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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005.



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the transition period from



Commission file number: 0-27704



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i2 Telecom International, Inc.

(Exact Name of Small Business Issuer as
Specified in its Charter)



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|                                                               |  |                                                 
|-------------------------------------------------------------- |  | ------------------------------------------------
|Washington                                                     |  | 91-1426372                                      
|(State or Other Jurisdiction of Incorporation or Organization) |  | (IRS Employer Identification No.)               
|                                                               | 
|1200 Abernathy Rd. Suite 1800 Atlanta, GA 30328                |  | (770) 512-7174                                  
|(Address of Principal Executive Offices)                       |  | (Issuers Telephone Number, Including Area Code)



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



As of May 16, 2005, the registrant had 36,903,522 shares of common stock outstanding.



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##### Table of Contents

INDEX



|              |  |                                                             |  |     
|------------- |  | ----------------------------------------------------------- |  | ----
|              |  |                                                             |  | Page
|PART I.       |  | FINANCIAL INFORMATION                                       |  |     
|              |  |                                                            
|Item 1.       |  | Financial Statements                                        |  | 3   
|              |  |                                                            
|Item 2.       |  | Managements Discussion and Analysis or Plan Of Operation   |  | 17  
|              |  |                                                            
|Item 3.       |  | Controls and Procedures                                     |  | 21  
|              |  |                                                            
|PART II.      |  | OTHER INFORMATION                                           |  |     
|              |  |                                                            
|Item 1.       |  | Legal Proceedings                                           |  | 22  
|              |  |                                                            
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 22  
|              |  |                                                            
|Item 6.       |  | Exhibits                                                    |  | 23  
|              | 
|SIGNATURES    |  | 24                                                         
|              | 
|EXHIBIT INDEX |  | 25                                                         



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



i2
TELECOM INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)



ASSETS



|                                                                                                 |  |                |           |                   |   |          
|------------------------------------------------------------------------------------------------ |  | -------------- | --------- | ----------------- | - | ---------
|                                                                                                 |  | March 31, 2005 |           | December 31, 2004
|Current Assets                                                                                   |  |                |           |                   |   |          
|Cash                                                                                             |  | $              | 154,315   |                   | $ | 231,127  
|Accounts Receivable, Net of Allowance for Doubtful Accounts of $75,000 and $75,000, respectively |  |                | 276,316   |                   |   | 232,371  
|Inventories                                                                                      |  |                | 1,151,787 |                   |   | 961,056  
|Prepaid Expenses and Other Current Assets                                                        |  |                | 266,489   |                   |   | 231,966  
|                                                                                                 |  |                |           |                   |   |          
|Total Current Assets                                                                             |  |                | 1,848,907 |                   |   | 1,656,520
|                                                                                                 |  |                |           |                   |   |          
|Property and Equipment, Net                                                                      |  |                | 1,216,393 |                   |   | 1,267,763
|                                                                                                 |  |               
|Other Assets                                                                                     |  |                |           |                   |   |          
|Intangible Assets, Net of Accumulated Amortization of $490,813 and $435,507,respectively         |  |                | 2,841,449 |                   |   | 2,880,579
|Deposits                                                                                         |  |                | 71,552    |                   |   | 78,164   
|                                                                                                 |  |                |           |                   |   |          
|Total Other Assets                                                                               |  |                | 2,913,001 |                   |   | 2,958,743
|                                                                                                 |  |                |           |                   |   |          
|Total Assets                                                                                     |  | $              | 5,978,301 |                   | $ | 5,883,026
|                                                                                                 |  |                |           |                   |   |          



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i2 TELECOM INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)



LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)



|                                                                                                                                       |  |                |             |   |                   |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                       |  | March 31, 2005 |             |   | December 31, 2004 |  
|Current Liabilities                                                                                                                    |  |                |             |   |                   |   |             |  
|Accounts Payable and Accrued Expenses                                                                                                  |  | $              | 1,745,822   |   |                   | $ | 1,303,656   |  
|Deferred Revenue                                                                                                                       |  |                | 99,827      |   |                   |   | 99,901      |  
|Notes Payable-Current                                                                                                                  |  |                | 300,000     |   |                   |   | 100,000     |  
|                                                                                                                                       |  |                |             |   |                   |   |             |  
|Total Current Liabilities                                                                                                              |  |                | 2,145,649   |   |                   |   | 1,503,557   |  
|                                                                                                                                       |  |               
|Long-Term Debt  Notes Payable                                                                                                         |  |                | -0-         |   |                   |   | -0-         |  
|                                                                                                                                       |  |                |             |   |                   |   |             |  
|Total Liabilities                                                                                                                      |  |                | 2,145,649   |   |                   |   | 1,503,557   |  
|                                                                                                                                       |  |                |             |   |                   |   |             |  
|Stockholders Equity (Deficit)                                                                                                         |  |                |             |   |                   |   |             |  
|Preferred Stock, No Par Value, 5,000,000 Shares Authorized, 4,185 Shares and 4,175 Shares Issued and Outstanding, respectively         |  |                | 4,160,000   |   |                   |   | 4,175,000   |  
|Common Stock, No Par Value, 10,000,000 Shares Authorized, 36,903,522 Shares and 34,381,172 Shares Issued and Outstanding,
respectively |  |                | 14,356,074  |   |                   |   | 12,949,148  |  
|Restricted Units                                                                                                                       |  |                | 441,851     |   |                   |   | 662,777     |  
|Additional Paid-In Capital                                                                                                             |  |                | 710,714     |   |                   |   | 324,979     |  
|Accumulated Deficit During The Development Stage                                                                                       |  |                | (15,835,987 | ) |                   |   | (13,732,435 | )
|                                                                                                                                       |  |                |             |   |                   |   |             |  
|Total Stockholders Equity (Deficit)                                                                                                   |  |                | 3,832,652   |   |                   |   | 4,379,469   |  
|                                                                                                                                       |  |                |             |   |                   |   |             |  
|Total Liabilities and Stockholders Equity (Deficit)                                                                                   |  | $              | 5,978,301   |   |                   | $ | 5,883,026   |  
|                                                                                                                                       |  |                |             |   |                   |   |             |  



