**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**





(MARK
      ONE)


**[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**


**ACT
      OF 1934**





For
      the
      quarterly period ended March 31, 2007





OR





**[_]
      TRANSITION 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**
            **98-0207554**(State
                or other jurisdiction ofincorporation
                or organization)
            (I.R.S.
                EmployerIdentification 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 [_]





As
      of
      March 31, 2007 there were 74,945,504 shares of the Registrant’s common stock,
      $0.001 par value per share, outstanding, and 35,000 shares of Series A
      Convertible Preferred Stock outstanding.





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Exchange
      Act Rule 12b-2 of the Exchange Act):  o Yes xNo





**VOCALSCAPE
      NETWORKS, INC.**


**QUARTERLY
      REPORT ON FORM 10-QSB**


**FOR
      THE PERIOD ENDED MARCH 31, 2007**





**INDEX**





**Index**
            
            **Page****Part
                I.**
            **Financial
                Information**Item
                1.Financial
                StatementsConsolidated
                Balance Sheet as of March 31, 2007 (unaudited)
            2Consolidated
                Statements of Operations - for the three months ended March 31, 2007
                and
                2006(unaudited)
            3Consolidated
                Statements of Cash Flows for the three months ended March 31, 2007
                and
                2006 (unaudited)
            4Notes
                to Unaudited Consolidated Financial Statements
            5-20Item
                2.Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            21Item
                3.Controls
                and Procedures
            24**Part
                II.**
            **Other
                Information**Item
                1.Legal
                Proceedings
            24Item
                2.Unregistered
                Sales of Equity Securities and Use of Proceeds
            24Item
                3. Defaults Upon Senior Securities
            25Item
                4. Submission of Matters to a Vote of Security Holders
            25Item
                5. Other Information
            25Item
                6.Exhibits
            25**Signatures**
            
            26**Certifications**








CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
      Form
      10-QSB release 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 76% **** 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-QSB, 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, 2007 and 2006**


**(Unaudited)**










**Vocalscape
      Networks, Inc. and Subsidiary**




Index
      to
      Consolidated Financial Statements





Page(s)Consolidated
                Balance Sheet (unaudited)
            2Consolidated
                Statements of Operations (unaudited)
            3Consolidated
                Statements of Cash Flows (unaudited)
            4Notes
                to Consolidated Financial Statements (unaudited)
            5-20








Vocalscape
      Networks, Inc. and Subsidiary


Consolidated
      Balance Sheet


March
      31,
      2007


(Unaudited)


**ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              4,479Total
                  current assets
              
              
              4,479Property
                  and equipment, net
              
              
              23,134Development
                  costs, net
              
              
              2,217Total
                  assets
              
              $
              29,830**LIABILITIES
                  AND STOCKHOLDER'S DEFICIT****Current
                  liabilities:**Bank
                  overdraft
              
              $
              148Notes
                  payable
              
              
              1,192,000Notes
                  payable, related parties
              
              
              167,416Loan
                  payable due for software purchase, net of discount
              
              
              128,483Accounts
                  payable
              
              
              204,670Accounts
                  payable, related parties
              
              
              184,177Accrued
                  expenses
              
              
              1,213,079Accrued
                  expenses, related parties
              
              
              86,533Convertible
                  debentures
              
              
              84,912Payable
                  to shareholder
              
              
              900,027Other
                  liablilities
              
              
              14,289Total
                  current liabilities
              
              
              4,175,734Commitments
                  and contingencies (Note 9)**STOCKHOLDERS'
                  DEFICIT**Preferred
                  stock, $0.001 par value, 25,000,000 authorizedSeries
                  A, voting convertible preferred stock, 100,000shares
                  authorized, 35,000 shares issued and outstanding(liquidation
                  value $0.50 per share)
              
              
              35Common
                  stock, $0.001 par value, 400,000,000 authorized,74,601,271
                  issued and outstanding
              
