended December 31, 2005 has
      been derived from VoIP, Inc.'s historical statements.




(2)  Caerus,
      Inc. Basis of Presentation




Historical
      financial information for Caerus, Inc. for the year ended December 31, 2005
      has
      been derived from Caerus, Inc.'s historical statements.




(3)  Historical
      financial information for WQN, Inc. for the year ended December 31, 2005 has
      been derived from WQN, Inc.’s historical financial statements.




(4)  VoIP,
      Inc. and Caerus, Inc. Merger




On
      June
      1, 2005, the Company and Caerus, Inc. announced the closing of the merger of
      Volo Acquisition Corp., a wholly-owned subsidiary of the Company with and into
      Caerus, Inc. with Caerus, Inc. as the surviving corporation (the "Merger"). The Merger was completed pursuant to an Agreement
      and Plan of Merger (the "Merger Agreement'), executed on May 31, 2005 by the
      conversion of all Caerus, Inc. capital stock into 16,434,470 shares of common
      stock, par value $0.001, of the Company.




(5)  On
      October 6, 2005, the Company purchased substantially all of the assets of WQN,
      Inc. relating to WQN’s “Voice over Internet Protocol” business. Such assets
      consist of WQN’s properties and infrastructure for its services platform for
      both retail and wholesale voice over internet business.




(6)  Pro
      Forma
      Statements of Operations Adjustments




Adjustments
      to the pro forma Statements of Operations represent amortization of intangible
      assets and interest expense related to convertible debt recorded in connection
      with the acquisitions.


F-23


**REPORT
      OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS**




Board
      of
      Directors


Caerus,
      Inc.


Altamonte
      Springs, Florida




We
      have
      audited the accompanying consolidated balance sheets of Caerus, Inc. as of
      December 31, 2004 and 2003, and the related consolidated statements of
      operations, changes in stockholders' equity (deficit), and cash flows for the
      year ended December 31, 2004 and for period May 15, 2002 (date of inception)
      through December 31, 2003. These consolidated financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements based on our audits.




We
      conducted our audits in accordance with auditing standards generally accepted
      in
      the United States of America. Those standards require that we plan and perform
      the audits to obtain reasonable assurance about whether the financial statements
      are free of material misstatement. An audit includes examining, on a test basis,
      evidence supporting the amounts and disclosures in the financial statements.
      An
      audit also includes assessing the accounting principles used and significant
      estimates made by management, as well as evaluating the overall financial
      statement presentation. We believe that our audits provide a reasonable basis
      for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Caerus, Inc.
      as
      of December 31, 2004 and 2003, and the results of its operations and cash flows
      for the year ended December 31, 2004 and for the period May 15, 2002 (date
      of
      inception) through December 31, 2003 in conformity with accounting principles
      generally accepted in the United States of America.




The
      accompanying financial statements have been prepared assuming the Company will
      continue as a going concern. As discussed in Note 1 to the consolidated
      financial statements, the Company has incurred significant losses and negative
      cash flows from operations, has a working capital deficit, and has significant
      unresolved litigation as discussed in Note 8 to the financial statements. These
      matters, among other things, raise substantial doubt about the Company's ability
      to continue as a going concern. Management's plans related to these matters
      are
      also discussed in Note 1. These financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.




*/s/
        Moore Stephens Lovelace, P.A.*
 *Certified
        Public Accountants*
  *Orlando,
        Florida*
 *July
        25, 2005*


F-24





**CAERUS,
                INC.****CONSOLIDATED
                BALANCESHEETS****December
                31, 2004 and 2003****ASSETS**




**2004**
            
            **2003**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            19,414
            
            $
            25,078Restricted
                cash
            
            
            60,224
            
            
            196Accounts
                receivable
            
            
            2,098,598
            
            
            358,522Note
                receivable - related party
            
            
            -
            
            
            179,974Supplies,
                deposits and prepaid expenses
            
            
            70,999
            
            
            350,199TOTAL
                CURRENT ASSETS
            
            
            2,249,235
            
            
            913,969PROPERTY
                AND EQUIPMENTTelecommunications
                equipment and computers
            
            
            6,390,973
            
            
            732,205Furniture
                and fixtures
            
            
            61,960
            
            
            21,624Leasehold
                improvements
            
            
            163,808
            
            
            146,358Purchased
                and developed software
            
            
            473,228
            
            
            598,2437,089,969
            
            
            1,498,430Less
                accumulated depreciation and amortization
            
            
            (824,580
            )
            
            (183,408
            )NET
                PROPERTY AND EQUIPMENT
            
            
            6,265,389
            
            
            1,315,022OTHER
                ASSETSDeferred
                loan origination costs, net
            
            
            285,075
            
            
            -Lease
                deposit and other
            
            
            28,959
            
            
            65,000TOTAL
                ASSETS
            
            $
            8,828,658
            
            $
            2,293,991**LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIT)**CURRENT
                LIABILITIESAccounts
                payable and accrued expenses
            
            $
            7,137,293
            
            $
            452,094Note
                payable
            
            
            6,006,899
            
            
            -Convertible
                notes payable - related party
            
            
            1,830,000
            
            
            1,050,000Deferred
                revenue and customer deposits
            
            
            38,750
            
            
            60,576TOTAL
                CURRENT LIABILITIES
            
            
            15,012,942
            
            
            1,562,670STOCKHOLDERS’
                EQUITY (DEFICIT)Common
                stock - $.01 par value; 50,000,000 shares authorized;14,940,508
                and 11,948,367 shares issued and outstanding, respectively
            
            
            149,405
            
            
            119,484Preferred
                stock - $.01 par value; 25,000,000 shares authorized;-0-
                shares issued and outstanding
            
            
            -
            
            
            -Additional
                paid-in capital
            
            
            4,618,253
            
            
            2,952,184Accumulated
                deficit
            
            
            (10,951,942
            )
            
            (2,340,347
            )TOTAL
                SHAREHOLDERS’ EQUITY (DEFICIT)
            
            
            (6,184,284
            )
            
            731,321TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
            
            $
            8,828,658
            
            $
            2,293,991




The
      accompanying notes are an integral part of the consolidated financial
      statements.


F-25


**CAERUS,
                INC.****CONSOLIDATED
                STATEMENTS OF OPERATIONS****For
                The Year Ended December 31, 2004, and****The
                Period May 15, 2002 (Date of Inception) Through December 31,
                2003**




**2004**
            ****
            **2002-2003****(Development****Stage)**SALES
            
            $
            14,379,365
            
            $
            1,191,287COST
                OF SALESNetwork
                and termination costs
            
            
            15,103,149
            
            
            900,681Testing
                and sales concessions
            
            
            662,052
            
            
            -TOTAL
                COST OF SALES
            
            
            15,765,201
            
            
            900,681GROSS
                PROFIT (LOSS)
            
            
            (1,385,836
            )
            
            290,606OPERATING
                EXPENSESEquipment
                and computer expenses
            
            
            603,189
            
            
            97,068Office
                expenses
            
            
            228,108
            
            
            206,215Labor-related
                expenses
            
            
            2,973,070
            
            
            1,214,240Professional
                fees
            
            
            814,243
            
            
            400,872Marketing
            
            
            217,835
            
            
            16,689Litigation
                settlement
            
            
            326,205
            
            
            -Rent,
                utilities and security
            
            
            246,545
            
            
            355,481Taxes
                and licenses
            
            
            55,527
            
            
            25,390Travel,
                lodging and entertainment
            
            
            163,555
            
            
            90,928Depreciation
                and amortization
            
            
            641,172
            
            
            183,409Asset
                impairment charge
            
            
            299,122
            
            
            -TOTAL
                EXPENSES
            
            
            6,568,571
            
            
            2,590,292LOSS
                FROM OPERATIONS
            
            
            (7,954,407
            )
            
            (2,299,686
            )OTHER
                EXPENSESInterest
                expense, net
            
            
            (657,238
            )
            
            (19,654
            )Other
                expense, net
            
            
            50
            
            
            (21,007
            )NET
                LOSS
            
            $
            (8,611,595
            )
            $
            (2,340,347
            )




The
      accompanying notes are an integral part of the consolidated financial
      statements.


F-26


**CAERUS,
        INC.**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**
 **For
        The Year Ended December 31, 2004, and**
 **The
        Period May 15, 2002 (Date of Inception) Through December 31,
        2003**
 
 **Common
                  Stock**
                **$.01
                  Par Value**
              ****
              ****
              ****
              ****
              ****
              ****
              ********
              ****
              **Shares**
              ****
              **Amount**
              ****
              **Additional**
                **Paid-In**
                **Capital**
              ****
              **Accumulated**
                **Deficit**
              ****
              **Total**
                **Stockholders’**
                **Equity
                  (Deficit)**BALANCE
                  - MAY 15, 2002
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -ISSUANCE
                  OF FOUNDER STOCK
              
              
              5,400,000
              
              
              54,000
              
              
              -
              
              
              -
              
              
              54,000SALE
                  OF COMMON STOCK
              
              
              6,186,592
              
              
              61,866
              
              
              2,721,909
              
              
              -
              
              
              2,783,775ISSUANCE
                  OF COMMON STOCKFOR
                  SERVICES
              
              
              150,000
              
              
              1,500
              
              
              81,750
              
              
              -
              
              
              83,250ISSUANCE
                  OF COMMON STOCKFOR
                  PROPERTY AND EQUIPMENT
              
              
              211,775
              
              
              2,118
              
              
              148,525
              
              
              -
              
              
              150,643NET
                  LOSS
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,340,347
              )
              
              (2,340,347
              )BALANCE
                  - DECEMBER 31, 2003
              
              
              11,948,367
              
              
              119,484
              
              
              2,952,184
              
              
              (2,340,347
              )
              
              731,321ISSUANCE
                  OF COMMON STOCK
              
              
              712,071
              
              
              7,121
              
              
              273,139
              
              
              -
              
              
              280,260ISSUANCE
                  OF COMMON STOCKFOR
                  DEBT
              
              
              2,280,070
              
              
              22,800
              
              
              1,097,200
              
              
              -
              
              
              1,120,000ISSUANCE
                  OF STOCK WARRANTSIN
                  CONNECTION WITH SECUREDNOTE
                  PAYABLE
              
              
              -
              
              
              -
              
              
              218,813
              
              
              -
              
              
              218,813EMPLOYEE
                  STOCK OPTIONS -COMPENSATION
                  EXPENSERECOGNIZED
              
              
              -
              
              
              -
              
              
              76,917
              
              
              -
              
              
              76,917NET
                  LOSS
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,611,595
              )
              