4



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##### Table of Contents

i2 TELECOM INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|---------------------------------------------------------------------------------------- |  | ------------------------------------------- | ----------- | - | ----------------------------------------- | - | ---------- | ----------------------------------------- |  | - | ---------- | -
|                                                                                         |  | Cumulative From Inception to March 31, 2005 |             |   | For the Three Months Ended March 31, 2005 |   |            | For the Three Months Ended March 31, 2004 | 
|Revenue                                                                                  |  | $                                           | 880,629     |   |                                           | $ | 186,308    |                                           |  | $ | 127,444    |  
|Cost of Revenue                                                                          |  |                                             | 1,094,464   |   |                                           |   | 117,026    |                                           |  |   | 173,383    |  
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Gross Profit (Loss)                                                                      |  |                                             | (213,835    | ) |                                           |   | 69,282     |                                           |  |   | (45,939    | )
|General and Administrative Expenses                                                      |  |                                             | 14,821,893  |   |                                           |   | 1,753,013  |                                           |  |   | 1,429,129  |  
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Loss From Operations                                                                     |  |                                             | (15,035,728 | ) |                                           |   | (1,683,731 | )                                         |  |   | (1,475,068 | )
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Other Income (Expense)                                                                   |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Interest Income                                                                          |  |                                             | 13,633      |   |                                           |   | 396        |                                           |  |   | 66         |  
|Interest Expense                                                                         |  |                                             | (262,936    | ) |                                           |   | (4,194     | )                                         |  |   | (10,298    | )
|Gain on Forbearance of Debt                                                              |  |                                             | 27,643      |   |                                           |   | -0-        |                                           |  |   | -0-        |  
|Loss on Disposal of Assets                                                               |  |                                             | (593        | ) |                                           |   | -0-        |                                           |  |   | -0-        |  
|Loss on Subscription List                                                                |  |                                             | (118,000    | ) |                                           |   | -0-        |                                           |  |   | -0-        |  
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Total Other Income (Expense)                                                             |  |                                             | (340,253    | ) |                                           |   | (3,798     | )                                         |  |   | (10,232    | )
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Loss Before Cumulative Effect of Accounting Change                                       |  |                                             | (15,375,981 | ) |                                           |   | (1,687,529 | )                                         |  |   | (1,485,300 | )
|Cumulative Effect of Accounting Change on Years Prior to 2004, Net of Income Tax of $-0- |  |                                             | (340,117    | ) |                                           |   | (340,117   | )                                         |  |   | -0-        |  
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Net Income (Loss)                                                                        |  | $                                           | (15,716,098 | ) |                                           | $ | (2,027,646 | )                                         |  | $ | (1,485,300 | )
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Weighted Average Common Shares:                                                          |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Basic                                                                                    |  |                                             | 13,303,383  |   |                                           |   | 35,390,091 |                                           |  |   | 6,212,247  |  
|Diluted                                                                                  |  |                                             | 29,614,387  |   |                                           |   | 40,327,674 |                                           |  |   | 33,052,704 |  
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Basic Earnings Per Common Share:                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Loss Before Cumulative Effect of Accounting Change                                       |  | $                                           | (1.16       | ) |                                           | $ | (.05       | )                                         |  | $ | (.24       | )
|Cumulative Effect of Accounting Change                                                   |  |                                             | (.02        | ) |                                           |   | (.01       | )                                         |  |   | .00        |  
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Net Loss                                                                                 |  | $                                           | (1.18       | ) |                                           | $ | (.06       | )                                         |  | $ | (.24       | )
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Diluted Earnings Per Common Share                                                        |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Loss Before Cumulative Effect of Accounting Change                                       |  | $                                           | (.51        | ) |                                           | $ | (.04       | )                                         |  | $ | (.04       | )
|Cumulative Effect of Accounting Change                                                   |  |                                             | (.01        | ) |                                           |   | (.01       | )                                         |  |   | .00        |  
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Net Loss                                                                                 |  | $                                           | (.52        | ) |                                           | $ | (.05       | )                                         |  | $ | (.04       | )
|                                                                                         |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  