              
              74,601Common
                  stock issuable at par value (5,004,969 shares)
              
              
              5,005Stock
                  subscriptions
              
              
              (285,000
              )Deferred
                  Consulting
              
              
              (50,000
              )Additional
                  paid-in capital
              
              
              6,732,843Accumulated
                  deficit
              
              
              (10,623,388
              )Total
                  stockholders' deficit
              
              
              (4,145,904
              )Total
                  liabilities and stockholders' deficit
              
              $
              29,830




2


Vocalscape
                    Networks, Inc. and SubsidiaryConsolidated
                    Statements of OperationsFor
                    the Three Months Ended March 31, 2007 and 2006(Unaudited)Three
                    Months EndedMarch
                    31**2007**
                
                **2006**Revenue
                
                $
                10,511
                
                $
                100,967Cost
                    of revenue
                
                
                739
                
                
                13,151Gross
                    profit
                
                
                9,772
                
                
                87,816Costs
                    and expenses:Compensation
                
                
                176,857
                
                
                33,323Consulting
                
                
                153,616
                
                
                111,624Professional
                    fees
                
                
                (17,182
                )
                
                132,093Bad
                    debts
                
                
                
                
                
                22,601General
                    and administration
                
                
                66,845
                
                
                85,096380,136
                
                
                384,737Loss
                    from operations
                
                
                (370,364
                )
                
                (296,921
                )Other
                    income (expense)Loss
                    on conversion
                
                
                (80,000
                )
                
                -Interest
                    expense
                
                
                (61,230
                )
                
                (193,044
                )Foreign
                    currency transaction gain (loss), net
                
                
                (3,284
                )
                
                (3,304
                )Total
                    other income (expense)
                
                
                (144,514
                )
                
                (196,348
                )Net
                    loss
                
                $
                (514,878
                )
                $
                (493,269
                )Net
                    loss per share - basic and diluted
                
                $
                (0.01
                )
                $
                (0.18
                )Weighted
                    average shares outstandingduring
                    the period
                
                
                68,818,277
                
                
                2,747,118
  3
  Vocalscape
                  Networks, Inc. and SubsidiaryConsolidated
                  Statements of Cash FlowsFor
                  the Three Months Ended March 31, 2007 and 2006(Unaudited)**2007**
              
              **2006****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (514,878
              )
              $
              (493,269
              )Adjustments
                  to reconcile net loss to net cashused
                  by operating activities:Stock
                  options granted for services
              
              
              9,639Stock
                  option exercises paid for with services
              
              
              1,850Non
                  cash loan fee
              
              
              20,000Amortization
                  of debt discount
              
              
              8,431Foreign
                  currency transaction loss
              
              
              1,143Amortization
                  of debt discount to interest expense
              
              
              60,000Depreciation
                  and amortization
              
              
              2,425
              
              
              2,425Amortization
                  of beneficial conversion on convertible note
              
              
              -
              
              
              160,000Deferred
                  consulting amortization
              
              
              96,667
              
              
              -Changes
                  in other assets and liabilities:Other
                  assets
              
              
              -
              
              
              (2,200
              )Deferred
                  revenue
              
              
              -
              
              
              (45,000
              )Accounts
                  payable
              
              
              (32,737
              )
              
              89,036Accounts
                  payable, related party
              
              
              (23,250
              )
              
              -Accrued
                  interest and expenses
              
              
              28,720
              
              
              -Accrued
                  expenses - related parties
              
              
              68,668Accrued
                  interest-related parties
              
              
              3,547
              
              
              -Other
                  accrued liabilities
              
              
              (14,888
              )Accrued
                  expenses
              
              
              -
              
              
              31,246Net
                  cash used in operations
              
              
              (284,663
              )
              
              (257,762
              )**Cash
                  flows from investing activities:**Acquisition
                  of property and equipment
              
              
              -
              
              
              -Net
                  cash used in investing activities
              
              
              -
              
              
              -**Cash
                  flows from financing activities:**Bank
                  overdraft
              
              
              (4,175
              )
              
              22,563Payment
                  of expense for Vocalscape, Inc.
              
