**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549 

 

**FORM 10-Q**

(Mark One) 

 

**x**    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED**September 30, 2008**

 

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

 

**Commission File No. 0-27704**

 

**i2 Telecom International, Inc.**

 

(Exact name of registrant as specified in it charter)

 

| ******Washington******
 

91-1426372

(State or other jurisdiction of incorporation or 

 

(IRS Employer Identification

organization) 

 

No.)

 

**5070 Old Ellis Pointe,**

**Suite 110**

**Roswell, GA 30076**

 

(Address of principal executive offices)

 

**(404) 567-4750**

 

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (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 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  

Non-Accelerated Filer  o  

 
 

Accelerated Filer  o  

 

Smaller Reporting Company x  

 

The registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each issuer's classes of common stock, as of the latest practicable date: 265,995,909 issued and outstanding as of November 12, 2008.

 

**I2 TELECOM INTERNATIONAL, INC.**

TABLE OF CONTENTS

TO QUARTERLY REPORT ON FORM 10-Q

FOR PERIOD ENDED September 30, 2008

 

 

 

******Page******
******PART I****** ** ****
******FINANCIAL INFORMATION****** 
 

Item 1.

Financial Statements

3

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures 

26

 

 

 

******PART II******
******OTHER INFORMATION******
 

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

34

Item 4.

Submission of Matters to a Vote of Security Holders

34

Item 5.

Other Information

35

Item 6.

Exhibits

35

******Signatures******
36

 

 

 

 

 

 

 

 

2

 

 

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.**

**FINANCIAL STATEMENTS**

 

i2 TELECOM INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

ASSETS

 

 

September 30, 2008

December 31, 2007

Current Assets

 

 

Cash

Restricted Cash

Accounts Receivable, net of Allowance for Doubtful Accounts of

$72,677 and $69,476 respectively

Inventories

Prepaid Expenses and Other Current Assets 

$   147,055

 

 

2,350

189,592

574,643

$    194,279

0

 

0

191,211

73,877

Total Current Assets

913,640

459,367

 

 

 

 

 

 

Property and Equipment, Net

1,026,841

432,823

 

 

 

 

 

 

Other Assets

 

 

Intangible Assets

Deposits

 

2,874,731

38,840

 

3,014,850

38,840

Total Other Assets

 

2,913,571

 

3,053,691

 

 

 

 

 

 

Total Assets

$   4,854,053

$  3,945,880

 

 

 

 

 

 

 

 

 

 

 

3

 

 

i2 TELECOM INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 
 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

September 30, 2008

December 31, 2007

 
 
Current Liabilities

Accounts Payable and Accrued Expenses

Deferred Revenue

Convertible Bonds                                                                                                 

Notes Payable-Current

 

$   2,147,384

28,277

100,000

2,852,178

 

$   2,421,105

23674

100,000

3,984,175

 
Total Current Liabilities

5,127,839

6,528,955

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
Shareholders’ Equity (Deficit)

Preferred Stock, No Par Value, 5,000,000

Shares Authorized,800 Shares and 800 Shares Issued and                Outstanding, respectively

800,000

800,000

 
Common Stock, No Par Value, 500,000,000 Shares Authorized, 263,145,909 Shares and 163,392,118Shares Issued and Outstanding, respectively

34,323,110

29,684,187

 
Restricted Common Stock (related to No Par Value above),

0

0

 
Additional Paid-In Capital

2,879,824

4,237,801

 
Accumulated Deficit 

(38,276,720)

(37,305,063)

 
Total Shareholders’ Equity (Deficit)

(273,786)

(2,583,075)

 
 

 

 

 
Total Liabilities and Shareholders’  Equity (Deficit)

$4,854,053

$ 3,945,880

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

i2 TELECOM INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

For the

Three

Months

Ended

September 30,

2008

For the

Three

Months

Ended

September 30,

2007

For the

Nine

Months

Ended

September 30,

2008

For the

Nine

Months

Ended

September 30,

2007

Revenue

$163,904   

$  242,300

$484,087   

$  618,090

 

 

 

 

 

Cost of Revenue

185,427

268,501

556,349

724,292

 

 

 

 

 

Gross Profit (Loss)

(21,523)

(26,201)

(72,262)

(106,202)

 

 

 

 

 

General and Administrative Expenses

2,546,487

1,459,289

5,182,359

5,683,865

 

 

 

 

 

Loss From Operations

(2,568,010)

(1,485,490)

(5,254,622)

(5,790,067)

 

 

 

 

 

Other Income (Expense)

Interest Income

Interest Expense

Gain on Forbearance of Debt

Gain on Disposal of Assets

 

 

0

(121,433)

0

0

 

 

0

(1,559,412)

10,000

0

 

 

0

(894,902)

2,190

5,193,620

 

 

172

(1,736,146)

165,061

0

 

Total Other Income (Expense)

(121,433)

(1,549,412)

4,300,908

(1,570,913)

Net  Income (Loss)

$(2,689,433)

 

$(3,034,902)

 

$(953,714)

 

$(7,360,980)            

Dividends on Preferred Stock

(6,000)

(86,325)     

(18,000) 

(302,855)

Net Income (Loss) Available to Common Shareholders

$(2,695,433)

$(3,121,227)                   

$(971,714)

$(7,663,835)

Weighted Average Common Shares:

Basic

 

191,139,950

 

159,526,534

 

187,338,156      

 

122,388,542

Basic Earnings Per Common Share:

 

$         (.14)

 

 

$         (.02)

 

$       (.14)

 

 

 

$          (.06)

 

 

 

 

 

 

 

5

 

 

 

 

 

 

i2 TELECOM INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

For the Nine

Months Ended September 30, 2008

For the Nine

Months Ended September 30, 2007

 

 

 

Net Loss From Operations

$(953,714)

$(7,360,980)

Adjustments to Reconcile Net Income to cash

 

 

Depreciation and amortization

Amortization of Loan Fees

Gain on Forbearance of Debt

489,647

1,001,094

0

270,312

1,947,632

(110,000)

Stock compensation

349,827

757,959

Accounts receivable

2,350

(4,158)

Inventories

1,620

87,480

Prepaid Expenses

(1,419,208)

(60,859)

Other Assets

0

(11,000)

Increase (Decrease) In:

 

 

Accounts Payable and Accrued Expenses

(348,527)

(1,052,136)

Deferred Revenue

4,603

(5,442)

Net Cash Used In Operating Activities

(877,007)

(3,436,920)

Cash Flows From Investing Activities

 

 

Equipment Purchases

Payments for Intangible Assets

(828,445)

(115,100)

(18,728)

0

Net Cash Used In Investing  Activities

(943,545)

(18,728)

Cash Flows From Financing Activities

 

 

Proceeds from Issuance of Convertible Bonds

0

2,375,000

Payments of Convertible Bonds

0

(1,325,000)

Proceeds From Notes Payable

2,459,024

2,885,000

Payment of Notes Payable

(3,591,022)

(1,551,970)

Proceeds from redemption of options

Issuance of Common Stock

Payment of Financing Costs

352,500

836,760

1,716,066

439,348

0

0

Net Cash Provided By Financing Activities

1,773,328

2,822,378

Increase (Decrease) in Cash

(47,224)

(633,270)

Balance, Beginning of Period

194,279

807,811

Balance, End of Period

$ 147,055   

$    174,541

 

 

 

6

 

 

 

 

 

 

 

i2 TELECOM INTERNATIONAL, INC.

 NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 1.**

**NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES**

 

**Nature of Business**

 

The Company, through its subsidiary, i2Telecom International, Inc., (“i2Telecom (DE)”), provides low-cost telecommunications services employing next-generation VoIP technology. These operations are based in Roswell, Georgia. Through i2Telecom (DE), the Company controls its own proprietary technology and outsources the majority of its production and service functions with strategic partners. The Company, through i2Telecom (DE), provides the VoiceStick®, MyGlobalTalkTM, micro gateway adapters, VoIP long distance and other enhanced communication services to subscribers. The Company’s proprietary technology platform is built to the Session Initiation Protocol (“SIP”) standard. The Company’s revenue model now includes revenue from the sale of the VoiceStick®, MyGlobalTalkTM,  and other integrated access devices (“IADs”) alongwith recurring monthly subscriptions and call minute termination. The Company believes its proprietary technology provides meaningful advantages particularly in the areas of ease of use, high quality service, and low cost and robust features.  

The Company, a Washington corporation formerly known as Digital Data Networks, Inc., was incorporated as “Transit Information Systems, Inc.” under the laws of the State of Washington on October 17, 1988. In July 1995, the Company changed its name to “Digital Data Networks, Inc.” In March 2004, the Company changed its name to “i2 Telecom International, Inc.” The Company’s offices are currently located at 5070 Old Ellis Pointe, Suite 110, Roswell, GA 30076, and the Company’s telephone number at that address is (404) 567-4750. The Company maintains websites at www.i2telecom.com, www.voicestick.com and www.myglobaltalk.com .

On February 26, 2004, a newly-formed, wholly-owned subsidiary of the Company merged with and into i2 Telecom International, Inc., a Delaware corporation (“i2Telecom (DE)”), with i2Telecom (DE) surviving the merger as a wholly-owned subsidiary of the Company (the “Merger”), pursuant to that certain Agreement and Plan of Merger dated as of January 30, 2004, among the Company, a wholly-owned subsidiary of the Company, i2Telecom (DE) and certain stockholders of the Company and i2Telecom (DE) signatory thereto (the “Merger Agreement”). In connection with the Merger, former stockholders of i2Telecom (DE) became entitled to receive shares of Common Stock and shares of various classes and series of the Company’s preferred stock, no par value per share (collectively, the “Preferred Stock”), constituting up to 88.44% of the voting securities of the Company,assuming the issuance of all contingent consideration such stockholders may become entitled to receive pursuant to the Merger Agreement upon the resolution of a certain legal proceeding pending against i2Telecom (DE). In connection with the Merger, effective February 26, 2004, (i) the Company’s Board of Directors (the “Board of Directors”) appointed Paul R. Arena, Chief Executive Officer and Chairman of the Board of i2Telecom (DE), to serve as a director of the Company; (ii) all individuals serving as officers of the Company immediately prior to the Merger resigned their positions with the Company; and (iii) the officers of i2Telecom (DE) were appointed as officers of the Company. 

