**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 **FORM
        10-Q**
 
 (MARK
        ONE)
 
 **xQUARTERLY
        REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**
 **ACT
        OF 1934**
 
 For
        the
        quarterly period ended March 31, 2008
 
 OR
 
 **oTRANSITION
        REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**
 **EXCHANGE
        ACT OF 1934**
 
 For
        the
        transition period from _____ to ____
 
 Commission
        File No. 000-27277
 
 **VOCALSCAPE
        NETWORKS, INC.**
 
 (Exact
        name of registrant as specified in its charter)
 
 **NEVADA**
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              **98-0207554**
                (I.R.S.
                  Employer
                Identification
                  No.)
 
 170
        E.
        Post Road, Suite 206
 White
        Plains, New York 10601
 (Address
        of principal executive offices, zip code)
 
 (914)
        448-7600
 (Registrant’s
        telephone number, including area code)
 
 (Former
        name, former address and former fiscal year,
 if
        changed since last report)
 
 Check
        whether the issuer (1) has filed all reports required to be filed by Section
        13
        or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
        (or for such shorter period that the registrant was required to file such
        reports), and (2) has been subject to such filing requirements for the past
        90
        days. Yes x No o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Exchange
        Act Rule 12b-2 of the Exchange Act):
 Yes o No
x
 
 Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        stock, as of the latest practicable date.
  As
        of May
        16, 2008, there were 383,783,937 shares of the issuer’s common stock, par value
        $0.001 per share, outstanding, 60,000 shares of Series A Convertible Preferred
        Stock outstanding, and 100,000,000 shares of Class A Common Stock, par value
        $0.001 per share, outstanding.
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act. (check one):
  Large accelerated filer o
              Accelerated
                  filer o
              Non-accelerated
                  filer o
              Smaller
                  reporting company x
 (Do
        not
        check if a smaller reporting company)
  
  **VOCALSCAPE
        NETWORKS, INC.**
 **QUARTERLY
        REPORT ON FORM 10-Q**
 **FOR
        THE PERIOD ENDED MARCH 31, 2008**
 
 **INDEX**
  **Index**
              
              
              **Page****Part
                  I.**
              **Financial
                Information**Item
                  1.
              Financial
                  Statements
              1Consolidated
                  Balance Sheet as of March 31, 2008 (unaudited)
              F-2Consolidated
                  Statements of Operations - for the three months ended March 31,
                  2008 and
                  2007 (unaudited)
              F-3Consolidated
                  Statements of Cash Flows for the three months ended March 31, 2008
                  and
                  2007 (unaudited)
              F-4Notes
                  to Consolidated Financial Statements (unaudited)
              F-5Item 2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              2Item 3.
              Controls
                  and Procedures
              5**Part
                  II.**
              **Other
                Information**Item 1.
              Legal
                  Proceedings
              5Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              6Item
                  3.
              Defaults
                  Upon Senior Securities
              6Item 4.
              Submission
                  of Matters to a Vote of Security Holders
              6Item 5.
              Other
                  Information
              6Item 6.
              Exhibits
              7**Signatures**
              
              
              7**Certifications**
  
  CAUTIONARY
        NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 This
        Quarterly Report on Form 10-Q contains “forward-looking statements.” In some
        cases, you can identify forward-looking statements by terminology such as
“may,”
“will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential” or “continue” or the negative
        of such terms and other comparable terminology. These forward-looking statements
        include, without limitation, statements about our market opportunity, our
        strategies, competition, expected activities and expenditures as we pursue
        our
        business plan, and the adequacy of our available cash resources. Although
        we
        believe that the expectations reflected in the forward-looking statements
        are
        reasonable, we cannot guarantee future results, levels of activity, performance
        or achievements. Actual results may differ materially from the predictions
        discussed in these forward-looking statements. The economic environment within
        which we operate could materially affect our actual results. Additional factors
        that could materially affect these forward-looking statements include, among
        other things, the company’s ability to (i) adapt to rules and regulations that
        may be promulgated that affect how Vocalscape must conduct its
        Voice-over-Internet Protocol business and operations; (ii) market and distribute
        its Voice-over-Internet Protocol services; (iii) secure capital to continue
        operations; (iv) achieve and manage growth; and (v) develop or acquire new
        technology to effectively provide new and/or better services. Additional
        factors
        that will impact the company’s success include the company’s ability to attract
        and retain qualified personnel; the voting decisions of Robert Koch, who
        controls approximately 37.86% **** of
        the
        voting power of all securities of Vocalscape; and other factors discussed
        in
        Vocalscape’s filings with the Securities and Exchange Commission
        (“SEC”).
 
 Our
        management has included projections and estimates in this Form 10-Q, which
        are
        based primarily on management’s experience in the industry, assessments of our
        results of operations, discussions and negotiations with third parties and
        a
        review of information filed by our competitors with the Securities and Exchange
        Commission or otherwise publicly available. We caution readers not to place
        undue reliance on any such forward-looking statements, which speak only as
        of
        the date made. We disclaim any obligation subsequently to revise any
        forward-looking statements to reflect events or circumstances after the date
        of
        such statements or to reflect the occurrence of anticipated or unanticipated
        events.
 
 **PART
        I. FINANCIAL INFORMATION**
 
 **ITEM
        1. FINANCIAL STATEMENTS.**




**Vocalscape
      Networks, Inc. and Subsidiary**


**Consolidated
      Financial Statements**


**For
      the Three Months ended March 31, 2008 and 2007**


**(Unaudited)**


1





**Vocalscape
      Networks, Inc. and Subsidiary**




Index
      to
      Consolidated Financial Statements





Page(s)Consolidated
                Balance Sheet (Unaudited)
            F-2Consolidated
                Statements of Operations (Unaudited)
            F-3Consolidated
                Statements of Cash Flows (Unaudited)
            F-4Notes
                to Consolidated Financial Statements (Unaudited)
            F-5


F-1


Vocalscape
      Networks, Inc. and Subsidiary


Consolidated
      Balance Sheets




(Unaudited)March 31, 2008
            
            December 31, 2007**ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            $
            210
            
            $
            236Total
                current assets
            
            
            210
            
            
            236Investment
                in non-marketable equity securities
            
            
            21,116
            
            
            18,656Property
                and equipment, net
            
            
            16,388
            
            
            18,074Development
                costs, net
            
            
            -
            
            
            -Total
                assets
            
            $
            37,714
            
            $
            36,966**LIABILITIES
                AND STOCKHOLDER'S DEFICIT****Current
                liabilities:**Loans
                and notes payable
            
            $
            1,767,000
            
            $
            1,767,000Loans
                and notes payable, related parties
            
            
            160,486
            
            
            160,486Loan
                payable due for software purchase, net of discount
            
            
            131,746
            
            
            131,746Accounts
                payable
            
            
            296,671
            
            
            285,379Accounts
                payable, related parties
            
            
            260,802
            
            
            240,779Accrued
                expenses
            
            
            1,358,856
            
            
            1,270,289Accrued
                expenses, related parties
            
            
            348,025
            
            
            272,304Convertible
                debentures
            
            
            84,912
            
            
            84,912Payable
                to shareholder
            
            
            900,027
            
            
            900,027Embedded
                conversion option liability
            
            
            159,851
            
            
            193,375Other
                liablilities
            
            
            14,289
            
            
            14,289Total
                current liabilities
            
            
            5,482,665
            
            
            5,320,586Commitments
                and contingencies (Note 11)**STOCKHOLDERS'
                DEFICIT**Preferred
                stock, $0.001 par value, 25,000,000 authorized Series A, voting
                convertible preferred stock, 100,000 shares authorized, 50,000 shares
                issued and outstanding (liquidation value $0.50 per share)
            
            
            50
            
            
            50Common
                stock, $0.001 par value, 400,000,000 authorized, 337,278,968 and
                272,935,968 issued and outstanding at March 31, 2008 and December
                31,
                2007, respectively
            
            
            337,279
            
            
            272,937Common
                stock issuable, at par value (11,504,969 and 8,004,969 shares at
                March 31,
                2008 and December 31, 2007, respectively)
            
            
            11,505
            
            
            8,005Common
                stock , Class A non voting, $.001 par value, 100,000,000 shares
                authorized, 100,000,000 shares issued and outstanding
            
            
            100,000
            
            
            100,000Common
                stock and Common Stock, Class A subscriptions receivable
            
            
            (1,165,000
            )
            
            (1,165,000
            )Additional
                paid-in capital
            
            
            7,749,274
            
            
            7,602,329Accumulated
                deficit
            
            
            (12,478,059
            )
            
            (12,101,941
            )Total
                stockholders' deficit
            
            
            (5,444,951
            )
            
            (5,283,620
            )Total
                liabilities and stockholders' deficit
            
            $
            37,714
            
            $
            36,966





See
      accompanying notes to consolidated financial statements


F-2





Vocalscape
      Networks, Inc. and Subsidiary


Consolidated
      Statements of Operations





Three Months Ended March 31,**2008**
            
            **2007****(Unaudited)**
            
            **(Unaudited)**Revenue
            
            $
            6,275
            
            $
            10,511Cost
                of revenue
            
            
            -
            
            
            739Gross
                profit
            
            
            6,275
            
            
            9,772Costs
                and expenses:Compensation
            
            
            167,997
            
            
            176,857Consulting
            
            
            126,548
            
            
            153,616Professional
                fees
            
            
            12,293
            
            
            (17,182
            )General
                and administration
            
            
            25,945
            
            
            66,845332,783
            
            
            380,136Loss
                from operations
            
            
            (326,508
            )
            
            (370,364
            )Other
                income (expense)Loss
                on conversion
            
            
            -
            
            
            (80,000
            )Interest
                expense
            
            
            (85,594
            )
            
            (61,230
            )Change
                in fair value of embedded conversion option liability
            
            
            33,524
            
            
            -Foreign
                currency transaction gain (loss), net
            
            
            2,460
            
            
            (3,284
            )Total
                other income (expense)
            
            
            (49,610
            )
            
            (144,514
            )Net
                loss
            
            $
            (376,118
            )
            $
            (514,878
            )Net
                loss per share - basic and diluted
            