              (8,611,595
              )BALANCE
                  - DECEMBER 31, 2004
              
              
              14,940,508
              
              $
              149,405
              
              $
              4,618,253
              
              $
              (10,951,942
              )
              $
              (6,184,284
              )
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-27





**CAERUS,
                INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****For
                The Year Ended December 31, 2004, and****The
                Period May 15, 2002 (Date of Inception) Through December 31,
                2003**




**2004**
              
              **2002-2003**
              ********
              ****
              ****
              ****
              **(Development**
                **Stage)**CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (8,611,595
              )
              $
              (2,340,347
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Litigation
                  settlement
              
              
              326,205
              
              
              -Depreciation
                  and amortization
              
              
              641,172
              
              
              183,408Asset
                  impairment charge
              
              
              299,122
              
              
              -Amortization
                  of deferred loan fees
              
              
              56,613
              
              
              -Stock
                  issued to Founder
              
              
              -
              
              
              54,000Stock
                  issued for services
              
              
              -
              
              
              83,250Expense
                  related to employee stock options
              
              
              76,917
              
              
              -Forgiveness
                  of related-party loan
              
              
              415,323
              
              
              -Changes
                  in:Restricted
                  cash
              
              
              (60,028
              )
              
              (196
              )Accounts
                  receivable
              
              
              (2,066,281
              )
              
              (358,522
              )Supplies,
                  deposits and prepaid expenses
              
              
              279,200
              
              
              (415,199
              )Other
                  assets
              
              
              36,041
              
              
              -Accounts
                  payable and accrued expenses
              
              
              6,685,199
              
              
              452,094Deferred
                  revenue
              
              
              (21,826
              )
              
              60,576NET
                  CASH USED IN OPERATING ACTIVITIES
              
              
              (1,943,938
              )
              
              (2,280,936
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESAdditions
                  to property and equipment
              
              
              (5,890,661
              )
              
              (1,347,787
              )Additions
                  to related-party loan
              
              
              (235,349
              )
              
              (179,974
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (6,126,010
              )
              
              (1,527,761
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from borrowings
              
              
              8,900,000
              
              
              1,050,000Repayment
                  of note payable
              
              
              (993,101
              )
              
              -Proceeds
                  from issuance of common stock
              
              
              280,260
              
              
              2,783,775Payments
                  for loan origination costs
              
              
              (122,875
              )
              
              -NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              8,064,284
              
              
              3,833,775NET
                  CHANGE IN CASH
              
              
              (5,664
              )
              
              25,078CASH
                  AND CASH EQUIVALENTS - BEGINNING OF PERIOD
              
              
              25,078
              
              
              -CASH
                  AND CASH EQUIVALENTS - END OF PERIOD
              
              $
              19,414
              
              $
              25,078




The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-28




**Caerus,
      Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




For
      The
      Year Ended December 31, 2004 and For The Period May 15, 2002 (Date of Inception)
      Through December 31, 2003




**NOTE
      1 - DESCRIPTION OF BUSINESS**




Caerus,
      Inc. and subsidiaries (collectively referred to as the "Company") were
      incorporated on May 15, 2002 and are wholesale providers of advanced
      telecommunications technologies and services to carriers and service providers,
      including Inter Exchange Carriers ("IXCs"), Competitive Local Exchange Carriers
      ("CLECs"), Internet Service Providers, Cable Operators and Enhanced Voice and
      Data Service Providers. Through its wholesale-only model, the Company has
      positioned itself as a "carrier's carrier" and offers protocol-agnostic packet
      switched technologies to address the gap between traditional communications
      and
      "next generation" platforms.




During
      the period May 15, 2002 (date of inception) to December 31, 2003, the Company
      was in the process of developing its resources, enhancing its proprietary
      technology, building a nationwide network with five physical interconnection
      points (cities), working with potential customers on testing its network, and
      attracting key engineering professionals; accordingly, the Company was
      considered to be a development stage enterprise. In January 2004, the Company
      became fully operational and management determined that the Company was no
      longer in a development stage.




The
      Company offers a comprehensive suite of Internet Protocol ("IP")-based broadband
      packet voice services, IP and Time Division Multiplexing ("TDM")
      origination/termination services, IP PBX-hosted services, and unified messaging
      services that include enhanced voice and data solutions. The suite of services
      is complemented by a Service Creation Environment that enables the Company
      to
      develop custom applications and features "on the fly" for its customers.




The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries. All significant intercompany balances and
      transactions have been eliminated.




The
      Company has incurred significant losses and negative cash flows from operations
      since its inception. Additionally, the Company has a working capital deficit
      of
      $12,763,707 and an accumulated deficit of $10,951,942 at December 31, 2004.
      Management continues to undertake steps as part of a plan to attempt to improve
      liquidity and operating results with the goal of sustaining Company operations.
      These steps include seeking (a) to increase high-margin sales; and




(b)
      to
      control overhead costs and operating expenses. Management plans, in this regard,
      to continue the implementation of a stabilized and fully operational network,
      adding recurring-revenue customers, attracting an experienced management team
      capable of building a profitable company, and securing funding to meet current
      obligations.




There
      can
      be no assurance that the Company can successfully accomplish these steps.
      Accordingly, the Company's ability to continue as a going concern is uncertain
      and dependent upon continuing to achieve improved operating results and cash
      flows or obtaining additional financing. These consolidated financial statements
      do not include any adjustments to the amounts and classification of assets
      and
      liabilities that might be necessary should the Company be unable to continue
      in
      business.




**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Cash
      and Cash Equivalents**




For
      financial presentation purposes, the Company considers short-term, highly liquid
      investments with original maturities of three months or less to be cash
      equivalents.




F-29


**Restricted
      Cash and Letters of Credit**




Certain
      cash is restricted to support standby letters of credit which, in turn, support
      operating license bonds required by several states' regulatory agencies. These
      standby letters of credit are generally in force for one year with automatic
      one-year extensions. Maximum draws available to the beneficiary as of December
      31, 2004 were $60,000. If the Company was required to obtain replacement standby
      letters of credit as of December 31, 2004 for those currently outstanding,
      it is
      the Company's opinion that the replacement costs would not significantly vary
      from the present fee structure.




**Accounts
      Receivable**




Accounts
      receivable result from the sale of the Company's services, net of estimated
      allowances. The Company estimates an allowance for doubtful accounts based
      on a
      specific-identification basis. The Company had no allowance for doubtful
      accounts as of December 31, 2004 and 2003.




**Property
      and Equipment**




Property
      and equipment are recorded at cost. Depreciation and amortization are calculated
      on a straight-line basis over the assets' useful lives, which range from three
      to ten years. Leasehold improvements are amortized over the estimated useful
      lives of the improvements, or the term of the lease, if shorter. Maintenance
      and
      repairs are expensed as incurred, while renewals and betterments are
      capitalized. Upon the sale or other disposition of property, the cost and
      related accumulated depreciation are removed from the accounts, and any gain
      or
      loss is recognized in operations.




Under
      the
      Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer
      Software Developed or Obtained for Internal Use," the Company expenses computer
      software costs related to internal-use software that is incurred in the
      preliminary project stage. When the capitalization criteria of SOP 98-1 have
      been met, costs of developing or obtaining internal-use computer software are
      capitalized. The Company capitalized approximately $772,350 of costs incurred
      for internally developed software during the period from inception through
      December 31, 2004. Amortization of internal-use software over a 5-year estimated
      useful life commenced upon the software being placed in service beginning
      January 1, 2004. Amortization of internal-use software for the periods ended
      December 31, 2004 and 2003 was approximately $77,000 and $-0-, respectively.
      During 2004, the Company suspended a number of software development projects
      and, accordingly, recognized a related asset impairment charge of $299,122
      in
      2004.




**Deposits**




Deposits
      consist primarily of an equipment deposit, a refundable office lease deposit
      and
      various other deposits outstanding with service providers.




**Deferred
      Revenue**




Deferred
      revenue represents fees for services that have not yet met the criteria to
      be
      recognized as revenue.




**Revenue
      Recognition**




Revenue
      is recognized when earned. Revenue related to long distance, carrier access
      service and certain other usage-driven charges are billed monthly in arrears,
      and the associated revenues are recognized during the month of service.




**Income
      Taxes**




The
      Company utilizes the asset and liability method of accounting for income taxes.
      Under this method, deferred income taxes are recorded to reflect the tax
      consequences in future years of differences between the tax basis of assets
      and
      liabilities and their financially reported amounts at each year-end, based
      on
      enacted laws and statutory rates applicable to the periods in which differences
      are expected to affect taxable income. As of December 31, 2004, the Company
      had
      a deferred tax asset of approximately $3,000,000, the components of which
      consisted primarily of the Company's net losses, fixed asset depreciation and
      stock-based compensation. Also at December 31, 2004, the Company had a net
      operating loss carryforward of approximately $11,000,000 for federal income
      tax
      purposes that will begin to expire in 2022, and that is subject to significant
      limitations based upon the occurrence of certain changes in ownership of the
      Company.




F-30


A
      valuation allowance is provided against the future benefits of deferred tax
      assets if it is determined that it is more likely than not that the future
      tax
      benefits associated with the deferred tax asset will not be realized. Due to
      recurring losses since inception and the resultant uncertainty of the
      realization of the tax loss carryforward, the Company has established a 100%
      valuation allowance against the carryforward benefit. Accordingly, no
      provision/benefit for income taxes has been included in these consolidated
      financial statements.




**Concentration
      of Credit Risk**




Financial
      instruments that may subject the Company to concentrations of credit risk
      consist principally of cash and cash equivalents and accounts receivable. The
      Company has investment policies and procedures that are reviewed periodically
      to
      minimize credit risk.




One
      customer represented approximately 98% and 90% of the Company's accounts
      receivable as of December 31, 2004 and 2003, respectively, and approximately
      91%
      and 95% of the Company's revenues for the year ended December 31, 2004 and
      for
      the period May 15, 2002 (date of inception) through December 31, 2003,
      respectively. The loss of this customer would have a significant adverse affect
      on the Company's operations.




**Concentration
      of Supplier Risk**




One
      supplier represented approximately 86% of the Company's accounts payable as
      of
      December 31, 2004, and approximately 94% of the Company's cost of sales for
      the
      year ended December 31, 2004 (see Note 8).




**Stock-based
      Compensation**




The
      Company uses the fair value method of Statement of Financial Accounting
      Standards No. 123R, "Accounting for Stock Based Compensation" in accounting
      for
      its stock options. This standard states that compensation cost is measured
      at
      the grant date based on the value of the award and is recognized over the
      service period, which is usually the vesting period. The fair value for each
      option granted is estimated on the date of the grant using the minimum value
      method.




