**U.S. Securities and Exchange Commission**


**Washington, D.C. 20549**








**Form 10-KSB/A**








**[ X ]**
**ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**


**for the fiscal year ended September 30, 2004**
 
 **[ ]**
**TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** **For the transition period from ______________ to ________________**




**Commission File Number: 0-30611**





**ITS Networks Inc.**


**(Name of small business issuer in its charter)**




**Florida**
**52-2137517****(State or other jurisdiction of**
**(I.R.S. Employer Identification No.****incorporation or organization)**








**Parque Tecnologico de Andalucia, Edif. Estepona Business Park 2**


**C/ Severo Ochoa, No. 16-20, 1a, Campanillas, Malaga 28590, Spain**


**(Address of principal executive offices)**





**Issuer's telephone number, including area code:** **011-34-95-202-9400**





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





**Title of each class**
**Name of each exchange on which registered****N/A**
**N/A**





**Securities registered under Section 12(g) of the Exchange Act:**





**common stock, par value**  **$.001**





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





Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure 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]





State issuer's revenues for its most recent fiscal year: $6,167,000





The aggregate market value of voting and non-voting equity held by non-affiliates of the registrant as of September 30, 2004: Common stock, $.001 par value: $10,038,515





ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS





Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes _X___ No _____


1


The number of shares of the registrant's common stock outstanding as of September 30, 2004: 60,588,280 shares.


Documents incorporated by reference: None





Transitional Small Business Disclosure Format:


Yes  No X





2







**TABLE OF CONTENTS****PART I**Item 1. Description of Business
4Item 2. Description of Property
17Item 3. Legal Proceedings
17Item 4. Submission of Matters to a Vote of Security Holders
17**PART II**Item 5. Market for Common Equity and Other Stockholder Matters
18Item 6. Managements=Discussion and Analysis or Plan of Operations
19Item 7. Financial Statements
25Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
25**PART III**Item 9. Directors and Executive Officers of Registrant.
25Item 10. Executive Compensation
26Item 11. Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters
28Item 12. Certain Relationships and Related Transactions
30Item 13. Exhibits and Reports on Form 8-K
30Item 14. Controls and Procedures
31Signatures
33Exhibit Index
34Financial Statements







3





**PART I**
 
 **Item 1.** **Description of Business** **.**
 
 General
 
 ITS Networks Inc. (the "Company") was incorporated under the laws of the State of Florida on November 23, 1998. However, it did not conduct any significant operations until December 2000 when there was a change in control of the Company. The new controlling stockholders changed its corporate name from Technology Systems International, Inc. to ITS Networks Inc. and increased the authorized number of shares of common stock. In connection with the change of control of the Company in December 2000, the Company acquired all of the issued and outstanding capital stock of ITS Europe, S.L., a Spanish telecommunications company that was organized in 1995. As a result, ITS Europe, S.L. ("ITS Europe") became a wholly owned subsidiary of the Company.
 
 On December 15, 2002, the Company consummated a stock exchange agreement with the majority stockholders of Teleconnect Comunicaciones, S.A. ( A Teleconnect @ ), a company formed under the laws of Spain which operates a pre-paid telephone card business in Spain. The Company agreed to issue up to 3,000,000 shares of its restricted common stock to the stockholders of Teleconnect in reliance upon Regulation S under the Securities Act of 1933 and also agreed to assume and pay up to approximately 2,200,000 Euro of the outstanding debts of Teleconnect; during September 2003, the Company agreed to the issuance of a total of 5,000,000 shares of its Common Stock to the stockholders of Teleconnect to resolve disputes regarding the Stock Exchange Agreement. During the 2003 fiscal year, the operating activities of ITS Europe S.L. was assumed by Teleconnect. As a result, substantially all of the operations of the Company at the time were are conducted by Teleconnect and were comprised of pre-paid telephone services and some post-paid services in Spain.
 
 The Company is engaged in the telecommunication industry in Spain and offers telecommunications services for home and business use.
 
 During October 2003, the Company had to secure the continuity of its connection and business relations with UNI2 and sold its postpaid business to Affinalia, a Spanish postpaid accounts reseller, also working together with UNI2. As a result, the Company sold its post-paid telephone business to Affinalia so that its net credit risk for UNI2 decreased drastically. The Company = s is now only engaged in prepaid telephone voice services.
 
 During the 2004 fiscal year, ITS Networks management has focused on improving margins on its prepaid business by reducing operating costs and reducing outstanding debt. As a result, it has decreased its debt and looked for additional debt/equity funding. Its telephone services have been redefined as a part of a new marketing mix and certain services relaunched with a raw image and brand name associated with the prepaid telephone card business of Teleconnect. The Company has constantly focused on reducing its operating costs to a minimum and is still taking measures which will further reduce its monthly expenses. The Company = s objective was to have a monthly break even situation before year end even if no additional funds from investors were to arrive.
 
 In parallel to the cost reductions, the Company has developed a new rechargeable pre-paid telephone card. Other marketing actions are being planned to bring up sales levels to help reach a montly break even as quickly as possible.
 
 Telecommunication Industry in Spain
 
 Full deregulation was instituted in Spain on December 1, 1998, almost a year behind most other countries in western Europe, but since that time many companies have entered the market providing end users with a variety of services and competitive offers. A limited number of operators have traditionally dominated the European telecommunications market. In Spain, the principal operator has been, and still is, Telefonica S.A.
 4
 
 In order to offer telecommunications services in Spain, a company must apply for the appropriate license or authorization to conduct business. In Spain, there are several companies with carrier licenses which allow these companies to build their own telecommunications infrastructures and also interconnect with Telefonica. ITS Europe S.L. (wholly owned by ITS Networks Inc.) possesses an "A" type authorization to resell telecommunications services and as such cannot build its own infrastructure. Hence, ITS Europe is a reseller of telecommunications products and services. ITS Europe can also act as a VISP (virtual ISP) reselling Internet Access from actual Internet service providers. Teleconnect does have a Carrier A A @ license and as such can build out its own infrastructure.
 
 Long distance services in Spain have become very competitive since 1999 and as such prices have been reduced considerably. Teleconnect focuses primarily on offering inexpensive international calling to foreign residents in Spain that make a higher than average number of calls internationally. In order to offer this service during fiscal 2004, Teleconnect resold the long distance services from UNI2 (France Telecom subsidiary in Spain), BT Spain, Jazztel and Worldcom. UNI2 has a carrier license in Spain, has its own infrastructure as well as direct international connections to other carriers. Teleconnect depends primarily on its relationship with UNI2 such that any failure in service from UNI2 would affect all of its customers of long distance calling.
 
 Several new companies entered the Spanish market in recent years on the wave of new technologies such as LMDS and UMTS. The former was intended as an alternative to Telefonica's local loop while the latter supposedly offered more advanced services for mobile users. Today, due to the current market conditions, a lack of clients, or problems with the technologies, many of these companies have either folded, joined together or left their business projects in hibernation awaiting better times.
 
 Products and Services
 
 The Company is presently providing prepaid only voice telephone services to its customers through prepaid calling cards as well as prepaid residential and small business accounts. It also has a prepaid long distance service which can be accessed from any mobile phone. The Company intends to enter other European markets with its pre-paid telephone services.
 
 Calling Cards .
 
 The Company offers various types of pre-paid calling cards to its customers. Prepaid calling cards are used primarily by tourists, students, and immigrants. They are purchased from a variety of local merchants, kiosks, etc. These are cost effective and can be used from hotels, pay phones, public and/or any private telephone.
 
 The calling cards require the user to dial a toll free prefix number, listen to the instructions, which can be given in either Spanish, English, German or French, and dial in their "code" or "PIN". The code is  then confirmed and the user dials the number. The calling cards typically have sixty days after first activation expiration date. Teleconnect sold approximately 850,000 calling cards during its fiscal year ended September 30, 2004.
 
 Residential Accounts .
 
 For those clients who have a fixed line and/or a mobile provided by a telecom operator in Spain, the Company offers a prepaid residential account with which they can save money on their international calls. These customers are typically foreigners living in Spain or having a second home in Spain, as well as small and medium enterprises with international contacts. During the 2004 fiscal year, the Company offered prepaid and postpaid accounts. The prepaid accounts are based on credit card payments. During fiscal 2004, Teleconnect eliminated all postpaid accounts, which were based on a monthly billing cycle and automatic collection system, and thereby, reducing bad debt expenses considerably.
 5
  The prepaid accounts work the same as prepaid calling cards except for the fact that our network recognizes the caller = s line identification, so a PIN is not needed, which is more convenient for our customers than using a calling card. Customers can recharge their balance manually or automatically. Traffic from the prepaid accounts goes directly through our network, the same as with prepaid calling cards.
 
 Marketing
 
 The marketing strategy of the residential services of the Company (Teleconnect) was focused during fiscal 2004 on foreigners in Spain. These foreigners are primarily located on the costal areas of Spain, including the islands.
 
 In the case of our pre-paid calling cards, the cards are distributed throughout Spain via distribution channels with thousands of vending points as well as via large accounts (retail chains).
 
 Teleconnect is not in a position, due to its size and limited financial resources, to compete against the major carriers for corporate clients in the big cities. Teleconnect requires additional external financing in order to carry out its marketing plans, to increase its capacity with carriers, and to expand to other countries in Europe.
 
 Industry Participants and Competition
 
 The growth of the telecommunications industry from 1997 to 2003 attracted many new entrants as well as existing businesses from different industries to enter the telecommunications business. Current and prospective industry participants include multinational alliances, long distance and local telecommunications providers, systems integrators, cable television and satellite communications companies, software and hardware vendors, wireless telecommunications providers and national, local and regional ISPs. Our present primary competitor is Telefonica S.A. Other significant competitors include France Telecom (UNI2), Jazztel, Citycall and Communitel.
 
 Some participants specialize in specific segments of the market, such as access and/or backbone provision; managed access, e.g., intranets and extranets; application services, e.g., Web hosting; security services; and communication services, e.g., IP-based voice, fax and video services.
 
 In order to become more competitive in the market, Teleconnect will have to invest in setting up additional switching infrastructure in order to reduce its traffic carrying cost (telephone transmission costs). The Company will require additional funding in order to be able to do so. During fiscal 2004, Teleconnect reduced its transmission costs with other carriers by over 20%.
 
 Regulation
 
 General . The Spanish government undertook a process of revising the legislative and regulatory scheme applicable to participants in the telecommunications industry in preparation for the liberalization of the telecommunications market in December 1998. As the main step in this process, on April 24, 1998, the Spanish Parliament passed the new General Law on Telecommunications (Law 11/1998). This law was published in the Official Gazette on April 25, 1998 and took effect on April 26, 1998.
 
 The General Law on Telecommunications repealed and replaced nearly all the existing laws and regulations on telecommunications (including laws regulating satellite and cable telecommunications). In general terms, the General Law on Telecommunications adopted all European Union directives mandating the liberalization of telecommunications services. Among other things, the General Law on Telecommunications addresses the following matters relating to our business:
 6
  *
conditions for granting licenses to provide telecommunications services; and*
the obligation of telecommunications providers to extend service to rural areas and the financing of associated capital expenditures.
 
 European Union Regulations . Since 1995, the European Union has adopted a number of directives that regulate the provision of telecommunications services in European Union member states, including:
 
 *
regulations designed to ensure the full liberalization of the telecommunications sector;*
regulations which impose standard conditions throughout member states for granting individual licenses and general authorizations;*
regulations regarding access and interconnection between competing operators;*
regulations dealing with the universal service obligation;*
regulations requiring member states to allocate wireless radio based services according to the DCS-1800 standard and the UMTS standard;*
regulations relating to telecommunications data protection and privacy regulations; and*
regulations for unbundled access to the local loop.
 The General Law on Telecommunications and other applicable Spanish law were designed to implement all applicable European Union directives with respect to the provision of telecommunications services. In 1999, the European Union began to revise the directives in force with respect to the provision of telecommunications services. Today, Spain has revised its regulatory framework to comply with the revised directives.
 
 Regulatory Framework . The provision of telecommunications services in Spain is regulated and overseen by the Spanish government through the Secretary of State for Telecommunications and Information Society, a unit of the Ministry of Science and Technology. The Ministry of Science and Technology has various powers, including in certain cases the authority to grant licenses or authorizations, if applicable, for telecommunications services and to impose sanctions for certain infringements of the General Law on Telecommunications. An additional independent oversight body, the Telecommunications Market Commission, was created in 1996. The Telecommunications Market Commission supervises the activities of telecommunications operators and has the authority to grant licenses for telecommunications services and to arbitrate any conflicts that may arise between operators, subject to the consent of the interested parties. The Telecommunications Market Commission is also responsible for safeguarding free competition in the telecommunications market, particularly with regard to a plurality of service offerings, access to networks and network interconnection. With regard to interconnection, the Telecommunications Market Commission may make a binding decision in respect of any conflict between operators and may fix tariffs (other than for regulated services), such as interconnection charges, in the event of disputes.
 
 The Telecommunications Market Commission has advisory and arbitration responsibilities with respect to tariffs for end user services. It issues reports on all proposed tariffs and the regulation of prices for telecommunications services. It also issues reports on proposed tariffs for exclusive services or services for which a dominant operator exists.
 