            $
            (0.00
            )
            $
            (0.01
            )Weighted
                average shares outstanding during the period - basic and
                diluted
            
            
            321,504,168
            
            
            68,818,277





See
      accompanying notes to consolidated financial statements


F-3


Vocalscape
      Networks, Inc. and Subsidiary


Consolidated
      Statements of Cash Flows




Three
                Months Ended March 31,**2008**
            
            **2007**(unaudited)
            
            
            (unaudited)**Cash
                flows from operating activities:**Net
                loss
            
            $
            (376,118
            )
            $
            (514,878
            )Adjustments
                to reconcile net loss to net cash used by operating
                activities:Depreciation
                and amortization
            
            
            1,686
            
            
            2,425Amortization
                of debt discount
            
            
            -
            
            
            68,431Deferred
                consulting amortization
            
            
            -
            
            
            96,667Stock
                issued for services
            
            
            84,000
            
            
            -Stock
                options exercises paid for with services
            
            
            -
            
            
            1,850Stock
                options granted for services
            
            
            21,002
            
            
            9,639Foreign
                currency transaction loss (gain)
            
            
            (2,460
            )
            
            1,143Change
                in fair value of embedded conversion option liability
            
            
            (33,524
            )
            
            -Non-cash
                loan fee
            
            
            -
            
            
            20,000Changes
                in other assets and liabilities:Accounts
                payable
            
            
            11,292
            
            
            (32,737
            )Accounts
                payable, related party
            
            
            20,023
            
            
            (23,250
            )Other
                accrued liabilities
            
            
            24,466
            
            
            (14,888
            )Accrued
                interest - related party
            
            
            1,471
            
            
            3,547Accrued
                expenses
            
            
            64,101
            
            
            28,720Accrued
                expenses, related aprties
            
            
            74,250
            
            
            68,668Net
                cash used in operations
            
            
            (109,811
            )
            
            (284,663
            )**Cash
                flows from financing activities:**Bank
                overdraft
            
            
            -
            
            
            (4,175
            )Loan
                proceeds from related party
            
            
            -
            
            
            16,000Proceeds
                from common stock sales
            
            
            109,785
            
            
            82,620Loan
                proceeds
            
            
            -
            
            
            180,000Net
                cash provided by financing activities
            
            
            109,785
            
            
            274,445Net
                increase (decrease) in cash and cash equivalents
            
            
            (26
            )
            
            (10,218
            )Cash
                and cash equivalents, beginning of period
            
            
            236
            
            
            14,697**Cash
                and cash equivalents, end of period**
            
            $
            210
            
            $
            4,479**Supplemental
                disclosure of cash flow information:**Cash
                paid during the period for:Interest
            
            $
            -
            
            $
            -Income
                taxes
            
            $
            -
            
            $
            -**Supplemental
                disclosure of non-cash investing and financing
                activities:**Recording
                of beneficial conversion value to debt discount and APIC
            
            $
            -
            
            $
            60,000Conversion
                of note to common stock
            
            $
            -
            
            $
            120,000Exchange
                of accounts payable for common stock on exercise of
                warrants
            
            $
            -
            
            $
            27,150Recording
                od deferred consulting
            
            $
            -
            
            $
            60,000





See
      accompanying notes to consolidated financial statements


F-4





**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**1.**
            **NATURE
                OF BUSINESS AND GOING
                CONCERN**





**Nature
      of Business and Current Operations –** VNOS is
      a developer of Voice over Internet Protocol (VoIP) telephony solutions. VNOS
      provides VoIP telephony solutions and communications software for Internet
      Service Providers (ISPs), Internet Telephony Service Providers (ITSPs) and
      Telecommunications companies worldwide. VNOS develops VoIP and interactive
      communications software, including Soft phone applications, Customer Acquisition
      and Billing Systems, SIP Servers, Gatekeepers and Virtual Calling Cards. VNOS’s
      strategy is to focus on VoIP software and Long Distance termination solutions
      that bring together a full range of communications solutions and services
      thereby providing a turn-key VoIP infrastructure for ISP’s, ITSP’s and
      Telecommunications companies.





**Organization –** VNI
      is a
      Nevada corporation, which was incorporated on June 12, 1998.





VNOS
      is a
      Nevada corporation, which was incorporated on February 5, 2003.





**Recapitalization** - On
      October 28, 2005, Vocalscape, Inc. (“VSI”) and Dtomi, Inc. (“Dtomi”) announced
      that on October 4, 2005, Dtomi and its wholly owned subsidiary Vocalscape
      Networks, Inc. (Subsidiary) (“VNI OLD”) effected a merger pursuant to that
      certain Agreement and Plan of Reorganization (the “Agreement”) by and between
      Dtomi and VSI dated August 25, 2005. Effective October 4, 2005, the date that
      Articles of Merger effecting the merger were filed with the Nevada Secretary
      of
      State, VNI OLD became a wholly owned subsidiary of Dtomi. Pursuant to the
      amended Agreement, Dtomi issued shares of its common stock with voting rights
      equal to 82% (1,138,889 common shares) of the voting power of the stockholders
      of Dtomi, to VSI in exchange for VNI OLD merging into a wholly owned subsidiary
      of Dtomi. The business of VNI OLD became the primary business of Dtomi.
      Subsequent to the recapitalization, Dtomi changed its name to Vocalscape
      Networks, Inc. and the subsidiary changed its name to Vocalscape Networks
      Operating Subsidiary, Inc.





Due
      to
      the change in control of Dtomi, the transaction was accounted for as a
      recapitalization of VNI OLD.





Accordingly,
      the financial statements of the Company consists of the historical operations
      of
      VNI OLD from its inception, and the operations of Dtomi from the
      recapitalization date. The Company assumed approximately $2.3 million of
      liabilities and deferred stock based costs of approximately $842,000 and is
      deemed to have issued 250,129 common shares to the existing pre-recapitalization
      shareholders of Dtomi. All share and per share data in the accompanying
      financial statements has been retroactively adjusted for the effect of the
      recapitalization.


F-5





**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**Going
      Concern –** The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America, which
      contemplate continuation of the Company as a going concern. The Company had
      a
      net loss for the three months ended March 31, 2008 of $376,118, net cash used
      in
      operations for the three months ended March 31, 2008 of $109,811, and working
      capital deficit of $5,482,455, accumulated deficit of $12,478,059 and
      stockholders’ deficit of $5,444,951 at March 31, 2008. In addition, the Company
      was in default on $436,746 of promissory notes and loans at March 31,
      2008.




These
      conditions raise substantial doubt about the Company’s ability to continue as a
      going concern. These consolidated financial statements do not include any
      adjustments to reflect the possible future effect on the recoverability and
      classification of assets or the amounts and classifications of liabilities
      that
      may result from the outcome of these uncertainties.




In
      order
      to execute its business plan, the Company will need to raise additional working
      capital and generate additional revenues. There can be no assurance that the
      Company will be able to obtain the necessary working capital or generate
      additional revenues to execute its business plan. During 2008, the Company
      generated revenues from customer consulting agreements and raised capital
      through initiating a Regulation S offering by VSI.  Management
      believes the continuation of revenues combined with additional capital raises
      and additional promissory notes will provide the Company the ability to continue
      as a going concern.





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                PRINCIPLES**





**Principles
      of Consolidation –** The
      consolidated financial statements include the accounts of Vocalscape Networks,
      Inc. (the “Company” or “VNI” or “Vocalscape”) and it’s wholly owned subsidiary
      Vocalscape Networks Operating Subsidiary, Inc. (“VNOS”). All material
      intercompany balances and transactions have been eliminated in consolidation.




**Cash
      and Cash Equivalents -** The
      Company classifies as cash equivalents any investments which can be readily
      converted to cash and have an original maturity of less than three months.
      At
      times cash and cash equivalent balances at a limited number of banks and
      financial institutions may exceed insurable amounts. The Company believes it
      mitigates its risks by depositing cash or investing in cash equivalents in
      major
      financial institutions.





**Investments** -
      Certain securities that the Company may invest in may be determined to be
      non-marketable. Non-marketable securities where the Company owns less than
      20%
      of the investee are accounted for at cost pursuant to APB No. 18, "The Equity
      Method of Accounting for Investments in Common Stock" ("APB
      18").


F-6





**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**




Management
      determines the appropriate classification of its investments at the time of
      acquisition and reevaluates such determination at each balance sheet date.
      The
      cost of investments sold is based on the specific identification
      method.




The
      Company periodically reviews its investments in non-marketable securities and
      impairs any securities whose value is considered non-recoverable. The Company's
      determination of whether a security is other than temporarily impaired
      incorporates both quantitative and qualitative information. GAAP requires the
      exercise of judgment in making this assessment for qualitative information,
      rather than the application of fixed mathematical criteria. The Company
      considers a number of factors including, but not limited to, the length of
      time
      and the extent to which the fair value has been less than cost, the financial
      condition and near term prospects of the issuer, the reason for the decline
      in
      fair value, changes in fair value subsequent to the balance sheet date, and
      other factors specific to the individual investment. The Company's assessment
      involves a high degree of judgment and accordingly, actual results may differ
      materially from the Company's estimates and judgments.




**Fair
      Value of Financial Instruments -** The
      following methods and assumptions were used by the Company in estimating its
      fair value disclosures for financial instruments:





·
            Cash
                and cash equivalents: The carrying amount reported in the balance
                sheet
                for cash approximates its fair
                value.


·
            Accounts
                payable: Due to their short-term nature, the carrying amounts reported
                in
                the balance sheet for accounts payable approximate their fair value.


·
            Notes
                payable: The carrying amount of the Company’s notes payable approximate
                their fair value.




**Property
      and Equipment -** Property
      and equipment are recorded at cost, net of accumulated depreciation.
      Depreciation is calculated by using the straight-line method over the estimated
      useful lives of the assets, which is five to seven years for all categories
      except for internal use computer software, which is depreciated over three
      years. Leasehold improvements are amortized over the life of the lease if it
      is
      shorter than the estimated useful life. Repairs and maintenance are charged
      to
      expense as incurred. Expenditures for betterments and renewals are capitalized.
      The cost of property and equipment and the related accumulated depreciation
      are
      removed from the accounts upon retirement or disposal with any resulting gain
      or
      loss being recorded in operations.