              
              -
              
              
              (4,871
              )Loan
                  proceeds related party
              
              
              16,000
              
              
              -Common
                  stock sales
              
              
              82,620
              
              
              75,802Repayment
                  of notes payable
              
              
              -
              
              
              (21,753
              )Loan
                  proceeds
              
              
              180,000
              
              
              212,500Net
                  cash provided by financing activities
              
              
              274,445
              
              
              284,241Net
                  increase (decrease) in cash and cash equivalents
              
              
              (10,218
              )
              
              26,479Cash
                  and cash equivalents, beginning of period
              
              
              14,697
              
              
              -**Cash
                  and cash equivalents, end of period**
              
              $
              4,479
              
              $
              26,479**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
                  options
              
              
              27,150Recording
                  of deferred consulting
              
              
              60,000




4




**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.




5





**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 in the first quarter of 2007 of $514,878, net cash used in operations
      in the first quarter of 2007 of $284,663, and working capital deficit of
      $4,171,255, accumulated deficit of $10,623,388 and stockholders’ deficit of
      $4,145,904 at March 31, 2007.




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 the first quarter
      of
      2007, the Company generated revenues from customer consulting agreements and
      raised capital through initiating a Regulation S offering by VSI and entering
      into additional Promissory Notes.  Management
      believes the continuation of revenues combined with additional capital raises
      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.




**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.




6




**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.




**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.




7





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 2007 and 2006 and is 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.





**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.




8





**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. At
      December 31, 2005, the Company had not formed a Stock Option Plan and had not
      issued any options.





Prior
      to
      January 1, 2006, the Company elected to continue to follow the intrinsic value
      method in accounting for its stock-based employee compensation arrangements
      as
      defined by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for
      Stock Issued to Employees,” and related interpretations including “Financial
      Accounting Standards Board Interpretations No. 44, “Accounting for Certain
      Transactions Involving Stock Compensation,” an interpretation of APB No. 25.





**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.





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.





9




**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 2007 and 2006 include the valuation of stock-based
      payments, valuation of beneficial conversion feature on convertible debt and
      valuation allowance on deferred tax assets.





**Net
      Earnings (Loss) Per Share -** Basic
      earnings (loss) per common share is based on the weighted-average number of
      all
      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.




The
      Company has not issued any warrants or options since its inception in February
      2003. 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. There were also options outstanding to
      purchase 2,276 common shares at $40 per share and 229 common shares at $38
      per
      share.





As
      of
      March 31, 2007, all warrants had expired except for 1,250. At March 31, 2007
      there were also 2,505 options outstanding.





The
      exercise of such warrants and options may dilute future earnings per share.





**Recently
      Issued Accounting Standards -**





In
      May
      2005, the FASB issued SFAS No. 154, *“Accounting
      Changes and Error Corrections”* which
      replaces Accounting Principles Board Opinion (“APB”) No. 20, *“Accounting
      Changes”,* and SFAS
      No. 3, *“Reporting
      Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion
      No. 28.”* SFAS 154
      provides guidance on the accounting for and reporting of accounting changes
      and
      error corrections. SFAS 154 is effective for accounting changes and a correction
      of errors made in fiscal years beginning after December 15, 2005 and did not
      have a material effect on our consolidated financial statements


.


10





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.





**Reclassifications**





Certain
      amounts in the 2006 consolidated financial statements have been reclassified
      to
      conform with the 2007 presentation.





**3.**
            **PROPERTY
                AND EQUIPMENT**





Property
      and equipment at March 31, 2007, consists of the following:


Office
                  equipment
              
              $
              35,854Accumulated
                  depreciation
              
              
              (12,720
              )Property
                  and equipment, net
              
              $
              23,134




11




Depreciation
      during the three months ended March 31, 2007 and 2006 was $1,686 and $1,686,
      respectively.