 The General Law on Telecommunications . The General Law on Telecommunications culminates the liberalization process initiated in 1987 in Spain with the enactment of the Telecommunications Regulation Law and establishes a regulatory framework for telecommunications services in accordance with applicable European Union directives. The General Law on Telecommunications provides for free competition with respect to all telecommunications services and with respect to the construction and operation of telecommunications networks, subject to governmental licensing or general authorization requirements. Individual licenses are required:
 7
 
 *
to construct or operate public telecommunications networks;*
to provide fixed-line telephone services to the general public; and*
to provide telecommunications services or construct or operate telecommunications networks using radio spectrum.
 The Spanish government may determine pursuant to Royal Decree that other activities and services require individual licenses. In all other cases where the type of service or network does not fall within the scope of the individual license regime, only a general authorization is required. A general authorization is automatically granted to any party who fulfills basic licensing requirements.
 
 The Ministry of Science and Technology may, in order to guarantee the most efficient use of radioelectric spectrum, limit the number of individual licenses it will grant, in which case individual licenses will be granted to the winner of a bidding contest administered by the Ministry of Science and Technology.
 
 Tariffs . Under the general principles of the General Law on Telecommunications, operators are free to fix tariffs. Nevertheless, the Spanish government's Delegate Commission for Economic Affairs has the authority, subject to the issuance of a report by the Telecommunications Market Commission, to establish fixed, maximum or minimum tariffs, or to determine the criteria by which to establish tariffs and the mechanism for their control. In doing so, the government's Delegate Commission for Economic Affairs must take into account:
 
 *
the effective cost of the applicable service; and*
the degree of competition in the market for the applicable service.
 The General Law on Telecommunications recognized the existence of an imbalance in the tariffs charged for fixed-line telephone services as of the date of its enactment and the need to rebalance such tariffs. The General Law on Telecommunications further recognized the possibility of compensating the dominant operator (Telefonica de Espana, a subsidiary of Telefonica) for the access deficit which may result from the existing rate imbalance.
 
 Interconnection . The General Law on Telecommunications requires owners of public telecommunications networks to allow competitors to interconnect with their networks and services at non-discriminatory rates and under non-discriminatory conditions. The General Law on Telecommunications provides that the conditions for interconnection are to be freely agreed among the parties while the government has the authority to establish the minimum conditions for interconnection agreements, which must be included in all interconnection agreements. On July 24, 1998, the government issued a Royal Decree elaborating the regulations relating to interconnection. Where the parties are unable to reach an agreement, the Telecommunications Market Commission may impose the obligations to interconnect upon the conditions it dictates. Similarly, the Telecommunications Market Commission may release certain network owners, temporarily and on a case-by-case basis, from the obligation to interconnect where there are technical or commercial alternatives to such interconnection.
 
 Although under the General Law on Telecommunications interconnection prices may be freely negotiated, prices charged by Telefonica de Espana, as the dominant operator in Spain, are determined by an Interconnection Offer Framework approved by the government.
 8
 
 In August 2001, the Telecommunications Market Commission approved modifications to the Interconnection Offer Framework, which include among other things, new interconnection prices that are between 20% and 30% below previously existing interconnection prices. Consequently, on September 11, 2001, Telefonica S.A. filed a petition with the Telecommunications Market Commission against the new interconnection prices, claiming that they are below Telefonica de Espana's actual costs, as measured in accordance with accounting criteria approved by the Telecommunications Market Commission. On November 2, 2001, the Telecommunications Market Commission dismissed Telefonica de Espana's petition, except with respect to interconnection rates in connection with Internet access. As a result, Telefonica de Espana is seeking relief through administrative litigation.
 
 The modifications to the Interconnection Offer Framework approved in August 2001 provide for interconnection based on capacity as well as time. In early 2002, the Telecommunications Market Commission introduced further modifications to the Interconnection Offer Framework with respect to intelligent network services and establishment of prices for the interconnection of circuits, which were reduced by approximately 25%.
 
 Public Service Obligation . The General Law on Telecommunications provides that the owners of public telecommunications networks, as well as operators rendering telecommunications services on the basis of an individual license, are subject to certain public service obligations. In addition, some of these obligations may be imposed on operators whose services require a general authorization.
 
 The public service obligations include:
 
 *
the universal service obligation, which is elaborated in the Royal Decree of July 31, 1998;*
the compulsory services obligation; and*
other public service obligations.
 
 The universal service obligation consists of the obligation to provide basic telephone to all end users within Spain, free telephone directory services, sufficient public pay phones throughout Spain and access to telephone services for disabled people. These services must be provided by the dominant operator in each territory, and in certain cases, by another operator, pursuant to regulations. Telefonica is the dominant operator in each territory and, according to the General Law on Telecommunications, Telefonica will be considered to be the dominant operator until at least 2005. If meeting the universal service obligation in a particular territory is loss-producing, all operators in that territory could be obligated to contribute to meeting this obligation through the National Fund for Universal Service.
 
 The compulsory services obligation enables the government to appoint a telecommunications operator to provide certain essential telecommunications services, such as emergency call services and telex, telegraphic and maritime communications. Telefonica was designated as the provider of maritime communications services. Telefonica may in the future be designated as the provider of other telecommunications services. The Spanish government may establish further public service obligations to the extent that the government determines that such services are not adequately provided, are in the public interest or are necessary for national defense.
 
 In December 2001, the Spanish government adopted a ministerial order that governs certain aspects of the universal service obligation, including among others:
 
 *
maximum time periods for the provision of initial interconnection to telecommunications networks;*
requirements with respect to the guarantee of continuing fixed-line telephone service to the public;*
criteria with respect to the information included in public telephone directories; and*
standards for the quality of service and systems for measuring the quality of services.
 9
  Terminal Equipment . The General Law on Telecommunications provides that consumers may freely purchase or lease any terminal equipment, including telephone sets, and connect that equipment to the telecommunications network. All terminal equipment is required by the General Law on Telecommunications to meet certain technical specifications and safety requirements and is subject to the prior approval of the Secretary of State for Telecommunications and Information Society.
 
 Ownership Limitations . Pursuant to the General Law on Telecommunications, direct or indirect investments in us and by foreign persons may not exceed 25% of our share capital unless otherwise provided for by the applicable international treaties or agreements, including the Fourth Protocol of the General Agreement on Trade in Services (GATS), or authorized by the Spanish government. Pursuant to European Union directives, citizens of other European Union member states, including entities domiciled in such countries, are not considered foreign persons for the purposes of this provision. However, under Spanish law any foreign investment by non-European Union governments and state-owned and state-controlled entities (regardless of the amount of such investment) requires the Council of Minister's prior approval unless otherwise provided for in the applicable treaties. For purposes of computing the 25% threshold, only holdings of capital stock in excess of 5% and holdings that would entitle the foreign investor to designate a member of our Board of Directors are taken into account. The 25% threshold does not apply to our subsidiaries generally. However, certain of our subsidiaries may be subject
 independently to similar constraints.
 
 Telefonica S.A. is currently the only significant provider of comprehensive local service. This is expected to change gradually as other cable operators develop their networks. In addition, in March 2000, the government issued six new licenses (in addition to those previously awarded to Retevision and Lince) for the provision of local multipoint distribution services (LMDS), and the new licensees have begun to deploy their networks. These new licensees compete with Telefonica S.A.in the local access market.
 
 Pursuant to a Royal Decree adopted in December 2000, Telefonica S.A. is required to implement local loop unbundling, line sharing and sub loop unbundling. Local loop unbundling enables other telecommunications operators to provide telecommunications services, including DSL-type services, to end customers using Telefonica S.A.'s existing local loop (i.e., the connections between the customer's premises and the exchange) to connect with their customers. Other operators may install their own equipment either in Telefonica S.A.'s exchanges or in nearby buildings to provide this service. Telefonica S.A. has offered local loop unbundling since January 2001. Line sharing similarly enables other telecommunications operators to provide telecommunications services using a high frequency portion of Telefonica S.A.'s copper loop on an unbundled basis. Therefore, shared access to the local loop enables a consumer to retain Telefonica S.A. for voice service and use a competing operator for high speed data services. Telefonica S.A. introduced line sharing in January 2001.
 
 In January 2001, Telefonica S.A. published its local loop unbundling offer. The tariffs were initially approved by the Delegate Commission for Economic Affairs of the Spanish government and later revised by the Telecommunications Market Commission in certain respects. The monthly tariff for direct access to the local loop is 12.6 Euro, the monthly tariff for shared access is 4.8 Euro and the monthly tariff for indirect access is between 22 and 90 Euro depending on the speed of the connection.
 
 Competition in domestic and international long-distance services, particularly in the residential segment, is based on access through interconnection with Telefonica S.A. Since 2001, Telefonica S.A.'s customers have been able to select alternative providers of domestic and international long-distance services without having to dial a designated code prior to making each call. Preselection allows customers to choose their preferred local, long distance, international long-distance and fixed-to-mobile carrier.
 
 Telefonica S.A. faces indirect competition in international long-distance services from a number of sources, including calling cards, call-back services and call rerouting by other international operators. In addition, Telefonica S.A. competes with a number of international operators for the provision of closed user group communications services to multinational and large corporate customers and with a number of providers of data transmission services.
 10
  Type A License . The Company holds a Type A license for telecommunication and fixed-line networks. This license authorizes the provision of fixed-line public voice telephone service through the use of third-party switching and transmission equipment without the corresponding obligation or right to establish and operate a network as in the case of a Type B license.
 
 Regulation in the United States . Our operations are in Spain and as such are not currently subject to regulation in the U.S., either at the federal or state level.
  Employees
 
 As of September 30, 2004, the Company and its subsidiaries had 30 full-time employees, of which 2 were engaged in general management, 14 in operations, 6 in sales, 4 in accounting and finance, 2 in human resources and office management, and 2 in business development including marketing. None of the Company's employees are represented by a labor union with respect to his or her employment by the Company.
 
 The Company has experienced no organized work stoppages and believes that its relationship with its employees is good. None of our employees are represented by a union. The Company believes that an important factor in its future success will be its ability to attract and retain highly qualified personnel. Competition for such personnel in the industry in Spain is intense. There can be no assurance that the Company will be successful in attracting or retaining such personnel, and the failure to attract or retain such personnel could have a material adverse effect on the Company's business and results of operations. In such competitive environment, Teleconnect must differentiate itself based primarily on good customer care, ease for the customer to work with us, clarity of its invoices and quick response to service problems. Since we cannot pay high material incentives to the employees, we attempt to provide a healthy, enjoyable working environment where personal achievements and contributions are recognized.
 
 Banking Arrangements
 
 The Company has a 200,000 euro bank loan from the BBVA bank in Madrid, Spain, as of September 30, 2004.
 
 Risk Factors
 
 We May Not Achieve or Sustain Profitability in the Future . We have incurred substantial net losses and negative cash flow from operations since our inception. As of September 30, 2004, we had an accumulated deficit of $(17,296,000) and had a stockholders' deficit of $(7,391,000) at September 30, 2004. For the years ended September 30, 2004, and 2003, we had net losses of $(3,202,000), and $(10,031,000), respectively. We may also in the future incur operating and net losses and negative cash flow from operations, due in part to anticipated increases in expenses for expansion of our sales and marketing capabilities. We may not be able to achieve or maintain profitability.
 
 If our telecommunications services do not become widely used in our market, it is unlikely that we will be profitable.
 
 In order to be successful, and to achieve our strategic objectives, we must successfully, timely and cost-effectively expand our network capacity with carriers and expand our hardware switching platform. We must also continue to have at all times the right product/price mix for each target market.
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  Going Concern Qualification by Auditors . The accountants' reports of the independent certified public accountants of the Company for fiscal years 2004 and 2003 express a going concern qualification. The Company has had recurring operating losses for the past several years which raises substantial doubts about its ability to continue as a going concern. See Independent Auditors = Report(s), Note 2 to the Consolidated Financial Statements of the Company, and Management = s Discussion and Analysis or Plan of Operations - Plan of Operations.
 
 Information Structure . We must continue to develop and expand our information systems infrastructure as the number of our clients and the amount of information they wish to access, as well as the number of services which we offer, increase. The development of our Information Systems network infrastructure will require substantial financial, operational and management resources. We may not be able to expand our network adequately to meet the demand for increased usage. If we do not adapt our systems rapidly enough, additional stress may be placed on our network hardware, the traffic management and other systems and operating facilities. Our network may be unable to service a substantial number of additional clients while maintaining high performance , timely and accurate billing and high level customer care. Expanding is a function of having the necessary funds available.
 
 Transmission Availability . A variety of factors, uncertainties and contingencies that are beyond our control, such as the availability of transmission capacity, the price of transmission capacity, availability of wireless transmission capacity and technologies, local regulations and availability of sales representatives or other third party sales and support channels will affect the expansion of our network. A failure of adequate transmission facilities in certain new locations as we expand our service coverage as planned may have a material adverse effect on our ability to service our clients and grow our business. Expanding is a function of having the necessary funds available.
 
 Growth . Our limited growth has been a function of not having the necessary funds available to invest in capacity and equipment. This has placed a significant strain on our management, financial controls, operating and accounting systems, personnel and other resources. We currently rely on a relatively small core management team. If we grow, we must not only manage demands on this team but also increase management resources, among other things, to continue to expand, train and manage our employee base and maintain close coordination among our technical, accounting, financing, marketing and sales staff. In addition, our network infrastructure, technical support, applications, and other resources may not be sufficient to facilitate our growth. If we do not successfully manage our growth, we may be unable to adequately support our clients' communications needs in the future.
 