**Impairment
      of Long-Lived Assets -** The
      Company evaluates its long-lived assets and intangible assets for impairment
      whenever events or change in circumstances indicate that the carrying amount
      of
      such assets may not be recoverable. Recoverability of assets to be held and
      used
      is measured by a comparison of the carrying amount of the asset to the future
      net undiscounted cash flows expected to be generated by the asset. If such
      assets are considered to be impaired, the impairment to be recognized is the
      excess of the carrying amount over the fair value of the asset.


F-7


**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**Software
      Development Costs -** Costs
      incurred in connection with the development of software products are accounted
      for in accordance with Statement of Financial Accounting Standards (“SFAS”) No.
      86, *“Accounting
      for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed.”* Costs
      incurred prior to the establishment of technological feasibility are charged
      to
      research and development expense. Software development costs are capitalized
      after a product is determined to be technologically feasible and is in the
      process of being developed for market. Amortization of capitalized software
      development costs begins upon initial product shipment. Capitalized software
      development costs are amortized over the estimated life of the related product
      (generally thirty-six months), using the straight-line method. The Company
      evaluates its software assets for impairment whenever events or change in
      circumstances indicate that the carrying amount of such assets may not be
      recoverable. Recoverability of software assets to be held and used is measured
      by a comparison of the carrying amount of the asset to the future net
      undiscounted cash flows expected to be generated by the asset. If such software
      assets are considered to be impaired, the impairment to be recognized is the
      excess of the carrying amount over the fair value of the software asset.





No
      software development costs were amortized during the years ended December 31,
      2004 and 2003 as the product was not considered to be generally released until
      2005. The sales recorded during 2004 occurred prior to the general release.
      Amortization was recorded in 2006 and 2007 and was included in cost of
      revenues.





**Intangible
                Assets –**The Company records goodwill and intangible assets arising from business
                combinations in accordance with SFAS No. 141 “Business Combinations”
                (“SFAS 141”) which requires that the purchase method of accounting be used
                for all business combinations initiated after June 30, 2001. SFAS
                141 also
                specifies the criteria applicable to intangible assets acquired in
                a
                purchase method business combination to be recognized and reported
                apart
                from goodwill.




The
      Company accounts for goodwill and intangible assets in accordance with SFAS
      142.
      In accordance with SFAS 142, the Company does not amortize goodwill. SFAS 142
      requires that goodwill and intangible assets with indefinite useful lives no
      longer be amortized, but instead be tested at least annually for impairment.
      SFAS 142 also requires that intangible assets with definite useful lives be
      amortized over their respective estimated useful lives to their estimated
      residual values, and be reviewed for impairment.





**Accounting
      for Derivatives** **–**
      The Company evaluates its convertible debt, options, warrants or other contracts
      to determine if those contracts or embedded components of those contracts
      qualify as derivatives to be separately accounted for under Statement of
      Financial Accounting Standards 133 “ *Accounting
      for Derivative Instruments and Hedging Activities* ”
and
      related interpretations including EITF 00-19 “ *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock* ”.
      The
      result of this accounting treatment is that the fair value of the derivative
      is
      marked-to-market each balance sheet date and recorded as a liability. In the
      event that the fair value is recorded as a liability, the change in fair value
      is recorded in the statement of operations as other income or expense. Upon
      conversion or exercise of a derivative instrument, the instrument is marked
      to
      fair value at the conversion date and then that fair value is reclassified
      to
      equity. Equity instruments that are initially classified as equity that become
      subject to reclassification under SFAS 133 are reclassified to liability at
      the
      fair value of the instrument on the reclassification date.


F-8




**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**Contingencies** -
      Certain
      conditions may exist as of the date financial statements are issued, which
      may
      result in a loss to the Company, but which will only be resolved when one or
      more future events occur or fail to occur. Company management and its legal
      counsel assess such contingent liabilities, and such assessment inherently
      involves an exercise of judgment. In assessing loss contingencies related to
      legal proceedings that are pending against the Company or unasserted claims
      that
      may result in such proceedings, the Company's legal counsel evaluates the
      perceived merits of any legal proceedings or unasserted claims as well as the
      perceived merits of the amount of relief sought or expected to be sought
      therein. If the assessment of a contingency indicates that it is probable that
      a
      liability has been incurred and the amount of the liability can be estimated,
      then the estimated liability would be accrued in the Company's financial
      statements. If the assessment indicates that a potentially material loss
      contingency is not probable but is reasonably possible, or is probable but
      cannot be estimated, then the nature of the contingent liability, together
      with
      an estimate of the range of possible loss if determinable would be
      disclosed.





**Revenue
      Recognition –** The
      Company is engaged as a seller of VoIP telephony solutions. The Company
      generally recognizes revenue in accordance Securities and Exchange Commission
      Staff Accounting Bulletin 104, *“Revenue
      Recognition”* when
      persuasive evidence of an arrangement exists, delivery has occurred, the fee
      is
      fixed or determinable and collectibility is probable. Specifically, the Company
      recognizes software revenue in accordance with Statement of Position (“SOP”)
      97-2, *“Software
      Revenue Recognition,”* as
      amended by SOP 98-4, “ *Deferral
      of the Effective Date of a Provision of SOP 97-2* ,”
and
      SOP 98-9, “ *Modification
      of SOP 97-2 With Respect to Certain Transactions* ”
and *EITF
      00-21 “Revenue Arrangements with Multiple Deliverables”.*





The
      Company sells bundled solutions which may consist of the software, configuration
      services, support services, customization and future upgrades. The Company
      defers recognition of the software sales until configuration is completed as
      they are considered one unit of accounting. Support services are considered
      a
      separate unit of accounting and such fees are recognized as services are
      provided. Future upgrades or enhancements and customizations are considered
      separate units of accounting and related fees are recognized as those upgrades
      or enhancements are provided.





**Stock
      Based Compensation –** On
      January 1, 2006, the Company implemented Statement of Financial Accounting
      Standard 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment” which
      replaced SFAS 123 “Accounting for Stock-Based Compensation” and superseded APB
      Opinion No. 25, “Accounting for Stock Issued to Employees.” In
      March
      2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding
      its
      interpretation of SFAS 123R. SFAS
      123(R) and related interpretations requires the fair value of all stock-based
      employee compensation awarded to employees to be recorded as an expense over
      the
      related requisite service period. The statement also requires the recognition
      of
      compensation expense for the fair value of any unvested stock option awards
      outstanding at the date of adoption. The Company values any employee or
      non-employee stock based compensation at fair value using the Black Scholes
      Pricing Model. In adopting SFAS 123(R), the Company used the modified
      prospective application (“MPA”). MPA requires the Company to account for all new
      stock based compensation to employees using fair value, and for any portion
      of
      awards prior to January 1, 2006 for which the requisite service has not been
      rendered and the options remain outstanding as of January 1, 2006, the Company
      should recognize the compensation cost for that portion of the award that the
      requisite service was rendered on or after January 1, 2006. The fair value
      for
      these awards is determined based on the grant-date. There was no accounting
      effect of applying the MPA method.


F-9





**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**Foreign
      Currency Transactions** - The
      Company’s corporate offices are located in New York in the United States and its
      operating offices are located in Canada. Although the Company’s accounts are
      maintained in U.S. dollars, the Company does maintain one Canadian dollar bank
      account and engages in various transactions resulting in deposits and
      disbursements to and from that bank account. The Canadian dollar bank account
      was closed in the second quarter of 2007. The Company also holds one investment
      in non-marketable equity securities which is denominated in a foreign currency
      and translated to U.S dollars at each reporting date with any gain or loss
      recorded in operations.





Revenue
      and expense items transacted in Canadian dollars are translated using the
      average rate of exchange prevailing during the period. Gains and losses
      resulting from foreign currency transactions are recognized in operations of
      the
      period incurred.





**Income
      Taxes –** The
      Company accounts for income taxes using the liability method, which requires
      the
      determination of deferred tax assets and liabilities based on the differences
      between the financial and tax bases of assets and liabilities, using enacted
      tax
      rates in effect for the year in which differences are expected to reverse.
      Deferred tax assets are adjusted by a valuation allowance, if based on the
      weight of available evidence it is more likely than not that some portion or all
      of the deferred tax assets will not be realized.





**Use
                of Estimates in Financial Statements –**The presentation 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. Significant estimates
                in 2008
                and 2007 include the valuation of the investment in non-marketable
                equity
                securities, valuation of stock-based payments, valuation of beneficial
                conversion feature on convertible debt, fair value of the embedded
                conversion option liability, and valuation allowance on deferred
                tax
                assets.


F-10





**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**Net
      Earnings (Loss) Per Share -** Basic
      earnings (loss) per common share is based on the weighted-average number of
      all
      common shares and Class A Common Shares outstanding. The computation of diluted
      earnings (loss) per share does not assume the conversion, exercise or contingent
      issuance of securities that would have an anti-dilutive effect on earnings
      (loss) per share.




Class
      A
      Common Stock was issued in May and October 2007 with a majority of it issued
      into escrow. The subscription receivable has not been received as of December
      31, 2007 nor as of May 14, 2008. Accordingly, for purposes of the computation
      of
      net loss per share, Class A Common Shares are not considered issued and
      outstanding and not included in the computation of weighted average shares
      outstanding for the period ended March 31, 2008.





As
      of
      March 31, 2008, there were warrants and options convertible to 1,250 and 2,276
      common shares and there were promissory notes convertible into 20,855,932 common
      shares that may dilute future earnings per share.