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i2 TELECOM INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                 |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|-------------------------------------------------------------------------------- |  | ------------------------------------------- | ----------- | - | ----------------------------------------- | - | ---------- | ----------------------------------------- |  | - | ---------- | -
|                                                                                 |  | Cumulative From Inception to March 31, 2005 |             |   | For the Three Months Ended March 31, 2005 |   |            | For the Three Months Ended March 31, 2004 | 
|Cash Flows From Operations                                                       |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Net Loss From Continuing Operations                                              |  | $                                           | (15,716,098 | ) |                                           | $ | (2,027,646 | )                                         |  | $ | (1,485,300 | )
|Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Bad Debts                                                                        |  |                                             | 75,000      |   |                                           |   | -0-        |                                           |  |   | -0-        |  
|Depreciation and Amortization                                                    |  |                                             | 963,992     |   |                                           |   | 138,307    |                                           |  |   | 106,294    |  
|Interest Paid Via Issuance of Stock                                              |  |                                             | 192,604     |   |                                           |   | -0-        |                                           |  |   | -0-        |  
|Gain on Forbearance of Debt                                                      |  |                                             | (27,643     | ) |                                           |   | -0-        |                                           |  |   | -0-        |  
|Loss on Disposal of Assets                                                       |  |                                             | 593         |   |                                           |   | -0-        |                                           |  |   | -0-        |  
|Stock Compensation                                                               |  |                                             | 1,430,170   |   |                                           |   | 45,618     |                                           |  |   | -0-        |  
|Cumulative Effect of Accounting Change                                           |  |                                             | 340,117     |   |                                           |   | 340,117    |                                           |  |   | -0-        |  
|(Increase) Decrease In:                                                          |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Accounts Receivable                                                              |  |                                             | (351,316    | ) |                                           |   | (43,945    | )                                         |  |   | (96,285    | )
|Inventories                                                                      |  |                                             | (957,025    | ) |                                           |   | (190,731   | )                                         |  |   | (21,673    | )
|Prepaid Expenses                                                                 |  |                                             | (222,546    | ) |                                           |   | (34,523    | )                                         |  |   | (209,074   | )
|Other Assets                                                                     |  |                                             | (71,552     | ) |                                           |   | 6,612      |                                           |  |   | (2,913     | )
|Increase (Decrease) In:                                                          |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Accounts Payable and Accrued Expenses                                            |  |                                             | 1,510,680   |   |                                           |   | 442,166    |                                           |  |   | 133,349    |  
|Deferred Revenue                                                                 |  |                                             | 99,827      |   |                                           |   | (74        | )                                         |  |   | 1,329      |  
|                                                                                 |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Net Cash Used In Operating Activities                                            |  |                                             | (12,733,197 | ) |                                           |   | (1,324,099 | )                                         |  |   | (1,574,273 | )
|                                                                                 |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Cash Flows From Investing Activities                                             |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Proceeds from Disposal of Assets                                                 |  |                                             | 6,433       |   |                                           |   | -0-        |                                           |  |   | -0-        |  
|Equipment Purchases                                                              |  |                                             | (1,677,833  | ) |                                           |   | (31,631    | )                                         |  |   | (62,934    | )
|Payments for Patents and Trademarks                                              |  |                                             | (141,344    | ) |                                           |   | (16,176    | )                                         |  |   | (16,325    | )
|Investment in Subsidiary                                                         |  |                                             | (1,239,422  | ) |                                           |   | -0-        |                                           |  |   | -0-        |  
|                                                                                 |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Net Cash Used In Investing Activities                                            |  |                                             | (3,052,166  | ) |                                           |   | (47,807    | )                                         |  |   | (79,259    | )
|                                                                                 |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Cash Flows From Financing Activities                                             |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Proceeds From Shareholder Loans                                                  |  |                                             | 405,500     |   |                                           |   | 174,500    |                                           |  |   | -0-        |  
|Payments of Shareholder Loans                                                    |  |                                             | (305,500    | ) |                                           |   | (74,500    | )                                         |  |   | (225,000   | )
|Proceeds from Issuance of Convertible Notes                                      |  |                                             | 6,885,000   |   |                                           |   | -0-        |                                           |  |   | -0-        |  
|Proceeds From Notes Payable                                                      |  |                                             | 300,000     |   |                                           |   | 200,000    |                                           |  |   | -0-        |  
|Payment of Notes Payable                                                         |  |                                             | (390,943    | ) |                                           |   | -0-        |                                           |  |   | -0-        |  
|Issuance of Common Stock                                                         |  |                                             | 2,997,278   |   |                                           |   | 496,000    |                                           |  |   | -0-        |  
|Issuance of Preferred Stock                                                      |  |                                             | 6,120,224   |   |                                           |   | 575,000    |                                           |  |   | 2,000,000  |  
|Proceeds from Stock Notes Receivable                                             |  |                                             | 46,491      |   |                                           |   | -0-        |                                           |  |   | -0-        |  
|Dividends Paid                                                                   |  |                                             | (119,889    | ) |                                           |   | (75,906    | )                                         |  |   | -0-        |  
|Cash From Subsidiary Acquired Via Stock Exchange                                 |  |                                             | 1,517       |   |                                           |   | -0-        |                                           |  |   | -0-        |  
|                                                                                 |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Net Cash Provided By Financing Activities                                        |  |                                             | 15,939,678  |   |                                           |   | 1,295,094  |                                           |  |   | 1,775,000  |  
|                                                                                 |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Increase (Decrease) in Cash                                                      |  |                                             | 154,315     |   |                                           |   | (76,812    | )                                         |  |   | 121,468    |  
|Balance, Beginning of Period                                                     |  |                                             | -0-         |   |                                           |   | 231,127    |                                           |  |   | 671,421    |  
|                                                                                 |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  
|Balance, End of Period                                                           |  | $                                           | 154,315     |   |                                           | $ | 154,315    |                                           |  | $ | 792,889    |  
|                                                                                 |  |                                             |             |   |                                           |   |            |                                           |  |   |            |  



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i2 TELECOM INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL

STATEMENTS



NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLOCIES



Item 1. Description of the Business



Background of the Company



i2 Telecom International, Inc., a Washington corporation formerly known as
Digital Data Networks, Inc. (the Company), 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 1200 Abernathy Rd., Suite 1800, Atlanta, GA 30328, and the Companys telephone
number at that address is (770) 512-7174. The Company maintains a website at www.i2telecom.com.