 Our challenge is to expand our services and increase our customer base simultaneously so that both are increased in a proportional relationship which allows them to mutually support each other. Rapid expansion of our service area or technical facilities and capacity, without the customer base to support it, would be inefficient and result in a substantial decrease in financial return. Likewise, a substantial increase in our customer base which cannot be supported by our technical facilities and service area would impact the Company's ability to service its customers in a detrimental way and might result in an unfavorable sales environment and inability to maintain the Company's customer base.
 
 Customer Retention . Our ability to retain our clients and provide them with new and innovative service offerings may suffer if we are not able to keep up with the rapid technological developments in our industry and continue to ensure competitive prices of our services. In addition, even though the current telecoms market conditions are weeding out many players, other new competitors are arising from large, solid companies traditionally dedicated to telecoms and other non-telecoms business.
 
 Technological Changes . The global communications industry is subject to rapid and significant technological changes, such as continuing developments of alternative technologies for providing high-speed data communications. We cannot predict the effect of technological changes on our business. We will rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to communications and networking technologies. We expect that new services and technologies applicable to our market will emerge. New products and technologies may be superior and/or render obsolete the products and technologies that we currently use to deliver our services. Our future success will depend in part, on our ability to anticipate and adapt to technological changes and evolving industry standards. We may be unable to obtain access to new technologies on acceptable terms or at all, and we may be unable to obtain access to new technologies and offer services in a competitive manner.
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  Management Changes . If members of our senior management team leave the Company, then our ability to operate our business may be negatively affected.
 
 Our future success depends to a significant extent on the continued services of our senior management, particularly Gustavo Gomez and Herman de Haas, and other employees of the new executive team. The loss of their services or any other present or future key employee, could have a material adverse effect on the management of our business. We do not maintain "key person" life insurance for any of our personnel.
 
 Competition for Employees . Competition for highly-skilled personnel is intense and the success of our business depends on our continuing ability to attract and retain highly-skilled employees. As we grow, we will need to hire additional personnel in all areas. Competition for personnel throughout the data and voice communications industries is intense. We may be unable to attract or retain key employees or other highly qualified employees in the future. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly-skilled employees with appropriate qualifications. If we do not succeed in attracting sufficient new personnel or retaining and motivating our current personnel, our ability to provide our services could diminish.
 
 Sales Relationships . If we are unable to maintain our sales representative and third-party sales channel relationships, then our ability to sell and support our services may be negatively impacted.
 
 We are and will continue to be significantly dependent on a number of third-party relationships, our sales representatives and partners, to market and support our services. Many of our arrangements with third-party providers are not exclusive and may be terminated at the convenience of either party. We cannot provide any assurances that these third parties regard our relationship with them as important to their own respective businesses and operations, that they will not reassess their commitment to us at any time in the future, that they will meet their sales targets or that they will not develop their own competitive services.
 
 We may not be able to maintain our current relationships or form new relationships with third parties that supply us with clients, software or related products that are important to our success. Accordingly, we cannot provide any assurances that our existing or prospective relationships will result in sustained business partnerships, successful offerings or the generation of significant revenues.
 
 We rely on our sales representatives or distribution channels for some of the support and local implementation necessary to deliver our services on a broad basis. We also rely on these sales representatives or distribution channels for insights into local operating and market conditions. The failure of these sales representatives to perform their tasks or perform their responsibilities effectively could, in turn, adversely affect our business.
 
 Regulatory Approvals . The Company directly assumes the responsibility for obtaining the regulatory approvals and licenses that it may need to offer our communications services in other jurisdictions and provinces.
 
 Suppliers . Delays in receiving transmission capacity or delays in equipment delivery or loss of our equipment suppliers could impair the quality of our services and our growth.
 13
  We acquire, by lease or by purchase, transmission capacity from various suppliers to connect client premises to our network and for other network connections. We have from time to time experienced short-term delays in receiving the requisite transmission capacity from suppliers. There are no assurances that we will be able to obtain these services in the future within the time frames required by us at a reasonable cost. Any failure to obtain transmission capacity on a timely basis and at a reasonable cost in a particular jurisdiction, or any interruption of local access services, could have an adverse effect on our service levels and our growth.
 
 Service Disruptions . If our network infrastructure is disrupted or security breaches occur, we may lose clients or incur additional liabilities.
 
 We and other service providers may in the future experience interruptions in service as a result of fire, natural disasters, power loss, or the accidental or intentional actions of service users, current and former employees and others. Although we continue to implement industry-standard disaster recovery, security and service continuity protection measures, including the physical protection of our offices and equipment, similar measures taken by us or by others have been insufficient or circumvented in the past. We cannot assure you that these measures will be sufficient or that they will not be circumvented in the future. Unauthorized use of our network could potentially jeopardize the security of confidential information stored in the computer systems or transmitted by our clients. Furthermore, addressing security problems may result in interruptions, delays or cessation of services to our clients. These factors may result in liability to us or our clients.
 
 Competition . The markets we serve are highly competitive and our competitors may have much greater resources to commit to growth, new technology and marketing.
 
 Our current and potential competitors include other companies that provide voice and data communications services to multinational businesses, systems integrators, national and regional Internet Service Providers, or ISPs, wireless, cable television and satellite communications companies, software and hardware vendors, and global, regional and local telecommunications companies. In addition, we expect that the predicted growth of the voice and data communications market will attract other established and start-up companies building global networks and beginning to offer voice and data communications as part of a comprehensive communications services portfolio. Our competitors, which may operate in one or more of these areas, include companies such as Telefonica S.A., British Telecommunications, or BT, and France Telecom. Our sales representatives and suppliers could also become competitors either directly or through strategic relationships with our competitors.
 
 Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, greater name recognition and more established relationships in the telecommunications industry than we do. We cannot be sure that we will have the resources or expertise to compete successfully in the future. Our competitors may be able to:
 
 *
develop and expand their network infrastructures and service offerings more quickly;*
adapt better to new or emerging technologies and changing client needs;*
take advantage of acquisitions and other opportunities more readily;*
devote greater resources to the marketing and sale of their services and products; and*
adopt more aggressive pricing policies.
 
 Some of our competitors may also be able to provide clients with additional benefits at lower overall costs. We cannot be sure that we will be able to match cost reductions of our competitors. In addition, we believe it is likely that there will be additional consolidation in our market, which could increase competition in ways that may adversely affect our business, results of operations and financial condition.
 14
 
 Variable Revenues and Operating Results . Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, not all of which are in our control. These factors include:
 
 *
the size and timing of significant equipment and software purchases;*
the timing of new service offerings;*
changes in our pricing policies or those of our competitors;*
the timing and completion of the expansion of our service offering;*
market acceptance of voice and data communications generally, and of new and enhanced versions of our services in particular;*
the length of our contract cycles; and*
our success in expanding our sales force and expanding our distribution channels.
 
 In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to global communications capacity, depreciation, office lease costs and interest expenses and personnel, and therefore our results of operations are particularly sensitive to fluctuations in revenues. Due to the factors noted above and other risks discussed in this section, you should not rely on period-to-period comparisons of our results of operations. Quarterly results are not necessarily meaningful and you should not unduly rely on them as an indication of future performance. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In this event, the price of our Common Stock may not increase or may fall. Please see Management's Discussion and Analysis of Financial Condition or Results of Operations.
 
 Governmental Regulation . We face uncertain and changing regulatory restrictions which could limit our operating flexibility and increase our costs.
 
 We currently hold authorizations for international telecommunications services between Spain and other countries based on a third party's networks. Future regulatory, judicial and legislative changes in Spain may impose additional costs on us or restrict our activities. In addition, regulators or third parties may raise material issues with regard to our compliance with applicable regulations. Failure to comply with applicable laws or regulations in Spain could prevent us from carrying on our operations cost effectively.
 
 The law relating to the liability of online services companies and Internet access providers for data and content carried on or disseminated through their networks is currently unsettled and could expose us to unforeseen liabilities. It is possible that claims could be made against online services companies and Internet access providers under the laws of Spain and/or EU law for defamation, negligence, copyright or trademark infringement, or other theories based on data or content disseminated through their networks, even if a user independently originated this data or content. Several private lawsuits seeking to impose liability upon online services companies and Internet access providers have been filed in U.S. and foreign courts. While the United States has passed laws protecting Internet access providers from liability for actions by independent users in limited circumstances, this protection may not apply in any particular case at issue. In addition, some countries, such as China, regulate or restrict the transport of voice and data traffic in their jurisdiction. The risk to us, as an Internet access provider, of potential liability for data and content carried on or disseminated through our system could require us to implement measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue some of our services. Our ability to monitor, censor or otherwise restrict the types of data or content distributed through our network is limited. Failure to comply with any applicable laws or regulations in particular jurisdictions could result in fines, penalties or the suspension or termination of our services in these jurisdictions. The negative attention focused upon liability issues as a result of these lawsuits and legislative proposals could adversely impact the growth of public Internet use. We do not presently have any professional liability insurance. Our professional liability insurance in the future may not be adequate to compensate or may not cover us at all in the event we incur liability for damages due to data and content carried on or disseminated through our network. Any costs not covered by insurance that are incurred as a result of this liability or alleged liability, including any damages awarded and costs of litigation, could harm our business and prospects.
 15
  It is possible that claims could be made against online services companies and Internet access providers under the laws of Spain and/or EU law for defamation, negligence, copyright or trademark infringement, or other theories based on data or content disseminated through their networks, even if a user independently originated this data or content. Several private lawsuits seeking to impose liability upon online services companies and Internet access providers have been filed in U.S. and foreign courts. While the United States has passed laws protecting Internet access providers from liability for actions by independent users in limited circumstances, this protection may not apply in any particular case at issue. In addition, some countries, such as China, regulate or restrict the transport of voice and data traffic in their jurisdiction. The risk to us, as an Internet access provider, of potential liability for data and content carried on or disseminated through our system could require us to implement measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue some of our services. Our ability to monitor, censor or otherwise restrict the types of data or content distributed through our network is limited. Failure to comply with any applicable laws or regulations in particular jurisdictions could result in fines, penalties or the suspension or termination of our services in these jurisdictions. The negative attention focused upon liability issues as a result of these lawsuits and legislative proposals could adversely impact the growth of public Internet use. We do not presently have any professional liability insurance. Our professional liability insurance in the future may not be adequate to compensate or may not cover us at all in the event we incur liability for damages due to data and content carried on or disseminated through our network. Any costs not covered by insurance that are incurred as a result of this liability or alleged liability, including any damages awarded and costs of litigation, could harm our business and prospects.
 
 Penny Stock Trading Rules . When the trading price of the Company's Common Stock is below $5.00 per share, the Common Stock is considered to be "penny stocks" that are subject to rules promulgated by the Securities and Exchange Commission (Rule 15-1 through 15g-9) under the Securities Exchange Act of 1934. These rules impose significant requirements on brokers under these circumstances, including: (a) delivering to customers the Commission's standardized risk disclosure document; (b) providing to customers current bid and offers; (c) disclosing to customers the brokers-dealer and sales representatives compensation; and (d) providing to customers monthly account statements.
 
 Future Sales of Our Common Stock May Depress Our Stock Price . The market price of our Common Stock could decline as a result of sales of substantial amounts of our Common Stock in the public market in the future. In addition, it is more difficult for us to raise funds through future offerings of Common Stock. There were approximately 56,206,370 shares of our Common Stock outstanding as "restricted securities" as defined in Rule 144 as of September 30, 2004, which will be available for sale in the future. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.
 
 The Company has registered 1,000,000 post-split shares of Common Stock which will be reserved for issuance upon exercise of options or stock bonuses to be granted or reserved for grant under our 2002 Stock Option, SAR and Stock Bonus Consultant Plan. Upon issuance of these shares, they can be sold in the public market, subject to restrictions under the securities laws applicable to resales by affiliates. In addition, the Company has registered another 1,250,000 shares of Common Stock which is reserved for our 2002 Employee Stock Option, SAR and Stock Bonus Plan. As of September 30, 2004, 2,405,000 shares have been issued as stock compensation to consultants for services rendered to the Company.
 16
  Technological Changes . The global communications industry is subject to rapid and significant technological changes, such as continuing developments of alternative technologies for providing high-speed data communications. We cannot predict the effect of technological changes on our business. We will rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to communications and networking technologies. We expect that new services and technologies applicable to our market will emerge. New products and technologies may be superior and/or render obsolete the products and technologies that we currently use to deliver our services. Our future success will depend in part, on our ability to anticipate and adapt to technological changes and evolving industry standards. We may be unable to obtain access to new technologies on acceptable terms or at all, and we may be unable to obtain access to new technologies and offer services in a competitive manner. Any new products and technologies may not be compatible with our technologies and business plan. We believe that the global communications industry should set standards to allow for the compatibility of various products and technologies. The industry however, may not set standards on a timely basis or at all. As such, the Company is investing in launching new services in Spain based on technologies which exist in the United States but that are still relatively new to Europe.
 
 Voting Control . The largest single shareholder of the Company, Geeris Holdings Nederland B.V., owned approximately 49.97% of the Company = s outstanding Common Stock as of September 30, 2004. This stockholder has exercised considerable influence over all matters requiring approval by our stockholders, including approval of significant corporate transactions. Geeris Holding Nederland, B.V. is owned by Leonardus Geeris, a director of the Company.
 