**Recently
      Issued Accounting Standards –**





In
      July
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes — an Interpretation of FASB Statement No. 109, Accounting for
      Income Taxes” (FIN 48) to create a single model to address accounting for
      uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes
      by prescribing a minimum recognition threshold a tax position is required to
      meet before being recognized. FIN 48 also provides guidance on derecognizing,
      measurement, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. We are currently evaluating the impact of
      adopting FIN 48 and do not expect the adoption of FIN 48 will have a material
      impact on our Consolidated Financial Statements.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
      No. 157 defines fair value and applies to other accounting pronouncements that
      require or permit fair value measurements and expands disclosures about fair
      value measurements. SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007 and interim periods within those fiscal years. We are
      currently evaluating the impact of adopting SFAS No. 157 on our Consolidated
      Financial Statements.




In
      September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, to
      address diversity in practice in quantifying financial statement misstatements
      and the potential for the build up of improper amounts on the balance sheet.
      SAB
      No. 108 identifies the approach that registrants should take when evaluating
      the
      effects of unadjusted misstatements on each financial statement, the
      circumstances under which corrections of misstatements should result in a
      revision to financial statements, and disclosures related to the correction
      of
      misstatements. SAB No. 108 is effective for the fiscal year ending December
      31,
      2006. The adoption of SAB No. 108 did not have a material impact on our
      Consolidated Financial Statements.


F-11


**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
      2007), *Business Combinations* ,
      which
      replaces SFAS No 141. The statement retains the purchase method of accounting
      for acquisitions, but requires a number of changes, including changes in the
      way
      assets and liabilities are recognized in the purchase accounting. It also
      changes the recognition of assets acquired and liabilities assumed arising
      from
      contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. SFAS No. 141R is effective for us beginning
      January 1, 2009. We do not expect it to have a material effect on our
      consolidated financial statements.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements, an amendment
      of
      ARB 51* ,
      which
      changes the accounting and reporting for minority interests. Minority interests
      will be recharacterized as non-controlling interests and will be reported as
      a
      component of equity separate from the parent’s equity, and purchases or sales of
      equity interests that do not result in a change in control will be accounted
      for
      as equity transactions. In addition, net income attributable to the
      noncontrolling interest will be included in consolidated net income on the
      face
      of the income statement and, upon a loss of control, the interest sold, as
      well
      as any interest retained, will be recorded at fair value with any gain or loss
      recognized in earnings. SFAS No. 160 is effective for us beginning
      January 1, 2009 and will apply prospectively, except for the presentation
      and disclosure requirements, which will apply retrospectively. We do not expect
      it to have a material effect on our consolidated financial
      statements.





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161).
      This statement is intended to improve transparency in financial reporting by
      requiring enhanced disclosures of an entity’s derivative instruments and hedging
      activities and their effects on the entity’s financial position, financial
      performance, and cash flows. SFAS 161
      applies to all derivative instruments within the scope of SFAS 133, “Accounting
      for Derivative Instruments and Hedging Activities” (SFAS 133) as well as related
      hedged items, bifurcated derivatives, and nonderivative instruments that are
      designated and qualify as hedging instruments. Entities with instruments subject
      to SFAS 161
      must
      provide more robust qualitative disclosures and expanded quantitative
      disclosures. SFAS 161
      is
      effective prospectively for financial statements issued for fiscal years and
      interim periods beginning after November 15, 2008, with early application
      permitted. We are currently evaluating the disclosure implications of this
      statement.


F-12


**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**Reclassifications**





Certain
      amounts in the 2007 consolidated financial statements have been reclassified
      to
      conform with the 2008 presentation.





**3.**
            **INVESTMENT
                IN NON-MARKETABLE EQUITY
                SECURITIES**





The
      composition of non-marketable securities at March 31, 2008 is as follows:





**Cost**
            
            **Fair Value**Equity
                securities
            
            $
            21,116
            
            $
            21,116





During
      April 2007 the Company received 2.1 million equity securities of a customer
      based in Europe. These securities were received from this private company as
      payment for services rendered. The value of the securities could not be
      determined and the value of the services was also not determinable, therefore
      the Company valued the securities at a nominal value equal to the par value
      of
      the securities or $17,290 which the Company believes is below the value of
      services provided. This amount was recorded as revenues. At December 31, 2007
      the cost and fair value were increased by $1,366 to reflect the increase due
      to
      changes in the exchange rates. At March 31, 2008 the cost and fair value were
      increased by $ 2,460 to reflect the increase due to changes in the exchange
      rates.





**4.**
            **PROPERTY
                AND EQUIPMENT**





Property
      and equipment at March 31, 2008, consists of the following:





Office
                equipment
            
            $
            35,854Accumulated
                depreciation
            
            
            (19,466
            )Property
                and equipment, net
            
            $
            16,388





Depreciation
      during the three months ended March 31, 2008 and 2007 were $1,686 and $ 1,686,
      respectively.





**5.**
            **DEVELOPMENT
                COSTS**





Capitalized
                software development cost consists of the following at March 31,
                2008:





Cost
            
            $
            8,869Accumulated
                amortization
            
            
            (8,869
            )Software,
                net
            
            $
            0


F-13




**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





During
      January 2004 the Company capitalized $136,538 relating to a suite of software
      products purchased by a related party and assigned to the Company with the
      related liabilities (see Notes 7 and 10). The related liabilities due to the
      seller are collateralized by the purchased software. These products had already
      reached the point of technological feasibility prior to the Company’s purchase
      and needed some modifications by the Company to bring the product to market.
      Accordingly, no amortization had been charged to operations as of December
      31,
      2004. Due to the lack of available resources during 2004 and subsequent, the
      Company did not allocate the resources to this project and instead allocated
      resources to other software projects being developed internally. Accordingly,
      since the Company could not reliably project any positive cash flows from this
      asset, the Company had recorded an impairment loss of $136,538 at December
      31,
      2004. During December 2004, the Company recorded $8,869 of software costs for
      certain VoIP products, which it had been developing internally and had reached
      technological feasibility. During the year ended December 31, 2004, the Company
      had no amortization expense. During 2005 the Company recognized $ 2,956 of
      amortization expense, upon general release of the software product. During
      2006
      the Company recognized $2,956 of amortization expense. During 2007 the Company
      recognized $2,956 of amortization expense.





**6.**
            **NOTES
                PAYABLE, NOTES PAYABLE RELATED PARTIES AND CONVERTIBLE
                DEBENTURES**




Notes
      payable to related and unrelated parties consists of the following at March
      31,
      2008:





Note
                payable to the related party principal shareholder and officer of
                the
                Parent and to companies owned or controlled by him; due on demand;
                unsecured; with interest at prime plus 2% to 3% (7.25% to 8.25% at
                March
                31, 2008)
            
            $
            101,486Note
                payable to law firm, due on demand, non-interest bearing
            
            
            59,000Subtotal –
                Notes payable related parties
            
            
            160,486Notes
                payable to two individuals – non interest bearing-in
                default
            
            
            145,000Notes
                payable to two individuals with interest at 10.50%-Due March 2008
– in
                default
            
            
            160,000Notes
                payable to two individuals with interest accruing at 10%
            
            
            159,000Notes
                payable to six individuals; due on demand; unsecured; with interest
                at
                prime plus 3% (8.25% at March 31, 2008)
            
            
            1,303,000Subtotal –
                Notes payable unrelated parties
            
            
            1,767,000Total
                Notes Payable
            
            $
            1,927,486





The
      weighted average interest rate on short term outstanding as of March 31, 2008
      was 8.39 %.


F-14


**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





At
      December 31, 2007, $145,000 of the above promissory notes were in default.
      At
      March 31, 2008, $305,000 of the above promissory notes were in
      default.





**Convertible
      Debentures** - In
      October 2005, upon recapitalization, the Company assumed four 10% one-year
      convertible debentures to four individuals for $11,698, $60,705, $6,121 and
      $6,388 cash. These debentures had been issued in October and November 2004.
      The
      debentures are convertible into 2,123 common shares based on a conversion rate
      of $40 per share. The embedded conversion options were determined not to be
      derivatives at the issuance date or as of March 31, 2008 since the debt
      qualifies as conventional convertible debt. Based upon the conversion rate
      at
      the issuance date, there was no beneficial conversion feature
      recorded.





**Convertible
      Promissory Notes and Conversions**





In
      March
      2006, the Company issued a convertible promissory note for $150,000 with
      interest payable at maturity at 10.5% per annum. The note matures and is due
      March 3, 2008. The note principal is convertible to common stock at a fixed
      price of $.118 per share which equates to 1,271,186 common shares. Management
      has determined that this note qualifies as conventional convertible debt
      pursuant to SFAS 133 and EITF 00-19 and accordingly the embedded conversion
      option is not a derivative. The convertible promissory note was converted into
      common stock in March 2006. The Company computed a beneficial conversion value
      of $150,000 based on the quoted stock price on the grant date of $.60 per share.
      The $150,000 was recorded as a debt discount and credited to additional paid-in
      capital. The debt discount was amortized to interest expense in March 2006
      when
      the note was converted. The note is guaranteed by, Azatel Communications Inc.
      (the “Acquiree”) with the note holder holding a first security interest in
      substantially all assets of the Acquiree and the Company has guaranteed the
      conversion.




In
      March
      2006, the Company issued a convertible promissory note for $10,000 with interest
      payable at maturity at 10.5% per annum. The note matures and is due March 15,
      2008. The note principal is convertible to common stock at a fixed price of
      $.118 per share which equates to 85,746 common shares. Management has determined
      that this note qualifies as conventional convertible debt pursuant to SFAS
      133
      and EITF 00-19 and accordingly the embedded conversion option is not a
      derivative. The convertible promissory note was converted into common stock
      in
      March 2006. The Company computed a beneficial conversion value of $10,000 based
      on the quoted stock price on the grant date of $.60 per share. The $10,000
      was
      recorded as a debt discount and credited to additional paid-in capital. The
      debt
      discount was amortized to interest expense in March 2006 when the note was
      converted.





In
      late
      2007, the Company was notified by the above lenders that the lenders had not
      converted and the shares issued to them were pursuant to a collateral
      arrangement. Although management believes the conversion occurred, they have
      reclassified the $160,000 into loans payable and removed them from the issued
      and outstanding shares as of December 31, 2007


F-15


**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





On
      January 9, 2007, the Company received cash and issued a promissory note for
      $30,000 which bears interest at prime plus three percent and is due within
      90
      day of written demand.