**Estimates**




The
      preparation of these consolidated financial statements in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the financial statements. Estimates also affect
      the
      reported amounts of revenues and expenses during the reporting period. Actual
      results could differ from those estimates. Significant management estimates
      affect the carrying value of, among other things, internal-use software, cost
      of
      goods sold (see Note 7), the estimating of the fair value of the Company's
      common stock (see Note 3), and the evaluation of existing disputes and claims
      (see Notes 7 and 8).




**Reclassifications**




Certain
      reclassifications have been made to the 2003 financial statements to conform
      to
      the 2004 presentation.




**NOTE
      3 - CONVERTIBLE NOTES PAYABLE - RELATED PARTY**




During
      2003, the Company issued two one-year convertible notes to a stockholder of
      the
      Company, $1,050,000 and $70,000 of which were funded in the periods ended
      December 31, 2003 and 2004, respectively. These notes accrued interest at 12%
      per annum, with all interest and principal due in September and December 2004.
      These notes, which had certain anti-dilution provisions and which were
      collateralized by substantially all of the assets of the Company, were converted
      into common stock in May 2004 (see Note 6) and the convertible notes were
      cancelled and the principal amount was satisfied in full.




F-31


The
      Company determined the conversion rates based upon its evaluation of the
      Company's common stock on the issuance dates. The Company's evaluations were
      based upon, among other things, peer company valuations, industry and market
      conditions, the Company's current financial position, terms and conditions
      of
      funding available to the Company at the time of issuance, etc.




During
      2004, the Company issued two one-year convertible notes to a stockholder of
      the
      Company, totaling $1,830,000. These notes accrue interest at 12% per annum,
      with
      monthly principal and interest payments originally scheduled through August
      and
      November 2004. Restrictive covenants pertaining to the note payable discussed
      in
      Note 4 to these financial statements precluded payment of scheduled principal
      and interest on these notes; therefore, these notes are currently due. However,
      the same covenants preclude payment until the note described in Note 4 to these
      financial statements is paid in full. These one-year notes are collateralized
      by
      substantially all of the assets of the Company (see Note 8).




Interest
      expense incurred with respect to these notes during the year ended December
      31,
      2004 and the period May 15, 2002 (date of inception) through December 31, 2003,
      was $122,223 and $19,653, respectively.




Interest
      payments made with respect to these notes during the year ended December 31,
      2004 and the period May 15, 2002 (date of inception) through December 31, 2003,
      were $42,560 and $-0-, respectively.




**NOTE
      4 - NOTE PAYABLE**




In
      June
      2004, the Company secured a $15,000,000 debt facility and drew down the first
      $7,000,000 traunch primarily for the purpose of funding network equipment
      purchases. These borrowings are repayable over a three-year period and bear
      interest at 12.5% per annum. Additional borrowings under this facility are
      contingent upon, among other things, the Company raising certain levels of
      additional equity financing. The loan agreement contains customary covenants
      and
      restrictions and provides the lender the right to a perfected first-priority,
      secured interest in all of the Company's assets, as well as rights to preferred
      stock warrants (see Notes 6 and 8).




Interest
      paid under this debt facility during the year ended December 31, 2004, was
      $484,867.




The
      Company is currently in violation of several of the restrictive covenants in
      this debt facility. Under its provisions, the lender has the right to call
      the
      related note payable due. Accordingly, the full amount of the note at December
      31, 2004 has been classified as current.




**NOTE
      5 - NOTE RECEIVABLE - RELATED PARTY**




During
      the period May 15, 2002 (date of inception) through December 31, 2004, the
      Company advanced $415,323 to an officer of the Company. In 2005, these advances
      were characterized as compensation and were forgiven; accordingly, their
      carrying value was reduced to zero at December 31, 2004. In addition, the
      Company agreed to pay the related federal income tax withholding of
      approximately $104,000 on behalf of the related party, which was accrued at
      December 31, 2004.




**NOTE
      6 - STOCKHOLDERS' EQUITY**




In
      June
      2002, the Company increased its authorized shares to 100,000 shares of $0.01
      par
      value common stock. In July 2002, the Company increased its authorized shares
      to
      3,000,000 shares of $0.01 par value common stock and approved a 2-for-1 common
      stock split. In October 2002, the Company increased its authorized shares to
      6,000,000 shares of $0.01 par value common stock. In July 2003, the Company
      approved an additional 3-for-1 common stock split and an increase in the
      authorized shares of common stock to 18,000,000. The Articles of Amendment
      for
      this amendment were not filed with the state of Delaware until 2004. The
      accompanying consolidated financial statements and related notes present all
      of
      these amendments as if they were affected for all periods presented.




In
      2002,
      5,400,000 shares of common stock were issued to the founder of the Company.
      These shares were recorded at their par value.




F-32


In
      2002,
      the Company issued 150,000 shares of its common stock for legal services
      provided to the Company, which were recorded at their estimated fair value
      of
      $83,250.




During
      the period May 15, 2002 (date of inception) through December 31, 2003, the
      Company issued 5,965,957 shares of its common stock and received net proceeds
      of
      $2,783,775. Offering costs related to these sales consisted of the issuance
      of
      an additional 220,635 shares of the Company's common stock.




During
      the period May 15, 2002 (date of inception) through December 31, 2003, the
      Company issued 211,775 shares of its common stock in consideration for leasehold
      improvements and equipment, of which 190,211 of the shares were issued to the
      founder of the Company. These shares were recorded at their estimated fair
      value
      of $150,643.




In
      May
      2004, $1,120,000 of convertible notes payable to a shareholder were converted
      into 2,280,070 shares of common stock.




In
      May
      and August 2004, the Company issued 500,000 and 212,071 shares of its common
      stock for cash of $100,000 and $180,260, respectively.




In
      May
      2004, the Company authorized the issuance of up to 25,000,000 shares of $.01
      par
      value preferred stock, the terms of which will be decided upon by the Company's
      Board of Directors.




In
      August
      2004, the Company approved increasing the authorized common stock to 50,000,000
      shares. However, the related state filing has yet to be effected.




**Rights
      to Convert to Preferred Stock**




At
      December 31, 2004, related parties held 12,989,445 shares of common stock that
      had the right to be converted into preferred shares; however, as of December
      31,
      2004, no shares of preferred stock had been issued by the Company (see Note
      8).




**Stock
      Options**




During
      October 2004, the Board approved the Company's 2004 Stock Option Plan (the
      "Plan"), whereby 4,000,000 shares of the Company's common stock were reserved
      for issuance under the Plan to selected directors, officers, employees and
      consultants of the Company. As of December 31, 2004, options to purchase
      2,164,969 shares of common stock for $0.85 per share were issued and outstanding
      under the Plan. These options expire ten years from the date of issuance. They
      vest from 36 to 48 months of employment following the date of option issuance.
      These options had an estimated fair value of $330,599 at the date of grant,
      using the minimum-value method with the following assumptions:




Expected
              life (in years)
            
            
            10.0Risk-free
              interest rate
            
            
            2.0
            %Dividend
              yeild
            
            
            0.0
            %





Related
      2004 compensation expense was $76,917, determined by amortizing the options'
      estimated fair value at grant date over their vesting period. The weighted
      average remaining contractual life of the options outstanding at December 31,
      2004 was 9.8 years (see Note 8). The Company had no stock options outstanding
      at
      December 31, 2003.




F-33


**Stock
      Warrants**




In
      2004,
      the Company granted a series of warrants to purchase shares of preferred stock,
      the specific terms of which had yet to be determined, at an exercise price
      of
      $0.85 per share, in conjunction with the long-term note payable issuance (see
      Note 4). These warrants expire at the earlier of ten years from their issuance
      date, or five years after a potential initial public securities offering. At
      the
      warrant holder's election, these warrants may be exercised on a non-cash basis
      whereby the warrant holder uses the surplus of the preferred stock's then-fair
      market value per share over the $0.85 exercise price as payment for the
      preferred stock purchased under these warrants.




These
      warrants had estimated fair values totaling $218,813 at their grant dates,
      recognized as additional paid-in capital and deferred loan origination costs.
      Additional information pertaining to these warrants issued and outstanding
      at
      December 31, 2004 is as follows:




**Date
                Granted**
              ****
              **Shares**June,
                2004
              
              
              1,235,294August
                2004
              
              
              766,020October,
                2004
              
              
              383,010Total
                Issued and Outstanding
              
              
              2,384,324


Also
      in
      conjunction with the long-term note payable issuance (see Note 4), the Company
      granted warrants to purchase up to $1.0 million of common or preferred stock
      that may be issued in conjunction with any future securities offering of at
      least $5.0 million, upon the same price and conditions as afforded to
      third-party investors in said potential securities offering.




In
      August
      2004, the Company issued warrants to purchase 150,000 shares of common stock
      to
      a former employee whose employment was terminated in June 2004. Such warrants
      are exercisable at $0.85 per share, and expire on June 26, 2006. The Company
      had
      no stock warrants outstanding at December 31, 2003.




**NOTE
      7 - OTHER COMMITMENTS AND CONTINGENCIES**




**Operating
      Leases**




In
      August
      2002, the Company entered into an operating lease for office space, which
      expires in February 2008. Approximate minimum future lease payments due under
      this operating lease, are as follows:




**Year
                EndingDecember
                31,**
            ****
            **Amount**2005
            
            $
            196,0002006
            
            $
            202,0002007
            
            $
            208,0002008
            
            $
            35,000




During
      the year ended December 31, 2004 and the period May 15, 2002 (date of inception)
      through December 31, 2003, $172,700 and $234,000, respectively, were charged
      to
      operations for rent expense related to this operating lease.




**Legal
      and Regulatory Proceedings**




The
      Company's 100%-owned subsidiary, Volo Communications, Inc., settled its breach
      of contract dispute related to a 2003 "take or pay" sales contract with the
      Company. In connection with this settlement, the Company wrote off its
      previously recorded account receivable of $326,205 in 2004.


F-34


**Vendor
      Dispute**




Certain
      transport and termination costs incurred by the Company are recorded at vendor
      invoice amount less any amounts that have been formally disputed, for which
      the
      Company expects to receive a credit. Disputed amounts are based upon
      management's detailed review of vendor call records and contract provisions;
      accordingly, the recorded transport and termination costs represent management's
      estimates of what is ultimately due and payable. During the year ended December
      31, 2004, and the period May 15, 2002 (date of inception) through December
      31,
      2003, $4,500,000 and $2,500,000, respectively, of one vendor's charges were
      formally disputed. As of December 31, 2004, approximately $4,759,000 remained
      in
      dispute and are, therefore, not included in the accompanying financial
      statements (see Note 8). Differences between the disputed amounts and final
      settlements, if any, are reported in operations in the year of settlement.