From October 17, 1988, until February 27, 2004, the Company was a wireless, passenger communication and advertising company, principally engaged in
selling digital advertising space through the operation of a digital information network, utilizing digital radio transmission technology to display current news, information and advertising to riders on-board public transit vehicles. From 1991
through February 2004, the Company operated a digital information network in Dallas, Texas under the assumed name The Transit Network on the Dallas Area Rapid Transit (DART) bus and rail system.



In February 1996, the Company completed an initial public offering of shares
of its common stock, no par value per share (the Common Stock), and raised net cash proceeds of approximately $5.8 million.



On February 26, 2004, a newly-formed, wholly-owned subsidiary of the Company merged with and into i2 Telecom International, Inc., a Delaware corporation
(i2 Delaware), with i2 Delaware 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, i2 Delaware and certain stockholders of the Company and i2 Delaware signatory thereto (the Merger Agreement). In connection with the Merger, former stockholders of i2 Delaware 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 i2 Delaware. 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 i2 Delaware, 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 i2 Delaware were appointed as officers of the Company.



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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 IUTI.



On December 8, 2004, the Company relocated its corporate
headquarters to Atlanta, 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 i2 Delaware. The Companys operations
as currently conducted are described below.



Nature of Business



The Company, through its subsidiary, i2 Delaware,
provides low-cost telecommunications services employing next-generation Voice over Internet Protocol (VoIP) technology. These operations are based in Atlanta, Georgia, Redwood City, California and China. Through i2 Delaware, the Company
controls its own proprietary technology and outsources the majority of its production and service functions with strategic partners. The Company, through i2 Delaware, provides the VoiceStick, micro gateway adapters (InternetTalker(TM)), 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 and other integrated access devices
(IADs) along with recurring monthly subscriptions, call minute termination. The Company believes its proprietary technology provides meaningful advantages as compared to the technology of other VoIP providers particularly in the areas of
quality of service, flexibility (i.e., broadband and dial-up capability in the same unit) and ease of use.



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;
| | - |  | --------------------------------------



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| |  |  | low cost long distance calling worldwide;
| | - |  | -----------------------------------------



| |  |  | broadband access via your laptop with the Companys VoiceStick;
| | - |  | ----------------------------------------------------------------



| |  |  | broadband and dial-up technology in the Companys InternetTalker IAD;
| | - |  | ----------------------------------------------------------------------



| |  |  | plug and play technology using traditional phones without professional installation; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | unlimited global calling among VoiceStick and InternetTalker IAD users with a minimal monthly subscription.
| | - |  | -------------------------------------------------------------------------------------------------------------



The Companys management intends 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 these opportunities by incurring debt, then such debt may not be available to the Company on favorable terms, if at all.



Liquidity and Going Concern



It is imperative that the Company raise capital in the near-term in order to continue as a going concern. Without raising additional capital, the Company
likely will not be able to satisfy these liabilities unless they are modified or restructured. There is no guarantee that (i) additional capital will be available to the extent required, or that if available, it will be available on terms acceptable
to the Company, or (ii) the current and other liabilities due in the near-term can be modified or restructured. If the Company can not raise additional capital or modify or restructure such liabilities, then the Company may be unable to pursue its
business plan and may be forced to cease doing business.



As
can be seen from the Companys filings over the past year, the Company has experienced net losses and negative cash flows from operations and has an accumulated deficit at March 31, 2005 of approximately $15,835,987 million and a negative
working capital position. The ability of the Company to generate positive cash flows from operations and net income is dependent, among other things, on market conditions, the recovery of recorded assets, cost control, identifying and securing
additional revenue sources, and the Companys ability to raise capital under acceptable terms. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. As noted in an
explanatory paragraph in the Report of Independent Certified Public Accountants on the Companys consolidated financial statements for the year ended December 31, 2004, as set forth in the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2004, filed with the Securities and Exchange Commission (the SEC), these conditions have raised substantial doubt about the companys ability to continue as a going concern.



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##### Table of Contents

Critical Accounting Policies



The policies identified below are considered as relatively critical to the Companys business operations and the
understanding of the Companys results of operations. The impact and any associated risks related to these policies on the Companys business operations is discussed throughout Managements Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Financial Statements included
in this Annual Report. Preparation of this Annual Report on Form 10-KSB requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, and the
reported amounts of revenue and expenses. There can be no assurance that actual results will not differ from those estimates.



Accounting for the Reverse Merger



On February 27, 2004, subsequent to the Merger, the Company sold substantially all of its operating assets relating to its digital information network to
InTransit Media. Pursuant to the Asset Purchase Agreement, the assets were exchanged for InTransit Media assuming certain liabilities and obligations relating to thereto.