On
      January 10, 2007, the Company received cash and issued a promissory note for
      $30,000 which bears interest at prime plus three percent and due within 90
      day
      of written demand.





In
      February 2007, the Company issued a convertible promissory note for $120,000
      with no specified term or interest rate and thus it is considered due on demand.
      The note principal is convertible into 3,000,000 shares of common stock and
      collateralized by such shares which were to be issued as security. Management
      has determined that this note qualifies as conventional convertible debt
      pursuant to SFAS 133 and EITF 00-19 and accordingly the embedded conversion
      option is not a derivative. The Company computed a beneficial conversion value
      of $60,000 based on the quoted stock price on the grant date of $.06 per share.
      The $60,000 was recorded as a debt discount and credited to additional paid-in
      capital and then charged to interest expensed immediately since the note is
      due
      on demand. The Company received proceeds on the note of $100,000 and they were
      charged $20,000 as a loan fee. The loan fee was charged to interest expense
      in
      March 2007 since the note is due on demand.





On
      April
      30, 2007 the Company issued a convertible promissory note for $150,000. The
      Company received $100,000 of the proceeds from this note during the second
      quarter and $50,000 in July 2007 (see below). The note bears interest at prime
      plus three percent, is due on demand and is collateralized by non-marketable
      equity securities owned by the Company (see Note 3). The note holder has the
      option to convert the note into Common Stock of the Company within 365 days
      of
      the note date at the lessor of 50% of the closing market price of the Common
      Stock on the date the written notice is provided by the holder of the note
      or
      $0.10 per share. Management of the Company has determined that the note is
      a
      derivative and contains an embedded conversion option since the variable
      conversion rate causes an inability to guarantee that there will be enough
      authorized shares available if the holder elects to convert. The Company
      recorded an embedded conversion option liability on this note of $169,596.
      This
      created a change in fair value of the embedded conversion options of $69,596
      that was recorded as an other expense. Since the note is due on demand, the
      Company recognized $100,000 of interest expense on the debt discount. At June
      30, 2007 the Company adjusted the embedded conversion option liability to fair
      value and decreased it by $5,816 due to changes in market value. The $5,816
      was
      credited to expense in June 2007. The embedded conversion option was valued
      using the Black-Scholes model with the following assumptions in May 2007 and
      June 30, 2007: stock price $0.02 and $.015, exercise price of $.01 and $.0075,
      volatility of 242%, term of 1 year and .83 years, and interest rate of 4.8%.
      At
      September 30, 2007 the Company adjusted the embedded conversion option liability
      to fair value and decreased it by $21,945 due to changes in market value. The
      $21,945 was credited to expense in September 2007. At December 31, 2007 the
      Company adjusted the embedded conversion option liability to fair value and
      decreased it by $12,918 due to changes in market value. The $12,918 was credited
      to expense in December 2007. At March 31, 2008 the Company adjusted the embedded
      conversion option liability to fair value and decreased it by $22,349 due to
      changes in market value. The $22,349 was credited to expense in March
      2008.


F-16





**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





On
      July
      2, 2007 the Company received the $50,000 balance of the above note payable.
      Management of the Company has determined that the note is a derivative and
      contains an embedded conversion option since the variable conversion rate causes
      an inability to guarantee that there will be enough authorized shares available
      if the holder elects to convert. The Company recorded an embedded conversion
      option liability on this note of $81,825. This created a change in fair value
      of
      the embedded conversion option of $31,825 that was recorded as an other expense.
      Since the note is due on demand, the Company recognized $50,000 of interest
      expense on the debt discount. At September 30, 2007 the Company adjusted the
      embedded conversion option liability to fair value and decreased it by $10,908
      due to changes in market value. The $10,908 was credited to expense in September
      2007. The embedded conversion option was valued using the Black-Sholes model
      with the following assumptions in July 2007 and September 2007: stock price
      of
      $0.014 and $0.026, exercise price of $0.007 and $0.013, volatility of 204%,
      term
      of .83 and.58 years, and interest rate of 4.80%. At December 31, 2007 the
      Company adjusted the embedded conversion option liability to fair value and
      decreased it by $6,459 due to changes in market value. The $6,459 was credited
      to expense in December 2007. At March 31, 2008 the Company adjusted the embedded
      conversion option liability to fair value and decreased it by $11,175 due to
      changes in market value. The $11,175 was credited to expense in March
      2008.





The
      Company also determined that all other common stock equivalent securities
      including the convertible debentures, warrants and options, but excluding
      conventional convertible debt, may require classification as liabilities due
      to
      the authorized shares problem. However, due to the relatively large conversion
      and exercise prices of these other instruments, the fair value of the
      liabilities at all dates from April 2007 through March 31, 2008 was
      zero.





On
      October 11, 2007, the Company received $20,000 on a note payable. The Company
      was charged a $5,000 loan fee for the note. The note was due on November 11,
      2007 and is in default at December 31, 2007. The note does not bear interest
      but
      is secured by a Pledge and Security agreement covering 1,500,000 shares of
      the
      capital stock of Vocalscape Networks, Inc.





On
      November 2, 2007, the Company received $100,000 and issued a promissory note
      for
      $120,000 which includes a $20,000 loan fee. The loan is non-interest bearing
      and
      due in 30-days or on December 2, 2007. At March 31, 2008 the loan was in
      default.


F-17





**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**7.**
            **LOAN
                PAYABLE FOR SOFTWARE
                PURCHASE**





In
      2004 a
      liability was recorded relating to a software purchase. The software purchase
      price was $200,000 Canadian dollars (“CA$”) payable with CA$26,096 down payment
      and CA$10,842 payable per quarter commencing May 1, 2004 and on August 1,
      November 1, February 1 and May 1 in each year thereafter until the purchase
      price is paid in full. In accordance with APB 21, “Interest on Receivables and
      Payables,” the Company imputed interest at 6% or CA$21,845 on this loan payable.
      This resulted in an initial loan payable balance translated to US dollars of
      $136,538, net of discount of $16,742, an initial payment made of $20,000
      (recorded as a note payable to the related party assignor of the purchase
      agreement) and quarterly payments of approximately $8,309 as adjusted for
      foreign currency transaction gains or losses.





The
      loan
      payable balance at March 31, 2008 was as follows:





Loan
                payable
            
            $
            131,746Debt
                discount
            
            
            (0
            )Loan
                payable, net of discount
            
            $
            131,746





This
      loan
      payable is collateralized by the software asset. Additional interest in the
      amount of $7,698 was accrued in 2007. The loan is currently in
      default.





**8.**
            **STOCKHOLDERS’
                DEFICIT**





**Recapitalization
      -** In
      October 2005, VNI OLD was acquired by Dtomi, Inc., a public shell, in a
      transaction accounted for as a recapitalization of the Company. All authorized,
      issued and outstanding share and per share data in the accompanying consolidated
      financial statements has been retroactively adjusted to reflect the
      recapitalization. (See Note 1)





**Authorized
      Shares** - In
      January 2007, the Company amended its Articles of Incorporation to increase
      the
      number of authorized common shares to 400,000,000. The Company also authorized
      100,000,000 new Class A common shares at a par value of $0.001 per share. The
      Class A has the same rights, terms, and preferences, as common stock except
      it
      is non-voting. The changes in capitalization are reflected retroactively in
      the
      accompanying consolidated Balance Sheet.





**Preferred
      Stock -** The
      Company has authorized 25,000,000 shares of preferred stock. The Board of
      Directors at its discretion may determine the rights and preferences of the
      preferred stock. In December 2005 the Company designated 100,000 shares as
      Series A Convertible Preferred Stock (“Series A shares”). The Series A shares
      upon issuance and consideration received by the Company is convertible to common
      stock on a one-for-one basis at a minimum of 50 shares per conversion. The
      conversion rate is not adjustable except for standard anti-dilution provisions,
      such as stock splits, reorganization or recapitalizations. Upon liquidation
      the
      Series A stockholders would receive $0.50 per share plus any unpaid dividends.
      Each Series A share has voting rights equal to 5,000 common shares. On January
      20, 2006 the Company accepted a subscription from its CEO to purchase 20,000
      Series A shares in exchange for a $5,000 portion of a promissory note due to
      the
      CEO. Such note was previously due to a controlled affiliate of the CEO and
      assigned to the CEO by that affiliate. In October 2006, the CEO resigned and
      executed an employment agreement as Head of Business Development. Among other
      compensation the employment agreement grants 15,000 Series A preferred shares
      as
      compensation. The shares were valued at $0.25, the same amount he previously
      paid and expensed immediately in 2006 since it was not material. In November
      2007 another 10,000 Series A Preferred Shares were granted to this former CEO
      and 5,000 shares to another director for services rendered. The shares were
      valued at an estimated $.50 per share based on their liquidation value and
      expensed immediately.


F-18




**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**Common
      Stock and Class A Common Stock Issued for Cash and Subscriptions
      Receivable**





During
      2007, the Company sold 206,680,139 common shares for net proceeds of $459,470
      pursuant to a Regulation S Stock Purchase Agreement.





In
      May
      2007, the Company entered into a subscription agreement with an individual
      to
      purchase 100,000,000 shares of the Class A non voting common stock of the
      Company. The total sales price is $1,000,000. It is to be paid in four blocks.
      The Company issued the first block of 25,000,000 shares on July 11, 2007. The
      remaining 75,000,000 shares were issued on October 1, 2007. All 100,000,000
      shares are reflected in the accompanying balance sheet as common stock Class
      A
      non-voting and a subscription receivable at March 31, 2008.





In
      September 2007, the Company executed a settlement agreement with an individual
      who had subscribed to 3,000,000 common shares for a $120,000 promissory note
      in
      2006, which shares were issued to him, and never paid the subscription price.
      The settlement resulted in the return of the shares to the Company and
      cancellation of the subscription promissory note.





During
      February and March 2008, the Company sold 64,343,000 common shares for net
      proceeds of $109,785 pursuant to a Regulation S Stock Purchase Agreement.