**Other**




Telecommunications
      industry revenues are subject to statutory and regulatory changes,
      interpretations of contracts, etc., all of which could materially affect our
      revenues. Generally, our customers have sixty days from the invoice date to
      dispute any billed charges. Management reviews all billings for compliance
      with
      applicable rules, regulations and contract terms and believes that it is in
      compliance therewith; accordingly, no allowance has been recorded in the
      accompanying financial statements for potential disputed charges.




**NOTE
      8 - SUBSEQUENT EVENTS**




**Capital
      Stock Transactions**




In
      February 2005, the Company issued 511,750 shares of Series B preferred stock
      for
      $818,800 cash. In May 2005, 7,289,445 shares of common stock were converted
      into
      5,944,669 shares of Series A preferred stock. Both Series A and Series B
      preferred stock are convertible into common stock, and they carry voting rights
      equal to the equivalent number of common shares into which they are convertible.
      Also, both Series A and Series B preferred stock contain equal and ratable
      dividend and liquidation preferences over common stock.




**Litigation**




On
      April 8, 2005, Volo Communications, Inc. (“Volo”) (a wholly-owned
      subsidiary of Caerus, Inc.) filed suit against MCI Worldcom Network Services,
      Inc. d/b/a UUNET (“MCI”). Volo alleges that MCI engaged in a pattern and
      practice of over-billing Volo for the telecommunications services it provided
      pursuant to the parties’ Services Agreement, and that MCI refused to negotiate
      such overcharges in good faith. Volo also seeks damages arising out of MCI’s
      alleged fraudulent practice of submitting false bills by, among other things,
      re-routing long distance calls over local trunks to avoid access charges, and
      then billing Volo for access charges that were never incurred. On April 4,
      2005, MCI declared Volo in default of its obligations under the Services
      Agreement, claiming that Volo owes a past due amount of $8,365,980 through
      March, 2005, and threatening to terminate all services to Volo within 5 days.
      On
      April 12, 2005, MCI terminated all services to Volo. By these actions, Volo
      alleges claims for (1) breach of contract; (2) fraud in the
      inducement; (3) primary estoppel; and (4) deceptive and unfair trade
      practices. Volo also seeks a declaratory judgment that (1) MCI is in breach
      of the Services Agreement; (2) $8,365,980 billed by MCI is not “due and
      payable” under that agreement; and (3) MCI’s default letter to Volo is in
      violation of the Services Agreement. Volo seeks direct, indirect and punitive
      damages in an amount to be determined at trial.




On
      May 26, 2005, MCI filed an Answer, Affirmative Defenses, Counterclaim and
      Third-Party Complaint naming Caerus, Inc. as a third-party defendant. MCI
      asserts a breach of contract claim against Volo, a breach of guarantee claim
      against Caerus, Inc., and a claim for unjust enrichment against both parties,
      seeking an amount to be determined at trial. On July 11, 2005, Volo and
      Caerus, Inc. answered the counterclaim and third-party complaint, and filed
      a
      third-party counterclaim against MCI for declaratory judgment, fraud in the
      inducement, and breach of implied duty of good faith and fair dealing. Volo
      and
      Caerus, Inc. seek damages in an amount to be determined at trial. MCI has filed
      a motion to strike certain of Caerus’ affirmative defenses and a motion to
      dismiss Caerus’ counterclaims. Discovery should commence shortly. While
      management is optimistic about the outcome of this litigation, it is currently
      unable to assess the ultimate likelihood of a favorable or unfavorable outcome;
      accordingly, no related provision or liability has been made in the accompanying
      financial statements.


F-35


**Merger**




On
      May
      31, 2005, the Company consummated an Agreement and Plan of Merger ("Merger
      Agreement") with VoIP, Inc. ("VoIP") (OTCBB:VOII.OB), whereby 100% of Caerus,
      Inc.'s common and preferred stock, stock options and warrants were exchanged
      for
      the common stock of a wholly-owned subsidiary of VoIP. The VoIP subsidiary's
      name was then changed to Caerus, Inc. Also in conjunction with this merger,
      the
      holder of the $1,830,000 notes payable at December 31, 2004 referred to in
      Note
      3 agreed to exchange those notes plus accrued interest for an equivalent number
      of shares of VoIP common stock valued at $1.23 per share.




F-36


**Report
      of Independent Registered Public Accounting Firm**




Board
      of
      Directors


WQN,
      Inc.
      and Subsidiaries




We
      have
      audited the accompanying consolidated balance sheets of WQN, Inc. (a Delaware
      corporation) formerly known as WorldQuest Networks, Inc. and subsidiaries as
      of
      December 31, 2004 and 2003, and the related consolidated statements of
      operations, changes in stockholders’ equity, and cash flows for the years then
      ended. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform an audit of its internal control over
      financial reporting. Our audits 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 also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements ***,*** 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 WQN, Inc. and subsidiaries
      as of December 31, 2004 and 2003, and the results of its operations and its
      cash flows for the years then ended in conformity with accounting principles
      generally accepted in the United States of America.


As
        more
        fully discussed in Note 20 to the financial statements, the Company sold
        substantially all of its operating assets and liabilities to an unrelated
        third-party.




/s/
      Berkovits, Lago and Company, LLP




Fort
      Lauderdale, FloridaOctober 16, 2006


F-37


**WQN,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**




**December
                31,**
            ********
            ****
            **2004**
            ****
            **2003****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            9,942,280
            
            $
            17,931,820Investment
                in partnership
            
            
            2,944,243
            
            
            —Accounts
                receivable, net of allowances of $25,000 in 2004 and 2003
            
            
            689,885
            
            
            553,251Notes
                receivable
            
            
            2,408,679
            
            
            —Prepaid
                expenses and other current assets
            
            
            806,068
            
            
            557,577Total
                current assets
            
            
            16,791,155
            
            
            19,042,648Property
                and equipment, net
            
            
            597,522
            
            
            1,039,783Note
                receivable
            
            
            204,167
            
            
            —Other
                assets, net
            
            
            972,794
            
            
            101,192Total
                assets
            
            $
            18,565,638
            
            $
            20,183,623**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            1,630,088
            
            $
            1,108,152Accrued
                expenses
            
            
            457,459
            
            
            471,746Deferred
                revenue
            
            
            444,988
            
            
            254,121Promissory
                note
            
            
            300,000
            
            
            —Total
                current liabilities
            
            
            2,832,535
            
            
            1,834,019Promissory
                note
            
            
            —
            
            
            300,000Commitments
                and contingenciesStockholders’
                equity:Preferred
                stock, par value $0.01 per share:Authorized
                shares—10,000,000; none issued and outstanding
            
            
            —
            
            
            —Common
                stock, par value $.01 per share:Authorized
                shares—50,000,000; issued and outstanding shares — 6,830,062at
                December 31, 2004 and — 6,386,199 at December 31, 2003
            
            
            68,301
            
            
            63,862Additional
                capital
            
            
            43,180,859
            
            
            41,994,594Accumulated
                deficit
            
            
            (27,516,057
            )
            
            (24,008,852
            )Total
                stockholders’ equity
            
            
            15,733,103
            
            
            18,049,604Total
                liabilities and stockholders’ equity
            
            $
            18,565,638
            
            $
            20,183,623




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-38


**WQN,
      INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**Year
                ended December 31,**
            ********
            ****
            **2004**
            ****
            **2003**Retail
                telephony revenue
            
            $
            9,036,354
            
            $
            9,152,320Wholesale
                telephony revenue and other
            
            
            6,227,452
            
            
            206,572Total
                revenue
            
            
            15,263,806
            
            
            9,358,892Cost
                of revenue
            
            
            13,536,886
            
            
            7,008,908Gross
                profit
            
            
            1,726,920
            
            
            2,349,984Operating
                expenses:Selling,
                general and administrative
            
            
            3,901,045
            
            
            4,517,784Merger
                expenses
            
            
            1,311,945
            
            
            —Depreciation
                and amortization
            
            
            796,426
            
            
            921,900Total
                operating expenses
            
            
            6,009,416
            
            
            5,439,684Operating
                loss
            
            
            (4,282,496
            )
            
            (3,089,700
            )Interest
                income, net
            
            
            287,709
            
            
            202,187Loss
                from partnership investment
            
            
            (55,757
            )
            
            —Loss
                from continuing operations
            
            
            (4,050,544
            )
            
            (2,887,513
            )Income
                (loss) from discontinued operations
            
            
            543,339
            
            
            (457,879
            )Net
                loss
            
            $
            (3,507,205
            )
            $
            (3,345,392
            )Income
                (loss) per share - basic and diluted:Continuing
                operations
            
            $
            (0.61
            )
            $
            (0.45
            )Discontinued
                operations
            
            
            0.08
            
            
            (0.07
            )Income
                (loss) per share
            
            $
            (0.53
            )
            $
            (0.52
            )Weighted-average
                common shares outstanding - basic and diluted
            
            
            6,642,005
            
            
            6,386,199




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-39


**WQN,
      INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**




**Common
                Stock**
            ****
            **Additional
                Capital**
            ****
            **Accumulated
                Deficit**
            ****
            **Total****Shares**
            ****
            AmountBalance
                at December 31, 2002
            
            
            6,386,199
            
            $
            63,862
            
            $
            41,994,594
            
            $
            (20,663,460
            )
            $
            21,394,996Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,345,392
            )
            
            (3,345,392
            )Balance
                at December 31, 2003
            
            
            6,386,199
            
            $
            63,862
            
            $
            41,994,594
            
            $
            (24,008,852
            )
            $
            18,049,604Issuance
                of warrants
            
            
            —
            
            
            —
            
            
            76,000
            
            
            —
            
            
            76,000Exercise
                of stock options
            
            
            443,863
            
            
            4,439
            
            
            1,110,265
            
            
            —
            
            
            1,114,704Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,507,205
            )
            
            (3,507,205
            )Balance
                at December 31, 2004
            
            
            6,830,062
            
            $
            68,301
            
            $
            43,180,859
            
            $
            (27,516,057
            )
            $
            15,733,103




The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-40


**WQN,
      INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**Year
                ended December 31,****2004**
            
            **2003****Operating
                Activities**Net
                loss
            
            $
            (3,507,205
            )
            $
            (3,345,392
            )**Adjustments
                to reconcile net loss to net cash used in operating
                activities:**Gain
                on sale of operations
            
            
            (777,114
            )
            
            —Depreciation
                and amortization
            
            
            796,426
            
            
            921,900Loss
                on disposition of property and equipment, net
            
            
            76,522
            
            
            18,541Loss
                in investment in partnership
            
            
            55,757
            
            
            —Changes
                in operating assets and liabilities net of effects of
                acquisitions:Accounts
                receivable and notes receivable
            
            
            (227,585
            )
            
            4,243Accounts
                payable and accrued expenses
            
            
            283,649
            
            
            237,297Deferred
                revenue
            
            
            190,867
            
            
            15,185Other
                assets
            
            
            (1,122,886
            )
            
            (235,772
            )Net
                cash used in operating activities of continuing operations
            
            
            (4,231,569
            )
            
            (2,383,998
            )**Investing
                Activities**Additions
                to property and equipment
            
            
            (436,423
            )
            
            (405,389
            )Proceeds
                from the sale of subsidiary net of disposed cash
            
            
            417,915
            
            
            —Payments
                received on note from the sale of subsidiary
            
            
            145,833
            
            
            —Loan
                to Ntera Holdings, Inc.
            