**4.**
            **DEVELOPMENT
                COSTS**





Capitalized
        software development cost consists of the following at March 31,
        2007:


Cost
                
                $
                8,869Accumulated
                    amortization
                
                
                (6,652
                )Software,
                    net
                
                $
                2,217


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 6 and 8). 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 has 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 the first quarter
      of 2007 the Company recognized $739 of amortization expense.





**5.**
                **NOTES
                    PAYABLE, NOTES PAYABLE RELATED PARTIES AND CONVERTIBLE
                    DEBENTURES**




Notes
      payable to related and unrelated parties consists of the following at March
      31,
      2007:





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% (10.25% to 11.25%
                at March
                31, 2007)
            
            $
            108,416Note
                payable to law firm, due on demand, non-interest bearing
            
            
            59,000Subtotal
                - Notes payable related parties
            
            
            167,416Notes
                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% (11.25% at March 31, 2007)
            
            
            1,033,000Subtotal
                - Notes payable unrelated parties
            
            
            1,192,000Total
                Notes Payable
            
            $
            1,359,416





12




The
      weighted average interest rate on short term outstanding as of March 31, 2007
      was 11.11%





**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, 2007 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 Conversion**





In
      February 2007, the Company issued a convertible promissory note for $120,000.
      The note principal is convertible into 3,000,000 shares of common stock
      immediately and automatically converted after 30 days. 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 to be converted into common
      stock in March 2007. 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. The debt discount was amortized to interest expense in March 2007
      when
      the note was to be automatically converted into stock. 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 stock
      had
      not been issued as of March 31, 2007, it is included in the accompanying balance
      sheet as issuable shares.





**6.**
            **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.





13




The
      loan
      payable balance at March 31, 2007 was as follows:





Loan
                payable
            
            $
            131,746Debt
                discount
            
            
            (3,263
            )Loan
                payable, net of discount
            
            $
            128,483





This
      loan
      payable is collateralized by the software asset. The loan is currently in
      default.





**7.**
            **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
      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
      comp ensation
      the employment agreement grants 15,000 Series A preferred shares as
      compensation. The shares are valued at $0.25, the same amount he previously
      paid
      and expensed immediately since it was not material.




14





**Common
      Stock Issued for Cash**





During
      2007 the Company sold 5,263,510 common shares for net proceeds of $52,620
      pursuant to a Regulation S Stock Purchase Agreement.





**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 was paid for with a payable that
      was due to the option holder.





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.





**Common
      Stock Issued Upon Conversion of Note**





In
      2007 a
      note holder converted a $120,000 convertible promissory note at $.04 and the
      Company issued 3,000,000 shares. (See Note 5)





**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 stock 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.




15





In
      March
      2007 the Company granted 1,000,000 common stock options to a consultant for
      services. The options were valued 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.





**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.





**Options**





A
      summary
      of the options issued to employees and assumed in the recapitalization and
      changes during the first quarter ending March 31, 2007 and 2006 is presented
      below.





Number
                of Options
            
            Weighted
                Average Exercise PriceBalance
                at January 1, 2006
            
            
            2,505
            
            $
            38.20Granted
            
            
            7,500,000
            
            
            .0474Exercised
            
            
            (7,500,000
            )
            $
            .0474Expired
            
            
            -
            
            $
            80.00Balance
                at December 31, 2006
            
            
            2,505
            
            $
            38.20Weighted
                average fair value of options granted during the year
            
            
            
            
            $
            .0474Balance
                at January 1, 2007
            
            
            2,505
            
            
            38.20Granted
            
            
            4,225,000
            
            
            .014Exercised
            
            
            (4,225,000
            )
            $
            .014ExpiredBalance
                at March 31, 2007
            
            
            2,505
            
            
            38.20Weighted
                average fair value of options granted during the year
            
            
            
            
            