 **Item 2.** **Description of Property**
 
 The Company recently moved its principal executive offices to Parque Tecnologico de Andalucia (PTA), Edif. Estepona, Malaga Business Park, C/Severo Ochoa No. 16-20 1a, Campanillas, Malaga 28590, Spain, which is comprised of approximately 800 square feet, and is leased for 3,800 Euros per month. The lease expires in November 2007.
 
 These facilities are leased at commercial rates under standard commercial leases in the geographic area. We believe that suitable space for these operations is generally available on commercially reasonable terms as needed.
 
 **Item 3.** **Legal Proceedings**
 
 In addition to the $136,000 provision to cover three pending cases, the following are other legal proceedings threatened or pending against the Company:
 
 1.
Affinalia has threatened to file legal proceedings against the Company regarding an 80,000 Euros dispute regarding adjustments to the sale price of our post-paid telephone business, over actual traffic with postpaid customers sold to them;2.
Nicholas Bruemmer claims over 250,000 Euros; and3.
SPACOM affiliate of Teleconnect for 85,000 Euros.
 
 **Item 4.** **Submission of Matters to a Vote of Security Holders**
 
 The shareholders of the Company held a special meeting on November 26, 2004 where the majority of the shareholders of the Company approved and ratified the present members of the Board of Directors. The only members of the Board of Directors of the Company are Gustavo Gomez as Chairman of the Board, Herman de Haas and Leonardus Geeris.
 17
  The shareholders of the Company held a special meeting on July 29, 2004 where the majority of the shareholders of the Company approved and ratified an amendment to the Articles of Incorporation of the Company which increased the authorized number of shares of our Common Stock from 100,000,000 shares to 200,000,000.
 
 **PART II**
 
 **Item 5.** **Market for Common Equity and Other Shareholder Matters**
 
 General
 
 The Common Stock of the Company is currently traded on the NASD Electronic Bulletin Board over-the-counter market, and is quoted under the symbol ITST.
 
 Market Price
 
 The following table sets forth the range of high and low closing bid prices per share of the Common Stock of the Company (reflecting inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions) as reported by Pink Sheets (formerly known as National Quotation Bureau, L.L.C.) for the periods indicated.
 High Closing(1)

Low Closing (1)Bid Price

Bid PriceYear Ended December 31, 2002(1)1stQuarter

$
0.75

$
0.402ndQuarter

$
0.96

$
0.333rdQuarter

$
0.52

$
0.314thQuarter

$
0.60

$
0.30Year Ended December 31, 2003(1)1stQuarter

$
0.92

$
0.412ndQuarter

$
1.07

$
0.633rdQuarter

$
1.01

$
0.284thQuarter through 12/28/2003

$
0.54

$
0.274thQuarter 12/29/2003 through 12/31/2003

$
0.36

$
0.22Year Ended December 31, 20041stQuarter

$
1.08

$
0.202ndQuarter

$
0.30

$
0.163rdQuarter

$
0.48

$
0.234thQuarter

$
0.46

$
0.15


(1)
The above prices reflect trading prior to a 1-for-2 reverse stock split of the common stock of the Company which was effective on December 29, 2003.The closing bid price of the Common Stock (pre-split) of the Company on September 30, 2004 was $0.40 per share.
    Stock Option, SAR and Stock Bonus Consultant Plan
 
 Effective March 27, 2002, the Company adopted and approved its 2002 Stock Option, SAR and Stock Bonus Consultant Plan (the A Plan @ ) which reserved 1,000,000 post-split shares of Common Stock for issuance under the Plan. The Plan allows us to issue awards of incentive non-qualified stock options, stock appreciation rights, and stock bonuses to consultants to the Company which may be subject to restrictions.
 18
  Sale of Unregistered Securities
 
 During the three months ended September 30, 2004, the Company issued 2,500,00 restricted shares of its Common Stock to Volim Holdings B.V. in exchange for facilitating $247,000 in debt payable by the Company, in reliance upon Regulation S under the Securities Act of 1933. In addition, the Company issued 400,000 restricted shares of its Common Stock for accrued interest totaling $40,000.
 
 During the three months ended September 30, 2004, the Company issued 2,500,000 restricted shares of its Common Stock to Geeris Holding Nederland B.V. in exchange for the forgiveness of $245,000 in debt payable by the Company, in reliance upon Regulation S under the Securities Act of 1933. In addition, the Company issued 1,000,000 restricted shares of its Common Stock for accrued interest totaling $100,000.
 
 **Item 6.** **Management** **=** **s Discussion and Analysis or Plan of Operations**
 
 *You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included elsewhere herein.*
 
 Forward Looking Statements
 
 When used in this annual report on Form 10-KSB and in our other filings with the SEC, in our press releases and in oral statements made with the approval of one of our authorized executive officers, the words or phrases "will likely result", "plans", "will continue", "is anticipated", "estimated", "expect", "project" or "outlook" or similar expressions (including confirmations by one of our authorized executive officers of any such expressions made by a third party with respect to us) are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We caution readers not to place undue reliance on any such statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties, including but not limited to our history of losses, our limited operating history, our need for additional financing, rapid technological change, and an uncertain market, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the factors described below and in the Description of Business section of this annual report. We undertake no obligation to release publicly revisions we made to any forward-looking statements to reflect events or circumstances occurring after the date of such statements. All written and oral forward-looking statements made after the date of this annual report and/or attributable to us or persons acting on our behalf are expressly qualified in their entirety by this discussion.
 
 Significant Accounting Estimates and Policies
 
 The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the saleability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
 We must make estimates of the collectability of accounts receivable. We analyze historical write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts. Differences may result in the amount and timing of expenses for any period if we make different judgments or use difference estimates.
 19
  Property and equipment are evaluated for impairment whenever indicators of impairment exist. Accounting standards require that if an impairment indicator is present, the Company must assess whether the carrying amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result form the asset, undiscounted and without interest charges. If the carrying amount is less than the recoverable amount, an impairment charge must be recognized, based on the fair value of the asset. Management assumed the Company was a going concern for purposes of evaluating the possible impairment of its property and equipment. Should the Company not be able to continue as a going concern, there may be significant impairment in the value of the Company = s property and equipment.
 
 Goodwill is reviewed at least annually for impairment, or more frequently if indicators of impairment exist. Goodwill is tested by comparing net book value of the reporting entity to fair value. Managements assumptions about fair values require significant judgment because broad economic factors, industry factors and technology considerations can result in variable and volatile fair values.
 
 As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent that we establish a valuation allowance or increase this allowance in a period, we must include a tax provision or reduce our tax benefit in the statements of operations. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We believe, based on a number of factors including historical operating losses, that we will not realize the future benefits of a significant portion of our net deferred tax assets and we have accordingly provided a full valuation allowance against our deferred tax assets. However, various factors may cause those assumptions to change in the near term.
 
 We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
 
 We have determined the significant principles by considering accounting policies that involve the most complex or subjective decisions or assessments. Our most significant accounting policies are those related to revenue recognition and accounting for stock-based compensation.
 
 *Revenue Recognition* . Our revenue recognition policies are based on the requirements of SEC Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements.*
 
 Revenue from sales of telecommunication services is generally recognized during the period when the services are rendered. Prepaid services which have not yet been rendered are reflected in deferred income until such time as the services are rendered.
 
 *Accounting for Stock-Based Compensation.* We have elected to apply the disclosure-only provisions of SFAS No. 123, *Accounting for Stock-Based Compensation* . In accordance with the provisions of SFAS 123, we apply Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* , and will use related interpretations in accounting for stock option plans. We account for stock issued to non-employees in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18, *Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services.* Generally, under APB 25, if the option exercise price for a fixed award to an employee is equal to the fair value of the common stock at the date of the grant of the stock option, no compensation expense is recorded. Under SFAS 123 and EITF 96-18, the amount of compensation expense that is recorded is based on an option pricing model which incorporates such factors as the expected volatility of future movements in the price of the underlying stock, risk-free interest rates, the term of the options and any dividends expected to be paid. As a result, under SFAS 123 and EITF 96-18, we would generally expect to record a greater amount of compensation expense than under APB 25.
 20
  *Segment Reporting* . We have adopted SFAS No. 131, *A* *Disclosures About Segments of an Enterprise and Related Information* . @ SFAS 131 requires companies to disclose certain information about reportable segments. Based on the criteria within SFAS 131, we have determined that we currently have only one reportable segment, telecommunications systems and related services.
 
 Overview
 
 We derive our revenues primarily from the sale of our long-distance telecommunication services. Our revenues and operating results have depended, and will continue to depend, upon the continued adoption and use of our products and services by consumers and small businesses. The rate of adoption is influenced significantly over the longer term by government laws and mandates, performance and pricing of our products/services, relationships with the public and other factors.
 
 Our revenues also may be impacted by other factors including the length of our sales cycle, the timing of sales orders, budget cycles of our customers, competition, the timing and introduction of new versions of our products, the loss of, or difficulties affecting, key personnel and distributors, changes in market dynamics or the timing of product development or market introductions. These factors have impacted our historical results to a greater extent than has seasonality. Combinations of these factors have historically influenced our growth rate and profitability significantly in one period compared to another, and are expected to continue to influence future periods, which may compromise our ability to make accurate forecasts.
 
 Our three most significant customers each accounted for more than 10% of our revenues during the year ended September 30,2004. Domestic sales in Spain accounted for 100% of our revenues in each of the last two years.
 
 Telecommunication revenues increased by $1,629,000 in 2004, or 35.9% from 2003 revenues despite the sale of our post-paid telephone services, during fiscal 2004, because there was an increase in our pre-paid telephone services. The sale of our post-paid telephone services substantially eliminates any credit risk with our customers.
 
 Cost of goods sold consists primarily of the costs associated with carriers which supply the telecom services for the Company to resell. We rely on third parties to offer the majority of the services we have in our portfolio. Accordingly, a significant portion of our cost of goods sold consists of payments to these carriers. Cost of goods sold revenues also consists of customer support costs, training and professional services expenses, and parts.
 
 Our gross profit has been and will continue to be affected by a variety of factors, including competition, the mix and average selling prices of products, maintenance and services, new versions of products, the cost of equipment, component shortages, and the mix of distribution channels through which our products are sold. Our gross profit will be adversely affected by price declines if we are unable to reduce costs on existing products or to introduce new versions of products with higher margins.
 
 Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, legal and human resources personnel, professional fees and corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we employ additional personnel and incur additional costs related to the growth of our business and our operation as a public company. We present stock-based compensation as a part of general and administrative expenses.
 21
  Stock-based compensation charges are recorded when the exercise price of an option or the sales price of stock is less than the fair value of the underlying Common Stock for awards to employees. We also record stock-based compensation charges when options are granted to non-employees. Compensation charges for non-employees are based on estimates of the underlying stock fair values. As of September 30, 2004, the Company has granted 1,000,000 stock options. In addition the Company has issued Common Stock to consultants and professionals in exchange for services to the Company.
 
 Year Ended September 30, 2004, Compared to September 30, 2003
 
 The following table sets forth certain operating information regarding the Company, including its subsidiary Teleconnect Comunicaciones, S.A.
   Year Ended


Year EndedSeptember 30,
2004


September 30, 2003Revenues

$
6,167,000

$
4,538,000Cost of goods sold

$
4,944,000

$
3,494,000Selling, general and administrative

$
4,127,000

$
4,078,000Depreciation

$
480,000

$
367,000Bad Debt Expense (Recoveries)

$
(227,000
)
$
255,000Impairment of goodwill

$
0

$
6,637,000Other Income (Expenses)

$
(558,000
)
$
(121,000
)Net Loss

$
(3,202,000
)
$
(10,031,000
)Comprehensive (Loss)

$
(3,645,000
)
$
(11,480,000
)Net Loss Per Share

$
(0.10
)
$
(0.58
)
   Revenues . Revenues for the year ended September 30, 2004,increased to $6,167,000, compared to $4,538,000 or 35.9% from the prior year revenues.
 
 Our revenues during the year ended September 30, 2004, were derived primarily from providing a range of integrated telephone service solutions to our clients:
 
 * Prepaid Calling Cards
 * Prepaid fixed line long distance calling
 * Other
 
 Pricing Policies.  The pricing for our services differs depending on the services provided, the speed of service, geographic location and capacity utilization. In the case of services directed at foreign residents in Spain for them to call long distance, pricing is oriented to provide a significant discount compared to the incumbent operator. It is not the intention of the Company to enter "price wars @ with other similar companies. The Company strives to differentiate itself with the quality of our customer care, with the quality of the service, and the accuracy of the billing. For services directed at small and medium companies, we try to position ourselves to provide a turnkey solution to their telecommunications needs, providing voice local and long distance calling, access to the internet, email, web hosting, PBX supply and maintenance, etc. With our prepaid calling card services, we have sought tourists that needed to call home but at cheaper prices than the hotel phone or local public phone.
 
 
  22
 
 
 Cost of Goods Sold.  Cost of goods sold for the year ended September 30, 2004 were $4,944,000, an increase of $1,460,000 or 41.5% from the prior year cost of sales of $3,494,000. Gross profits decreased by 3.2% from 19.8% in fiscal 2004 compared to 23.0% in fiscal 2003. This decrease was due in part to competitive market conditions and in part due to heavy discounting done at the end of the fiscal year to raise cash for operations. The cost of goods sold increased more than the sales due to the mix of prepaid and postpaid services where the prepaid has lower margins. Management consciously selected postpaid clients that were advantageous to our bottom line while simultaneously cutting services to customers which produced more cost than profit to the Company. As market conditions are becoming more competitive, management has tightened its selection criteria for A profitable @ postpaid clients.
 