            
            (2,000,000
            )
            
            —Purchase
                of partnership interest
            
            
            (3,000,000
            )
            
            —Net
                cash used in investing activities
            
            
            (4,872,675
            )
            
            (405,389
            )**Financing
                Activities**Proceeds
                from exercise of stock options
            
            
            1,114,704
            
            
            —Net
                cash provided by financing activities
            
            
            1,114,704
            
            
            —Decrease
                in cash and cash equivalents
            
            
            (7,989,540
            )
            
            (2,789,387
            )Cash
                and cash equivalents at beginning of year
            
            
            17,931,820
            
            
            20,721,207Cash
                and cash equivalents at end of year
            
            $
            9,942,280
            
            $
            17,931,820Supplemental
                Disclosures of Cash Flow Information:Interest
                paid
            
            $
            4,538
            
            $
            4,692Non-cash
                note receivable from sale of subsidiary
            
            $
            700,000
            
            $
            —







The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-41


**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Years
      ended December 31, 2004 and 2003**




**1.**  **Organization
      and Description of Business**




We
      are a
      Voice Over Internet Protocol (VoIP) telephony company providing international
      long distance services. VoIP enables voice communications over the Internet
      by
      compressing voice into data packets that can be efficiently transmitted over
      data networks and then converted back into voice at the receiving end. Our
      customers utilize our enhanced VoIP services platform to make and receive calls
      using their home phone, business phone, personal computer and mobile
      phone.




Our
      business currently includes the provision of enhanced Internet-based and other
      telephony services under various brand names to individual consumers primarily
      seeking to make international calls; the provision of enhanced Internet-based
      and other telephony services to resellers, corporations and service providers
      under their brand names and carrier transmission services whereby we sell our
      excess capacity to other long-distance carriers. We also distribute telephony
      services including prepaid long- distance and prepaid wireless through a network
      of over 90 private distributors. Through this network we estimate that our
      products are sold through over 10,000 retail outlets of which more than 5,000
      retail outlets are located in Southern California. We began selling our
      proprietary VoIP products through this distribution channel in
      2005.




As
      of
      December 31, 2004, Eagle Venture Capital, LLC (“Eagle Venture”) owned
      approximately 2.6 million, or 38%, of our outstanding shares of common stock.
      Eagle Venture is primarily owned by B. Michael Adler, our founder and Chief
      Executive Officer.




In
      November 2004, we changed our name to WQN, Inc. from WorldQuest Networks,
      Inc. (see Note 18).


On
        October 5, 2005, the Company sold substantially all of its operating assets
        and
        liabilities to an unrelated third-party (see Note 20).
  **2.**  **Significant
        Accounting Policies**




**Use
      of Estimates**




The
      preparation of financial statements in conformity with generally accepted
      accounting principles in the United States of America requires management to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses during
      the reporting period. Management believes the estimates used in preparing the
      financial statements are reasonable; however, actual results could differ from
      these estimates.




**Principles
      of Consolidation**




The
      consolidated financial statements include the accounts of the Company, its
      subsidiaries and joint ventures in which the Company owns a controlling
      interest. Investments in 20% to 50% owned partnerships and affiliates are
      accounted for on the equity method. All significant intercompany balances and
      transactions have been eliminated in consolidation.




**Reclassifications**




Certain
      reclassifications have been made to the 2003 financial statements to conform
      to
      the 2004 presentation.


F-42


**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




**Cash
      Equivalents**




Cash
      equivalents include money market mutual funds and other highly liquid
      investments purchased with maturities of three months or less.




**Depreciation
      and Amortization**




Property
      and equipment are recorded at cost and depreciated using the straight-line
      method over the estimated useful lives of the assets. Amortization of capital
      leases and leasehold improvements is provided on a straight line basis over
      the
      lives of the related assets or the life of the lease, whichever is shorter,
      and
      is included with depreciation expense. Maintenance repairs are charged to
      operations as incurred. Gains and losses on the disposition of property and
      equipment are recorded in the period incurred.




Depreciation
      expense totaled $500,778 and $820,709 for 2004 and 2003, respectively.
      Amortization expense totaled $295,648 for 2004 and $101,191 for 2003 for
      continuing operations and $107,297 for 2004 and $153,863 for 2003 for
      discontinued operations.




**Impairment
      of Long-lived Assets**




The
      Company evaluates long-lived assets, including intangible assets, for impairment
      whenever events or changes in circumstances indicate the carrying amount of
      an
      asset may not be recoverable and the undiscounted cash flows to be generated
      by
      these assets are less than the carrying amounts of these assets. For the year
      ended December 31, 2004 the Company determined that certain stored value
      equipment could no longer be used and recorded a non-cash impairment charge
      of
      approximately $60,000.




**Website
      Development Costs**




Costs
      related to the planning and post implementation phases of our website
      development efforts are expensed. Direct costs incurred in the development
      phase
      are capitalized and amortized over the product’s estimated useful life of one to
      three years and are included in depreciation expense. Costs associated with
      minor enhancements and maintenance for the website are expensed. Website
      development costs capitalized for the years ended December 31, 2004 and
      2003 were $243,986 and $190,000, respectively.




**Income
      Taxes**




Income
      taxes are determined using the liability method, which gives consideration
      to
      the future tax consequences associated with differences between the financial
      accounting and tax basis of assets and liabilities. This method also gives
      immediate effect to changes in income tax laws.




**Revenue
      Recognition**




Retail
      telephony revenue is recorded net of estimated returns and allowances and is
      recognized as calling services are used. Wholesale traffic revenue is recognized
      as calls are processed. Revenue on the distribution of telephony products is
      included in wholesale telephony revenue, is recorded net of estimated returns
      and allowances and is recognized when the products are shipped to the customer.
      Distribution products are processed by other carriers therefore no future
      service is provided by the Company.


F-43


**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




**Intangible
      Assets**




Intangible
      assets consist primarily of acquired customer lists and are included in other
      assets. Amortization is provided for by the straight-line method over the assets
      estimated life ranging from 2 to 4 years. At December 31, 2004
      intangible assets totaled $972,794 net of accumulated amortization of $337,136.
      The estimated aggregate amortization for each of the succeeding years is as
      follows: 2005 - $362,395, 2006 - $295,269, 2007 - $253,711, 2008 -
      $61,419.




**Investment
      in Partnership**




The
      Company’s investment in partnership is accounted for on the equity basis of
      accounting. Gains and losses are included in income (loss) from partnership
      investment. The Company can receive a distribution on its partner capital
      account by giving the partnership 60 days written notice.




**Notes
      Receivable**




Notes
      receivable represent balances due from third parties related to the sale of
      its
      wholly-owned subsidiary buyindiaonline.com, Inc. and the merger agreement with
      Ntera Holdings. Interest earned on notes receivable are recognized over the
      term
      of the note and is included in interest income, net.




**Advertising
      Costs**




The
      Company expenses advertising costs as incurred. Advertising expense for the
      years ended December 31, 2004 and 2003 was $467,000 and $334,000,
      respectively.




**Stock-Based
      Compensation**




The
      Company has elected to follow Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” in the primary financial statements
      and has provided supplemental disclosures required by Statement of Financial
      Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and
      by Statement of Financial Accounting Standards No. 148, “Accounting for
      Stock-Based Compensation - Transition and Disclosure an amendment of FASB
      Statement No. 123.”




Statement
      of Financial Accounting Standards No. 123, “Accounting for Stock Based
      Compensation,” (“SFAS 123”) requires the disclosure of pro forma net loss and
      loss per share computed as if the Company had accounted for its employee stock
      options under the fair value method set forth in SFAS 123. The Company’s
      reported and pro forma net loss for the years ending December 31, 2004 and
      2003
      are as follows:




**Year
                ended December 31,****2004**
            
            **2003**Net
                loss as reported
            
            $
            (3,507,205
            )
            $
            (3,345,392
            )Pro
                forma stock-based employee compensation expense
            
            
            (202,499
            )
            
            (170,863
            )Pro
                forma net loss
            
            $
            (3,709,704
            )
            $
            (3,516,255
            )Net
                loss per share:As
                reported - basic and diluted
            
            
            (0.53
            )
            
            (0.52
            )Pro
                forma - basic and diluted
            
            $
            (0.56
            )
            $
            (0.55
            )





F-44


**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




The
      fair
      value of options granted was estimated at the date of grant using the
      Black-Scholes option pricing model. The following weighted average assumptions
      used in the December 31, 2004 calculation were as follows: risk free
      interest rate of 3.5%, dividend yield of zero, volatility factor of 1.1, and
      average expected life of 4 years. The weighted average assumptions used in
      the December 31, 2003 calculation were as follows: risk free interest rate
      of 3.25%, dividend yield of zero, volatility of .85 and average expected life
      of
      5 years. The options granted during 2004 and 2003 had a weighted average
      fair value of $1.50 and $1.40 per share, respectively.




**Net
      Loss per Share**




Basic
      and
      diluted net loss per share is computed using the Company’s net loss for each
      period presented divided by the average common shares outstanding during the
      period. Stock options and warrants convertible into 1,267,759 and 1,790,556
      shares of the Company’s common stock for the years ended December 31, 2004
      and 2003, respectively, are excluded from the calculation of diluted earning
      per
      share because the Company reported losses from continuing operations in those
      periods and their effect would be antidilutive.