**Common
      Stock Issued as Settlement**





In
      late
      2007, the Company agreed to issue an investor 2,000,000 shares that had been
      paid for in 2006 but never issued and are reflected as issuable in the
      accompanying statement of financial statements. As settlement compensation,
      the
      Company also issued the investor another 1,000,000. These were valued at the
      quoted trading price of $0.023 on the settlement date resulting in an expense
      of
      $23,000. The total 3,000,000 were issued by the transfer agent in
      2008.


F-19




**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**Common
      Stock Issued for Services**





In
      March
      2008 the Company granted 3,500,000 common shares to a consultant for services
      rendered. The shares were valued at the $.024 quoted trading price on the grant
      date resulting in an expense of $84,000.





**Common
      Stock Issued for Exercise of Stock Options**





In
      January 2007, the Company issued 225,000 common shares upon exercise of a stock
      option at $.04 per share. The exercise price of $9,000 was paid for with a
      payable that was due to the option holder. In May 2007, the company issued
      575,000 common shares to the same option holder upon exercise of a stock option
      at $.01 per share in exchange for a payable of $5,750.





In
      March
      2007, the Company issued 3,000,000 common shares upon exercise of stock options
      at $.01 per share and received the $30,000 exercise price in cash.





In
      March
      2007, the Company issued 1,000,000 common shares upon exercise of stock options
      at $.02 per share which was paid for $18,150 with a payable due to the option
      holder and the remaining $1,850 was expensed as a professional fee.





In
      June
      2007, the Company issued 500,000 common shares upon exercise of stock options
      at
      $.01 per share in exchange for a payable of $5,000.





In
      August
      2007, the Company issued 200,000 common shares upon exercise of stock options
      at
      $0.016 per share in exchange for a payable of $3,200.





**Grants
      of Options to Purchase Common Stock**





In
      January 2007, the Company granted 225,000 common stock options to a law firm
      for
      services provided. The options were valued at $7,876 ($.035 per option) using
      a
      Black-Scholes option pricing model with the following assumptions: stock price
      $0.075, exercise price of $.04, volatility of 282%, term of 1 day, and interest
      rate of 4.8%. The term of 1 day was used since as intended the recipient
      exercised their options immediately on the grant date. (See above) The Company
      recognized $7,876 in expense.





In
      March
      2007, the Company granted options for 3,000,000 common shares at an exercise
      price of $.01 per share pursuant to a consulting agreement. The options were
      valued at $60,000 ($.02 per option), using a Black-Scholes option pricing model
      with the following assumptions: stock price $0.03, exercise price of $.01,
      volatility of 282%, term of 1 day, and interest rate of 4.8%. The term of 1
      day
      was used since as intended the recipient exercised their options immediately
      on
      the grant date (see above). The value is to be recognized over the requisite
      service period and accordingly, $50,000 was deferred as of March 31, 2007.
      During the second quarter of 2007 $50,000 of the deferred consulting was
      expensed.


F-20


**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





In
      March
      2007, the Company granted 1,000,000 common stock options to a consultant for
      services. The options were valued at $0.0018 per option or $1,763 using a
      Black-Scholes option pricing model with the following assumptions: stock price
      $0.021, exercise price of $.02, volatility of 282%, term of 1 day, and interest
      rate of 4.8%. The term of 1 day was used since as intended the recipient
      exercised their options immediately on the grant date. (See above) The Company
      recognized $1,763 in expense.





In
      May
      2007, the Company granted 575,000 options to a law firm for services provided.
      The options were valued at $2,877 ($.005 per option) using a Black-Scholes
      option pricing model with the following assumptions: stock price $0.015,
      exercise price of $.01, volatility of 242%, term of 1 day, and interest rate
      of
      4.8%. The term of 1 day was used since as intended the recipient exercised
      their
      options immediately on the grant date. The Company recognized $2,877 in
      expense





In
      June
      2007, the Company granted 500,000 options to a consultant for services provided.
      The options were valued at $0.003 per option or $1,513 using a Black-Sholes
      Option Pricing Model with the following assumptions: stock price $0.013,
      exercise price of $.01, volatility of 242%, term of 1 day, and interest rate
      of
      4.8%. The term of 1 day was used since as intended the recipient exercised
      their
      options immediately on the grant date. The Company recognized $1,513 in
      expense.





In
      August
      2007, the Company granted 200,000 options to a consultant for services provided.
      The options were valued at $0.007 per option or $146 using a Black-Sholes Option
      Pricing Model with the following assumptions: stock price of $0.016, exercise
      price of $0.016, volatility of 220%, term of 1 day and interest rate of 4.8%.
      The term of 1 day was used since as intended the recipient exercised their
      options immediately on the grant date. The Company recognized $146 in
      expense.





In
      March
      2008 the Company granted 1,500,000 options for services rendered. The options
      were valued at $21,002 using a Black-Sholes option pricing model with the
      following assumptions: stock price of $0.024 and exercise price of $0.01,
      volatility of 214%, term of 1 day and interest rate of 4.8%. The term of 1
      day
      was used since the recipient exercised their options shortly
      after grant date in April, 2008. The $21,002 was expensed.





**Warrants** - Upon
      the recapitalization in October 2005, the Company assumed outstanding warrants
      as follows: At December 31, 2005 there were warrants to purchase 41,347 shares
      at an exercise price of $72.00 expiring December 31, 2006; 214 shares at an
      exercise price of $.40 expiring December 31, 2006 and 1,250 shares at an
      exercise price of $100.00 expiring December 31, 2009. Total warrants outstanding
      at December 31, 2005 were 42,811. At December 31, 2005, 2,632 options
      exercisable at $72.00 had expired and are excluded from the above balance.
      As of
      December 31, 2006, all warrants had expired except for the 1,250 at an exercise
      price of $100 which expire December 31, 2009. (See Note 6)


F-21





**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**9.**
            **RELATED
                PARTY TRANSACTIONS**





In
      October 2006, the Company accepted a $165,000 subscription promissory note
      from
      a Director (former officer) as payment for the exercise of his 3,000,000 stock
      options. Management believes this amount may be materially offset, with the
      director’s approval, against loans and accrued compensation due to this director
      or his controlled affiliates. Loans and accrued compensation due to this
      director at March 31, 2008 was $410,792.





Notes
      payable to a related party director or his affiliates were $101,486 at March
      31,
      2008





At
      March
      31, 2008, accrued expenses to related parties amounted to $348,025 which
      includes $25,682 of accrued interest.





Certain
      officers and directors of the Company remain as officers and directors of the
      former parent, Vocalscape, Inc. now known as Nevstar.





The
      Company has an agreement with a related party director dated August 25, 2005
      for
      legal services with his law firm whereby the related party is periodically
      issued vested non-forfeitable common shares of the Company so the director
      shall
      hold 4.9% of the issued and outstanding common shares and any proceeds from
      the
      sale of such shares by the related party are credited against invoice amounts
      due to that related party for legal services. The agreement has no stated term.
      Due to the contingent nature of the proceeds and the unstated term of the legal
      service agreement, the fair value of any shares issued will be expensed when
      issued. The related party invoices are accrued to accounts payable, periodically
      paid in cash and the accounts payable and legal expenses are credited for any
      proceeds in the period the proceeds are received by the related party and
      reported to the Company. As of September 30, 2007 proceeds in the amount of
      $
      42,871 were reported to the Company in 2007. These proceeds were credited to
      legal expenses and reduced the payable to the related party. No additional
      shares were issued as the director held in excess of 4.9% of the common stock
      of
      the Company. At December 31, 2007 accounts payable to this law firm were
      $240,779 and included in accounts payable, related parties. In addition a loan
      payable to the law firm was $59,000 and included in loans and notes payable,
      related parties. Expenses incurred by the Company during 2007 to this law firm
      were $33,352 after the $42,871 credit above. See Note 8 for common share grants
      to this related party.





**10.**
            **COMMITMENTS
                AND CONTINGENCIES**





**Commitments**





The
      Company is a party to a five-year office lease agreement covering 2,238 square
      feet, which commenced July 1, 2005, for the office in Vancouver, British
      Columbia. The lease provides for 22 monthly payments of $2,238 Canadian dollars
      (“CDN”) with two free months during the first 24 months of the agreement; 24
      monthly payments of $2,331 CDN during the third and fourth years of the
      agreement; and 12 monthly payments of $2,425 CDN during the final year of the
      agreement. In addition, the agreement provides for a monthly common area
      maintenance charge of $1,585 CDN.


F-22


**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





The
      Company is a party to a second office lease agreement, with a two-year term,
      covering 1,435 square feet, which commenced March 1, 2005, for the office in
      White Plains, New York. The agreement calls for monthly rental of $2,350. The
      lease expired on February 28, 2007 and the Company pays $2,500 per month, on
      a
      month to month basis.





The
      Company enters into sales agent and distributor agreements to sell its products.
      These agreements are primarily commission based. There were no commissions
      payable as of March 31, 2008.





**Legal
      Matters**





The
      Company continues to receive claims from a prior director of Dtomi, Inc.
      relating to periods prior to the October 2005 recapitalization transaction
      with
      the Company.  The cash amounts the director claims he is due total
      approximately $520,000 and the total shares he claims he is due are estimated
      by
      the Company to be approximately 6,300. These amounts appear to relate to prior
      license or other alleged agreements between the director and the Company. 
The Company has accrued $86,000 in prior license fees due and has accounted
      for,
      in a prior period of Dtomi, Inc. approximately 15,278 common shares issued
      by
      the transfer agent in the director’s name. The director claims he never received
      2,778 of the 15,278 shares or other anti-dilution shares.  Management of
      the Company disputes the remaining cash amounts and believes no anti-dilution
      shares are due (which would account for the remaining 3,522 shares) since the
      license agreement was terminated in early 2005 by the licensor.  Management
      believes it will prevail in this matter.  Accordingly, no accruals have
      been made for the disputed amounts. The termination of the Patent License
      Agreement terminates these and other obligations during 2005. In May of 2006
      the
      director entered into an agreement with a third party whereby the director
      assigned his rights to any financial obligations made by the Company. In
      consideration of such assignment to such third party, the director was to
      receive a payment of $15,000.