 

 

 

7

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 1.**

**NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

On February 27, 2004, the Company sold substantially all of its operating assets relating to the operations of The Transit Network to InTransit Media, Inc. (“InTransit Media”) in exchange for InTransit Media assuming certain obligations and liabilities relating to such assets (the “Asset Sale”), pursuant to that certain Asset Purchase Agreement dated as of January 30, 2004, as amended by the First Amendment thereto dated as of February 26, 2004, between the Company and InTransit Media (the “Asset Purchase Agreement”). On March 5, 2004, in connection with the Merger and the Asset Sale, the Company changed its name from “Digital Data Networks, Inc.” to “i2 Telecom International, Inc.” and changed its ticker symbol on the over-the-counter electronic bulletin board from “DIDA” to “ITUI”. On December 8, 2004, the Companyrelocated its corporate headquarters to Georgia in order to be closer to more technology driven companies and to aide in the Company’s recruitment of technology workers. As a result of the Merger and the Asset Sale, the Company’s operations now consist of the operations of i2Telecom (DE). The Company’s operations as currently conducted are described below. 

 

The Company’s proprietary technology platform is built to the SIP standard and offers the end user the following primary benefits: 

 

 

 

 

**•**     near carrier grade quality of service 

 

 

 

 

**•**     low cost long distance calling worldwide;

 

 

 

 

**•**     broadband telephony access via your laptop with the Company’s VoiceStick®; 

 

 

 

 

**•**     broadband telephony technology; 

 

 

 

 

**•**     plug and play technology using traditional phones without professional installation;

 

 

 

 

**•**     unlimited and “Pay as You” global calling among VoiceStick® and MyGlobalTalkTM users; and

 

**•**     local and long distance calling via cellular phones utilizing Company’s proprietary technology.

 

The Company’s management is focused solely upon VoIP as the Company’s primary line of business. In addition, the Company’s management is constantly exploring various strategic alternatives, including partnering with other telecommunication companies, both foreign and domestic, and engaging in acquisitions of strategic competitors and/or telecommunication service providers. There can be no assurances that such efforts will be successful. The Company may finance these new business opportunities through a combination of equity and/or debt. If the Company determines to finance these opportunities by issuing additional equity, then such equity may have rights and preferences superior to the outstanding Common Stock, and the issuance of such equity will dilute the ownership percentage of the Company’s existing shareholders. If the Company determines to finance theseopportunities by incurring debt, then such debt may not be available to the Company on favorable terms, if at all. 

 

**Critical Accounting Policies**

 

The policies identified below are considered as critical to the Company’s business operations and the understanding of the Company’s results of operations.  The impact of and any associated risks related to these policies on the Company’s business operations is discussed throughout “Management’s Discussion and Analysis or Plan of Operation.” For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Company’s consolidated financial statements for the year ended December 31, 2007, included in the Annual Report.  Preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (this “Quarterly Report”) requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, andthe reported amounts of revenue and expenses.  There can be no assurance that actual results will not differ from those estimates.

 

 

 

8

 

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 1.**

**NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

**Basis of Consolidation**

 

The consolidated financial statements include the accounts of i2Telecom (DE) and SuperCaller Community, Inc. (“SuperCaller”), both of which are, directly or indirectly, wholly-owned subsidiaries of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

**Accounting Estimates**

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expenses during the reporting period.  Estimates are used when accounting for allowances for doubtful accounts, revenue reserves, inventory reserves, depreciation and amortization, taxes, contingencies and impairment allowances.  Such estimates are reviewed on an on-going basis and actual results could differ from those estimates.

 

**Revenue Recognition**

 

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”), as amended by SAB No. 101A and SAB No. 101B.  SAB No. 101 requires that four basic criteria must be met before revenue can be recognized:  (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services rendered; (iii) the fee is fixed and determinable; and (iv) collectability is reasonably assured.  Determination of criteria (iii) and (iv) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees.  Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.The Company has concluded that its revenue recognition policy is appropriate and in accordance with accounting principles generally accepted in the United States of America and SAB No. 101.

 

**Impairment of Long-Lived Assets**

 

The Company evaluates its long-lived assets for financial impairment and continues to evaluate them as events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable.  The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flows from an asset is less than its carrying value.  In that event, a loss is recognized for the amount by which the carrying value exceeds the fair value of the long-lived asset.  The Company has not recognized any impairment losses.  

 

 

 

 

 

 

 

9

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 1.**

**NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

**Recent Accounting Pronouncements**  

 

This summary of significant accounting policies of i2 Telecom International, Inc. and Subsidiary (the “Company”) is presented to assist in understanding the Company's financial statements.  The financial statements and notes are representations of the Company's management who is responsible for their integrity and objectivity.  These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

 

 

A.

Nature of Operations – The parent Company was incorporated under the laws of the State of Washington on October 17, 1988, and the operating subsidiary was incorporated on February 28, 2002.  The Company, headquartered in Atlanta, Georgia, is a telecommunications service provider of Voice over Internet Protocol (“VoIP”) technology.  The Company has proprietary patent pending technology that allows transmission of VoIP, connection to long distance public-switched telephone network (“PSTN”), and other enhanced communications services through an Internet Access Device (“IAD”).

 

The Company has targeted specific markets that are connected to the Internet.  Customers are supplied an i2 Telecom “IAD” micro gateway, which will enable them to: 1) make, at no cost other than the initial cost of micro gateway and the subscription fee, unlimited calls to other i2 Telecom subscribers – anywhere in the world using the customer’s existing phone (no new or special IP phone required); 2) make long distance calls to people who use a normal telephone line using the i2 Telecom least cost routing network that provides competitive long distance rates; and 3) use either a broadband (DSL, Cable, etc.) or dial up service.

 

 

B.

Basis of Consolidation – The consolidated financial statements include the accounts of SuperCaller Community, Inc., a wholly owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

 

C.

Revenues - The Company recognizes revenue from sale of its i2 Telecom “IAD” micro gateway at time of shipment.  Revenues from per-minute charges and user fees are recognized as incurred by its customers.

 

 

D.

For purposes of the statement of cash flows, the Company considers all short-term securities purchased with a maturity of three months or less to be cash equivalents.

 

 

E.

Inventories - Inventories consisting of purchased components available for resale are stated at lower of cost or market.  Cost is determined on the first-in, first-out (FIFO) basis.

 

 

F.

Costs associated with obtaining loans have been capitalized and are being amortized on a straight-line basis over the life of the loan.  

 

 

G.

Property, Equipment and Related Depreciation - Property and equipment are recorded at cost.  Depreciation is computed using the straight-line method for financial and tax reporting purposes. Estimated lives range from five to ten years.  When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts and any gain or loss on disposition is recognized at that time.  Maintenance and repairs which do not improve or extend the lives of assets are expensed as incurred.

 

 

H.

Intangible Assets – The Company has capitalized certain costs related to registering trademarks and patent pending technology.  In accordance with SFAS No. 142, intangible assets with an indefinite life are not amortized but are tested for impairment at least annually or whenever changes circumstances indicate that the carrying value may not be recoverable.  The Company amortizes its intangible assets with a finite life over 10 years on a straight-line basis.  

 

 

10

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 1.**

**NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

 

I.

In accordance with SFAS No. 144, the Company reviews its long-lived assets, including property and equipment, goodwill and other identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.  To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets.  Impairment is measured at fair value. The Company had no impairment of assets during the third quarter or the nine months ended September 30, 2008 or the years ended December 31, 2007 and 2006.

 

 

J.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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.

 

 

K.

Income Taxes - The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s consolidated financial statements or tax returns.  Under this method, deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

 

L.

Research and Development Expenses – The Company expenses research and development expenses as incurred.  Amounts payable to third parties under product development agreements are recorded at the earlier of the milestone achievement, or when payments become contractually due.

 

 

M.

Earnings (loss) per share - Basic earnings (loss) per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period.  Diluted earnings (loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Options on shares of common stock and certain bonds convertible into common shares were not included in the computing of diluted earnings (loss) per share because their effects were anti-dilutive.

 

 

 

 

 

11

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 1.**

**NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

 

N.

New Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15. 2007. Management is currently evaluating the effect that adoption of this statement will have on the Company’s consolidated financial position and results of operations.

 

On January 1, 2007, we adopted FASB Interpretation No. 48 (“FIN No. 48”), “*Accounting for Uncertainty in Income Taxes,*” which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain income tax positions that the Company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). The adoption of FIN No. 48 on January 1, 2007 did not result in a cumulative-effect adjustment or have an effect on our consolidated financial statements. 

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. Two FASB Staff Positions on SFAS No. 157 were subsequently issued. On February 12, 2007, FSP No. 157-2 delayed the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. This FSP is effective for fiscal years beginning after November 15, 2008. On February 14, 2007, FSP No. 157-1excluded FASB No. 13 *Accounting for Leases*and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB No. 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, *Business**Combinations*or FASB No. 141R, *Business Combinations.*This FSP is effective upon initial adoption of SFAS No. 157. We are assessing the impact that SFAS No. 157 will have on our consolidated financial statements. 

 

In September 2006, the FASB ratified the consensus on EITF Issue No. 06-3, “*How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement*” (“EITF No. 06-3”). The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, USF contributions and excise taxes. The Task Force concluded that entities should present these taxes in the income statement on either a gross or net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” If such taxes are significant and are presented on a gross basis,the amount of those taxes should be disclosed. The consensus on EITF No. 06-3 was effective for interim and annual reporting periods beginning after December 15, 2006. We currently record sales, use and excise taxes on a net basis in our consolidated financial statements whereas USF contributions are recorded on a gross basis in our consolidated financial statements. The adoption of EITF No. 06-3 did not have an effect on our consolidated results of operations. 

 

**Quantitative and Qualitative Disclosure about Market Risk**

 

The Company believes that it does not have any material exposure to interest or commodity risks.  The Company does not own any derivative instruments and does not engage in any hedging transactions.

 

**Comprehensive Income or Loss**

 

The Company has no components of other comprehensive income or loss, and accordingly, net loss equals comprehensive loss for all periods presented.

 

 

12

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 1.**

**NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

**Earnings per Share**

 

For the third quarter of 2008 and 2007, net income (loss) per share is based on the weighted average number of shares of Common Stock outstanding.  At September 30, 2008 and September 30, 2007, the Company had, on a weighted average, 187,388,156 shares and 163,392,118shares of Common Stock outstanding, respectively.  