 Selling, General and Administrative . Selling, general and administrative expenses for the year ended September 30, 2004 were $4,127,000, an increase of $49,000 or 1.2% from the prior year = s operating expenses of $4,078,000. The principal reasons for the increase was taking over the operating expenses of Teleconnect but relatively improved due to the synergies associated with the consolidation of the business; Teleconnect - ITS Europe.
 
 Depreciation Expense . Depreciation expense for the year ended September 30, 2004 was $480,000, an increase of $113,000 or 30.8% from the prior year = s depreciation expense of $367,000. This increase is due primarily to the depreciation of Teleconnect property and equipment for twelve months during 2004 compared to nine months during 2003.
 
 Impairment of Goodwill . During the year ended September 30, 2003, the Company fully impaired the goodwill associated with the Teleconnect acquisition in the amount of $6,637,000. This impairment was recorded as a result of lower than projected operating results from the acquired subsidiary. The Company had no investment in goodwill at September 30, 2004.
 
 Bad Debt Expense (Recoveries) . Bad debt expense recoveries for the year ended September 30, 2004 was $(227,000), a decrease of $482,000 from the prior year = s bad debt expense of $255,000. The principal reason for the decrease was due to the improved collection procedures by the Company.
 
 Interest Expense . Interest expense for the year ended September 30, 2004 was $558,000 as compared to only $121,000 for the prior year. This increase was due primarily to interest incurred on loans made from affiliated parties during fiscal 2004 to finance the operations.
 
 Net Loss . The net loss of the Company decreased to $(3,202,000) during the fiscal year ended September 30, 2004 compared to $(10,031,000) during the fiscal year ended September 30, 2003, a decrease of approximately 68.1%. The decrease in the net loss of the Company is attributable primarily to bad debt recoveries in 2004.
 
 Liquidity and Capital Resources . At September 30, 2004, the Company had negative working capital of approximately $(7,970,000), compared to negative working capital of $(7,453,000) at September 30, 2003.
 
 The ability of the Company to satisfy its obligations and to continue as a going concern will depend in part upon its ability to raise funds through the sale of additional shares of its Common Stock, increasing borrowing, and in part upon its ability to reach a profitable level of operations. The Company = s financial statement so not reflect adjustments that might result from its inability to continue as a going concern and these adjustments could be material.
 
 The Company = s capital resources have been provided primarily by capital contributions from stockholders, stockholders = loans, the conversion of outstanding debt into Common Stock of the Company, and services rendered in exchange for Common Stock.
 23
  Contractual Obligations and Commercial Commitments . The following table is a recap of the Company = s contractual obligations as of September 30, 2004.
 
 Payments Due by PeriodTotal


Less than
One Year


1-3 YearsTax Agency Debt

$
390,000

$
100,000

$
290,000Operating Leases


241,000


211,000


30,000Total Contractual Cash Obligations

$
631,000

$
311,000

$
320,000
 
 Plan of Operations . The Company expects that new funds will be injected into the Company during the three months ending March 31, 2005.
 
 The Company will be offering to sell its Common Stock and other securities to further capitalize the Company, and will also borrow from banks and others to the extent necessary to provide liquidity for its operations.
 
 The Company has maintained its telecommunications activities and the associated costs consistent with its plan of operations in order to develop its telephone and other communications services and products for proposed residential and commercial use. The Company expects to continue the development of its telephone and other communications products and services to incorporate technical changes and improvements. In addition, as the Company increases its marketing activities, the Company will incur additional operating and equipments costs.
  Recent Accounting Pronouncements . SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, became effective January 1, 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative = s fair value be recognized in earnings unless specific hedge accounting criteria are met. We believe the adoption of SFAS No. 133 will not have an effect on our financial statements because we do not engage in derivative or hedging activities.
 
 In December 2002, the FASB issued SFAS No 148, A Accounting for Stock-Based Compensation - Transition and Disclosure @ . This statement amends SFAS No. 123, A Accounting for Stock-Based Compensation. @ The provisions of this statement are effective for interim and annual financial statements for fiscal years ending after December 15, 2002. This statement provides alternative methods of transition for a voluntary charge to the fair value based method of accounting for stock-based employee compensation. Also, this statement amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. The Company continues to apply APB 25 recognition and measurement principles, but will comply with the new disclosure requirements of this statement. As of September 30, 2003 the Company has not issued any stock under its stock-based employee compensation plan.
 
 In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue having a material impact on our financial statements.
 24
  **Item 7.**
**Financial Statements** 
 The consolidated financial statements of the Company for its fiscal years ended September 30, 2004 are provided with this Form 10-KSB.
 
 **Item 8.**
**Changes in and Disagreements with Accountants on Accounting and Financial Disclosure** 
 There have been no disagreements regarding accounting and financial disclosure matters with the independent certified public accountants of the Company.
 
 PART III
 **Item 9.**
**Directors and Executive Officers** 
 The directors and officers of the Company as of September 30, 2004, are as follows:
 
 Name
Age
PositionGustavo A. Gomez
41
Director, President and TreasurerHerman C. de Haas
43
Director, Executive Vice President and Chief OperatingOfficer, and Managing Director of TeleconnectComunicaciones, S.A.Leonardus Geeris
59
Director
  The background and principal occupations of each director and officer of the Company are as follows:
   Mr. Gomez became a director, the President, Secretary and Treasurer of the Company on March 6, 2002. From May 2001 to the present, he has been the founder and operator of OpenVia S.L., a European telecommunication consulting company. From January 2000 to April 2001, he was the co-founder and Managing Director of Broadband Optical Access S.A., a carrier engaged in the European broadband access market. From January 1998 to January 2000, Mr. Gomez was its Account Director in Spain with Nortel Networks Corp. and previously was Nortel = s Manager GSM products in Spain until September 1998. From April 1997 to January 1998, he was the Director of Marketing of Retevision. From February 1996 to April 1997, Mr. Gomez was the Deputy Commercial Director of Telefonica S.A. = s international business unit. Mr. Gomez received a Bachelor of Electrical Engineering degree from McGill University in 1986, and received a MBA degree from the Instituto de Empresa (Madrid Business School) in 1997. On March 16, 2002, the Company entered into a contract for professional services with Mr. Gomez which provides for annual compensation of 121,000 Euros, and bonuses based upon the performance of his services to the Company; and was issued 250,000 shares of restricted Common Stock.
 
 Mr. de Haas became a director of the Company in May 2003, and became the President and Chief Operating Officer of the Company on May 27, 2003; and has been the Managing Director of Teleconnect Comunicaciones, S.A., the principal subsidiary of the Company, since March 2003. From September 2000 to the present, he has been the Chief Executive Officer and owner of ShareWorks Capital Management, a management and investment consulting firm. From September 1999 to August 2000, Mr. de Haas was the Managing Director and 50% owner of Vermeulen Adviesgroep B.V. From February 1996 to August 1999, he was the Director of Operations of McDonald = s Nederland B.V. Mr. de Haas graduated with a degree in Industrial Engineering & Business Administration in 1986 from Technical University of Rotterdam.
 
 Mr. Geeris became a director of the Company in May 2003. He is the President, managing director and owner of Geeris Holding Nederland B.V. which owns and invests in real estate and other industries
  25
 
  **Item 10.** **Executive Compensation**
 
 All executive officers, for services in all capacities to the Company, received the following compensation during the fiscal year ended September 30, 2004
 
 Annual compensation(1)
Long-Term Compensation(2)Awards
PayoutsName and
Principal
Position
Fiscal
Year
Salary(1)(2)
Bonus
Other
Annual
Compensation
Restricted Stock Awards(3)
Securities Underlying Options/
SARs
LTIP
Payouts
All Other Compen-sationGustavo Gomez
President and Treasurer
2004
$156,000
$ 0
$ 0
$0
$ 0
$ 0
$ 0Herman de Haas
Executive Vice
President and Chief
Operating Officer, and
Managing Director of
Teleconnect Comuni-
caciones, S.A.
Former Secretary(5)
2004
$156,000
$ 0
$ 0
$ 0
$ 0
$ 0
$ 0
 
 All executive officers as a group (2 persons)  $312,000
 
 (1)
The salaries of the officers of the Company has been fixed at 120,000 Euro since 2002. However, differences in reported amounts is due to the varying currency exchange rates between the Euro and U.S. dollars. 
   
 (2)
Personal benefits received by the Company=s executive officers are valued below the levels which would otherwise require disclosure under the rules of the U.S. Securities and Exchange Commission. 
 (3)
The Company does not currently provide any contingent or deferred forms of compensation arrangements, annuities, pension or retirement benefits. 
 Committees of the Board of Directors
 
 The Company does not have an audit committee, compensation committee, nominating committee, or an executive committee of the Board of Directors. The Company does have a Stock Option Plan Committee which has been established to administer the stock option, SAR and stock bonus plans of the Company. The Board of Directors plans to establish various committees in the future.
 26
  Compliance with Section 16(a) of the Securities Exchange Act
 
 Section 16(a) of the Exchange Act requires the Company = s executive officers and directors, and persons who beneficially own more than ten percent of the Company = s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
 
 Based on its review of the copies of such forms received by it, the Company believes that during the year ended September 30, 2004, all such filing requirements applicable to its officers and directors were complied with.
 
 2002 Employee Stock Option, SAR and Stock Bonus Plan
 
 Effective June 10, 2002, the Company adopted and approved its 2002 Employee Stock Option, SAR and Stock Bonus Plan (the A Plan @ ) which reserves 1,250,000 (after effect of split) shares of Common Stock for issuance under the Plan. The Plan allows us to issue awards of incentive or non-qualified stock options, stock appreciation rights, and stock bonuses which may be subject to restrictions. No awards of stock options, SAR = s or stock bonuses have been granted to directors, officers or employees of the Company as of September 30, 2004.
 
 Stock Option, SAR and Stock Bonus Consultant Plan
 
 Effective March 27, 2002, the Company adopted and approved its 2002 Stock Option, SAR and Stock Bonus Consultant Plan (the A Plan @ ) which reserved 1,000,000 shares (after effect of split) of Common Stock for issuance under the Plan. The Plan allows us to issue awards of incentive non-qualified stock options, stock appreciations rights, and stock bonuses to consultants to the Company which may be subject to restrictions.
 
 Benefit Plans
 
 The Company does not have any pension plan, profit sharing plan, or similar plans for the benefit of its officers, directors or employees. However, the Company may establish such plans in the future.
 
 Board Compensation
 
 Directors of the Company have not received any compensation in their capacity as directors during the fiscal year ended September 30, 2004.
 
 Director and Officer Indemnification and Limitations on Liability
 
 Article X of our Articles of Incorporation and Article VI of our Bylaws limit the liability of directors, officers and employees to the fullest extent permitted by Florida law. Consequently, our directors will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except in the following circumstances:
 
 *
A violation of the criminal law, unless the director, officer, employee or agent had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; 
 *
A transaction from which the director, officer, employee, or agent derived an improper personal benefit; 27
  *
In the case of a director, a circumstance under which the liability provisions of Section 607.0834 under the Florida Business Corporation Act are applicable; or 
 *
Willful misconduct or a conscious disregard for the best interests of the corporation in a proceeding by or in the right of the corporation to procure a judgment in its favor on in a proceeding by or in the right of a shareholder. 
 This limitation of liability does not apply arising under federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.
 
 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and, is therefore, unenforceable.
 
 **Item 11.** **Security Ownership of Certain Beneficial Owners and Management**
 
 The total number of shares of Common Stock of the Company, as adjusted to record effects of stock split, beneficially owned by each of the officers and directors, and all of such directors and officers as a group, and their percentage ownership of the outstanding shares of Common Stock of the Company as of September 30, 2004, are as follows:
 SharesManagement

Beneficially

Percent ofShareholders (1)

Owned (1)

Common StockLeonardus Geeris


30,277,813


49.97
%Gustavo A. Gomez


125,000


0.21
%Herman C. de Haas


100,000


0.17
%Directors and officers as a group(3 persons, including the above persons)


30,502,813


50.34
%





(1)
Except as otherwise noted, it is believed by the Company that all persons have full voting and investment power with respect to the shares indicated. Under the rules of the Securities and Exchange Commission, a person (or group of persons) is deemed to be a "beneficial owner" of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security which that person has the right to acquire within 60 days, such as options or warrants to purchase the Common Stock of the Company.


(2)
Mr. Geeris beneficially owns these shares of Common Stock through his ownership of Geeris Holding Nederland B.V.


28




The following table sets forth information with respect to the beneficial ownership of the Company = s Common Stock, as adjusted for the stock split, by each shareholder who beneficially owns more than five percent (5%) of the Company = s Common Stock, the number of shares beneficially owned by each and the percent of outstanding Common Stock so owned of record as of September 30, 2004. It is believed by the Company that all persons listed have sole voting and investment power with respect to their shares, except as otherwise indicated.







Title of
Shares ofBeneficially
Outstanding
PercentNames and Addresses
Class
Common Stock
OwnedCarnival Enterprises Ltd.
Common
6,184,240
10.21%Suite 4, 4 Giro=s PassageGibralter, SpainGeeris Holding Nederland B.V.(1)
Common
30,277,813
49.97%Helvoirtseweg 146, 5263, EH VughtPostbus 317, 5260, AH VughtThe NetherlandsFranz Broekhof
Common
4,460,750
7.36%Van Beuningen laan 15Soest, GE 3768The NetherlandsVolim Holding B.V.
Common
5,976,863
9.86%Zandpad 553621 NE BreukelenThe NetherlandsWKC Groenwoud
Common
3,616,350
5.97%Helvoirtsweg 146 Postbus 21905260 CD VughtThe Netherlands




(1)
Geeris Holding Nederland B.V. is owned by Leonardus Geeris, a director of the Company.