In
      July
      and August 2005, the Company received correspondence from a former officer
      and
      former employee regarding threatened material litigation relating to alleged
      compensation due to each employee. Although the Company disputes such amounts,
      these amounts aggregating $ 687,407 had been previously accrued in a period
      prior to 2005 and are included in accrued expenses.


F-23


**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





**11.**
            **ACCRUED
                EXPENSES**





Accrued
      expenses at March 31, 2008 consist of the following:





Accrued
                license fees
            
            $
            36,000Accrued
                interest
            
            
            504,632Accrued
                compensation
            
            
            687,407Accrued
                expenses - other
            
            
            130,817Total
            
            $
            1,358,856





**12.**
            **PAYABLE
                TO SHAREHOLDER**





During
      the second quarter of 2006 one of the shareholders of the Company, who is a
      former director who resigned during the second quarter, was assigned certain
      debts of the company pursuant to assignment agreements between the shareholder
      and creditors as follows:





Payable
                to Vocalscape, Inc. former parent (n.k.a. Nevstar)
            
            $
            265,617Former
                officer note payable and accrued compensation
            
            
            214,410Accounts
                payable to related party attorney
            
            
            420,000Total
            
            $
            900,027





There
      was
      no consideration given by the Company to assign these debts. They were assigned
      from the vendors directly to the shareholder in a private transaction between
      those parties.





**13.**
            **SUBSEQUENT
                EVENTS**





In
      April
      2008, the Company issued 7,500,000 and 16,000,000 common shares to two
      consultants, respectively, pursuant to consulting agreements. The shares were
      valued at the $0.021 quoted trading price for a total of $493,500 and will
      be
      recognized over the service period.





In
      April
      2008, the Company issued 10,000,000 options and 10,000,000 shares and another
      20,000,000 options to a related party director for services his law firm
      rendered. The options were valued at $470,000 using the Black-Sholes method
      with
      volatility of 214%, expected term of 5 years and interest rate of 4.8%. The
      shares were valued at the $0.021 quoted trading price or $210,000 and both
      amounts are to be applied to accounts payable to this related
      party.





In
      April
      2008, the Company granted 10,000 Series A Preferred Shares to the former CEO
      and
      current Chairman for $2,500.





In
      April
      2008, the Company granted 46,500,000 common shares to various employees and
      lenders. The shares were valued at the $0.013 quoted trading price or $604,000
      and expensed.


F-24


**Vocalscape
      Networks, Inc. and Subsidiary**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2008**





In
      May,
      2008 the Company received $75,000 on a promissory note. The note is for
      $100,000, without interest, but with a loan fee of $30,000. The loan is due
      on
      July 13, 2008. The Company expects to receive the balance of the funding of
      $25,000 shortly.


F-25




**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**




You
      should read the following discussion and analysis of our financial condition
      and
      results of operations together with our financial statements and related notes
      appearing elsewhere in this Form 10-Q. This discussion and analysis contains
      forward-looking statements that involve risks, uncertainties and assumptions.
      Our actual results may differ materially from those anticipated in these
      forward-looking statements.




**OVERVIEW**





The
      following discussion relates to the business of Vocalscape Networks, Inc.,
      which
      includes the operations of its wholly owned subsidiary Vocalscape Operating
      Subsidiary, Inc., which holds assets through which Vocalscape provides services
      in connection with its business. Vocalscape is a next generation communications
      provider that provides Voice over Internet Protocol (“VoIP”) solutions. The
      current business of Vocalscape is the result of a merger of Dtomi, Inc. with
      Vocalscape Networks, Inc. on October 4, 2005, a date prior to which Vocalscape
      Networks, Inc. was not affiliated with the Company, and the Company was named
      “Dtomi, Inc.” Until October 4, 2005, the Company was named “Dtomi, Inc.”, and
      was a Florida-based, company that was developing the Air Spring Axle system,
      a
      suspension system for small and medium sized trailers.





2




**PRODUCTS
      AND SERVICES**




Vocalscape
      provides VoIP telephony solutions and communications software for Internet
      Service Providers (“ISPs”), Internet Telephony Service Providers (“ITSPs”) and
      telecommunications companies worldwide. Vocalscape develops VoIP and interactive
      communications software including Softphone applications, Customer Acquisition
      and Billing Systems, SIP Servers, Gatekeepers and Virtual Calling Cards.
      Vocalscape’s strategy is to focus on VoIP software and long distance termination
      solutions that bring together a full range of communications solutions and
      services thereby providing a turn-key VoIP infrastructure for ISPs, ITSPs and
      Telecommunications companies. Additionally, Vocalscape is actively seeking
      and
      negotiating strategic alliances with companies.





**COMPETITION**





The
      market for VoIP telephony software and services is relatively new and is quickly
      evolving and subject to rapid technological change. The VoIP telephony market
      has also seen significant consolidation and this trend is projected to continue.
      The companies following companies are not meant to be an exhaustive list of
      competitors to Vocalscape, but represent the largest and most active
      participants in this market: Deltathree, VocalTec Communications Ltd. and
      Net2Phone.





Vocalscape’s
      software solutions operate on the customer’s choice of hardware. Our software
      solutions support our customer’s choice of business models including, pre-paid,
      post-paid or monthly subscriber billing systems. Vocalscape’s product offerings
      are designed to streamline subscriber provisioning and subscriber services
      online.





**DEVELOPMENT**





Vocalscape
      has a team of engineers with software and systems industry experience. These
      engineers and management have significant experience in telecommunications,
      communication and control systems development. Vocalscape will be able to bring
      to market its products in a timely fashion while retaining the IP, and producing
      a superior product with high reliability and quality. Our core team is
      overseeing the development of: 1) a seamless 911 Dashboard designed to integrate
      multiple 911 service providers and 2) an IP PBX subscriber system, enabling
      resellers to service business customers online with a self-managed telephone
      system.




**DISTRIBUTION
      & MARKETING**





Vocalscape
      has a direct sales team and will build an indirect or reseller sales force.
      Direct resources will target the ISP’s, ITSP’s and Alternative Providers with
      the residential VoIP solution. Indirect channels will include VARs that supply
      the growing VoIP provider market with IP PBX solutions.





The
      direct sales force will also utilize web based leads (generated by search
      engine, blog, publication and email marketing) and outbound telemarketing to
      go
      directly after the solution sales clients. A select number of tradeshows will
      be
      attended to build the Vocalscape brand and the awareness of the solutions and
      product offerings from the company.




**GOING
      CONCERN**




Our
      company has nominal revenues and has incurred net losses in the first quarter
      of
      $376,118 and net cash used in operations of $109,811 in the three months ended
      March 31, 2008. Our current liabilities exceed our current assets by $5,482,455
      and we have an accumulated deficit and stockholder’s deficit of $12,478,049 and
      $5,444,951 respectively, at March 31, 2008. These conditions give rise to
      substantial doubt about Vocalscape’s ability to continue as a going concern.
      Vocalscape’s ability to continue developing its operations and generate revenues
      or its ability to obtain additional funding will determine its ability to
      continue as a going concern. Our consolidated financial statements do not
      include any adjustments that might result from the outcome of this
      uncertainty.





**RESULTS
      OF OPERATIONS**




The
      Company recorded revenues of $6,275 for the quarter ending March 31, 2008,
      as
      compared to revenues of $10,511 for the quarter ending March 31,
      2007.




3




General
      and administrative expenses decreased to $25,945 for the quarter ending March
      31, 2008, a decrease of 61% over expenses of $66,845 for the quarter ending
      March 31, 2007. General and administrative expenses in this first quarter of
      2008 consist primarily of rent, telephone, travel sales and other general
      corporate and office expenses.




Interest
      expense was $85,594 for the quarter ending March 31, 2008, an increase of 39%
      over expense of $61,230 for the quarter ending March 31, 2007. This interest
      expense consists of interest on various loans, and convertible
      debentures.




Compensation
      expense for the quarter ending March 31, 2008, was $167,997, as compared to
      $176,857 for the quarter ending March 31, 2007. Compensation expense for the
      current quarter consists of salaries paid to the Company’s employees and
      officers.




Professional
      fees increased to $12,293 for the quarter ending March 31, 2008, compared to
      a
      credit of $(17,182) for the quarter ending March 31, 2007. These expenses
      consist primarily of legal and accounting fees in 2007 as a result of the
      Company being a reporting issuer under the Securities Exchange Act of 1934,
      as
      amended.




Consulting
      fees expense for the quarter ending March 31, 2008 was $126,548, a decrease
      of
      18% over expenses of $153,616 for the quarter ending March 31, 2007. The
      consulting fees in this first quarter of 2007 primarily relate to amounts paid
      to non-officer and director persons performing services on behalf of Vocalscape
      and includes $105,002 of stock based expenses.




Depreciation
      expense for the quarter ending March 31, 2008 was $1,686 compared to $1,686
      for
      the quarter ending March 31, 2007.




The
      net
      loss for the quarter ending March 31, 2008 is $376,118 (de minimis net loss
      per
      share) compared to a net loss for quarter ending March 31, 2007 of $514,878
      (net
      loss per share of $0.01).




**LIQUIDITY
      AND CAPITAL RESOURCES**




The
      Company has cash and cash equivalents of $210, total current liabilities of
      $5,482,665 and total assets of $37,714 at March 31, 2008. The Company continues
      to incur costs, but has not secured adequate new revenue to cover the costs.
      The
      Company does not currently have an adequate source of reliable, long-term
      revenue to fund operations. As a result, Vocalscape is completely dependent
      on
      outside sources of capital funding to continue operations. There can be no
      assurances that the company will in the future achieve a consistent and reliable
      revenue stream adequate to support continued operations. In addition, there
      are
      no assurances that the Company will be able to secure adequate sources of new
      capital funding, whether it is in the form of share capital, debt, or other
      financing sources.




**PLAN
      OF OPERATION FOR THE NEXT 12 MONTHS**




Vocalscape
      has limited cash and will only be able to satisfy its cash requirements through
      raising additional funds in the next 12 months.