 

At September 30, 2008, the Company had outstanding 263,145,909 shares of Common Stock and options and warrants to purchase 119,182,738 shares of Common Stock. Consequently, on an as-converted, fully-diluted basis, the Company would have 382,328,647 shares of Common Stock outstanding at September 30, 2008.

 

**Stock Compensation**

 

During 2004, the Company’s shareholders approved a stock option plan for its officers, directors and certain key employees.  Generally, the options vest based on the attainment of certain performance criteria set forth in the option agreements.  In addition, the Company has issued stock warrants to key employees, consultants, and certain investors, with expiration dates of one to five years.  Effective January 1, 2005, the Company adopted early application of SFAS No. 123R.  SFAS No. 123R supersedes APB Opinion No. 25 which was previously used by the Company.  Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123.  However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Under APB Opinion No. 25, compensation expensewas recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price, the intrinsic value method.  Under SFAS No. 123R, the Company recognizes an expense over the vesting period of the fair value of all stock-based awards on the date of grant.  Beginning January 1, 2005, all stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123R and related interpretations.

 

Additionally, the Company adopted early application of SFAS No. 123R on January 1, 2005.  The cumulative effect of this change in accounting principle for periods prior to 2005 was $340,117, net of income tax and has been included on the statement of operations for the three months ended March 31, 2005.  

 

Stock compensation expense is comprised of the amortization of deferred compensation resulting from the grant of stock options to employees at exercise or sale prices deemed to be less than fair value of the Common Stock at grant date, net of forfeitures related to such employees who terminated service while possessing unvested stock options, as these terminated employees have no further service obligations.

 

**Reclassifications**

 

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

**Interim Financial Data**

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC. These financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2007, set forth in the Annual Report.  The interim financial information included herein has not been audited. However, management believes the accompanying unaudited interim financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the consolidated financial position of i2 Telecom International, Inc. and Subsidiaries as of September 30,2008 and September 30, 2007, and the results of their operations and cash flows for the nine six months ended September 30, 2008 and 2007.  The results of operations and cash flows for the period are not necessarily indicative of the results of operations or cash flows that can be expected for the year ending December 31, 2008.

 

 

13

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 2.**

**NOTES PAYABLE**

 

Notes Payable as of September 30, 2008 and December 31, 2007:

 

 

09/30/2008

12/31/2007

a.   10% note payable due to an individual shareholder of the company payable in monthly installments of $4,000, including interest, through December 31, 2008 when all outstanding principal and interest is due.  The note is unsecured and guaranteed by an officer of the Company. 

152,178

248,047

b.   12% note payable due to a corporation.  The principal and all accrued interest were due on December 31, 2007.  The note is unsecured and guaranteed by an officer of the Company. In January 2008, the maturity date was extended to December 31, 2008.

100,000

100,000

c.   10% note payable.  The note required weekly payments of $3,000, including interest, until paid in full. The note was paid in full on 06/03/2008.  The note was unsecured. 

0

61,128

d.   8% note payable to an individual. The principal and all accrued interest were due on December 31, 2007.  The note is unsecured.  In January 2008, the maturity date was extended until December 31, 2008.

25,000

25,000

e.   8% note payable to an individual. The principal and all accrued interest were due on December 31, 2007.  The note is unsecured.  In January 2008, the maturity date was extended until December 31, 2008

25,000

25,000

f.   12% note payable to an individual.  The principal and all accrued interest was due on December 31, 2007.  The principal portion of the note was paid on 06/04/2008, leaving $25,444 of interest still due as of 09/30/08. In January 2008, the maturity date was extended until December 31, 2008. The note is unsecured. 

0

100,000

g.   12% note payable to an individual.  The principal and all accrued interest was due on December 31, 2007.  The principal portion of the note was paid on 06/04/2008, leaving $51,644 of interest still due as of 09/30/08. In January 2008, the maturity date was extended until December 31, 2008. The note is unsecured. 

0

200,000

h.   12% note payable to a director and an individual. The principal and all accrued interest were due on January 4 2008. The note was paid on March 25, 2008.  All accrued interest was paid in full during the quarter ended 06/30/2008.

0

1,000,000

i.    12% note payable to an institutional lender, guaranteed by a director of the company. The principal and all accrued interest are due on November 25, 2008. The note is secured.

1,000,000

0

 

 

 

j.    12% note payable to an institutional investor.  The principal and all accrued interest were due on March 25, 2008.  The note was paid down by $487,500 on June 4, 2008.  The note is unsecured. In September 2008, the maturity date was extended until November 24, 2008.

162,500

650,000

k.   12% note payable to an institutional investor.  The principal and all accrued interest were due on May 24, 2008.  The note was paid down by $450,000 on June 4, 2008.  The note is unsecured. In September 2008, the maturity date was extended until November 24, 2008

150,000

600,000

 

 

14

 

 

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 2.**

**NOTES PAYABLE (CONTINUED)**

 

l.    12% note payable to an institutional investor.  The principal and all accrued interest were due on April 7, 2008.  The note was paid down by $187,500 on June 4, 2008.  The note is unsecured. In October 2008, the maturity date was extended until December 7, 2008. 

62,500

250,000

m.  12% note payable to an institutional investor.  The principal and all accrued interest were due on July 19, 2008.  The note is unsecured.  In October 2008, the maturity date was extended until November 22, 2008.

25,000

0

n.   12% note payable.  The principal and all accrued interest were due on March 21, 2008.  The principal portion of the note was paid down by $150,000 on June 4, 2008.  The note is unsecured.  In October 2008, the maturity date was extended to November 27, 2008.

50,000

200,000

o.   12% note payable.  The principal and all accrued interest were due on May 22, 2008.  The principal portion of the note was paid down by $100,000 on June 4, 2008.  The note is unsecured.  In October 2008, the maturity date was extended to November 22, 2008.

50,000

0

p.   12% note payable.  The principal and all accrued interest were due on May 22, 2008.  The note is unsecured.  The loan was paid down by $100,000 on June 4, 2008.  In October 2008, the maturity date was extended until November 22, 2008.

100,000

0

q.   12% note payable.  The principal and all accrued interest were due on November 28, 2008.  The note is secured.  

200,000

0

r.   12% note payable to a director.  The principal and all accrued interest were originally due on March 7, 2008.  The lender is an entity controlled by director of the Company. The principal portion of the note was paid in full on June 4, 2008, leaving $11,188 in interest due at September 30, 2008.  

0

125,000

s.   12% note payable.  The principal and all accrued interest were originally due on March 1, 2008.  The loan was paid down by $50,000 on June 4, 2008.  The note is secured. In October 2008, the maturity date was extended until December 1, 2008.

50,000

100,000

t.    12% note payable.  The principal and all accrued interest were originally due on March 2, 2008.  The loan was paid down by $50,000 on June 4, 2008.  The note is secured. In October 2008, the maturity date was extended until December 1, 2008.

50,000

100,000

u.   12% note payable.  The principal and all accrued interest were originally due on Feb. 20, 2008.  The loan was paid down by $25,000 on June 4, 2008.  The note is secured. In October 2008, the maturity date was extended until November 20, 2008.

25,000

50,000

v.   12% note payable.  The principal and all accrued interest were originally due on April 8, 2008.  The loan was paid down by $50,000 on June 4, 2008.  The note is secured. In October 2008, the maturity date was extended until December 15, 2008.

50,000

0

 

 

15

 

 

 

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 

**NOTE 2.**              **NOTES PAYABLE (CONTINUED)**

 

 

 

w.  12% note payable.  The principal and all accrued interest were originally due on June 24, 2008.  The loan was paid down by $25,000 on June 4, 2008.  The note is secured.  In October 2008, the maturity date was extended until December 15, 2008.

25,000

0

x.   12% note payable.  The principal and all accrued interest were originally due on June 30, 2008.  The loan was paid down by $25,000 on June 4, 2008.  The note is secured.  In October 2008, the maturity date was extended until December 1, 2008.

25,000

0

 

y.   12% note payable.  The principal and all accrued interest were November 25, 2008.  The note is secured. 

50,000

0

z.   12% note payable.  The principal and all accrued interest were originally due on February 20, 2008.  The note is secured. In October 2008, the maturity date was extended until December 28, 2008.

50,000

50,000

aa. 12% note payable.  The principal and all accrued interest were originally due on July 6, 2008.  The note is secured. In October 2008, the maturity date was extended until December 7, 2008.

50,000

0

bb.12% note payable.  The principal and all accrued interest were originally due on January 7, 2008.  The principal portion of the note was paid in full on June 11, 2008, leaving $2,650 in interest due at September 30, 2008.

0

50,000

cc. 12% note payable.  The principal and all accrued interest were originally due on March 1, 2008.  The loan was paid down by $25,000 on June 4, 2008.  The note is secured. In October 2008, the maturity date was extended until December 1, 2008.

25,000

50,000

dd.12% note payable.  The principal and all accrued interest were due on May 7, 2008.  In October 2008, the maturity date was  extended until December 7, 2008.  The note is secured.

100,000

0

ee. 12% note payable.  The principal and all accrued interest were due on March 1, 2008.  The principal portion of the note was paid in full on June 9, 2008, leaving $2,683 in interest due at September 30, 2008.

0

0

ff.  12% note payable.  The principal and all accrued interest were originally due on May 14, 2008.  In October 2008, the maturity date was extended until December 15, 2008. The note is secured.

100,000

0

gg.12% note payable.  The principal and all accrued interest were originally due on July 14, 2008.  In October 2008, the maturity date was extended until December 14, 2008. The note is secured

50,000

0

hh.12% note payable.  The principal and all accrued interest are  due on November 18, 2008.  The note is secured

100,000

0

 

Total Long Term Debt

2,852,178

3,984,175

Less:  Current Portion

2,852,178

3,984,175

Long-Term Portion

$             -0-

$            -0-

 

 

16

 

 

We have been able to meet our operating requirements since September 30, 2008 without any interim financing.  We will need to receive additional capital to continue our operations.

 

Financing may not be available to us on commercially reasonable terms, if at all. There is no assurance that we will be successful in raising additional capital or that the proceeds of any future financings will be sufficient to meet our future capital needs. It is not likely that we will be able to continue our business without additional financing. Currently, we have no commitments for additional financing. 