29


**Item 12.** **Certain Relationships and Related Transactions**





During February 2004, Mr. Leonardus Geeris and Mr. Frans Broekhof converted loans they had made to the Company of 350,000 Euro each into 4,460,750 shares each of restricted Common Stock in reliance upon Regulation S under the Securities Act of 1933, as amended, which were issued to Geeris Holding Nederland B.V., a company that is owned by Leonardus Geeris, a director of the Company, and Frans Broekhof.





During the year ended September 30, 2004, Mr. Leonardus Geeris made unsecured loans of $1,137,000 to the Company which are due on demand with no interest payable.




**Item 13.** **Exhibits and Reports on Form 8-K**
 
 (A)
Reports on Form 8-K 
   No current reports on Form 8-K were filed by the Company during the three months ended September 30, 2004.
 
 (B)
Exhibits 
 1(i) Articles of Incorporation of the Company  The Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3.1 to the Form SB-2 registration   statement of the Company (File No. 333-93583)
 
 1(ii) Amendment to Articles of Incorporation  An Amendment to the Articles of Incorporation of the Company is incorporated herein by reference to Exhibit 99.1 to the Form 8-K current report of the Company dated January 29, 2001.
 
 1(iii) Amendment to Articles of Incorporation  An Amendment to the Articles of Incorporation of the Company filed on February 26, 2003, is incorporated hereby by reference to Exhibit 1 (iii) to the Form 10-KSB annual report of the Company for its fiscal year ended September 30, 2003.
 
 1(iv) By-Laws of the Company  The By-Laws of the Company are incorporated herein by reference to Exhibit 3.2 to the Form SB-2 registration statement of the Company (File No. 333-93583)
 
 10. Material Contracts
 
 10(a)




Bridge Loan Agreement dated August 8, 2004, between the Company and Volim Holding B.V. 
 10(b)




Bridge Loan Agreement dated August 8, 2004, Between the Company and Geeris Holdings Nederland B.V. 
 10(c)




Management Agreement dated October 29, 2004, between the Company and Openvia S. L.  10(d)




Management Agreement dated October 29, 2004, between the Company and Shareworks Espana S. L. 
 11. Statement re: computation of per share
 earnings herein. Reference is made to the Consolidated Statements of Operations of the Consolidated Financial Statements which are
 incorporated by
 
 21. A description of the subsidiaries of
 the Company Description of the subsidiaries of the Company.
 
 23. Consent of Murrell, Hall, McIntosh
 & Co., PLLP Consent of Murrell, Hall ,McIntosh & Co., PLLP, independent auditor
 
 30
 **Item 14.** **Controls and Procedures**
  A. Evaluation of Disclosure Controls and Procedures . The Company = s Chief Executive Officer and the Company = s principal financial officer, after evaluating the effectiveness of the Company = s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rule 13a-14(c)and 15d-14(c) as of a date within 90 days of the filing date of this report on Form 10-KSB for September 30, 2004, have concluded that as of the Evaluation Date, the Company = s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and the Company = s consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this annual report on Form 10-KSB was being prepared.
 
 B. Changes in Internal Controls . There were no significant changes in the Company = s Internal controls or in other factors that could significantly affect the Company = s disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.
 31
 
 SIGNATURES
 
 
 In accordance with Section 13 or 15(d) of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
 
 ITS Networks Inc.Date: January 26, 2005
By:
/s/ Gustavo GomezGustavo GomezDirector, President and Treasurer
 ****By:
/s/ Herman de HaasHerman de HaasChief Financial Officer,
Executive Vice President and
Principal Accounting and Financial Officer
  
 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 ****Date: January 26, 2005
By:
/s/ Gustavo GomezGustavo GomezDirector, President and Treasurer ****By:
/s/ Herman de HaasHerman de HaasDirector, Chief Financial Officer,Executive Vice President andPrincipal          Accounting and Financial Officer
 
 32





INDEX OF EXHIBITS ATTACHEDExhibit
Description10. Material Contracts:10(a)
Bridge Loan Agreement dated August 8, 2004, between the Company and Volim Holding B.V.10(b)
Bridge Loan Agreement dated August 8, 2004, between the Company and Geeris Holding Nederland B.V.10(c)
Management Agreement dated October 29, 2004, between the Company and Openvia S. L.10(d)
Management Agreement dated October 29, 2004, between the Company and Shareworks Espana S. L.21.   A description of thesubsidiaries ofthe Company
Description of the subsidiaries of the Company23.  Consent of Murrell, Hall,McIntosh& Co., PLLP
Consent of Murrell, Hall, McIntosh & Co., PLLP, independent auditor31.1
Certification of Gustavo Gomez31.2
Certification of Herman de Haas32.1
Certification of Gustavo Gomez and Herman de Haas





33


ITS NETWORKS INC.


CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2004 AND 2003














Independent Auditors' Report
F-1Consolidated Balance Sheet
F-2Consolidated Statements of Operations
F-3Consolidated Statements of Stockholders' Deficit
F-4Consolidated Statements of Cash Flows
F-5Notes to Consolidated Financial Statements
F-7











|
|
|
|

|
|







Report of Independent Registered Public Accounting Firm











To the Board of Directors


ITS Networks, Inc.





We have audited the accompanying consolidated balance sheet of ITS Networks, Inc. and its subsidiaries as of September 30, 2004, and the related consolidated statements of operations, changes in stockholders deficit, and cash flows for the two 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 audit 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. 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 audit provides a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ITS Networks, Inc. and its subsidiaries as of September 30, 2004, and the consolidated results of its operations and its consolidated cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency, which raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/Murrell, Hall, McIntosh & Co., PLLP





December 31, 2004


Oklahoma City, Oklahoma





F-1


ITS NETWORKS INC.CONSOLIDATED BALANCE SHEETSEPTEMBER 30, 2004ASSETSCURRENT ASSETS:Cash and cash equivalents

$
93,000Accounts receivable - trade, net of allowancefor doubtful accounts of $1,375,000


359,000Accounts receivable - other


74,000Inventory


46,000Prepaid expenses


2,000Total current assets


574,000PROPERTY AND EQUIPMENT, NET


679,000OTHER ASSETS:Vendor deposits


190,000$
1,443,000LIABILITIES AND STOCKHOLDERS' (DEFICIT)CURRENT LIABILITIES:Accounts payable - trade

$
3,224,000Accrued liabilities


755,000Notes payable to bank


248,000Current portion of payment obligation to taxing authority


100,000Loans from related parties


2,452,000Deferred income


1,765,000Total current liabilities


8,544,000LONG TERM DEBTPayment obligation to tax agency, net of current portion shown above


290,000STOCKHOLDERS' DEFICIT:Preferred stock; par value of $0.001, 5,000,000 sharesauthorized, no shares outstanding


-Common stock; par value of $0.001, 200,000,000 sharesauthorized, 60,588,280 shares outstandingafter effect of reverse stock split, December 29, 2003


61,000Additional paid-in capital after effect of reverse stock split,


11,858,000Less: Prepaid syndication fees


-Accumulated (deficit)


(17,296,000
)Effect of cumulative translation adjustment


(2,014,000
)Total stockholders' (deficit)


(7,391,000
)$
1,443,000See accompanying summary of accounting policies and notes to financial statements.
 F-2


ITS NETWORKS INC.CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 20032004

2003SALES

$
6,167,000

$
4,538,000COST OF GOODS SOLD (exclusive of Depreciationshown separately below)


4,944,000


3,494,000GROSS PROFIT


1,223,000


1,044,000OPERATING EXPENSES:Selling, general and administrative expenses


4,127,000


4,078,000Depreciation


480,000


367,000Bad debt expense (recoveries)


(227,000
)

255,000Impairment on goodwill


-


6,637,000Total operating expenses


4,380,000


11,337,000(LOSS) FROM OPERATIONS


(3,157,000
)

(10,293,000
)OTHER INCOME (EXPENSES):Interest expense


(558,000
)

(121,000
)(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES


(3,715,000
)

(10,414,000
)PROVISION FOR INCOME TAXES


-


-(LOSS) FROM CONTINUING OPERATIONS


(3,715,000
)

(10,414,000
)DISCONTINUED OPERATIONS:Income on disposal of fixed line division


513,000


383,000NET (LOSS)

$
(3,202,000
)
$
(10,031,000
)BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:Loss from continuing operations

$
(0.11
)
$
(0.60
)Discontinued operations


0.01


0.02Net (Loss)

$
(0.10
)
$
(0.58
)AVERAGE COMMON AND COMMONEQUIVALENT SHARES OUTSTANDING


37,271,857


17,439,287THE COMPONENTS OF COMPREHENSIVE LOSS:Net (loss)

$
(3,202,000
)
$
(10,031,000
)Foreign currency translation adjustment


(443,000
)

(1,449,000
)COMPREHENSIVE (LOSS)

$
(3,645,000
)
$
(11,480,000
)BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

$
(0.10
)
$
(0.66
)Comprehensive (loss)See accompanying summary of accounting policies and notes to financial statements
  
 F-3
 
  ITS NETWORKS INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICITFOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003Common StockAs adjusted for stock split







AccumulatedNumber

$0.001

Additional

Prepaid



Other

Totalof

par

Paid-In

Syndication

Accumulated

Comprehensive

Stockholders'Shares

Value

Capital

Fees

Deficit

Loss

DeficitBalance, September 30, 2002


12,506,935

$
12,000

$
3,509,000

$
(418,000
)
$
(4,063,000
)
$
(122,000
)
$
(1,082,000
)Common stock bonus for consultingservices in lieu of cash payment


150,000


-


86,000


-


-


-


86,000Common stock issued for conversionof debt to equity


9,767,093


10,000


4,976,000


-


-


-


4,986,000Common shares repurchasedand retired


(3,750
)

-


(6,000
)

-


-


-


(6,000
)Foreign currency translationadjustment


-


-


-


-


-


(1,449,000
)

(1,449,000
)Net (loss) for the year endedSeptember 30, 2004


-


-


-


-


(10,031,000
)

-


(10,031,000
)Balance, September 30, 2003


22,420,278


22,000


8,565,000


(418,000
)

(14,094,000
)

(1,571,000
)

(7,496,000
)Common stock issued for cash


1,150,000


2,000


113,000


-


-


-


115,000Common stock issued for conversionof debt to equity


28,038,002


28,000


1,942,000


-


-


-


1,970,000Common stock issued for interest onnotes payable


6,800,000


7,000


575,000


-


-


-


582,000Common stock issued for professionalfees in lieu of cash payment


2,180,000


2,000


663,000











665,000Expired syndication fees


-


-


-


418,000


-


-


418,000Foreign currency translationadjustment


-


-


-


-


-


(443,000
)

(443,000
)Net (loss) for the year endedSeptember 30, 2004


-


-


-


-


(3,202,000
)

-


(3,202,000
)Balance, September 30, 2004


60,588,280

$
61,000

$
11,858,000

$
-

$
(17,296,000
)
$
(2,014,000
)
$
(7,391,000
)See accompanying summary of accounting policies and notes to financial statements.
 F-4
 ITS NETWORKS INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003Page 1 of 22004

2003CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss)

$
(3,202,000
)
$
(10,031,000
)Adjustments to reconcile net (loss) tonet cash used in operating activities:Depreciation


480,000


367,000Gain on write-down of asset


(3,996
)

-Loss on write-off of syndication fees


418,000


-Bad debt expense


-


255,000Loss on disposition of assets


-


110,000Non cash expenditures paid with stock


1,247,000


86,000Loss on impairment on goodwill


-


6,637,000Decrease (increase) in operating assets:Accounts receivable - trade


(160,000
)

(249,000
)Accounts receivable - other


145,000


(116,000
)Inventory


13,000


(59,000
)Prepaid expenses


8,000


6,000Vendor and other deposits


19,000


(115,000
)Increase (decrease) in operating liabilities:Accounts payable and accrued liabilities


(951,000
)

4,180,000Deferred income and deposits received


115,000


1,642,000Net cash provided by (used in) operating activities


(1,871,996
)

2,713,000CASH FLOWS FROM INVESTING ACTIVITIES:Purchased goodwill


-


(4,339,000
)Purchase of property and equipment


14,996


(1,427,000
)Net cash provided by (used in) investing activities


14,996


(5,766,000
)CASH FLOWS FROM FINANCING ACTIVITIES:Loan proceeds from related parties


2,194,000


3,906,000Loan proceeds from bank


15,000


233,000Payment on tax agency obligation


(90,000
)

480,000Cash paid for treasury stock





(6,000
)Proceeds from sale of common stock


115,000


-Net cash provided by financing activities


2,234,000


4,613,000EFFECT OF EXCHANGE RATE


(443,000
)

(1,449,000
)NET INCREASE (DECREASE) IN CASH ANDCASH EQUIVALENTS


(66,000
)

111,000CASH AND CASH EQUIVALENTS,BEGINNING OF YEAR


159,000


48,000CASH AND CASH EQUIVALENTS,END OF YEAR

$
93,000

$
159,000See accompanying summary of accounting policies and notes to the financial statements.
  F-5    ITS NETWORKS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003Page 2 of 22004

2003SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the year for:Interest

$
28,000

$
121,000SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:Stock issued as additional purchase consideration (Goodwill)

$
-

$
2,297,500Long-term debt converted to common stock

$
1,970,000

$
4,136,000Common stock issued for interest on notes payable

$
582,000

$
-Common stock issued for services received

$
665,000

$
86,000See accompanying summary of accounting policies and notes to financial statements.
  F-6    **ITS NETWORKS, INC.**
 **NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER 30, 2004 AND 2003**
 
 
 **1. THE COMPANY**
 
 ITS Networks Inc. (the "Company") was incorporated in the State of Florida on November 23, 1998. On December 22, 2000, the Company issued 8,433,334 shares of common stock, after the effect of the 1 for 2 reverse stock split on December 29, 2003, in exchange for 100% of the outstanding common stock of ITS Europe, S.L. ("ITS Europe"), a Spanish telecommunications company. For accounting purposes, the acquisition has been recorded as a recapitalization of ITS Europe, with ITS Europe as the acquirer. The 8,433,334 shares, after the effect of the 1 for 2 reverse stock split on December 29, 2003, issued are treated as issued by ITS Europe for cash. ITS Europe was engaged in providing both prepaid and post paid long distance telephone calling services.
 