**Comprehensive
      Income**




Comprehensive
      income is defined as the change in equity of a business enterprise during a
      period from transactions and other events and circumstances from non-owner
      sources. For the years ended December 31, 2004 and 2003, the Company had no
      transactions other than those reported in its statement of
      operations.




**Fair
      Value of Financial Instruments**




The
      Company’s financial instruments consist primarily of cash equivalents, accounts
      and notes receivable, accounts payable and long-term debt. At December 31,
      2004 and 2003, the carrying amount of the Company’s financial instruments
      approximates their fair values. Management believes the Company’s debt
      approximates fair value due to its short maturity and its variable interest
      rate.




**Concentration
      of Credit and Business Risks**




Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist primarily of cash equivalents, accounts receivable and notes
      receivable. Accounts receivable consist of amounts owed by credit card
      processing companies relating to retail telephony sales, amounts owed by
      distributors for the purchase of telephony products and money transfer services.
      We bill our retail customers on a prepaid basis through credit cards. Credit
      is
      extended to some wholesale customers with terms that generally allow them to
      pay
      for our products within two weeks. All other wholesale customers pay for our
      products upfront.




Customers
      purchase the Company’s retail telephony products using major credit cards, which
      are reimbursed by credit card processing companies. The Company does not
      routinely perform on-going credit evaluations of its retail customers but does
      evaluate its credit card processors. The Company performs credit evaluations
      and
      establishes credit limits for its wholesale traffic and whole sale distribution
      customers, including requiring deposits when applicable.


F-45


**WQN,
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




For
      the
      years ended December 31, 2004 and 2003, a substantial portion of our retail
      customers were calling from the United States to India. The India international
      telephony market continues to experience downward pricing pressures, which
      has
      resulted in a decrease in our average selling price to our retail customers.
      It
      is unlikely that this trend will reverse in the near future.




At
      December 31, 2004, one customer accounted for 19% of total accounts
      receivable and no receivables from credit card processing companies accounted
      for more than 10% of total accounts receivable. At December 31, 2003, three
      credit card processing companies accounted for 35%, 13%, and 10% of total
      accounts receivable. At December 31, 2004 and 2003, accounts receivable are
      stated net of an allowance for doubtful accounts of $25,000. Bad debt expense
      for the years ended December 31, 2004 and 2003 was $189,000 and $83,000,
      respectively. For the year ended December 31, 2004, the Company purchased
      data communication and telecommunication services from three suppliers, which
      accounted for 18%, 13% and 11% of cost of goods sold for telecommunication
      services. For the year ended December 31, 2003, the Company purchased data
      communication and telecommunication services from three suppliers, which
      accounted for 35%, 18%, and 11% of cost of goods sold for telecommunication
      services.




**New
      Accounting Pronouncements**




In
      December 2004, FASB issued statement of Financial Accounting standards
      No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which will be
      effective in our first quarter of fiscal 2006. This standard sets forth the
      revised rules for the accounting treatment of employee stock options and other
      share-based payments. SFAS 123(R) requires the adoption a fair value-based
      method for measuring the compensation expense related to employee stock awards;
      this will lead to additional compensation expense. We currently use the
      intrinsic value method to measure compensation expense for stock-based awards
      to
      our employees. Under this standard, we do not recognize any compensation related
      to stock option grants we issue under our stock option plans. Note 2 to our
      Consolidated Financial Statements in this report provides our pro forma net
      loss
      and loss per share as if we had used a fair value-based method required under
      SFAS 123 to measure the compensation expense for employee stock awards during
      fiscal 2004 and 2003. The Company has not yet determined the full effect of
      implementing SFAS 123R on the financial statements.


F-46


**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




**3.**  **Discontinued
      Operations**




In
      July 2004, the Company sold all of the outstanding capital stock of its
      wholly-owned subsidiary buyindiaonline.com, Inc. (“Cash2India”) to a private
      company for approximately $1,552,000. The Cash2India business comprised the
      Company’s previously reported financial services segment and is accounted for as
      a discontinued operation in the accompanying condensed consolidated financial
      statements. Under the terms of the transaction, the Company received $852,000
      in
      cash, a promissory note for $700,000, and a warrant to purchase common stock
      in
      the acquiring company. The cash payment included consideration for $352,000
      in
      working capital associated with Cash2India at the time of the sale. The
      promissory note bears interest at 5% per annum, is secured by the capital stock
      of Cash2India, and is to be repaid in twenty-four consecutive monthly payments
      of $29,167 plus accrued interest. The balance of the promissory note and accrued
      interest was $554,167 as of December 31, 2004. As a result of the
      transaction the Company recorded a gain on the disposition of Cash2India of
      approximately $777,000 in the third quarter of 2004. The net gain/(loss) from
      discontinued operations is comprised as follows:




**Year
                ended December 31,****2004**
            
            **2003**Revenue
            
            $
            340,027
            
            $
            556,462Cost
                of revenue
            
            
            (134,969
            )
            
            (200,880
            )Gross
                profit
            
            
            205,058
            
            
            355,582Operating
                Expenses
            
            
            (438,833
            )
            
            (813,461
            )Net
                loss
            
            
            (233,775
            )
            
            (457,879
            )Gain
                on disposal
            
            
            777,114
            
            
            —Income
                (loss) from discontinued operations
            
            $
            543,339
            
            $
            (457,879
            )




The
      components of assets and liabilities of discontinued operations are as follows:




**2004**
            
            **2003**Cash
                and cash equivalents
            
            $
            —
            
            $
            514,635Accounts
                receivable
            
            
            —
            
            
            409,717Prepaid
                expenses and other current assets
            
            
            —
            
            
            71,988Property
                and equipment, net
            
            
            —
            
            
            236,308Accounts
                payable and accrued expenses
            
            
            —
            
            
            (210,658
            )$
            —
            
            $
            1,021,990




F-47


**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




**4.**  **Merger
      Agreement with Ntera Holdings**




On
      March 16, 2004, the Company entered into an Agreement and Plan of Merger
      (the “Agreement”) with Ntera Holdings, Inc., a Delaware corporation (“Ntera”),
      providing for a transaction that would have resulted in a change of control
      of
      WQN. In connection with the Agreement, WQN extended to Ntera a bridge loan
      in
      the principal amount of $2 million bearing interest of 7% per annum, which
      is secured by the assets of Ntera. On September 2, 2004, the Company
      terminated the Agreement with Ntera. Under the terms of the loan agreement,
      the
      full amount of the loan and accrued interest are due and payable within six
      months of the termination of the Agreement. The Company and Ntera have amended
      the repayment provisions of the loan agreement whereby Ntera will make
      installment payments to repay the loan and accrued interest by March 31,
      2005. The balance of the note and accrued interest at December 31, 2004 was
      $2,058,679, which is net of a payment of approximately $56,000 received during
      2004 in the form of telecommunication services. During the first quarter of
      2005, the Company received debt payments from Ntera totaling $1,650,000. The
      unpaid principal and interest as of March 1, 2005 from Ntera was $408,679
      and is expected to be collected on its due date. The loan is secured by the
      assets of Ntera.




**5.**  **Value
      Communications Transaction**




In
      April 2004, the Company purchased from Value Communications Corporation
      (“ValuCom”), a wholly owned subsidiary of Rediff.com India Limited, certain
      assets consisting primarily of ValuCom’s customer list, brand, trademarks, web
      sites, internally built software, and certain hardware for $500,000 in order
      to
      increase its customer base. The Company paid $200,000 of the total consideration
      at closing with the remaining $300,000 to be paid in twelve monthly installments
      of $25,000 commencing May 2004. In addition, the Company entered into an
      advertising agreement with Rediff.com, Inc. (“Rediff”) entitling WQN to
      marketing services including exclusive rights to prominent online advertising
      space on the Rediff.com U.S. website, the premier online destination for Indians
      in North America. Under the terms of the advertising agreement, the Company
      will
      pay Rediff $50,000 for twelve consecutive months commencing in May 2004 for
      the advertising services. The Company provided both ValuCom and Rediff
      irrevocable letters of credit for the Company’s remaining obligation under the
      agreements. The letters of credit are secured by deposits in money market funds
      and the amount of the letters of credit and the deposits are reduced as the
      monthly installments are paid. At December 31, 2004, the Company’s
      obligation under both the agreements totaled $300,000. Substantially all of
      the
      ValuCom purchase consideration was allocated to customer lists, which is
      included in other assets and is being amortized over four years.




**6.**  **Distribution
      and Marketing Agreement**




In
      September 2004, we entered into a distribution and marketing agreement with
      a privately held company. As a result of the agreement, the Company’s products
      will be sold in more than 5,000 retail outlets in the Southern California
      market. We sell telephony and other products to a network of distributors who
      then re-sell the product to the retail outlets. The revenues generated through
      this agreement are included in wholesale telephony revenues. In connection
      with
      the agreement, we paid the private company $50,000 and issued a warrant to
      purchase 40,000 shares of our common stock for a total consideration of
      approximately $126,000 as valued with the Black-Scholes pricing model which
      is
      included in other assets and is being amortized over the three year term of
      the
      agreement. The warrants exercise price is $.01.


F-48




**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




**7.**  **Investment
      in partnership**




In
      November 2004, the Company invested $3 million in a partnership
      managed by an affiliate of a director of the Company. The majority of the
      partnership assets are to be invested in private investments in public entities.
      The partnership investments will take the form of common equity, preferred
      equity, convertible debt and/or equity or debt securities. Although the
      partnership will endeavor to engage in hedging transactions in order to mitigate
      downside risk, there can be no assurance that the partnership’s investments will
      be successful and, as a result, the Company may lose all or some of its
      investment. The partnership agreement contains certain restrictions, including
      limits on the Company’s ability to withdraw capital from the partnership and
      limits on the transferability of the Company’s interests in the partnership. The
      Company can receive a distribution on its partner capital account by giving
      the
      partnership 60 days written notice. The Company records its proportionate
      share of earnings and losses from the partnership based on its share of the
      partnership and for the year ended December 31, 2004 recorded a loss from
      its partnership investment of $55,757.




**8.**  **Notes
      Receivable**




Components
      of notes receivable are as follows:




**2004**
            
            **2003**Loan
                to Ntera Holdings, Inc.
            
            $
            2,058,679
            
            $
            —Note
                from sale of Cash2India subsidiary
            
            
            554,167
            
            
            —Less
                amounts classified as current
            
            
            (2,408,679
            )
            
            —Long-term
                portion
            
            $
            204,167
            
            $
            —




During
      2004, in connection with the Agreement and plan of merger with Ntera Holding
      Inc., WQN extended to Ntera a bridge loan in the principal amount of
      $2 million bearing interest of 7% per annum (see Note 4). The balance of
      the note and accrued interest at December 31, 2004 was $2,058,679. The full
      amount of the loan and accrued interest are to be repaid in installments by
      March 31, 2005. During the first quarter of 2005 the Company has received
      debt payments from Ntera totaling $1,650,000. The unpaid principal and interest
      as of March 1, 2005 from Ntera was $408,679. The loan is secured by the
      assets of Ntera.