 

**NOTE 3.**

**CONVERTIBLE BONDS**

 

On January 9, 2006, the Company sold $1,750,000 of 10% secured convertible debentures pursuant to a Securities Purchase Agreement dated thereof.  The Company received $600,000 upon closing, $600,000 on April 6, 2006, and $550,000 May 10, 2006.  The debentures were secured by all assets of the Company.

 

During the year ended December 31, 2006, the holders converted $425,000 of the convertible bonds into 14,707,310 shares of common stock.  In January 2007, the Company paid off the remaining balance due.

On December 9, 2006, the Company sold $2,000,000 of 6% secured convertible debentures pursuant to a Securities Purchase Agreement dated thereof. The Company received $1,625,000 in December 2006 and remaining $375,000 in January 2007.  The Debentures matured on May 9, 2007. The Debentures were convertible from time to time into 28,571,429 shares of common stock of the Company at the price of $.07 per share and 28,571,429 warrants exercisable at the price of $.07 per share.

On February 28, 2007, the Company sold $2,000,000 of 6% Senior Subordinated Secured Convertible Notes convertible into 16,666,666 shares of the Company's common stock priced at $.12 each, and 8,333,333 Warrants, priced at $.12 each. For every two shares of common stock to be issued, the investor(s) received one warrant which is exercisable into the Company's common stock at 100% of the Issue Price. These warrants mature three years from issuance.  The Notes will automatically convert into the Company's common stock if any of the following events occur: (i) the Shares become registered and freely trading, or (ii) the financial closing by the Company of $10,000,000 or more. The Notes are secured by all assets of the Company and its subsidiaries.  All future debt securities issued by the Company will be subordinate in right of payment to the Notes; provided, however, that the Company may raiseup to $1.0 million of senior indebtedness that ranks pari passu with the Notes in the future.

 

During the year ended December 31, 2007, the Company converted Convertible debt in the amount of $3,392,274, net of bond discount of $557,419, in principal and accrued interest, to common stock.  Total shares issued in exchange for the debt were 40,851,517.

 

Due to the late registration of shares received in conversion of the Convertible Debt during 2007, penalty shares were awarded & issued to convertible note holders.   The total number of penalty shares issued was 6,320,476.

 

 

 

17

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

Convertible bonds remaining at September 30, 2008 and June 30, 2008 consisted of the following:

 

 

September 30, 2008

June 30, 2008 

December 2006 6% Convertible Bonds

February 2007 6% Convertible Bonds

$ 50,000

50,000

$   50,000

50,000

 

 

100,000

100,000

 

**NOTE 4.**

**STOCK OPTIONS AND WARRANTS**

 

 

September 30, 2008

December 31, 2007

 

 

Number of

Options/

Warrants

Weighted

Average

Exercise

Price

 

Number of

Options/

Warrants

Weighted

Average

Exercise

Price

Outstanding at Beginning of  

Period

 

122,448,231

 

$   .13

 

81,168,183

 

$.23

Options Granted

Warrants Granted

Exercised

Forfeited

15,100,000

147,013,500

(158,546,094)

(6,123,499)

$   .10

$   .10

$   .09

$   .54

13,468,098

59,797,619

(11,634,951)

(20,350,718)

$   .09

$   .10

$.58

$   .19

Outstanding at End of Period

119,782,138

$   .11

122,448,231

$   .13

Options Exercisable at End of 

Period

 

107,140,121

 

$   .12

 

110,993,317

 

.13 

Weighted-average Fair Value of

Options Granted During the Period

 

 

$   .10

 

 

 

$   .13

 

 

As of September 30, 2008, the range of option and warrant exercise prices for outstanding and exercisable options and warrants was $.01 to $1.00 with a weighted average remaining contractual life of 02.31 years.

 

**NOTE 5.**

**STOCK APPRECIATION RIGHTS AND RESTRICTED SHARE UNITS**

 

On December 31, 2003, the Company terminated its stock appreciation plan and cancelled all outstanding rights granted.  As consideration for the consideration of rights cancelled, each employee received restricted stock or cancellation of their notes receivable at rate of $3.00 per right.  On December 31, 2003, the Company amended its 2002 Stock Option Plan to properly administer the granting of restricted stock.  Under the amended plan, employees are granted restricted share units without cost to the employee.  Each restricted share unit awarded to a participant represents an unfunded, unsecured right, which is nontransferable except in the event of death of the employee, to receive one share of common stock, $.01 par value, of i2 Delaware on the date specified in the grant.  As a result of the Merger each such right was converted into the right to receive shares of Common Stock, no parvalue per share, and Preferred Stock Series B, no par value per share (the “Preferred Stock Series B”), as outlined in the Merger Agreement.  The restricted share units granted under the plan vest evenly over three years, with immediate vesting upon termination.  

 

Information with respect to restricted share units as of September 30, 2008 and 2007 is as follows:

 

 

2008

2007

Restricted Units-Beginning of Year

0

1,003,784

Restricted Units Granted

0

0

Transfer to Common Stock Due to Lapse of Restrictions

(0)

(941,284)

Restricted Units-End of Year

0

62,500

Weighted Average Fair Value of Shares

$        .00

$           .07

Pre-Tax Compensation Expense Charged to

Earnings, net of cancellations

 

$        -0-  

 

$       0

 

 

18

 

 

 

i2 TELECOM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

**NOTE 6. SUBEQUENT EVENTS**

 

In October 2008, we issued to one institution and one individual, warrants to purchase an aggregate of 5,000,000 shares of Common Stock at an exercise price of $0.10 per share, vested immediately upon the date of grant with a five-year expiration period. The warrants were issued in connection with the execution of promissory notes in the aggregate amount of $1,000,000 made to us. Of this amount, 5,000,000 warrants were issued to one individual who is one of our directors and another individual who is an officer and director for which a loan was made to us for $1,000,000 of which half was guaranteed by an officer and director of ours. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the warrants to usregarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by us of a registration statement.

 

Also in October 2008, we issued to three individuals, warrants to purchase an aggregate of 625,000 shares of Common Stock at an exercise price of $0.10 per share, vested immediately upon the date of grant with a five-year expiration period. The warrants were issued in connection with the execution of promissory notes in the aggregate amount of $250,000 made to us. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the warrants to us regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by us of a registration statement.

 

Also in October 2008, we issued a total of 1,250,000 shares of Common Stock to one individual in lieu of $100,000 of debt owed by us to a consultant for services performed for us. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the shares to us regarding their investment interest and sophistication, among other things. 

In November 2008, we had pending issuance a total of 175,000 shares of Common Stock to one individual in lieu of $15,000 of debt owed by us to a consultant for services performed for us. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the shares to us regarding their investment interest and sophistication, among other things. 

 

Also in November 2008, we had pending issuance to one individual and one institution, warrants to purchase an aggregate of 6,250,000 shares of Common Stock at an exercise price of $0.10 per share, vested immediately upon the date of grant with a five-year expiration period to consultants for services performed for us. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the shares to us regarding their investment interest and sophistication, among other things. 

 

 

 

19

 

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

**Forward Looking Statements**

 

*Certain statements in the Management’s Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section* *27A of the Securities Act of 1933 and Section* *21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,”“should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section under “Risk Factors”. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.*

 

*As used in this Form 10-Q, unless the context requires otherwise, “we” or “us” or the “Company” or “i2” or “i2 Telecom” means i2 Telecom International, Inc. and its subsidiaries.*

 

**Overview**

 

The Company, through its subsidiary, i2Telecom International, Inc., (“i2Telecom (DE)”), provides low-cost telecommunications services employing next-generation VoIP technology. These operations are based in Roswell, Georgia. Through i2Telecom (DE), the Company controls its own proprietary technology and outsources the majority of its production and service functions with strategic partners. The Company, through i2Telecom (DE), provides the VoiceStick®, MyGlobalTalkTM, micro gateway adapters, VoIP long distance and other enhanced communication services to subscribers. The Company’s proprietary technology platform is built to the Session Initiation Protocol (“SIP”) standard. The Company’s revenue model now includes revenue from the sale of the VoiceStick®, MyGlobalTalkTM, and other integrated access devices (“IADs”) alongwith recurring monthly subscriptions and call minute termination. The Company believes its proprietary technology provides meaningful advantages particularly in the areas of ease of use, high quality service, and low cost and robust features.

 

The Company’s proprietary technology platform is built to the SIP standard and offers the end user the following primary benefits:

 

 

•

near carrier grade quality of service; 

 

 

•

low cost long distance calling worldwide; 

 

 

•

broadband access via laptop with the Company’s VoiceStick®; 

 

 

•

broadband technology; 

 

 

•

plug and play technology using traditional phones (including cellular) without professional installation; and 

 

 

•

unlimited and “Pay as You” global calling among VoiceStick® and MyGlobalTalkTM users. 

 

The Company’s management intends to focus upon the monetization and royalty revenues from our Intellectual property portfolio and related technology for mobile communications applications as the Company’s primary lines of business. In addition, the Company’s management is constantly exploring various strategic alternatives, including partnering with other telecommunication companies, both foreign and domestic, and engaging in acquisitions of strategic competitors and/or telecommunication service providers. There can be no assurances that such efforts will be successful. The Company may finance these new business opportunities through a combination of equity and/or debt. If the Company determines to finance these opportunities by issuing additional equity, then such equity may have rights and preferences superior to the outstanding Common Stock and Preferred Stock, and theissuance of such equity will dilute the ownership percentage of the Company’s 

 

20

 

 

existing shareholders. If the Company determines to finance these opportunities by incurring debt, then such debt may not be available to the Company on favorable terms, if at all. 

 

**Critical Accounting Policies and Estimates**

 

*Basis of Consolidation.*The consolidated financial statements include the accounts of i2Telecom (DE) and SuperCaller Community, Inc. (“SuperCaller”), both of which are, directly or indirectly, wholly-owned subsidiaries of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.  

 

*Accounting Estimates.*The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expenses during the reporting period.  Estimates are used when accounting for allowances for doubtful accounts, revenue reserves, inventory reserves, depreciation and amortization, taxes, contingencies and impairment allowances.  Such estimates are reviewed on an on-going basis and actual results could differ from those estimates.