 In December 2002 the Company acquired Teleconnect Comunicaciones, S.A. ("Teleconnect") for up to 1,500,000 shares of the Common Stock, after the effect of the 1 for 2 reverse stock split on December 29, 2003, of the Company valued at $.9190 (after effect of reverse split) per share and the assumption of approximately 2,200,000 Euros of net debt. See Note 4 for further details on this acquisition. Teleconnect principally provided prepaid long distance services via the sale and servicing of prepaid telephone calling cards.
 
 The consolidated financial statements include the accounts of ITS Europe, Teleconnect, and the Company. The Company is a provider of various telecommunication services and products within Spain. Significant inter-company balances and transactions have been eliminated in consolidation.
 
 
 **2. GOING CONCERN**
 
 During the two years ended September 30, 2004 and 2003, the Company incurred net (losses) of ($3,202,000) and ($10,031,000), respectively. As of September 30, 2004, the Company had negative working capital of ($7,970,000) and a deficit net worth of ($7,391,000). These factors raise substantial doubt about the Company's ability to continue as a going concern.
 
 The Company is seeking additional financing but there can be no assurance that any will be obtained.
 
 The ability of the Company to continue as a going concern is dependent upon the Companys ability to attain a satisfactory level of profitability and obtain suitable and adequate financing. There can be no assurance that management's plan will be successful. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 **3. SIGNIFICANT ACCOUNTING POLICIES**
 F-7
 
 Cash and Cash Equivalents - The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. There are no cash equivalents at September 30, 2004.
 
 Consolidation Policies - The accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned and majority owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
 
 Revenue Recognition - Revenues from the sale of prepaid calling cards are recognized at the time the cards are used. Unused time is reflected in deferred revenue until the time is utilized or the card reaches its expiration date. The Company had deferred revenues of $1,765,000 as of September 30, 2004.
 
 Inventory - Inventory consists primarily of unused calling cards. Inventories are stated at the lower of cost determined on the first in first out method, or cost, whichever is less.
 
 Property and Equipment - Property and equipment are stated at cost. Depreciation is provided primarily by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations when incurred.
 
 Impairment of Long-lived Assets - The Company evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment.
 
 Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires an asset and liability approach to determine deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based upon the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are assumed to reverse.
 
 Loss per Share - Loss per common and common equivalent share is computed based on the weighted average number of common shares outstanding.
 
 Use of Estimates - The preparation of 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
 Foreign Currency Translation/Transactions - The assets and liabilities of ITS Europe and Teleconnect whose functional currency is the Euro, are generally translated into US dollars at the September 30, 2004 exchange rate for current assets and liabilities and at the historical exchange rate on the date of acquisition on property and equipment. The revenues and expenses are translated at average exchange rates for the periods. Resulting translation adjustments are accumulated and reflected as a separate component of stockholders equity.
 F-8
  Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Foreign transaction gains and losses in the functional currencies are immaterial.
 Reclassification of Prior Year Balances - The classification of certain items within the financial statements for the year ended December 31, 2003 have been changed to be consistent with the classifications adopted by the Company in 2004.
 New Accounting Pronouncements - In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for certain contracts entered into or modified by the Company after June 30, 2003. The adoption of SFAS 149 had no impact on the Companys financial position, results of operations, or cash flows.
 
 In May 2003, the FASB issued SFAS No. 150, Accounting for Instruments with Characteristics of Both Debt and Equity (SFAS 150). Statement 150 requires liability classification for three types of instruments: 1) Mandatory redeemable shares that obligate the company to deliver cash or other assets to shareholders on fixed or determinable dates; 2) Freestanding written put options and forward purchase contracts on a companys own shares that obligate the company to deliver cash or other assets, and 3) Contracts that obligate a company to issue its own shares in amounts that are unrelated to, or inversely related to, the value of the shares. The adoption of SFAS 150 had no impact on the Companys financial position, results of operations, or cash flows.
 
 In November 2004, the FASB issued SFAS No. 151 Inventory Costs - an amendment of ARB No. 43, Chapter 4. Statement No. 151 requires that certain abnormal costs associated with the manufacturing, freight, and handling costs associated with inventory be charged to current operations in the period in which they are incurred. The adoption of SFAS 151 had no impact on the Companys financial position, results of operations, or cash flows.
 
 In December 2004, the FASB issued a revision of SFAS No. 123 "Share-Based Payment". The statement establishes standards for the accounting for transactions in which an entity exchanges its equity investments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. The statement does not change the accounting guidance for share-based payments with parties other than employees.
 
 The statement requires a public entity to measure the cost of employee service received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exception). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). A public entity will initially measure the cost of employee services received in exchange for an award of liability instrument based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation over that period.
 
 The grant-date for fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of these instruments.
 
 The statement is effective for the quarter beginning January 1, 2006.
 
 In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets-amendment of APB Opinion No. 29". Statement 153 eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance, defined as transactions that are not expected to result in significant changes in the cash flows of the reporting entity. This statement is effective for exchanges of nonmonetary assets occurring after June 15, 2005.
 F-9
 
 **4. CONCENTRATION OF CREDIT**
 
 The Company extends credit to retailers on the sale of prepaid calling cards. In the past, it has extended credit to fixed line customers for fixed line charges. Substantially all sales are made in Spain. The Company has incurred substantial losses in the past from the extension of credit but believes that as of September 30, 2004 its allowance for credit related losses is adequate to cover any uncollectible receivables.
 
 The Company does not require collateral or other security to support financial instruments that are subject to credit risk.
 
 As of September 30, 2004, three customers accounted for 31%, 18% and 17% of net accounts receivables.
 
 
 **5. ACQUISITION OF TELECONNECT COMMUNICACIONES, S.A.**
 
 In December 2002, the Company acquired Teleconnect Comunicaciones, S.A. ("Teleconnect") in consideration for the issuance of up to 1,500,000 shares of the Common Stock, after the effect of the 1 for 2 reverse stock split on December 29, 2003, of the Company valued at $.919 (after effect of reverse split) per share and the assumption of approximately 2,200,000 Euros of net debt. The stock issuance was subject to guarantees made by Teleconnect shareholders that Teleconnect liabilities will not exceed 2,200,000 Euro. Management anticipated that Teleconnect debts would sufficiently exceed the 2,200,000 Euro limit that no additional shares would be required to be issued.
 F-10
 
 Upon completion of the acquisition in December of 2002, which was treated as a purchase for financial reporting purposes, management determined that Teleconnect assets had been less and its liabilities more than believed based on due diligence. This resulted in the creation of $4,339,000 in goodwill associated with this acquisition before taking into consideration the value of any additional shares that might have been due the former Teleconnect shareholders.
 
 During the period of April 2003 to September 2003, the Management of the Company attempted to attract new investors to help relieve the additional cash strain produced by the hidden liabilities associated with the Teleconnect acquisition. These efforts were made ineffective due to the growing threats of mutual-litigation between the main ex-Teleconnect shareholders and the Company. Given the priority and urgency to raise funds at that time, Management believed, and still believes, that the only way to attract investment money was to reach a truce with the ex-Teleconnect shareholders and as such bring shareholder stability to the Company.
 
 As such, on September 29, 2003, the Company entered into an agreement with the major former shareholders of Teleconnect whereby the Company agreed to waive the Net Debt calculations compensation called for in the original stock purchase agreement and to issue the former Teleconnect shareholders the original 1,500,000 shares plus an additional 1,000,000 shares for a total of 2,500,000 shares of the Companys restricted common stock, after the effect of the reverse stock split on December 29, 2003. These 2,500,000 shares were valued at $.919 per share or a total consideration of $2,277,500. In exchange, all hostile actions taken by the ex-Teleconnect shareholders would be immediately withdrawn and they would support the Companys fund raising efforts.
 
 Following this transaction, the Company had $6,637,000 in goodwill associated with the Teleconnect acquisition.
 
 In accordance with Financial Accounting Standards Board Opinion No 142, the Company recognized an impairment loss of $6,637,000 during the fiscal year ended September 30, 2003. This impairment was recognized as a result of the failure of the Teleconnect acquisition to generate sufficient operating profits to support the carrying value of the goodwill.
 
 
 **6. PROPERTY AND EQUIPMENT**
 
 Property and equipment, substantially all of which are located in Spain, at September 30, 2004 was comprised as follows:
 
 Computers and switching systems

$
1,807,000Furniture and fixtures


141,000Transportation equipment


14,000Total at cost


1,962,000Less: Accumulated depreciationand amortization


(1,283,000
)Net Property and Equipment

$
679,000
 
 F-11
 The useful lives of property and equipment for purposes of computing depreciation are as follows:
 
 Computers and switching systems
5-7 yearsLeasehold improvements
5 yearsFurniture and fixtures
7 yearsTransportation equipment
4 years
 
 All depreciation is computed on a straight line bases over their useful lives.
 
 
 **7. LOANS FROM RELATED PARTIES**
 
 As of September 30, 2004, the Company had short term loans totaling $2,452,000 from shareholders. These loans do bear interest, are unsecured, and are due upon demand.
 
 
 **8. NOTE PAYABLE TO BANK**
 
 As of September 30, 2004, the Company had a $248,000 (200,000) loan from a bank. This loan bears interest at the rate of 4.25% and is due on February 10, 2005. This loan is secured by a bank guarantee issued by the Rabobank Netherlands in the name of a stockholder. The Company expects that the stockholder will extend the bank guarantee in order to delay the repayment of the loan for another six-month period.
 
 
 **9. LONG-TERM DEBT**
 
 During November 2002, the Company entered into an agreement with Spanish taxing authorities to pay past due employment tax liabilities incurred during the period commencing in January of 2001 through April of 2002 totaling 412,356. Payment terms call for a sixty month payout with interest paid monthly at 4.24% per annum and principal payments ranging from 3,436 per month in year one to 10,309 per month in year five. As of September 30, 2004, $290,000 (234,000) of this debt is long-term.
 
 Maturities on long term debt by year are as follows:
 
 Due within one year

$
100,000Due in year two


126,000Due in year three


151,000Due in year four


13,000Due in five years


-Thereafter


-Total

$
390,000
 
 **10. INCOME TAXES**
 F-12
 
 The Company's subsidiaries, ITS Europe and Teleconnect, file their income taxes on a calendar year basis. Statutory tax laws of Spain allow net losses from operations to be carried forward for a period of 15 years. For the year ended December 31, 2003, the available tax loss carryforwards for ITS Europe and Teleconnect are 4,292,000 and 11,796,000 respectively. The utilization of these losses expires as follows:
 
 ITS Europe

TeleconnectYear2010


11,000


-2011


25,000


-2012


63,000


-2013


79,000


-2014


713,000


129,0002015


1,319,000


638,0002016


783,000


2,770,0002017


778,000


6,240,0002018


521,000


2,019,000Total


4,292,000


11,796,000
 
 The Company accounts for income taxes under Financial Accounting Standards Number 109 (SFAS 109), Accounting for Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be reversed.
  At September 30, 2004, the Company had US net operating loss carryforwards of approximately $1,059,000 for federal income tax purposes.
 
 The US carryforward expiration years and amounts are as follows:
 
 Year

Amount2021

$
6,0002022


191,0002023


542,0002034


320,000$
1,059,000
 
 F-13
 Deferred tax assets and liabilities are comprised of the following as of September 30, 2004 and 2003:
  
 September 30,2004

2003Deferred income tax assets:Tax effect of impairment ofgoodwill in excess of amountsamortized for income taxreporting purposes

$
996,000

$
996,000Tax effect of net operatingloss carryforward


1,059,000


739,0002,055,000


1,735,000Valuation allowance


(2,055,000
)

(1,735,000
)Net deferred tax asset

$
-

$
-
 
 The Company has a deferred tax asset principally due to net operating loss carryforwards. This deferred tax asset has been offset in full by a valuation allowance, as the Company cannot be assured at this time that it will be able to utilize these loss carryforwards.
 