The Merger and Asset Sale are being accounted for as a transfer and exchange and are considered merely a change in legal
organization and not a change in the entity. Therefore, all assets and liabilities are transferred at historical cost and the gain on sale of assets is not included in the statements of operations and cash flows for the year ending December 31,
2004.



As of the date of the Merger, the Companys
accumulated deficit was $13,700,794. In accounting for the Merger, the accumulated deficit of the Company has been eliminated. The balance of accumulated deficit as of the end of the period represents the accumulated deficit of i2 Delaware since
inception. The other capital accounts, including common stock, preferred stock and additional paid-in capital represents the stock issued by the surviving corporation. The write-off the Companys accumulated deficit has been adjusted by a
reduction to the other capital accounts starting with additional paid-in capital, then preferred stock, and the balance against common stock. Since the Company had no outstanding preferred stock prior to the Merger, the preferred stock of the
Company has been reduced to zero.



Basis of Consolidation



The consolidated financial statements include the accounts of i2 Delaware
and 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.



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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 101), as amended by SAB 101A and 101B. SAB 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 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.



Recent Accounting Pronouncements



In September 2004, the FASB reached a final consensus on Emerging Issues
Task Force (EITF) Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share that contingently convertible debt instruments will be subject to the if-converted method under SFAS 128 Earnings Per
Share, regardless of the contingent features included in the instrument. Under current practice, issuers of contingently convertible debt instruments exclude potential common shares underlying contingently convertible debt instruments from the



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##### Table of Contents

calculation of diluted earnings per share until the market price or other contingency is met. The effective for EITF
Issue 04-8 is for reporting periods ending after December 15, 2004 and requires the restatement of diluted earnings per share for all periods presented. The effect on this consensus did not have an impact on the accompany consolidated financial
statements.



In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43 Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that  under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and handling costs may be so abnormal
to require treatment as current period charges This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement
requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. The provision of this statement will be effective for inventory costs during the fiscal years beginning
after June 15, 2005. The Company does not believe that the adoption of this statement will have a material impact on its financial condition or results of operations.



On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123R). SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS
123R is similar to the approach described in SFAS 123. However, SFAS 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. Pro forma
disclosure is no longer an alternative. SFAS123R must be adopted no later than January 1, 2006 for small business issuers. Early adoption will be permitted in periods in which financial statement have not yet been issued. The Company adopted SFAS
123R on January 1, 2005



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.



Earnings Per Share



For the first quarter of 2005 and 2004, net loss per share is based on the
weighted average number of shares of Common Stock outstanding. At March 31, 2005 and March 31, 2004, the Company had, on a weighted average, 35,390,091 shares and 6,212,247 shares of Common Stock outstanding, respectively.



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##### Table of Contents

At March 31, 2005, the Company had 36,903,522 shares of Common Stock outstanding, and options and
warrants to purchase 23,495,516 shares of Common Stock. Consequently, on an as-converted, fully-diluted basis, the Company would have 60,324,038 shares of Common Stock outstanding at March 31, 2005.



Stock Compensation



During 2002, the Companys board of directors 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 additions, 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. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123R). SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, which was previously used by the Company (See Note 18). Generally, the approach in SFAS 123R is similar to the approach
described in SFAS 123. However, SFAS 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 25, compensation expense was
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 123R, Accounting for Stock-Based Compensation, the Company recognize an expense,
over the vesting period, 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 123R and related
interpretations.



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.



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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 financial statements for the year ended December 31, 2004, set forth in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2004, filed with the SEC. 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 March 31, 2005 and March 31, 2004, and the results of their operations and cash flows for the three months ended March 31, 2005 and 2004. 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, 2005.



NOTE 2: NOTES PAYABLE



Notes Payable as of March 31, 2005 and December 31, 2004 consisted of the following:



|                                                                                                                                                                                                                                                                                |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                |  | 2005 |         | 2004
|a. 8% note payable due to an individual previously affiliated with SuperCaller. The principal and all accrued interest are due and payable upon the Company obtaining certain levels of equity
funding. These funding levels are expected to be met prior to December 31, 2005. |  | $    | 50,000  |      | $ | 50,000 
|                                                                                                                                                                                                                                                                                |  |     
|b. 6% note payable due to an individual previously affiliated with SuperCaller. The principal and all accrued interest are due and payable upon the Company obtaining certain levels of equity
funding. These funding levels are expected to be met prior to December 31, 2005. |  |      | 50,000  |      |   | 50,000 
|                                                                                                                                                                                                                                                                                |  |     
|c. 8% note payable due to a bank. The principal and all accrued interest are due and payable in May 2005. The note is secured by substantially all assets of the Company.                                                                                                       |  |      | 200,000 |      |   | -0-    
|                                                                                                                                                                                                                                                                                |  |      |         |      |   |        
|                                                                                                                                                                                                                                                                                |  |     
|Total Long Term Debt                                                                                                                                                                                                                                                            |  |      | 300,000 |      |   | 100,000
|Less: Current Portion                                                                                                                                                                                                                                                           |  |      | 300,000 |      |   | 100,000
|                                                                                                                                                                                                                                                                                |  |      |         |      |   |        
|Long-Term Portion                                                                                                                                                                                                                                                               |  | $    | -0-     |      | $ | -0-    
|                                                                                                                                                                                                                                                                                |  |      |         |      |   |        



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##### Table of Contents

During the three months ended March 31, 2005, some of the shareholders loaned the Company $174,500. The
loans were repaid prior to March 31, 2005, including reclassifying $100,000 to common stock as part of an exercise of stock options by one of the shareholders.