 

*Revenue Recognition.*The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”), as amended by SAB No. 101A and SAB No. 101B.  SAB No. 101 requires that four basic criteria must be met before revenue can be recognized:  (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services rendered; (iii) the fee is fixed and determinable; and (iv) collectibility is reasonably assured.  Determination of criteria (iii) and (iv) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees.  Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for anyreporting period could be adversely affected.  The Company has concluded that its revenue recognition policy is appropriate and in accordance with accounting principles generally accepted in the United States of America and SAB No. 101.

 

*Impairment of Long-Lived Assets.*The Company evaluates its long-lived assets for financial impairment and continues to evaluate them as events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable.  The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flows from an asset is less than its carrying value.  In that event, a loss is recognized for the amount by which the carrying value exceeds the fair value of the long-lived asset.  The Company has not recognized any impairment losses.  

 

*Recent Accounting Pronouncements* **

 

 

A.

Nature of Operations – The parent Company was incorporated under the laws of the State of Washington on October 17, 1988, and the operating subsidiary was incorporated on February 28, 2002.  The Company, headquartered in Atlanta, Georgia, is a telecommunications service provider of Voice over Internet Protocol (“VoIP”) technology.  The Company has proprietary patent pending technology that allows transmission of VoIP, connection to long distance public-switched telephone network (“PSTN”), and other enhanced communications services through an Internet Access Device (“IAD”).

 

The Company has targeted specific markets that are connected to the Internet.  Customers are supplied an i2 Telecom “IAD” micro gateway, which will enable them to: 1) make, at no cost other than the initial cost of micro gateway and the subscription fee, unlimited calls to other i2 Telecom subscribers – anywhere in the world using the customer’s existing phone (no new or special IP phone required); 2) make long distance calls to people who use a normal telephone line using the i2 Telecom least cost routing network that provides competitive long distance rates; and 3) use either a broadband (DSL, Cable, etc.) or dial up service.

 

 

B.

Basis of Consolidation – The consolidated financial statements include the accounts of SuperCaller Community, Inc., a wholly owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

 

C.

Revenues - The Company recognizes revenue from sale of its i2 Telecom “IAD” micro gateway at time of shipment.  Revenues from per-minute charges and user fees are recognized as incurred by its customers. Revenues from the monetization or license fees generated by our Intellectual property are recognized upon completion of the earnings cycle..

 

 

D.

For purposes of the statement of cash flows, the Company considers all short-term securities purchased with a maturity of three months or less to be cash equivalents.

 

 

F.

Inventories - Inventories consisting of purchased components available for resale are stated at lower of cost or market.  Cost is determined on the first-in, first-out (FIFO) basis.

 

21

 

 

 

H.

Costs associated with obtaining loans have been capitalized and are being amortized on a straight-line basis over the life of the loan.  

 

 

I.

Property, Equipment and Related Depreciation - Property and equipment are recorded at cost.  Depreciation is computed using the straight-line method for financial and tax reporting purposes. Estimated lives range from five to ten years.  When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts and any gain or loss on disposition is recognized at that time.  Maintenance and repairs which do not improve or extend the lives of assets are expensed as incurred.

 

 

H.

Intangible Assets – The Company has capitalized certain costs related to registering trademarks and patent pending technology.  In accordance with SFAS No. 142, intangible assets with an indefinite life are not amortized but are tested for impairment at least annually or whenever changes circumstances indicate that the carrying value may not be recoverable.  The Company amortizes its intangible assets with a finite life over 10 years on a straight-line basis.  

 

 

I.

In accordance with SFAS No. 144, the Company reviews its long-lived assets, including property and equipment, goodwill and other identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.  To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets.  Impairment is measured at fair value. The Company had no impairment of assets during the years ended December 31, 2007 and 2006. 

 

 

J.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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.

 

 

K.

Income Taxes - The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s consolidated financial statements or tax returns.  Under this method, deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

 

L. 

Research and Development Expenses – The Company expenses research and development expenses as incurred.  Amounts payable to third parties under product development agreements are recorded at the earlier of the milestone achievement, or when payments become contractually due.

 

 

M. 

Earnings (loss) per share - Basic earnings (loss) per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period.  Diluted earnings (loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Options on shares of common stock and certain bonds convertible into common shares were not included in the computing of diluted earnings per share because their effects were anti-dilutive.

 

 

N.

New Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15. 2007. Management is currently evaluating the effect that adoption of this statement will have on the Company’s consolidated financial position and results of operations.

 

On January 1, 2007, we adopted FASB Interpretation No. 48 (“FIN No. 48”), “*Accounting for Uncertainty in Income Taxes,*” which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain income tax positions that the Company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). The adoption of FIN No. 48 on January 1, 2007 has not resulted in a cumulative-effect adjustment or have an effect on our consolidated financial statements.  

 

22

 

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. Two FASB Staff Positions on SFAS No. 157 were subsequently issued. On February 12, 2007, FSP No. 157-2 delayed the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. This FSP is effective for fiscal years beginning after November 15, 2008. On February 14, 2007, FSP No. 157-1excluded FASB No. 13 *Accounting for Leases*and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB No. 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, *Business**Combinations*or FASB No. 141R, *Business Combinations.*This FSP is effective upon initial adoption of SFAS No. 157. We are assessing the impact that SFAS No. 157 will have on our consolidated financial statements. 

 

In September 2006, the FASB ratified the consensus on EITF Issue No. 06-3, “*How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement*” (“EITF No. 06-3”). The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, USF contributions and excise taxes. The Task Force concluded that entities should present these taxes in the income statement on either a gross or net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” If such taxes are significant and are presented on a gross basis,the amount of those taxes should be disclosed. The consensus on EITF No. 06-3 was effective for interim and annual reporting periods beginning after December 15, 2006. We currently record sales, use and excise taxes on a net basis in our consolidated financial statements whereas USF contributions are recorded on a gross basis in our consolidated financial statements. The adoption of EITF No. 06-3 did not have an effect on our consolidated results of operations. 

 

**Results of Operations**

 

*Comparison of Three Months Ended September 30, 2008 and 2007*

 

 

 

For the Three Months Ended

 

 

September 30,

 

 

2008

 

2007

 

Variance

 

Percentage

Revenue

$

163,904

$

242,300

 

(78,396)

 

-32.4%

Cost of Revenue

 

185,427

 

268,501

 

(83,074)

 

30.9%

Gross Profit (Loss)

 

(21,523)

 

(26,201

)

4,678

 

17.9%

Operating Expenses:

 

 

 

 

 

 

 

 

General and Administrative Expenses

 

2,546,487

 

1,459,289

 

1,087,498

 

74.5%

Other Income (Expense) Net

 

(121,433)

 

(1,549,412)

 

1,427,979

 

92.2%

Net Profit (Loss)

$

 

(2,689,443)

$

(3,034,902)

 

345,459

 

11.4%

 

 

Revenues decreased to $163,904 for the three months ended September 30, 2008 from $242,300 for the three months ended September 30, 2007. The decrease in revenues was due to lower customer volume due to expanded fraud control procedures and stricter customer acceptance methods.

 

Cost of revenues decreased to $185,427 for the three months ended September 30, 2008 from $268,501 for the three months ended September 30, 2007. The decrease in cost of revenues was due to continuing efforts in negotiating lower carrier rates, combined with lower sales volume.

 

Gross loss decreased from a loss of $26,201 for the three months ended September 30, 2007 to a loss of $21,523 for the three months ended September 30, 2008. 

 

23

 

 

Total selling, general and administrative expenses for the three months ended September 30, 2008 was $2,546,487 compared to $1,459,289 for the three months ended September 30, 2007. The increase was due to higher financing costs in Q3 2008, offset by lower Convertible Bond discount amortization occurring in the third quarter of 2007.

 

Net loss for the three months ended September 30, 2008 was $2,689,443 as compared to a net loss of $3,034,902 for the three months ended September 30, 2007. The non-cash compensation expense for the three months ended September 30, 2008 was $156,381. The decrease in net loss is primarily a result of lower financing costs. 

 

*Comparison of Nine Months Ended September 30, 2008 and 2007*

 

 

 

For the Nine Months Ended

 

 

September 30,

 

 

2008

 

2007

 

Variance

 

Percentage

Revenue

$

484,087

$

618,090

 

(134,003)

 

-21.7%

Cost of Revenue

 

556,349

 

724,292

 

167,943

 

23.2%

Gross Profit (Loss)

 

(72,262

)

(106,202

)

33,940

 

32.0%

Operating Expenses:

 

 

 

 

 

 

 

 

General and Administrative Expenses

 

5,182,359

 

5,683,865

 

501,506

 

8.8%

Other Income (Expense) Net

 

4,300,908

 

(1,570,913

)

5,871,821

 

373.8%

Net Profit (Loss)

$

(953,713)

$

(7,360,980

)

6,407,267

 

87.0%

 

 

Revenues decreased to $484,087 for the nine months ended September 30, 2008 from $618,090 for the nine months ended September 30, 2007. The decrease in revenues was due to lower customer volume due to expanded fraud control procedures and stricter customer acceptance methods.  Additionally, the decrease in revenue is due to a choice to not heavily market the existing product in anticipation of the launch in the fourth quarter of the improved MyGlobalTalk. 

 

Cost of revenues decreased to $556,349 for the nine months ended September 30, 2008 from $724,292 for the nine months ended September 30, 2007. The decrease in cost of revenues was due to continuing efforts in negotiating lower carrier rates, combined with lower sales volume

 

Gross loss decreased from $106,202 for the nine months ended September 30, 2007 to a loss of $72,262 for the nine months ended September 30, 2008. 

 

Total selling, general and administrative expenses for the nine months ended September 30, 2008 was $5,182,359 compared to $5,683,865 for the nine months ended September 30, 2007. The decrease was due to lower financing costs related to borrowings, and Convertible Bond Discount amortization occurring in 2007.

 

Net loss for the nine months ended September 30, 2008 was $953,713 as compared to a net loss for the nine months ended September 30, 2007 of $7,360,980. The decrease in net loss is primarily a result of the sale of intellectual property to a third party, combined with lower financing costs. As a result of the sale of Patent #7,336,654 in the amount of $6,500,000 in cash on May 31, 2008, the Company realized a net contribution of profits in the amount of $5,215,000 net of fees and related expenses related to this transaction.