 A reconciliation of the difference between the expected tax benefit at the U.S. federal statutory rate and the Company's of effective tax benefit for the years ended September 30, 2004 and 2003 are as follows:
 
 September 30,2004

2003Income tax benefit - Federal

$
1,089,000

$
341,000Less valuation allowance


(1,089,000
)

(341,000
)Income tax provision

$
-

$
-
 
 
 **11. OPERATING LEASES**
 
 The Company leases various office space and equipment under operating leases expiring in various years through 2005. Rent expense incurred in operating leases for the fiscal years ended September 30, 2004 and 2003 are $294,000 and $220,000, respectively.
 
 Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of September 30, 2004 for each of the next five years and in the aggregate are:
 
 Year ended September 30,

Amount2005

$
211,0002006


30,0002007


-2008


-2009


-Thereafter


-Total minimum future rental payments

$
241,000
 F-14
 **12. SALE OF FIXED LINE BUSINESS**
 
 During November 2003, the Company entered into an agreement with a third party to sell its post paid long distance business. The sales price was set at 550,000 euro subject to certain price adjustments related to sales volumes for the month of April 2004. Although a final settlement agreement has not been reached, the sale was recorded at 481,000 euros, based on managements best estimate of the final settlement price. Dialers and other equipment with a net book value of 89,000 euro were transferred to the purchasers resulting in a gain of 392,000 euro ($477,000).
 
 The sale of this fixed line business was necessary to ensure the continuity of the Company given the financial condition of the Company at that time. As per the Board minutes dated October 15, 2003, the Board detailed the immediate cash needs of 975,000 euros to avoid the sale of the fixed line business as well as to satisfy some other creditors and cover the operating loss being carried forward.
 
 Managements efforts to raise money from bank loans, existing shareholders or new investors under negotiation, were not successful due to the Companys financial situation at that point in time as well as the very short time available to raise this amount in order to avoid the main carrier paralyzing the Companys operations.
 
 The proceeds from the sale of the fixed line business were used to satisfy the situation with the main carrier.
 
 In accordance with the requirements of Accounting Principal Board Opinion 30, the discontinued operations were reflected after the loss from continuing operations in the financial statements.
 
 **13. LITIGATION AND CONTINGENT LIABILITIES**
 
 A shareholder filed suite against the Company claiming the right to an additional 623,100 shares of the Companys common stock and 246,624 euros in damage due to the failure to issue these shares on a timely basis. Management believes this suite to be without merit and has not accrued any liability for this litigation as of September 30, 2004.
 
 In the normal course of its operations, the Company may, from time to time, be named in legal actions seeking monetary damages. While the outcome of these matters cannot be estimated with certainty, management does not expect, based upon consultation with legal counsel, that they will have a material effect on the Company's business or financial condition or results of operations. As of September 30, 2004, the Company has accrued $136,000 to cover the anticipated cost of settling several litigation matters.
 
 **14. PREFERRED STOCK**
 
 The Company has 5,000,000 shares of authorized and unissued Preferred Stock with par value of $0.001, which is noncumulative and nonparticipating. No shares of preferred stock were issued and outstanding as of September 30, 2004.
 
 **15. STOCK TRANSACTIONS**
 
 During the year ended September 30, 2004, the Company issued 28,038,002 shares of restricted common stock in exchange for debts totaling $1,970,000; 6,800,000 restricted shares for accrued interest in the amount of $582,000 on notes payable; and 2,180,000 shares of unrestricted common stock for professional services rendered valued at $665,000.
 F-15
 
 During the year ended September 30, 2004, the Company issued 2,180,000 shares of common stock for professional fees totaling $665,000.
 
 During the year ended September 30, 2003, the Company issued 9,767,093 shares of restricted common stock, after the effect of the 1 for 2 reverse stock split on December 29, 2003, in exchange for debts totaling $4,986,000. In addition 150,000 restricted shares, after the effect of the 1 for 2 reverse stock split on December 29, 2003, were issued for services rendered valued at $86,000 and 3,750 shares, after the effect of the 1 for 2 reverse stock split on December 29, 2003, that were repurchased for $6,000 and retired during that year.
 
 **16. STOCK WARRANTS AND OPTIONS**
 
 During the year ended September 30, 2002, the Company adopted an Employee Stock Option, SAR and Stock Bonus Plan (the Employee Plan), which reserves 1,250,000 shares of Common Stock, after the effect of the 1 for 2 reverse stock split on December 29, 2003, for issuance under the Plan. The Employee Plan allows the Company to issue awards of incentive or non-qualified stock options, stock appreciation rights, and stock bonuses, which may be subject to restrictions. No options have been issued under this plan as of September 30, 2004.
 
 During the year ended September 30, 2002, the Company adopted a Stock Option, SAR and Stock Bonus Consultant Plan (the Consultant Plan), which reserves 1,000,000 shares of Common Stock, after the effect of the 1 for 2 reverse stock split on December 29, 2003, for issuance under the Plan. The Consultant Plan allows the Company to issue awards of incentive or non-qualified stock options, stock appreciation rights, and stock bonuses, which may be subject to restrictions. During the fiscal years ended September 30, 2004 and 2003 the Company issued 2,180,000 and 150,000 shares respectively under the provisions of this plan. On July 29, 2004, the Board of Directors and shareholders approved amending the existing plans to reserving up to 15,000,000 shares for the two plans, however, the amended plan has not yet been filed under Form S 8 with the Securities and Exchange Commission.
 
 As of September 30, 2003, the Company has warrants outstanding to purchase 440,000 shares of Common Stock, after the effect of the 1 for 2 reverse stock split on December 29, 2003, at the exercise price of $2.00 per share, which expire on or before December 24, 2004. Each of the warrants contain provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrants in the event of stock dividends, stock splits, reorganization and reclassifications and consolidations.
 
 On February 1, 2004, the Company issued restricted stock options which have a term of five years at an exercise price of $0.25 per share covering 1,000,000 shares of restricted common stock. The stock can be exercised on or after January 1, 2005. Restricted stock on the date the option was granted was valued at $.10 per share based on other restricted stock transactions during the year.
 F-16
 
 The Company applies APB 25 and related interpretations in accounting for its plan. Compensation for services that a corporation receives under APB 25 through stock-based compensation plans should be measured by the quoted market price of the stock at the measurement date less the amount, if any, that the individual is required to pay. No compensation expense was recorded during the years ended September 30, 2003, and 2002 related to its stock option plan under APB 25. If the Company had elected to recognize compensation based on the fair value of the options granted at the grant date as prescribed by "Statement of Financial Accounting Standards No. 123, ("SFAS 123") Accounting for Stock-Based Compensation", net earnings (loss) and net earnings (loss) per share would have increased to the pro forma amounts shown below for the years ending September 30, 2004 and 2003:
 
 2004

2003Pro forma net (loss) applicable to common stockholders

$
(3,202,000
)
$
(10,031,000
)Less: Total stock based compensation expense determinedunder fair value based method for all awards, net ofrelated tax effect


(-)


(-)Pro forma net (loss) per common share

$
(3,202,000
)
$
(10,031,000
)
 
 2004

2003Earnings (loss) per share:Basic - as reported

$
(0.10
)
$
(0.58
)Basic - pro forma

$
(0.10
)
$
(0.58
)Diluted - as reported

$
(0.10
)
$
(0.58
)Diluted - pro forma

$
(0.10
)
$
(0.58
)
 
 
 Information with respect to restricted stock options and warrants for restricted common stock outstanding are as follows:
 
 2004Average

ExerciseShares

PriceOutstanding at beginning of year


3,755,790

$
1.40Granted at market value


1,000,000


.25Exercised


-


-Expired


-


-Outstanding at the end of year


4,755,790

$
1.16
 F-17
 2003Shares(After theeffect of the 1for 2 reverse

Averagestock split on

ExerciseDecember 29, 2003)

PriceOutstanding at beginning of year


315,790

$
0.10Granted at market value


3,440,000


1.52Exercised


-


-Expired


-


-Outstanding at the end of year


3,755,790

$
1.40
 
 Options  and Warrants Outstanding

Options ExercisableShares

Average

Average

Shares

AverageOutstanding

Remaining

Exercise

Outstanding

Exercise9/30/04

Life (Years)

Price

9/30/03

Price$0.20


315,790


2.5

$
0.20


315,790

$
0.10$2.00


440,000


0.2


2.00


440,000


2.00$0.50 - $2.50


3,000,000


3.2


1.45


3,000,000


1.45$ .25


1,000,000


4.5


0.25


0


0.254,755,790




$
3.90


3,755,790

$
1.52
 
 
 Options and Warrants Outstanding

Options ExercisableShares

Average

Average

Shares

AverageOutstanding

Remaining

Exercise

Outstanding

Exercisable9/30/03

Life (Year)

Price

9/30/03

Price$0.20


315,790


3.5

$
0.20


315,790

$
0.10$2.00


440,000


1.2


2.00


440,000


2.00$0.50 - $2.50


3,000,000


4.2


1.45


3,000,000


1.453,755,790




$
3.65


3,755,790

$
1.52
 ****
 **17. EARNINGS (LOSS) PER SHARE**
 
 Basic earnings per share amounts are computed based on the weighted average number of shares outstanding on that date during the applicable periods. The numbers of shares used in the computations were 37,271,857 and 17,439,287 in 2004 and 2003, respectively. The earnings per share amounts for the discontinued operations have been computed using these numbers of shares.
 
 Diluted earnings per share was not disclosed as of September 30, 2004 and 2003 since the options and warrants outstanding at those dates were antidilutive. Warrants and options total 5,215,790 and 3,755,790 shares were outstanding at September 30, 3004 and 2003, respectively, as adjusted for the reverse stock split.
  **18. FUND RAISING EFFORTS**
 F-18
  During the year ended September 30, 2002, the Company entered into an equity line of credit with Cornell Capital Partners, L.P. ("Cornell"). Pursuant to the equity line of credit agreement, the Company, at its discretion, will periodically sell to Cornell shares of Common Stock for a total purchase price of up to $10,000,000. For each share of common stock purchased under the equity line of credit, Cornell will pay 95% of the lowest closing bid price on the Over-the-Counter Electronic Bulletin Board or other principal market on which our Common Stock is traded for the five consecutive trading days immediately following the notice date. On September 27, 2002, the Company issued 513,158 shares of Common Stock, after the effect of the 1 for 2 reverse stock split on December 29, 2003, for syndication fees for this equity line of credit. In addition, in connection with the Equity Line of Credit Agreement, we issued 13,158 shares of our Common Stock, after the effect of the 1 for 2 reverse stock split on December 29, 2003, to Westrock Advisors, Inc. ("Westrock") as a placement agent fee. Given the change in market conditions, the decision was taken to cancel the equity line. Due to the Companys failure to raise funds under this equity line of credit, syndication costs in the amount of $418,000 were charged against operations during 2004.
 
 On October 22, 2003, an investment agreement was reached between GreenRidge Investment Ltd (GreenRidge) and ITS Networks by which GreenRidge would have injected 2,900,000 Euros into the Company in exchange for 60% of the total outstanding shares of the Common Stock of the Company. Other associated conditions included the conversion of all shareholder debt to equity. Due to circumstances beyond its control, GreenRidge representatives could not carry out the purchase within the required period of time.
 
 As such, the management of the Company attempted to close with another potential investor which had showed interest. On November 28, 2003, Henk van Elst signed an investment agreement whereby he would invest 2,900,000 Euros into the Company with very similar conditions to GreenRidge, but without, amongst other things, the obligation for existing debt holders to convert their outstanding debt in the Company into equity.
 
 As agreed between the parties, funds to be received from Mr. van Elst will be used for: (i) the last phase of the restructuring (i.e. solving the financial situation with main carrier UNI2); (ii) increasing the network capacity; (iii) providing bank guarantees and/or prepayments to carriers to increase the potential traffic volume; (iv) paying back certain bridge loans; and (v) additional working capital.
 
 Hence, this agreement would have provided the Company with sufficient funds to repay major debts, as well as providing the necessary operating capital to expand its business and be more competitive. However, the Company did not receive the investment proceeds from Mr. van Elst.
 
 Due to the U.S. Patriots Act, the injections of funds from Mr. van Elst were delayed. The Company was informed that the funds were to be made available during the month of February 2004. These funds were necessary to ensure the continued operations of the Company.
 
 When these funds did not arrive, the Company hired financial consultant EuroPartners Company Limited to support the management of the Company in the fund raising process and on May 13, 2004 the management signed a Placement Agreement with EuroPartners Company Ltd. whereby the former reserved for future investors the option on 60% of the total share capital of the Company in exchange for the full injection of $5,000,000. At that time, May 2004, Euro Partners had advanced negotiations with investor parties which were expected to come to fruition before the end of the calendar year 2004. As of September 30, 2004, the Company had not received any confirmation from EuroPartners Company Ltd that the funds would arrive.
 
 The Company reserves itself the right to file for damages to cover the costs incurred and the loss of business as a result of the lack of fulfillment of the obligation of EuroPartners Company Limited. The Board will decide when and if any action is taken.
 
 In the meantime, without any funds from new investors, the current majority shareholder and related parties covered the operating losses of the company during that period.
 
 
 **19. SUBSEQUENT EVENTS**
 
 In October 2004, Management undertook the task of again starting the process of fund raising. As of the date of this filing, conversations are being maintained with different parties but no new funds have yet been committed.
 
 As part of its cost cutting measures, the Company moved its offices from Marbella to Malagas Technological Park.
 
 In addition, in November 2004, a stockholder converted an additional 500,000 euros of loans into equity of the Company.
 
 As well, the Board approved in October 2004 the renewal of the Management contracts of both the President and Vice-President of the Company.
 F-20