NOTE 3: STOCK OPTIONS AND WARRANTS



The summary of the status of the Companys stock option plan as of March 31, 2005 and 2004 and changes during the periods then ended is as follows
(adjusted for conversion of shares due to merger):



|                                                                 |  |                             |   |      |                                |     |                           |            |   |                              |   |    
|---------------------------------------------------------------- |  | --------------------------- | - | ---- | ------------------------------ | --- | ------------------------- | ---------- | - | ---------------------------- | - | ---
|                                                                 |  | 2005                        |   | 2004
|                                                                 |  | Number of Options/ Warrants |   |      | Weighted AverageExercise Price |     | Number ofOptions/Warrants |            |   | WeightedAverageExercisePrice
|Outstanding at Beginning of Period                               |  | 22,892,208                  |   |      | $                              | .67 |                           | 16,178,349 |   |                              |   | .47
|Options Granted                                                  |  | 2,291,500                   |   |      | $                              | .88 |                           | 414,657    |   |                              | $ | .67
|Warrants Granted                                                 |  | 509,495                     |   |      | $                              | .89 |                           | 3,462,729  |   |                              | $ | .89
|Exercised                                                        |  | (2,167,687                  | ) |      | $                              | .55 |                           | -0-        |   |                              |   | n/a
|Forfeited                                                        |  | (30,000                     | ) |      | $                              | .01 |                           | (641,375   | ) |                              | $ | .41
|                                                                 |  |                             |   |      |                                |     |                           |            |   |                              |   |    
|Outstanding at End of Period                                     |  | 23,495,516                  |   |      | $                              | .70 |                           | 19,414,360 |   |                              | $ | .55
|                                                                 |  |                             |   |      |                                |     |                           |            |   |                              |   |    
|Options Exercisable at End of Period                             |  | 19,588,847                  |   |      | $                              | .46 |                           | 7,945,330  |   |                              | $ | .65
|Weighted-average Fair Value of Options Granted During the Period |  |                             |   |      | $                              | .89 |                           |            |   |                              | $ | .05



As of March 31, 2005,
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 2.28 years.



Additionally, the Company has adopted early application of SFAS No. 123 (revised 2004), Share-Based Payment,
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 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.



The following table summarizes relevant pro-forma information for the three months ended



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March 31, 2005 and 2004 as if the change in accounting principal was applied retroactively to the prior period.



|                       |  |      |            |   |      |   |            |  
|---------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                       |  | 2005 |            |   | 2004 |  
|Net Loss               |  | $    | (1,687,529 | ) |      | $ | (1,510,856 | )
|                       |  |      |            |   |      |   |            |  
|Loss Per Share-Basic   |  | $    | (.06       | ) |      | $ | (.24       | )
|                       |  |      |            |   |      |   |            |  
|Loss Per Share-Diluted |  | $    | (.05       | ) |      | $ | (.05       | )
|                       |  |      |            |   |      |   |            |  



NOTE
4: 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 their notes
receivable at rate of $3 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 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 on the date specified
in the grant. As a result of the reverse merger with Digital Data Networks, Inc., each right to receive one share of common stock, $.01 par value was converted into a right to receive shares of common stock, no par value per share, and preferred
stock series B, no par value per share as outlined in the merger agreement (See Note 17). 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 March 31, 2005 and
2004 is as follows:



|                                                                       |  |      |           |   |      |   |          
|---------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | ---------
|                                                                       |  | 2005 |           |   | 2004
|Restricted Units-Beginning of Year                                     |  |      | 1,102,088 |   |      |   | 239,481  
|Restricted Units Granted                                               |  |      | -0-       |   |      |   | -0-      
|Reverse Merger with Digital Data Networks                              |  |      | -0-       |   |      |   | 1,351,584
|Transfer to Common Stock Due to Lapse of Restrictions                  |  |      | (367,363  | ) |      |   | -0-      
|                                                                       |  |      |           |   |      |   |          
|Restricted Units-End of Year                                           |  |      | 734,725   |   |      |   | 1,591,065
|                                                                       |  |      |           |   |      |   |          
|Weighted Average Fair Value of Shares                                  |  | $    | .45       |   |      | $ | .45      
|Pre-Tax Compensation Expense Charged to Earnings, net of cancellations |  | $    | -0-       |   |      | $ | -0-      



NOTE
5: DEVELOPMENT STAGE ENTERPRISE



The Company is a development stage enterprise
in that planned principal operations have only recently begun and only insignificant amounts of revenue have occurred through March 31, 2005. Development stage activities in which the Company, have been actively engaged include building a management
team, financial planning, raising capital, research and development, establishing sources of supply, acquiring property and equipment and other operating assets, training personnel, developing markets, building a network operation center, and
developing customer billing systems.



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Because of the factors noted in the preceding paragraph, the Company incurred a net loss of $2,027,646
during the quarter ended March 31, 2005. These losses, as well as the uncertain conditions that the Company faces relative to its ongoing debt and equity fund-raising efforts, create an uncertainty as to the Companys ability to continue as a
going concern. The ability of the Company to continue as a going concern is dependent upon the Companys success in its ability to obtain needed financing. There is no guarantee that this financing will be available, and even if available, that
it will be available on terms acceptable or favorable to the Company. As a result of the Companys losses and the difficult capital raising environment, should the Company be unable to continue to raise capital, its existence as a going concern
will be in question.