            .0165





16




The
      following table summarizes information about employee stock options outstanding
      at March 31, 2007:





Options
                Outstanding
            
            Options
                ExercisableRange
                of Exercise Price
            
            Number
                Outstanding at March 31, 2007
            
            Weighted
                Average Remaining Contractual Life
            
            Weighted
                Average Exercise Price
            
            Number
              Exercisable
                at
              March
                31, 2007
            
            Weighted
                Average Exercise Price$
            40
            
            229
            
            0.64
                Years
            $
            40.00
            
            229
            $
            40.00$
            38
            
            2,276
            
            1.50
                Years
            $
            38.00
            
            2,276
            $
            38.002,505
            
            
            $
            38.20
            
            2,505
            $
            38.20




**8.**
            **RELATED
                PARTY TRANSACTIONS**





Notes
      payable to a related party director or his affiliates were $108,416 at March
      31,
      2007.





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, 2007 was $166,284.





At
      March
      31, 2007 accrued expenses to related parties amounted to $86,533 which includes
      $17,865 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 March 31, 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 March 31, 2007 accounts payable to this law firm were $184,177
      and
      included in accounts payable. 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 a credit of ($23,250)
      due to the $42,871 credit above.




17





**9.**
            **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.





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, 2007.





**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.




18





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 reflected in accrued expenses at March 31,
      2007.





**10.**
            **CONCENTRATIONS**





**Revenues
      -** During
      2007, the Company had revenues from 1 customer.





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





Accrued
      expenses at March 31, 2007 consist of the following:


Accrued
                  compensation
              
              $
              687,407Accrued
                  license fees
              
              
              36,000Accrued
                  interest
              
              
              296,527Accrued
                  expenses - other
              
              
              193,145Total
              
              $
              1,213,079





**12.**
            **SHARE
                EXCHANGE AGREEMENT**





On
      February 26, 2006, Vocalscape and Azatel Communications Inc., a British Columbia
      corporation (“Azatel”), and all of the shareholders of Azatel (the
“Shareholders”), entered into a Share Exchange Agreement (the “Share Exchange
      Agreement”), pursuant to which Vocalscape shall acquire all of the issued and
      outstanding shares of common shares of Azatel in a transaction valued at
      approximately $118,000.  Under the Share Exchange Agreement, Vocalscape
      shall issue 200,000 shares of its common stock to the Shareholders, who number
      three persons, in exchange for all of their respective shares of Azatel (the
      “Share Exchange”).   Azatel had taken the position that the Share
      Exchange Agreement is terminated.  Vocalscape did not believe that the
      Share Exchange Agreement is terminated. Therefore, the company had fully
      reserved $22,601, which is the amount advanced through March 31, 2006. On June
      19, 2006 the company received CAN$23,804 pursuant to a settlement agreement
      signed on May 23, 2006 wherein the Share Exchange Agreement was terminated.
      The
      company has recorded the amount received of $20,873 as a bad debt recovery
      in
      June 2006.





19




**13.**
            **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.





**14.**
            **SUBSEQUENT
                EVENTS**





In
      April
      2007, the Company issued 3,795,000 common shares in exchange for $18,881 net
      proceeds under the Regulation S offering.




20




**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-QSB. 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. This third fiscal quarter
      of 2006 is the third full quarterly report since the merger was
      consummated.




21





**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
      $514,878 and net cash used in operations of $284,663 in the three months ended
      March 31, 2007. Our current liabilities exceed our current assets by $4,171,255
      and we have an accumulated deficit and stockholder’s deficit of $10,623,388 and
      $4,145,904 respectively, at March, 2006. 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.





22




**RESULTS
      OF OPERATIONS**




The
      Company recorded revenues of $10,511 for the quarter ending March 31, 2007,
      as
      compared to revenues of $100,967 for the quarter ending March 31,
      2006.