 

**Liquidity and Capital Resources**

 

On September 30, 2008, we had a working capital deficit of approximately $4,200,000 compared to a working capital deficit of approximately $6,800,000 on September 30, 2007. The decrease in working capital deficit was primarily due to increased cash resources from the sale of intellectual property, combined with payoffs of current liabilities.  Net cash used in operating activities was approximately $877,000 for the nine months ended September 30, 2008 as compared to net cash used in operating activities of approximately $3,400,000 for the nine months ended September 30, 2007. The decrease in net cash used by operating activities between the nine months ended September 30, 2008 and September 30, 2007 is attributable to the proceeds from the sale of intellectual property. 

 

24

 

 

 

Net cash used in investing activities was approximately $944,000 for the nine months ended September 30, 2008 as compared to net cash used in investing activities of $19,000 for the same period in 2007. The increase in net cash used investing activities is attributable to purchases of network system equipment, software application development, combined with purchases of Canadian licensing and patent rights.

 

Net cash provided by financing activities was approximately $1,773,000 for the nine months ended September 30, 2008 as compared to net cash provided of $2,800,000 for the same period in 2007. The decrease in net cash provided by financing activities is attributable to the pay downs of promissory note debt.    

 

**Off-Balance Sheet Arrangements**

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

**Contractual Obligations**

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments.

 

We have no current commitments or obligations for future capital expenditures. A summary of our debt and lease obligations at September 30, 2008 are as follows: 

 

 

 

 

Obligations payable in

 

 

 

 

Less than 1 year

 

1-3 years

 

Total

Debt

$

2,852,178

$

0

$

2,852,178

 

 

 

 

 

 

 

Leases

$

20,990

$

0

$

20,990

 

 

**ITEM 3.**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

 

Not applicable.

 
 
**strong>**B>**ITEM 4.**********
******CONTROLS AND PROCEDURES****.**********
 

**Disclosure Controls and Procedures**

 

As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision of, and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to enable us to record, process, summarize and report information required to be included in our reports that we file or submit under the Exchange Act within the time periods required. 

 

**Changes in Internal Control over Financial Reporting**

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

25

 

 

 

 

 

**PART II - OTHER INFORMATION**

 
 
******ITEM 1.****** **********
******LEGAL PROCEEDING****S**********
 

On December 22, 2003, former stockholders of SuperCaller Community, Inc., a Delaware corporation acquired by the Company in September 2002 (“SuperCaller”), filed a lawsuit against the Company in the United States District Court for the Northern District of California, San Francisco Division. The plaintiffs alleged that i2Telecom (DE) and certain of its affiliates and representatives deceived the plaintiffs into selling SuperCaller to the Company, among other things.  On March 27, 2006,  all federal claims against the Company and related parties in the United States District Court in San Francisco were “dismissed with prejudice” by Judge Vaughn Walker.  In addition, the court declined to exercise supplemental jurisdiction over the remaining state law claims which were all “dismissed” as well.  Therefore, no loss or liability has been recorded inthe Company’s financial statements.  In March 2008, the federal claims against the Company and related parties in the United States District Appellate Court in San Francisco were “dismissed with prejudice”.

The Company was named a defendant in a lawsuit regarding a disputed amount due for patent preparation and filings by the same attorney representing the plaintiffs in the above matter.  In January 2008, the claims against the Company and related parties in the United States District Appellate Court in San Francisco were “dismissed with prejudice”.  In April 2008, the same attorney representing the plaintiffs in the above matter filed an action against the Company in the Superior Court of California, County of Santa Clara (the Superior Court”).  The plaintiffs alleged that i2Telecom (DE) and certain of its affiliates and representatives deceived the plaintiffs into selling SuperCaller to the Company, among other things.  A demurrer has been filed by the Company and sustained by the Superior Court with leave to amend.  The Company will continue to vigorously defend these claimsand believes this litigation to be unsubstantiated and without merit.
 
******ITEM 1A.**********
******RISK FACTOR****S**********
 

*You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated into this offering that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.*

 

**Current economic conditions may adversely affect our industry, business and results of operations.**

The United States economy is currently undergoing a period of slowdown and very high volatility and the future economic environment may continue to be less favorable than that of recent years. A substantial portion of our revenues comes from residential and small business customers whose spending patterns may be affected by prevailing economic conditions. While we believe that the weakening economy had a modest effect on our net subscriber additions during recent months, if these economic conditions continue to deteriorate, the growth of our business and results of operations may be affected. Reduced consumer spending may drive us and our competitors to offer certain services at promotional prices, which could have a negative impact on our operating results. 

 

**We have a history of losses and negative cash flows from operations and we may not be profitable in the future.**

 

Although we had a significant revenue generating event in the second quarter of 2008, we had a loss of $971,714 for the first nine months of 2008 and a loss of $9,088,752 for the entire fiscal year of 2007. We had a gain of $2,933,123 for the quarter ended June 30, 2008, a loss of $9,088,752 for the fiscal year ended December 31, 2007, and a loss of $5,800,177 for the fiscal year ended December 31, 2006. We had an accumulated deficit at June 30, 2008 of $35,581,278. Our ability to generate positive cash flows from operations and net income is dependent, among other things, on the acceptance of our products in the 

 

26

 

 

marketplace, market conditions, cost control, and our ability to raise capital on acceptable terms. The financial statements included elsewhere in this prospectus do not include any adjustments that might result from the outcome of these uncertainties. Furthermore, developing and expanding our business will require significant additional capital and other expenditures. Accordingly, if we are not able to increase our revenue, then we may never achieve or sustain profitability. Recent economic events cast a doubt of uncertainty as to the possible decline of consumer spending in the future.

 

We have been able to meet our operating requirements since September 30, 2008 without any interim financing.  We will need to receive additional capital to continue our operations. The recent credit crisis may cause a prolonged strain on the capital markets which would create even a greater difficulty in obtaining proper financing into the Company.

 

Financing may not be available to us on commercially reasonable terms, if at all. There is no assurance that we will be successful in raising additional capital or that the proceeds of any future financings will be sufficient to meet our future capital needs. It is not likely that we will be able to continue our business without additional financing. Currently, we have no commitments for additional financing. The recent credit crisis may cause a prolonged strain on the capital markets which would create even a greater difficulty in obtaining proper financing into the Company.

 

**The price of our Common Stock has been volatile in the past and may continue to be volatile.**

 

The stock market in general, and the market for technology companies in particular, has been experiencing recent extreme volatility that has often been unrelated to the operating performance of particular companies. From January 1, 2003 to September 30, 2008, the per share closing price of our Common Stock on the Over-the-Counter Bulletin Board fluctuated from a high of $3.35 to a low of $.03. We believe that the volatility of the price of our Common Stock does not solely relate to our performance and is broadly consistent with volatility experienced in our industry. Fluctuations may result from, among other reasons, responses to operating results, announcements by competitors, regulatory changes, economic changes, market valuation of technology firms and general market conditions. 

 

In addition, in order to respond to competitive developments, we may from time to time make pricing, service or marketing decisions that could harm our business. Also, our Company’s operating results in one or more future quarters may fall below the expectations of securities analysts and investors. In either case, the trading price of our Common Stock would likely decline. 

 

The trading price of our Common Stock could continue to be subject to wide fluctuations in response to these or other factors, many of which are beyond our control. If the market price of our Common Stock decreases, then shareholders may not be able to sell their shares of our Common Stock at a profit. 

 

Our common shares are thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

 

Our common shares are sporadically or "thinly-traded" on the OTCBB, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company and we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to aseasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained. 

 

The market price for our common shares is particularly volatile given our status as a relatively unknown company with a small and thinly-traded public float and limited operating history. The price at which you purchase our common shares may not be indicative of the price that will prevail in the trading market. You may be unable to sell your common shares at or above your purchase price, which may result in substantial losses to you.

 

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders 

 

27

 

 

may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, lack of capital to execute our business plan, and uncertainty of future market acceptance for our restaurant concept. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stockof a seasoned issuer. The following factors may add to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results, market acceptance of our restaurant concept, government regulations, announcements of significant acquisitions, strategic partnerships or joint ventures, our capital commitments, and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect, if any, that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price. 

 

**Volatility in our common share price may subject us to securities litigation.**

 

As discussed in the preceding risk factor, the market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources. The application of the “penny stock” rules could adversely affect the market price of our common shares and increase your transaction costs to sell those shares.

 

As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the “penny stock” rules. The “penny stock” rules impose additional sales practice requirements on 

broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). 

 

For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell the common shares, and may result in decreasedliquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.

 

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our managementis aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. 

 

**The Company may not be able to successfully manage its growth**.

 

The Company’s liability to manage its growth will require that the Company continue to improve its operational, financial and management information systems, and to motivate and effectively manage its employees. If the Company’s management is unable to manage such growth effectively, then the quality of the Company’s services, its ability to retain key personnel and its business, financial condition and results of operations could be materially adversely affected.

 

28

 

 

 

 

**The Company may be unable to fund future growth**.

 

The Company’s business strategy calls for the Company to grow and expand its business both internally and otherwise. Significant funds will be required to implement this strategy, funding for additional personnel, capital expenditures and other expenses, as well as for working capital purposes. Financing may not be available to the Company on favorable terms or at all. If adequate funds are not available on acceptable terms, then the Company may not be able to meet its business objectives for expansion. This, in turn, could harm the Company’s business, results of operations and financial condition. In addition, if the Company raises additional funds through the issuance of equity or convertible debt securities, then the percentage ownership of the Company’s shareholders will be reduced, and any new securities could have rights, preferences and privileges senior to those of theCommon Stock. Furthermore, if the Company raises capital or acquires businesses by incurring indebtedness, then the Company will become subject to the risks associated with indebtedness, including interest rate fluctuations and any financial or other covenants that the Company’s lender may require.  Furthermore, the recent credit crisis may cause a prolonged strain on the capital markets which would create even a greater difficulty in obtaining proper financing into the Company.

 

**Our executive officers have been employed for a relatively short period of time, and may not be able to implement our business strategy. The failure to effectively implement our business strategy will have a material, adverse effect on our business, financial condition and results of operations.**

 

Our management team consists of 3 executive officers who have been employed by us for over three years. There can be no assurance that they will function successfully as a management team to implement our business strategy. If they are unable to do so, then our business, financial condition and results of operations could be materially adversely affected.