Item 2. Managements Discussion and Analysis or Plan of Operation



Certain statements in this Quarterly Report in future filings by the Company with the SEC and in the Companys written and oral statements that are
not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, intend,
will and similar expressions are examples of words that identify forward-looking statements. Forward-looking statements include, without limitation, statements regarding our future financial position, business strategy and expected cost
savings. These forward-looking statements are based on our current beliefs, as well as assumptions we have made based upon information currently available to us.



Each forward-looking statement reflects our current view of future events and is subject to risks, uncertainties and other
factors that could cause actual results to differ materially from any results expressed or implied by our forward-looking statements. Important factors that could cause actual results to differ materially from the results expressed or implied by any
forward-looking statements include:



| |  |  | our ability to fund future growth;
| | - |  | ----------------------------------



| |  |  | our ability to become profitable;
| | - |  | ---------------------------------



| |  |  | the volatility of the price of our Common Stock;
| | - |  | ------------------------------------------------



| |  |  | Market demand for and market acceptance for our products;
| | - |  | ---------------------------------------------------------



| |  |  | our ability to protect our intellectual property rights;
| | - |  | --------------------------------------------------------



| |  |  | new regulation and legislation;
| | - |  | -------------------------------



| |  |  | trends for the continued growth of our business and other businesses we may acquire;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our ability to successfully market existing products and services and develop and market new products and services;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to expand our market for existing products and services;
| | - |  | --------------------------------------------------------------------



| |  |  | the effects of our accounting policies and general changes in accounting principles generally accepted in the United States of America;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions of the telecommunications market, including the new and evolving market for next-generation communications solutions; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other risks and uncertainties disclosed in our Annual Report on Form 10-KSB for the year ended December 31, 2003 and in our other filings with the SEC.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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All subsequent forward-looking statements relating to the matters described in this document and
attributable to us or to persons acting on our behalf are expressly qualified in their entirety by such factors. We have no obligation to publicly update or revise these forward-looking statements to reflect new information, future events, or
otherwise, except as required by applicable Federal securities laws, and we caution you not to place undue reliance on these forward-looking statements.



RESULTS OF OPERATIONS



Results of operations for the three months ended March 31, 2005 compared with the results of operations for the three months ended March 31, 2004.



Revenues increased from $127,444 for the first quarter of 2004 to $186,303
for the frist quarter of 2005. The increase in revenues was driven by increased sales of the Companys new VoiceStick, coupled with increased billings for long distance minutes consumed by the Companys customer base.



Cost of revenues decreased slightly from $173,383 for first quarter of 2004
to $117,026 for first quarter of 2005. This decrease is attributable to revenues being made up of slightly more long distance minutes during the first quarter of 2005 as compared to the first quarter of 2004 when sales were comprised of the more
costly to produce IAD relative to the VoiceStick.
The VoiceStick carries a lower manufacturing cost
as compared to the Companys primary product during the first quarter of 2004, the MG-2 and MG-3.



Gross profit for the first quarter of 2005 was a $69,282 as compared to a negative $45,939 for the first quarter of 2004. The increase in gross profit is
attributable to the Company selling slightly higher margin long distance minutes coupled with sales of the Companys new product, the VoiceStick, in the first quarter of 2005 as compared with the first quarter of 2004. Additionally, during the first quarter of 2004 the Companys
main product was the MG-3, which the Company sold at a discount to its manufacturing cost, or was included in package deals where the full cost was not received at the time of the products sale.



Sales, general and administrative expenses for the first quarter of 2005 were
$1,753,013 as compared to $1,429,129 for the same period in 2004. This increase was attributable to quarter over quarter increases in marketing expenses of approximately $100,000. Costs associated with the Companys move from Florida to
Atlanta, GA were approximately $50,000. Additionally, consulting fees increased approximately $50,000 as the Company used outside sales consultants during the initial launch of the VoiceStick. Finally, salary and benefits expense increased approximately $180,000 for the first
quarter of 2005 as compared to the first quarter of 2004. This increase is attributable to new employees in customer service, network operations and sales.



Loss from operations for the first quarter of 2005 as compared to the first quarter of 2004 increased from $1,475,068 to $1,683,731.



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Net loss for the first quarter of 2005 was $2,027,646 as compared to net income for the same period in
2004 of $1,485,300. The primary cause of the increased Net Loss for the quarter is attributable to a cumulative effect of an accounting change. As discussed, the Company has adopted early application of SFAS No. 123 (revised 2004), Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 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.