General
      and administrative expenses decreased to $66,845 for the quarter ending March
      31, 2007, a decrease of 21.4% over expenses of $85,096 for the quarter ending
      March 31, 2006. General and administrative expenses in this first quarter of
      2007 consist primarily of rent, telephone, travel sales and other general
      corporate and office expenses.




Interest
      expense was $61,230 for the quarter ending March 31, 2007, a decrease of 68.3%
      over expense of $193,044 for the quarter ending March 31, 2006. This interest
      expense consists of interest on various loans, and convertible
      debentures.




Compensation
      expense for the quarter ending March 31, 2007, was $176,857, as compared to
      $33,323 for the quarter ending March 31, 2006. Compensation expense for the
      current quarter consists of salaries paid to the Company’s
      officers.




Professional
      fees decreased to a credit of $17,182 for the quarter ending March 31, 2007,
      a
      decrease of 113% compared to an expense of $132,093 for the quarter ending
      March
      31, 2006. These consist of primarily of legal and accounting fees in 2006 as
      a
      result of the Company being a reporting issuer under the Securities Exchange
      Act
      of 1934, as amended. In 2007, a credit results from a credit from a related
      party legal services provider.




Consulting
      fees expense for the quarter ending March 31, 2007 was $153,616, an increase
      of
      37.6% over expenses of $111,624 for the quarter ending March 31, 2006. 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.




Depreciation
      expense for the quarter ending March 31, 2007 was $1,686, compared to $1,686
      for
      the quarter ending March 31, 2006.




The
      net
      loss for the quarter ending March 31, 2007 is $514,878 (net loss per share
      of
      $0.01 compared to a net loss for quarter ending March 31, 2006 of $493,269
      (net
      loss per share of $0.18).




**LIQUIDITY
      AND CAPITAL RESOURCES**




The
      Company has cash and cash equivalents of $4,479, total current liabilities
      of
      $4,175,734 and total assets of $29,830 at March 31, 2007. 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.





23





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




**EVENTS
      SUBSEQUENT TO THE QUARTER ENDED MARCH 31, 2007**





In
      April
      2007, the Company offered and sold 3,795,000 shares of common stock for an
      aggregate purchase price of $18,881. Such offering made in under Rule 903(b)(3),
      promulgated under the Securities Act of 1933, as amended.





**ITEM
      3. CONTROLS AND PROCEDURES.**





As
      of the
      period covered by this report, Vocalscape carried out an evaluation, under
      the
      supervision and with the participation of its management, including Ron
      McIntyre, Vocalscape’s President, who also currently acts as Vocalscape’s
      principal financial officer, of the design and operation of its disclosure
      controls and procedures. Based on this evaluation, Vocalscape’s President
      concluded that Vocalscape’s disclosure controls and procedures are effective for
      the 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
      have been no significant changes in the Vocalscape’s internal controls or in
      other factors that could significantly affect the internal controls subsequent
      to the date of this evaluation.




**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.




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




In
      February 2007, the Company issued a convertible promissory note for $120,000.
      The note principal is convertible into 3,000,000 shares of common stock
      immediately and automatically converted after 30 days. In March 2007, the note
      was converted into shares of common stock at a rate of $.04 per share, resulting
      in the issuance of 3,000,000 shares. The offer and sale of the note was made
      pursuant to Section 4(2)
      of
      the Securities Act, in a private transaction not involving any public
      offering.


In
        April
        2007, the Company offered and sold 3,795,000 shares of common stock for an
        aggregate purchase price of $18,881. Such offering made in under Rule 903(b)(3),
        promulgated under the Securities Act of 1933, as amended. The shares were
        offered to non-US persons, in an offshore offering not involving any directed
        selling efforts in the US.


24




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





None.





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





None.


**ITEM
      5. OTHER INFORMATION.**





None.





**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.





25




**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 15, 2007
            By:
            /s/ Ron
              McIntyreRon
              McIntyrePresident





26




**EXHIBIT
      INDEX**





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.
  27