 

**Our performance could be adversely affected if we are unable to attract and retain qualified personnel in the fields of engineering, marketing and finance.**

 

Our performance is dependent on the services of our management as well as on our ability to recruit, retain and motivate other key employees in the fields of engineering, marketing and finance. Competition for qualified personnel is intense and there is a limited number of persons with knowledge of and experience with VoIP. We cannot assure you that we will be able to attract and retain key personnel, and the failure to do so could hinder our ability to implement our business strategy and could cause harm to our business. 

 

**The general condition of the telecommunications market will affect our business. Continued pricing declines may result in a decline in our operating results.**

 

We are subject to market conditions in the telecommunications industry. Our operations could be adversely affected if pricing continues to decline as it has in the past few years. If pricing declines continue, then we may experience adverse operating results.

 

**The VoIP telephony market is subject to rapid technological change. Newer technology may render our technology obsolete which would have a material, adverse impact on our business and results of operations.**

 

VoIP telephony is an emerging market that is characterized by rapid changes in customer requirements, frequent introductions of new and enhanced products, and continuing and rapid technological advancement. To compete successfully in this emerging market, we must continue to design, develop, manufacture, and sell new and enhanced VoIP telephony software products and services that provide increasingly higher levels of performance and reliability at lower cost. Our success in designing, developing, manufacturing, and selling such products and services will depend on a variety of factors, including:

 

 

**•**

the identification of market demand for new products; 

 

 

**•**

the scalability of our VoIP telephony software products; 

 

 

**•**

product and feature selection; 

 

 

29

 

 

 

 

**•**

timely implementation of product design and development; 

 

 

**•**

product performance; 

 

 

**•**

cost-effectiveness of current products and services and products under development; 

 

 

**•**

our ability to successfully implement service features mandated by federal and state law; 

 

 

**•**

effective manufacturing processes; and 

 

 

**•**

effectiveness of promotional efforts.

 

Additionally, we may also be required to collaborate with third parties to develop our products and may not be able to do so on a timely and cost-effective basis, if at all. We have in the past experienced delays in the development of new products and the enhancement of existing products, and such delays will likely occur in the future. If we are unable, due to resource constraints or technological or other reasons, to develop and introduce new or enhanced products in a timely manner, if such new or enhanced products do not achieve sufficient market acceptance, or if such new product introductions decrease demand for existing products, our operating results would decline and our business would not grow.

 

**The continued growth of the Internet as a medium for telephone services is uncertain. If this growth does not continue, our business and financial condition could be materially adversely affected.**

 

The continued market acceptance of the Internet as a medium for telephone services is subject to a high level of uncertainty. Our future success will depend on our ability to significantly increase revenues, which will require widespread acceptance of the Internet as a medium for telephone communications. There can be no assurance that the number of consumers using the Internet for telephone communications will grow. If use of the Internet for telephone communications does not continue to grow, our business and financial condition could be materially adversely affected.

 

**Our business faces security risks. Our failure to adequately address these risks could have an adverse effect on our business and reputation.**

 

A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our VoIP operations. We may be required to expend significant capital and resources to protect against the threat of such security breaches or to alleviate problems caused by such breaches. Consumer concern over Internet security has been, and could continue to be, a barrier to commercial activities requiring consumers to send their credit card information over the Internet. Computer viruses, break-ins, or other security problems could lead to misappropriation of proprietary information and interruptions, delays, or cessation in service to our customers. Moreover, until more comprehensive security technologies are developed, the security and privacy concerns of existing and potential customers may inhibit the growth of the Internet as a merchandising medium. Ourfailure to adequately address these risks could have an adverse effect on our business and reputation.

 

**The Company’s ability to do business depends, in part, on the Company’s ability to license certain technology from third parties.**

 

The Company relies on certain technology licensed from third parties, and there can be no assurance that these third party technology licenses will be available to the Company on acceptable commercial terms or at all. If the Company cannot license the technology it needs on acceptable commercial terms, then its business, financial condition and results of operations will be materially and adversely affected.

 

**Products and services like the ones we offer change rapidly, therefore, we must continually improve them. However, our need to invest in research and development may prevent us from ever being profitable.**

 

Products and services like the ones we offer are continually upgraded in an effort to make them work faster, be easier to us and provide more options. Our industry is characterized by the need for continued investment in research and development. If we fail to invest sufficiently in research and development, then our products could become less attractive to 

 

30

 

 

potential customers, which could have a material adverse effect on our results of operations and financial condition. However, any investment in research and development and technological innovation will cause our operating costs to increase. This could prevent us from ever achieving profitability.

 

**We sell a service that allows our customers to make land-line or mobile telephone calls over the Internet. Intellectual property infringement claims brought against us, even without merit, could require us to enter into costly licenses or deprive us of the technology we need.**

 

The service we sell allows our users to make land-line or mobile telephone calls over the Internet. Third parties may claim that the technology we develop or license infringes their proprietary rights. Any claims against us may affect our business, results of operations and financial conditions. Any infringement claims, even those without merit, could require that we pay damages or settlement amounts or could require us to develop non-infringing technology or enter into costly royalty or licensing agreements to avoid service implementation delays. Any litigation or potential litigation could result in product delays, increased costs or both. In addition, the cost of litigation and the resulting distraction of our management resources could have a material adverse effect on our results of operations and financial condition. If successful, a claim of product infringement could completelydeprive us of the technology we need.

 

**We have developed our underlying software and we try to protect it from being used by others in our industry. Failure to protect our intellectual property rights could have a material adverse effect on our business.**

 

We rely on copyright, trade secret and patent laws to protect our content and proprietary technologies and information, including the software that underlies our products and services. Additionally, we have taken steps that we believe will be adequate to establish, protect and enforce our intellectual property rights. There can be no assurance that such laws and steps will provide sufficient protection to our intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain rights to use our products or technologies.

 

We have pending several patent applications related to embedded software technology and methods of use. There can be no assurance that these patents will be issued. On February 28, 2008, the Company was awarded Patent #7,336,654 and on September 24, 2008 a Notice of Allowance for Patent Application #11/078,059 “Dynamically Adapting The Transmission Rate of Packets in Real-Time VoIP Communications to the Available Bandwidth” from the United States Patent Trademark Office. Even if the balance of patents pending are issued, the limited legal protection afforded by patent, trademark, trade secret and copyright laws may not be sufficient to protect our proprietary rights to the intellectual property covered by these patents.

 

Furthermore, the laws of many foreign countries in which we do business do not protect intellectual property rights to the same extent or in the same manner as do the laws of the United States. Although we have implemented and will continue to implement protective measures in those countries, these efforts may also not be successful. Additionally, even if our domestic and international efforts are successful, our competitors may independently develop non-infringing technologies that are substantially similar or superior to our technologies.

 

**If our products contain defects, then our sales would be likely to suffer, and we may even be exposed to legal claims. Defects in our products could have a material adverse impact on our business and operating results.**

 

Our business strategy calls for the development of new products and product enhancements which may from time to time contain defects or result in failures that we did not detect or anticipate when introducing such products or enhancements to the market. In addition, the markets in which our products are used are characterized by a wide variety of standard and non-standard configurations and by errors, failures and bugs in third-party platforms that can impede proper operation of our products. Despite product testing, defects may still be discovered in some new products or enhancements after the products or enhancements are delivered to customers. The occurrence of these defects could result in product returns, adverse publicity, loss of or delays in market acceptance of our products, delays or cessation of service to our customers or legal claims by customers against us. Any of theseoccurrences could have a material adverse impact on our business and operating results.

 

**Sales to customers based outside the United States have recently accounted for a significant portion of the Company’s operating revenues, which exposes the Company to risks inherent in international operations**. 

 

International sales represented approximately 30% of the Company’s recurring revenues for the quarter ended September 30, 2008. One of our goals is to increase our foreign sales in order to increase our revenues. However, international sales are subject to a number of risks, including changes in foreign government regulations, laws, and communications standards; export license requirements; currency fluctuations, tariffs and taxes; other trade barriers; difficulty in collecting accounts receivable; longer accounts receivable collection cycles; difficulty in managing across disparate geographic areas; 

 

31

 

 

difficulties associated with enforcing agreements and collecting receivables through foreign legal systems; expenses associated with localizing products for foreign markets; and political and economic instability, including disruptions of cash flow and normal business operations that may result from terrorist attacks or armed conflict.

 

If the relative value of the U.S. dollar in comparison to the currency of our foreign customers should increase, as it has in the last few months then the resulting effective price increase of our products to these foreign customers could result in decreased sales. In addition, to the extent that general economic downturns impact our customers, the ability of these customers to purchase our products could be adversely affected. Payment cycles for international customers are typically longer than those for customers in the United States. 

 

If we are able to increase our foreign sales significantly, the occurrence of any of the foregoing could have a material adverse impact on our results of operations.

 

**Doing business over the Internet may become subject to governmental regulation. If these regulations substantially increase the cost of doing business, they could have a material adverse effect on our business, results of operations and financial condition.**

 

We are not currently subject to direct federal, state, or local regulation, and laws or regulations applicable to access to or commerce on the Internet, other than regulations applicable to businesses generally. However, due to the increasing popularity and use of the Internet and other VoIP services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or other VoIP services covering issues such as user privacy, “indecent” materials, freedom of expression, pricing content and quality of products and services, taxation, advertising, intellectual property rights and information security. The adoption of any such laws or regulations might also decrease the rate of growth of Internet use, which in turn could decrease the demand for our products and services or increase the cost of doing business or in some other manner have a materialadverse effect on our business, results of operations, and financial condition. Although it is too early to gauge the impact of the most recent election, the change in administration could ultimately impact existing laws and regulations relating to our business sector.

 

**The Company may become subject to litigation.**

 

The Company may be subject to claims involving how the Company conducts its business or the market for or issuance of the Common Stock or other securities. Any such claims against the Company may affect its business, results of operations and financial conditions. Such claims, including those without merit, could require the Company to pay damages or settlement amounts and would require a substantial amount of time and attention from the Company’s senior management as well as considerable legal expenses. Although the Company does not anticipate that its activities would warrant such claims, there can be no assurances that such claims will not be made.