In
      July 2004, the Company sold all of the outstanding capital stock of its
      wholly-owned subsidiary Cash2India and received as a component of the purchase
      price a promissory note for $700,000 (See Note 3). The promissory note bears
      interest at 5% per annum, is secured by the capital stock of Cash2India, and
      is
      to be repaid in twenty-four consecutive monthly payments of $29,167 plus
      interest. During 2004, the Company received principal and interest payments
      of
      $159,290 and the balance of the promissory note and accrued interest was
      $554,167 as of December 31, 2004.




**9.**  **Prepaid
      Expenses and Other Current Assets**




Prepaid
      expenses and other current assets consist of the following as of
      December 31:




**2004**
            
            **2003**Prepaid
                telecommunication services
            
            $
            534,181
            
            $
            33,222Deposits
            
            
            151,781
            
            $
            316,936Prepaid
                expenses
            
            
            120,106
            
            
            207,419$
            806,068
            
            $
            557,577







F-49




**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




**10.**  **Property
      and Equipment**




Property
      and equipment consists of the following as of December 31:




**Estimated
                Useful Life (Years)**
            
            **2004**
            
            **2003**Leasehold
                improvements
            
            
            2
                to 5
            
            $
            78,134
            
            $
            78,134Computers
                and network equipment
            
            
            2
                to 5
            
            
            3,871,060
            
            
            3,797,148Furniture
                and fixtures
            
            
            5
            
            
            86,308
            
            
            87,196Purchased
                software and website development costs
            
            
            1
                to 5
            
            
            865,755
            
            
            1,315,622Total
            
            
            
            
            
            4,901,257
            
            
            5,278,100Less:
                accumulated depreciation and amortization
            
            
            
            
            
            (4,303,735
            )
            
            (4,238,317
            )Net
                property and equipment
            
            
            
            
            $
            597,522
            
            $
            1,039,783







Property
      and equipment balances at December 31, 2003 are inclusive of assets of our
      discontinued operation, Cash2India (See note 3 for a detail of the components
      of
      net assets of discontinued operations). For the years ended December 31,
      2004 and 2003 the Company recorded losses of $16,522 and $18,541, respectively
      on the disposal of certain fixed assets.




**11.**  **Accrued
      Expenses**




Accrued
      expenses consist of the following as of December 31:




**2004**
            
            **2003**Accrued
                franchise, property and sales taxes
            
            $
            44,471
            
            $
            130,608Accrued
                payroll expenses
            
            
            67,467
            
            
            62,115ValuCom
                payable
            
            
            300,000
            
            
            —Other
                accrued expenses
            
            
            45,521
            
            
            279,023$
            457,459
            
            $
            471,746




**12.**  **Debt**




Long-term
      debt consists of the following as of December 31:




**2004**
            
            **2003**Promissory
                note
            
            $
            300,000
            
            $
            300,000Less
                current portion
            
            
            (300,000
            )
            
            —Long
                term debt net of current portion
            
            $
            —
            
            $
            300,000







In
      2001,
      the Company borrowed $300,000 from a financial institution under a term
      promissory note agreement (the “Note”). The Note bears interest at the financial
      institution’s prime rate as adjusted from time to time (5.25% at
      December 31, 2004) less 2.25% per annum. The Note, originally due in
      October 2003 was extended and is now due in October 2005. The Note is
      collateralized by a $300,000 certificate of deposit bearing interest of 1.47
      %
      per annum.




F-50




**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




**13.**  **Related
      Party Transactions**




The
      Company’s founder, Chief Executive Officer and President holds a controlling
      interest in Eagle Venture Capital, which owns approximately 2.6 million
      outstanding shares of the common stock of the Company as of December 31,
      2004 and 2003.




A
      consulting company managed by one of the Company’s directors holds warrants to
      acquire 100,000 shares of the Company’s common stock. The warrants have an
      exercise price of $6.00 per share and expire in 2005.




In
      November 2004, the Company invested $3 million in a partnership
      managed by an affiliate of a director of the Company (see Note 7). Certain
      other
      company directors and officers have also invested separately in the
      partnership.




**14.**  **Income
      Taxes**




Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of deferred
      tax
      assets and liabilities are as follows as of December 31:




**2004**
            
            **2003**Deferred
                tax assets/(liability):Property
                and equipment
            
            $
            21,265
            
            $
            (35,341
            )Capital
                loss carry forward
            
            
            195,941
            
            
            195,941Other
            
            
            66,162
            
            
            29,075Net
                operating loss carry forwards
            
            
            9,281,128
            
            
            9,292,073Total
                deferred tax assets
            
            
            9,564,496
            
            
            9,481,748Valuation
                allowance
            
            
            (9,564,496
            )
            
            (9,481,748
            )Net
                deferred tax assets
            
            $
            —
            
            $
            —







The
      Company has U.S. net operating loss carry forwards of approximately $25,104,000
      as of December 31, 2004. The Company has not recognized a deferred tax
      asset in the accompanying balance sheets due to the uncertainty of future
      realization. Accordingly, no tax benefit has been recognized in the accompanying
      consolidated statements of operations. Net operating loss carry forwards
      associated with the sale of our Cash2India subsidiary of approximately
      $2,900,000 have not been included in the deferred tax assets at
      December 31, 2004. No other significant reconciling items exist between the
      actual effective tax rate and the expected effective tax rate. During 2004
      and
      2003, the valuation allowance increased by approximately $83,000 and $1,232,000,
      respectively. If unused, accumulated net operating losses expire as follows:
      2011 - $214,000; 2012 - $1,531,000; 2018 - $1,447,000; 2019 - $1,999,000; 2020
      -
      $4,628,000; 2021 - $8,210,000; 2022 - $3,828,000; 2023 -
      $3,247,000.


F-51


**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




**15.**  **Stockholders’
      Equity**




**Common
      and Preferred Stock**




The
      Company’s authorized share capital consists of 50,000,000 shares of common stock
      with par value of $0.01 per share, and 10,000,000 shares of preferred stock
      with
      par value of $0.01 per share.




**Warrants**




At
      December 31, 2004 and 2003, the Company had outstanding warrants to
      purchase 414,775 and 720,775 shares of its common stock, respectively. These
      warrants expire March 2005 through July 2006 and have a weighted average
      exercise price of $16.98 per share. At December 31, 2004, all of the
      warrants were exercisable. The warrants outstanding include warrants granted
      to
      a consulting company managed by one of the Company’s directors to acquire
      100,000 shares of common stock (see Note 13); warrants granted to
      representatives of the Company’s underwriters in connection with the Company’s
      initial public offering to acquire 275,000 shares of common stock; and warrants
      granted to various service providers and others to acquire 39,775 shares of
      common stock. In 2004, we issued warrants to purchase 40,000 shares of our
      common stock to a privately held company in connection with a distribution
      and
      marketing agreement (See Note 6).




**Stock
      Options**




The
      Company has stock option plans (the “Plans”) under which the Company may grant
      Directors and key employees options to purchase up to 1,750,000 shares of the
      Company’s common stock at an amount at least equal to the fair value of the
      Company’s common stock on the date of grant. The exercise and vesting period of
      each option is determined by the Company’s Board of Directors, but no option
      shall have a term longer than 10 years. Options granted under the Plans are
      non-qualified stock options. The following table summarizes the employee stock
      option transactions for the years ended December 31, 2004 and 2003 under
      the Plans:




**Number
                of Shares**
            
            **Weighted
                Average Exercise Price**Outstanding
                at December 31, 2002
            
            
            886,080
            
            $
            4.05Granted
            
            
            55,000
            
            
            2.04Exercised
            
            
            —
            
            
            0.00Cancelled
            
            
            (39,166
            )
            
            3.82Outstanding
                at December 31, 2003
            
            
            901,914
            
            $
            3.93Granted
            
            
            265,500
            
            
            2.65Exercised
            
            
            (275,996
            )
            
            2.51Cancelled
            
            
            (38,434
            )
            
            2.10Outstanding
                at December 31, 2004
            
            
            852,984
            
            $
            4.11Options
                exercisable:December
                31, 2003
            
            
            794,258
            
            
            4.18December
                31, 2004
            
            
            662,486
            
            $
            4.57







F-52




**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




A
      summary of stock options under the Plans outstanding as of December 31,
      2004 are as follows:




**Options
                Outstanding**
            ****
            **Options
                Exercisable**
            ******Range
                of Exercise Prices**
            ****
            **Shares**
            ****
            **Weighted-Average
                Remaining Life (Years)**
            ****
            **Weighted-Average
                Exercise Price**
            ****
            **Shares**
            ****
            **Weighted
                Average Exercise Price**$1.00
                - 1.99
            
            
            145,000
            
            
            6.59
            
            $
            1.31
            
            
            95,000
            
            $
            0.99$2.00
                - 2.99
            
            
            426,984
            
            
            5.02
            
            
            2.25
            
            
            341,486
            
            
            2.19$3.00
                - 3.99
            
            
            155,500
            
            
            3.46
            
            
            3.16
            
            
            100,500
            
            
            3.21$5.00
                - 11.00
            
            
            25,000
            
            
            2.60
            
            
            5.75
            
            
            25,000
            
            
            5.75$13.00
                - 14.00
            
            
            35,000
            
            
            1.90
            
            
            13.00
            
            
            35,000
            
            
            13.00$19.00
                - 20.00
            
            
            60,000
            
            
            2.24
            
            
            19.13
            
            
            60,000
            
            
            19.13$21.00
                - 22.00
            
            
            5,500
            
            
            2.22
            
            
            21.63
            
            
            5,500
            
            
            21.63Total
            
            
            852,984
            
            
            4.59
            
            $
            4.11
            
            
            662,486
            
            $
            4.57







In
      December 1998, the Company issued options outside of the option plans to
      purchase 167,867 shares of its common stock to a former officer of the Company
      at an exercise price of $3.33 with a seven-year term. During 2004 all of these
      options were exercised.




**16.**  **Benefit
      Plan**




The
      Company has a 401(k) benefit plan. The plan provides for voluntary employee
      contributions and the Company matches 15% of the first 8% of payroll contributed
      by the employee. Employees become 100% vested in employment contributions after
      2 years of service accruing 50% per year of service. For the years ended
      December 31, 2004 and 2003, the Company’s plan contributions were $3,400
      and $5,400, respectively.