The
      company recognizes that, without additional financing, the success of
      Vocalscape’s VOIP business is highly uncertain and Vocalscape must adapt its
      business operations to this reality. We are therefore seeking to broaden and
      transform our business base through the acquisition of innovative,
      value-differentiated products and services. Our focus is on revenue generating
      businesses poised for rapid growth that can benefit from being part of a public
      company and benefit from the sharing of resources and the sharing of costs
      associated with public filings and compliance.





We
      have
      limited funds with which to pursue the acquisition of new business
      opportunities, as we have generated losses since our inception. In our pursuit
      of acquiring new business opportunities, we anticipate needing additional funds
      to cover legal and accounting expenses, due diligence expenses and other costs.
      Subject to the availability of adequate financing, Vocalscape will continue
      to
      focus on providing services to our existing customers, marketing and selling
      our
      products to new customers and the continuous development of our products and
      services.


4




**EVENTS
      SUBSEQUENT TO THE QUARTER ENDED MARCH 31, 2008**





In
      April
      2008, the Company issued 7,500,000 and 16,000,000 common shares to two
      consultants, respectively, pursuant to consulting agreements. The shares were
      valued at the $0.021 quoted trading price for a total of $493,500 and will
      be
      recognized over the service period.




In
      April
      2008, the Company issued 10,000,000 options and 10,000,000 shares and another
      20,000,000 options to a related party director for services his law firm
      rendered. The options were valued at $470,000 using the Black-Sholes method
      with
      volatility of 214%, expected term of 5 years and interest rate of 4.8%. The
      shares were valued at the $0.021 quoted trading price or $210,000 and both
      amounts are to be applied to accounts payable to this related
      party.




In
      April
      2008, the Company granted 10,000 Series A Preferred Shares to the former CEO
      and
      current Chairman for $2,500.




In
      April
      2008, the Company granted 46,500,000 common shares to various employees and
      lenders. The shares were valued at the $0.013 quoted trading price or $604,000
      and expensed.




In
      May,
      2008 the Company entered into a promissory note for $100,000, without interest,
      but with a loan fee of $30,000. On May 13, 2007 the Company received $75,000.
      The loan is due on July 13, 2008. The Company expects to receive the $25,000
      balance of the promissory note prior to the end of May.




**ITEM
      3. CONTROLS AND PROCEDURES.**





We
      maintain disclosure controls and procedures, which are designed to ensure that
      information required to be disclosed in the reports we file or submit under
      the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
      processed, summarized and reported within the time periods specified in the
      Securities and Exchange Commission’s rules and forms, and that such information
      is accumulated and communicated to our management, including our President,
      who
      also acts as our principal financial officer, as appropriate, to allow timely
      decisions regarding required disclosure.





Under
      the
      supervision and with the participation of our management, including our
      President and principal financial officer, an evaluation was performed on the
      effectiveness of the design and operation of our disclosure controls and
      procedures as of the end of the period covered by this quarterly report. Based
      on that evaluation, our management, including our President, who also acts
      as
      our principal financial officer, concluded that our disclosure controls and
      procedures were effective as of the end of the period covered by this report for
      the
      purpose of gathering, analyzing and disclosing of information that Vocalscape
      is
      required to disclose in the reports it files under the Securities Exchange
      Act
      of 1934, within the time periods specified in the SEC’s rules and forms.





There
      were no changes in the Company's internal controls over financial reporting
      during the most recently completed fiscal quarter that have materially affected
      or are reasonably likely to materially affect the Company's internal control
      over financial reporting.





**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





The
      Company is not currently subject to any legal proceedings. From time to time,
      the Company may become subjected to litigation or proceedings in connection with
      its business, as either a plaintiff or defendant. There are no such pending
      legal proceedings to which the Company is a party that, in the opinion of
      management, is likely to have a material adverse effect on the Company’s
      business, financial condition or results of operations.





5




**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS.**




During
      February and March 2008, the Company sold 64,343,000 common shares for net
      proceeds of $109,785. The Company made such sale of pursuant to Rule 903(b)(3)
      of Regulation S, promulgated pursuant to the Securities Act, on the basis that
      the sale was made offshore of the United States, to a non-United States person,
      where no directed selling efforts were made in the United States and offering
      restrictions were implemented.




In
      March
      2008, the Company granted an option to purchase 1,500,000 shares of common
      stock
      and 3,500,000 shares of common stock to a consultant for services rendered.
      The
      Company made such sale of pursuant to Rule 903(b)(3) of Regulation S,
      promulgated pursuant to the Securities Act, on the basis that the sale was
      made
      offshore of the United States, to a non-United States person, where no directed
      selling efforts were made in the United States and offering restrictions were
      implemented.




In
      April
      2008, the Company issued 7,500,000 and 16,000,000 shares of common stock to
      two
      consultants, respectively, pursuant to consulting agreements. The shares were
      valued at the $0.021 quoted trading price for a total of $493,500 and will
      be
      recognized over the service period. The offer was made pursuant to the exemption
      from registration afforded by Section 4(2) of the Securities Act and Rule 506
      of
      Regulation D, promulgated thereunder, as each offeree wan was an “accredited
      investor” within the meaning of SEC Rule 501(a).





In
      April
      2008 the Company issued an option to purchase 10,000,000 shares of common stock
      and 10,000,000 shares of common stock and second option to purchase 20,000,000
      shares of common stock to David Otto, a director of the Company, for services
      his law firm rendered to the Company. The options were valued at $0.021 per
      option or $470,000. The shares were valued at the $0.021 quoted trading price
      or
      $210,000 and both amounts are to be applied to accounts payable to this related
      party. The offer and sale was made pursuant to the exemption from registration
      afforded by Section 4(2) of the Securities Act and Rule 506 of Regulation D,
      promulgated thereunder, as the offeree wan was an “accredited investor” within
      the meaning of SEC Rule 501(a).





In
      April
      2008, the Company granted 10,000 shares of Series A Preferred Stock to Robert
      Koch, the Chairman of the Board of Directors, for aggregate proceeds of $2,500.
      The offer and sale was made pursuant to the exemption from registration afforded
      by Section 4(2) of the Securities Act and Rule 506 of Regulation D, promulgated
      thereunder, as the offeree wan was an “accredited investor” within the meaning
      of SEC Rule 501(a).





In
      April
      2008 the Company granted 46,500,000 shares of common stock to various employees
      and lenders. The shares were valued at the $0.013 quoted trading price or
      $604,000 and expensed. The offer to employees was made pursuant to Rule
      903(b)(3) of Regulation S, promulgated pursuant to the Securities Act on the
      basis that the sale was made offshore of the United States, to a non-United
      States person, where no directed selling efforts were made in the United States
      and offering restrictions were implemented. The offer and sale to lenders was
      made pursuant to the exemption from registration afforded by Section 4(2) of
      the
      Securities Act and Rule 506 of Regulation D, promulgated thereunder, as the
      offeree was an “accredited investor” within the meaning of SEC Rule
      501(a).





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES.**





None.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**





None.




**ITEM
      5. OTHER INFORMATION.**





None.





6




**ITEM
      6. EXHIBITS.**




Exhibit
                Number
              Description


3.1.1
            Articles
                of Incorporation of the Company (incorporated by reference to the
                Company’s Registration Statement on Form 10-SB 12G/A filed on November 26,
                1999).





3.1.2
            Certificate
                of Amendment to Articles of Incorporation of the Company (incorporated
                by
                reference to the Company’s Registration Statement on Form 10-SB 12G/A
                filed on November 26, 1999).





3.1.3
            Certificate
                of Amendment to Articles of Incorporation of the Company filed October
                25,
                2001 (incorporated by reference to the Company’s Quarterly Report on Form
                10-QSB filed on December 18, 2001).





3.1.4
            Certificate
                of Amendment to Articles of Incorporation of the Company filed November
                6,
                2005 (incorporated by reference to the Company’s Annual Report on Form
                10-KSB filed on May 18, 2006).





3.1.5
            Certificate
                of Amendment to Articles of Incorporation of the Company filed January
                3,
                2007 (incorporated by reference to the Company’s Annual Report on Form
                10-KSB filed on April 17, 2007).





3.2.1
            Bylaws
                (incorporated by reference to the Company’s Registration Statement on Form
                10-SB 12G/A filed on November 26,
                1999).





31.1
            Certification
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





31.2
            Certification
                of Principal Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





32.1
            Certification
                of Principal Executive Officer and Principal Financial Officer Pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of
                2002.





**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.




Vocalscape
                Networks, Inc.
              (Name
                of Registrant)Date:
              May 20, 2008
            By:
            /s/ Ron
              McIntyreRon
              McIntyrePresident


7




**EXHIBIT
      INDEX**




3.1.1
            Articles
                of Incorporation of the Company (incorporated by reference to the
                Company’s Registration Statement on Form 10-SB 12G/A filed on November 26,
                1999).





3.1.2
            Certificate
                of Amendment to Articles of Incorporation of the Company (incorporated
                by
                reference to the Company’s Registration Statement on Form 10-SB 12G/A
                filed on November 26, 1999).





3.1.3
            Certificate
                of Amendment to Articles of Incorporation of the Company filed October
                25,
                2001 (incorporated by reference to the Company’s Quarterly Report on Form
                10-QSB filed on December 18, 2001).





3.1.4
            Certificate
                of Amendment to Articles of Incorporation of the Company filed November
                6,
                2005 (incorporated by reference to the Company’s Annual Report on Form
                10-KSB filed on May 18, 2006).





3.1.5
            Certificate
                of Amendment to Articles of Incorporation of the Company filed January
                3,
                2007 (incorporated by reference to the Company’s Annual Report on Form
                10-KSB filed on April 17, 2007).





3.2.2
            Bylaws
                (incorporated by reference to the Company’s Registration Statement on Form
                10-SB 12G/A filed on November 26,
                1999).





31.1
                Certification
                    of Principal Executive Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of
                    2002.





31.2
                Certification
                    of Principal Financial Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of
                    2002.





32.1
                Certification
                    of Principal Executive Officer and Principal Financial Officer
                    Pursuant to
                    Section 906 of the Sarbanes-Oxley Act of
                    2002.
 8