 

**We depend on third-party vendors for key Internet operations including broadband connectivity, termination capability and different operating systems. The loss of any of our vendors could have a material adverse effect on our business, results of operations and financial condition.**

 

We rely on our relationships with third party vendors of Internet development tools and technologies including providers of switches, network termination and operational and billing specialized operations. There can be no assurance that the necessary cooperation from third parties will be available on acceptable commercial terms or at all. Although there are a number of providers of these services, if we are unable to develop and maintain satisfactory relationships with such third parties on acceptable commercial terms, or if our competitors are better able to leverage such relationships, then our business, results of operations and financial condition will be materially adversely affected. 

 

**We may not be able to successfully compete with current or future competitors.**

 

The market for VoIP service providers and business solutions providers is highly competitive, and rapidly changing. Since the Internet’s commercialization in the early 1990’s, the number of websites on the Internet competing for the attention and spending of consumers and businesses has proliferated. With no substantial barriers to entry, we expect that competition will continue to intensify. In addition to intense competition from VoIP services providers, we also face competition from traditional telephone systems integrators and providers.

 

Some of our competitors, such as Vonage and Skype, have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and larger existing customer bases than we have. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and to devote greater resources to the development, promotion, and sale of their products or services than we can. There can be no 

 

32

 

 

assurance that we will be able to compete successfully against current or future competitors. If we cannot do so, then our business, financial condition and results of operations will be materially and adversely affected.

 

**We may not be able to comply with the FCC’s requirements to provide 911 service to our customers. Our inability to comply with these requirements could have an adverse effect on our business and results of operations.**

 

On June 3, 2005 the Federal Communications Commission (“FCC”) issued the VoIP 911 Order adopting rules that require interconnected VoIP providers to provide their new and existing subscribers with 911 service no later than November 28, 2005. On November 5, 2005, the FCC issued a public notice stating that VoIP providers who failed to comply with the VoIP 911 Order by November 28, 2005 would not be required to discontinue the provision of interconnected VoIP service to any existing customers, but would be required to discontinue marketing VoIP service and accepting new customers for VoIP service in all areas where the providers are not transmitting 911 calls to the appropriate PSAP (public safety answering point) in full compliance with the FCC’s rules. Because we have not fully complied with the VoIP 911 Order, we are subject to this restriction. We cannot be certain that wewill be able to fully comply with this VoIP 911 Order. Because it would prevent us from marketing and accepting new customers in certain areas, our inability to comply with the VoIP 911 Order may have an adverse effect on our business and results of operations. Although it is too early to gauge the impact of the most recent election, the change in administration could ultimately impact existing FCC laws and regulations relating to our business sector.

 

 
 
******ITEM 2.****** **********
******UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEED****S**********
 

In July 2008, we issued to two institutions and five individuals, warrants to purchase an aggregate of 8,572,500 shares of Common Stock at an exercise price of $0.10 per share, vested immediately upon the date of grant with a five-year expiration period. The warrants were issued in connection with the execution of promissory notes in the aggregate amount of $1,750,000 made to us. Of this amount, 5,000,000 warrants were issued to one individual who is one of our directors and another individual who is an officer and director for which a loan was made to us for $1,000,000 of which half was guaranteed by an officer and director of ours. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the warrants to usregarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by us of a registration statement.

 

Also in July 2008, we issued a total of 127,491 shares of Common Stock to one individual in lieu of $12,479 of debt owed by us to a consultant for services performed for us. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the shares to us regarding their investment interest and sophistication, among other things. 

 

In August 2008, we issued to six individuals and three institutions, warrants to purchase an aggregate of 19,500,000 shares of Common Stock at an exercise prices ranging from of $0.08 to $0.10 per share, vested immediately upon the date of grant with a five-year expiration period. The warrants were issued in connection with the execution of modifications to promissory notes in the aggregate amount of $1,850,000 made to us. Of this amount, 10,000,000 warrants were issued to one individual who is one of our directors and another individual who is an officer and director for which a loan was made to us for $1,000,000 of which half was guaranteed by an officer and director of ours. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representationsby the recipients of the warrants to us regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by us of a registration statement.

 

Also in August 2008, we issued to one individual and one institution, warrants to purchase an aggregate of 1,800,000 shares of Common Stock at an exercise price of $0.12 per share, which vest according to performance. The warrants were issued in connection with consulting services performed for us. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the warrants to us regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by us of a registration statement.

 

Also in August 2008, we issued a total of 56,457,026 shares of our Common Stock in exchange for the exercise of 146,653,041 warrants to six individuals and two institutions, one institution of which is an affiliate of the Company who 

 

33

 

 

exercised 72,180,357 cashless warrants in exchange for 29,755,357 shares of Common Stock. Of the total amount of shares issued, 11,953,177 shares of Common Stock were issued in exchange for 32,652,386 cashless warrants from one individual who is one of our directors and another individual who is an officer and director of ours. These shares of our Common Stock shall be issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the shares to us regarding their investment interest and sophistication, among other things. However, all of these shares above are entitled to registration rights for which we have agreed to file a registration statement. The Company entered into a Lock-Up Agreement with the shareholder whereby the shareholder will be restrictedto sell up to 1,400,000 common shares of the Company per month for a period of twelve months and provided that the Company’s market capitalization is in excess of $100 million twelve months from the date of exercise, the shareholder shall be restricted to sell up to 1,400,000 common shares of the Company per month for a second period of twelve months.

 

Also in August 2008, we issued a total of 499,023 shares of Common Stock to one individual in lieu of $34,139 of debt owed by us to a consultant for services performed for us. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the shares to us regarding their investment interest and sophistication, among other things. 

 

In September 2008, we issued to ten individuals, warrants to purchase an aggregate of 3,850,000 shares of Common Stock at an exercise prices ranging from of $0.08 to $0.10 per share, vested immediately upon the date of grant with a five-year expiration period. The warrants were issued in connection with the execution of modifications to promissory notes in the aggregate amount of $800,000 made to us. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the warrants to us regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by us of a registration statement.

 

Also in September 2008, we issued to two individuals, warrants to purchase an aggregate of 1,100,000 shares of Common Stock at an exercise price of $0.10 per share, which vest according to performance. The warrants were issued in connection with consulting services performed for us. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the warrants to us regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by us of a registration statement.

Also in September 2008, we issued a total of 400,000 shares of Common Stock to one individual in lieu of $30,000 of debt owed by us to a consultant for services performed for us. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. We based such reliance upon factual representations by the recipients of the shares to us regarding their investment interest and sophistication, among other things. 

Also in September 2008, the Company issued an aggregate of 4,000,000 shares of Common Stock to the holder of Series E Convertible Preferred Stock in exchange for the conversion of 800 shares of Series E Convertible Preferred stock. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the common shares to the Company regarding their investment interest and sophistication, among other things.

 
 
******ITEM 3.****** **********
******DEFAULTS UPON SENIOR SECURITIE****S**********
 

None. 

 
 
******ITEM 4.****** **********
******SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER****S**********
 

None. 

 
 
******ITEM 5.****** **********
******OTHER INFORMATIO****N**********
 

(a) 

None.

 

 

34

 

 

 

(b) 

There were no changes to the procedures by which security holders may recommend nominees to our board of directors.

 

**ITEM 6.**

**EXHIBITS** 

 

3.1

Articles of Incorporation, as amended (1)

 

 

 

3.2

Bylaws, as amended (1)

 

3.3

Certificate of Designations of Rights and Preferences for Series D Preferred Stock (2)

 

3.4

Amendment to our Articles of Incorporation (3)

 

3.5

Amendment to our Articles of Incorporation (3)

 

3.6

Certificate of Designation of Rights and Preferences for Series E Preferred Stock (4)

 

3.7

Amendment to our Articles of Incorporation dated April 17, 2006 (5)

 

3.8

Amendment to our Articles of Incorporation (6)

 

10.1

Form of Non-Negotiable Secured Promissory Note (7)

 

10.2

Form of Term Loan Agreement (7)

 

10.3

Form of Warrant (7)

 

10.4

10.5

Form of Registration Rights Agreement (7)

Lock-Up Agreement dated August 12, 2008, between the Company and Vestal Venture Capital *

 

31.1

Rule 13a-14(a)/15d-14(a) Certification by our Chief Executive Officer *

 

32.1

Rule 13a-14(a)/15d-14(a) Certification by our Principal Financial Officer *

 

32.1

Section 1350 Certification by our Chief Executive Officer and Principal Financial Officer *

 

*

Filed herewith

 

(1)

Filed with our Annual Report on Form 10-KSB for the year ended December 31, 2003.

 

(2)

Filed with our Current Report on Form 8-K filed August 13, 2004.

 

(3)

Filed with our Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004.

 

(4)

Filed with our Current Report on Form 8-K filed November 22, 2005.

 

(5)

Filed with our Quarterly Report on Form 10-QSB for the quarter ended March 31, 2006.

 

(6)

Filed with our Schedule 14A Definitive Proxy Statement filed on June 22, 2007.

 

(7)

Filed with our Current Report on Form 8-K filed October 3, 2008.

 

 

35

 

 

 

 

 

 

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

******i2 TELECOM INTERNATIONAL, INC.******
 

(Registrant)

 

 

Date: November 14, 2008

By: 

/s/ Paul R. Arena

 

 

Paul R. Arena

 

 

Chief Executive Officer 

 

 

 

 

36

 

 

 **Exhibit 31.1**

**CERTIFICATION**

 

I, Paul R. Arena, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of i2 Telecom International, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a) 

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b) 

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a) 

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b) 

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date:

November 14, 2008

/s/ Paul R. Arena______________________

Paul R. Arena

Chief Executive Officer (Principal Executive Officer)

 

37

 

 

**Exhibit 31.2**

**CERTIFICATION**

 

I, Paul R. Arena, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of i2 Telecom International, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a) 

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b) 

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:

November 14, 2008

/s/ Paul R. Arena______________________

Paul R. Arena

Chief Financial Officer (Principal Financial 

and Accounting Officer)

 

38

 

 

**Exhibit 32.1**

 

**CERTIFICATION**

 

In connection with the periodic report of i2 Telecom International, Inc. (the “Company”) on Form 10-Q for the quarter ending September 30, 2008 as filed with the Securities and Exchange Commission (the “Report”), I, Paul R. Arena, Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

 

(1)      The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and 

 

(2)      The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. 

 

 

Date:

November 14, 2008

/s/ Paul R. Arena______________________

Paul R. Arena

Chief Executive and Financial Officer (Principal Executive and Financial and Accounting Officer)

 

 

39

 

 

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