**17.**  **Commitments**




The
      Company has operating leases relating principally to office facilities, which
      expire in 2006 and have future minimum lease commitments under operating leases
      with remaining non-cancelable lease terms in excess of one year at
      December 31, 2004: 2005 — $112,500; 2006 - $75,000. Rental expense under
      operating leases was approximately $113,000 and $138,000 for the years ended
      December 31, 2004 and 2003, respectively. Subsequent to the sale of its assets
      and liabilities to an unrelated third-party (see Note 20), the Company partially
      leases space to the acquirer for $5,000 per month. Such lease expired August
      31,
      2006.




In
      September 2004, the Company settled a dispute with a vendor from which it
      had previously purchased telecommunication services. Under the terms of the
      settlement, the Company agreed to purchase from the vendor a total of $960,000
      in telecommunication services at rates less than the Company is paying for
      similar services over a fourteen month period. The Company must purchase a
      minimum of $80,000 per month in services beginning four months after the
      settlement date.


F-53


**WQN,
      INC. AND SUBSIDIARIES**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**




**18.**  **Contingencies**




In
      December 1996, the Company applied to the United States Patent and
      Trademark Office to register the trademarks: “WorldQuest” and “WorldQuest
      Networks.” We received a registration for the trademark “WorldQuest” from the
      U.S. Patent and Trademark Office on November 23, 1999. In
      October 1997, the Patent and Trademark Office issued a notice of
      publication regarding our application to register “WorldQuest Networks” as a
      trademark. In response to that notice, Qwest Communications filed a notice
      of
      opposition in September 1998. Qwest Communications instituted a
      cancellation proceeding in the Patent and Trademark Office for the registered
      trademark “WorldQuest.” In December 2001, a judgment was made in the
      Company’s favor whereby Qwest’s motion to cancel our “WorldQuest” trademark was
      dismissed, however, Qwest filed a motion appealing the judgment. In
      December 2002, Qwest filed a separate complaint stating that the Company’s
      prepaid cash card product infringes on the Qwest trademark. In
      February 2003, the companies settled all outstanding claims whereby
      WorldQuest received a cash payment and telecommunication services (primarily
      long distance termination) from Qwest and Qwest retained all rights to the
      trademarks in question. Pursuant to the term of a settlement agreement with
      Qwest Communications arising out of a trademark dispute, on November 9,
      2004 the Company changed its name to WQN, Inc. from WorldQuest Networks,
      Inc.




The
      Company is a defendant from time to time in lawsuits and disputes arising in
      the
      ordinary course of business. The Company believes that resolution of all known
      contingencies is uncertain, and there can be no assurance that future costs
      related to such litigation would not be material to the Company’s financial
      position or results of operations.




**19.**  **Interest
      Income, Net**




Interest
      income for the years ended December 31, 2004 and 2003 was $293,000 and
      $207,000, respectively. Interest income includes $114,778 interest on the Ntera
      loan and $13,457 interest on the loan received in connection with the sale
      of
      the Company’s financial service subsidiary. Interest expense for the years ended
      December 31, 2004 and 2003 was $5,000 and $5,000,
      respectively.




**20.**  **Subsequent
        Events**
 
 On
        October 5, 2005, the Company sold substantially all of its operating assets
        and
        liabilities to VoIP, Inc. Proceeds from the sale consisted of a $3.7 million
        note payable which is convertible into VoIP, Inc. common stock, 1,300,000
        shares
        of VoIP, Inc.’s common stock, and 5,000,000 warrants to purchase VoIP, Inc's
        common stock at $0.001 per share which were exercised in January
        2006.
 
 On
        July
        3, 2006, the Company’s securities were delisted from The Nasdaq National Market
        ("Nasdaq") Listing Qualifications Panel (the “Panel”). This action was a result
        of the Panel determining that the Company had not met the requirement that
        it be
        current in its required reporting obligations under Nasdaq Rule 430(c)(14),
        principally because of the Company's failure to file its Form 10-QSB for
        the
        quarter ended March 31, 2006 and because Nasdaq determined that the Company
        is a
        "public shell," which, in Nasdaq's determination, could be detrimental to
        the
        interests of the investing public under Nasdaq Rule 4300.


F-54


**ITEM
      13. EXHIBITS**




(b)
            Exhibits




(3)
            2.1
            Stock
                Contribution Agreement dated May 25, 2004, between Registrant and
                Steven
                Ivester




(11)
            2.2
            Agreement
                and Plan of Merger with Caerus, Inc. dated as of May 31,
                2005




(12)
            2.3
            Asset
                Purchase Agreement dated as of August 3, 2005, by and between VoIP,
                Inc.
                Acquisition Company and WQN, Inc.




(1)
            3.1.1
            Articles
                of Incorporation




(3)
            3.1.2
            Amendment
                of Articles of Incorporation




(1)
            3.2
            Bylaws




(3)
            10.1
            2004
                Stock Option Plan




(15)
            10.1.2
            2006
                Equity Incentive Plan




(2)
            10.2
            Stock
                Purchase Agreement dated February 27, 2004 between Registrant and
                Steven
                Ivester




(4)
            10.3
            Stock
                Purchase Agreement dated June 25, 2004 among Registrant, DTNet
                Technologies and Marc Moore




(5)
            10.4
            Stock
                Purchase Agreement among Carlos Rivas, Albert Rodriguz, Registrant
                and Vox
                Consulting Group Inc.




(6)
            10.5.1
            Subscription
                Agreement




(6)
            10.5.2
            Form
                of Class A Warrant




(6)
            10.5.3
            Form
                of Class B Warrant




(7)
            10.6.1
            Stock
                Purchase Warrant issued to Ivano
                Angelaftri




(7)
            10.6.2
            Stock
                Purchase Warrant issued to Ebony
                Finance




(8)
            10.7
            Net
                Exercise Agreement with John Todd




(9)
            10.8
            Asset
                Purchase Agreement dated February 23,
                2005




(10)
            10.9.1
            Subscription
                Agreement




(10)
            10.9.2
            Form
                of Class C Warrant




(10)
            10.9.3
            Form
                of Class D Warrant




(10)
            10.9.4
            Form
                of Convertible Note




(10)
            10.9.5
            Security
                Agreement




(10)
            10.9.6
            Security
                and Pledge Agreement













(10)
            10.9.7
            Guaranty




(10)
            10.10
            Caerus,
                Inc. Merger Documents dated May 31,
                2005:




(11)
            10.10.1
            Option
                Exchange Agreement




(11)
            10.10.2
            Registration
                Rights Agreement




(11)
            10.10.3
            Exchange
                Agreement




(11)
            10.10.4
            Registration
                Rights Agreement




(11)
            10.10.5
            Consent
                and Waiver Agreement




(11)
            10.10.6
            Guaranty




(11)
            10.10.7
            Security
                Agreement




(11)
            10.10.8
            Employment
                Agreement




10.11
            WQN,
                Inc. Documents dated August 3,
                2005:




(12)
            10.11.1
            Warrant




(12)
            10.11.2
            Security
                Agreement between VoIP, Inc. and WQN, Inc.




(12)
            10.11.3
            Consent,
                Waiver and Acknowledgement by and among Cedar Boulevard Lease Funding,
                Inc., VoIP, Inc. and certain Subsidiaries of VoIP, Inc.




(12)
            10.11.4
            Third
                Amendment to Subordinated Loan and Security Agreement by and among
                Cedar
                Boulevard Lease Funding, Inc., VoIP, Inc. and certain subsidiaries
                of
                VoIP, Inc.




(12)
            10.11.5
            Security
                Agreement between Cedar Boulevard Lease Funding, Inc. and VoIP Acquisition
                Company




(12)
            10.11.6
            Guaranty
                between Cedar Boulevard Lease Funding, Inc. And VoIP Acquisition
                Company
                Promissory Note




(13)
            10.12.1
            Subscription
                Agreement for Secured Note dated January 6,
                2006




(13)
            10.12.2
            Subscription
                Agreement for Unsecured Note dated January 6,
                2006




(14)
            10.12.3
            Subscription
                Agreement dated February 3, 2006




(15)
            21.1
            Subsidiaries
                of the Registrant




(15)
            31.1
            Certification
                of Chief Executive Officer under Section 302 of the Sarbanes-Oxley
                Act of
                2002




(15)
            31.2
            Certification
                of Chief Financial Officer under Section 302 of the Sarbanes-Oxley
                Act of
                2002




(15)
            32.1
            Certification
                of Chief Executive Officer under U.S.C. 1350, as adopted pursuant
                to
                Section 906 of the Sarbanes Oxley Act of
                2002




(15)
            32.1
            Certification
                of Chief Financial Officer under U.S.C. 1350, as adopted pursuant
                to
                Section 906 of the Sarbanes Oxley Act of
                2002











(1)
            
            Filed
                as exhibits to Registrant's Form 10SB filed January 19,
                2000




(2)
            
            Filed
                as exhibit to Form 8-K filed March 3,
                2004




(3)
            
            Filed
                as exhibit to Form 8-K filed June 9,
                2004




(4)
            
            Filed
                as exhibit to Form 8-K filed July 7,
                2001




(5)
            
            Filed
                as exhibit to Form 8-K filed September 16,
                2004




(6)
            
            Filed
                as exhibit to form 8-K filed November 17,
                2004




(7)
            
            Filed
                as exhibit to form 8-K filed December 15,
                2004




(8)
            
            Filed
                as exhibit to form 8-K filed February 16,
                2005




(9)
            
            Filed
                as exhibit to form 8-K filed March 1,
                2005




(10)
            
            Filed
                as exhibit to form 8-K filed June 6,
                2005




(11)
            
            Filed
                as exhibit to form 8-K filed July 11,
                2005




(12)
            
            Filed
                as exhibit to form 8-K filed August 9,
                2005




(13)
            
            Filed
                as exhibit to Form 8-K filed January 12,
                2006




(14)
            
            Filed
                as exhibit to Form 8-K filed February 8, 2006




(15)
            
            Filed
                herewith







**SIGNATURES**




Pursuant
      to the requirements of the Securities Act, the Company has duly caused this
      Amendment No. 2 to its Annual Report on Form 10-KSB/A to be signed on its
      behalf by the undersigned, thereunto duly authorized, in the City of Altamonte
      Springs, State of Florida, on October 27, 2006.




**VOIP,
              INC.**By:
            /s/
              Robert StaatsRobert
              StaatsChief Accounting
              Officer