The Companys accounts receivable balance increased between March 31, 2005 and March 31, 2004 by approximately $44,000. This increase is due to the
slight increase in credit sales quarter over quarter. The Companys inventory balance increased by approximately $90,000 between March 31, 2005 and March 31, 2004. This increase was due to the Company building its inventory of VoiceStick coupled with the Companys inventory of
MG-2s and MG-3s. The net inventory increase was due to the Company gearing up for the production of the Companys new VoiceStick, completion of MG-3s that were in production, and a decrease in production of the Companys first IAD, the MG-2.



|                                       |  |                                      |   |  |           |   |  |          |   |  |            |   
|-------------------------------------- |  | ------------------------------------ | - |  | --------- | - |  | -------- | - |  | ---------- | --
|                                       |  | For the Three Months Ended March 31, |  
|                                       |  | 2005                                 |   |  | 2004      |   |  | Variance |   |  | Percentage |   
|Gross Revenue                          |  | 183,303                              |   |  | 127,444   |   |  | 48,244   |   |  | 60.91      | % 
|Cost of Sales                          |  | 117,026                              |   |  | 173,383   |   |  | (56,357  | ) |  | (32.50     | )%
|Gross Profit                           |  | 69,282                               |   |  | (45,939   | ) |  | 115,221  |   |  | (250.81    | )%
|Operating Expenses:                    |  |                                      |   |  |           |   |  |          |   |  |            |   
|General and Administrative Expenses    |  | 1,753,013                            |   |  | 1,429,129 |   |  | 323,884  |   |  | 22.66      | % 
|Other Income (Expense)                 |  | (3,798                               | ) |  | (10,232   | ) |  | 6,434    |   |  | 62.88      | % 
|Cumulative Effect of Accounting Change |  | (340,117                             | ) |  | -0-       |   |  | 340,117  |   |  | NM         |   
|Net Loss                               |  | 2,027,646                            |   |  | 1,485,300 |   |  | 542,346  |   |  | 36.51      | % 



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



Liquidity and capital resources as of March 31, 2005 as compared with liquidity and
capital resources as of March 31, 2004.



On March 31, 2005
the Company had a working capital deficit of approximately $296,742, compared to March 31, 2004 when the Company had a working capital surplus of approximately $152,963. The Companys working capital position decreased by approximately $449,705
for the period ended March 31, 2005 as compared to the period ended March 31, 2004. The decrease in working capital was primarily due to an increase in accounts payable of approximately $442,166. Net cash used in operating activities was
approximately $1,324,099 for the first quarter of March 31, 2005. Net loss of approximately $2,026,646 is reduced by non-cash items of depreciation and amortization amounting to approximately $138,307 and increased by the cumulative effect of an
accounting change in the amount of $340,117. Primary sources of cash inflows from operations are from sales of the VoiceStick, VoiceStick activation charges and pre-paid charges and receivables collected from sales to customers for the Companys IAD, as well as the collection of revenue for carrying long distance
calls and from monthly service fees. Future cash inflows from sales are subject to the Companys pricing and ability to procure business at existing market conditions.



Net cash used in investing activities was approximately $47,807 for the first quarter of 2005 as compared to approximately $79,259 for the
same period in 2004. Both periods investing activities were primarily due to equipment purchases and payment for patents and trademarks.



Cash flows provided by financing activities were approximately $1,295,094 for the first quarter of 2005 as compared to $1,775,000 for the same period in 2004. The
principal source of cash for the first quarter of 2005 was the cash from the issuance of both notes payable and preferred and common stock as compared to the principal source of cash for the first quarter of 2004 from the issuance of $2,000,000 in
preferred stock.



It is imperative that the Company raise capital in the
near-term in order to continue as a going concern. Without raising additional capital, the Company likely will not be able to satisfy these liabilities unless they are modified or restructured. There is no guarantee that (i) additional capital will
be available to the extent required, or that if available, it will be available on terms acceptable to the Company, or (ii) the current and other liabilities due in the near-term can be modified or restructured. If the Company can not raise
additional capital or modify or restructure such liabilities, then the Company may be unable to pursue its business plan and may be forced to cease doing business.



As can be seen from the Companys filings over the past year, the Company has experienced net losses and negative cash flows from
operations and has an accumulated deficit at March 31, 2005 of approximately $15,835,987 million and a negative working capital position. The ability of the Company to generate positive cash flows from operations and net income is dependent, among
other things, on market conditions, the recovery of recorded assets, cost control, identifying and securing additional revenue sources, and the Companys ability to raise capital under acceptable terms. The accompanying financial statements do
not include any adjustments that might result from the outcome of these uncertainties. As noted in an explanatory paragraph in the Report of Independent Certified Public Accountants on the Companys consolidated financial statements for the
year ended December 31, 2004, as set forth in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2004, filed with the Securities and Exchange Commission (the SEC), these conditions have raised substantial
doubt about the companys ability to continue as a going concern.



OFF BALANCE SHEET ARRANGEMENTS



None



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Item 3: Controls and Procedures



The Companys Chief Executive Officer and Chief Financial Officer have evaluated the Companys controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended
(the Exchange Act)), as of the end of the period covered by this Quarterly Report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officers have concluded that, as of the end of
the period covered by this Quarterly Report, the Companys controls and procedures are effective.



During the quarter ended March 31, 2005, there was not any change in the Companys internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II-OTHER INFORMATION



Item 1. Legal Proceedings



Except
for the pending matters described in Part I, Item 3 of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2004, the Company is not a party to any material legal proceedings other than ordinary routine claims and
proceedings incidental to its business, and the Company does not expect these ordinary claims and proceedings, either individually or in the aggregate, to have a material adverse effect on the Company.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.



In March 2005, the Company issued options and warrants to purchase 2,152,495 shares of Common Stock to 10 individuals and two corporations. The options and warrants vest over a three-year period and have exercise
prices ranging from $.80 to $1.00. The options and warrants were issued to both employees under the Companys incentive stock option plan as well as to consultants for services rendered to the Company. The options and warrants were issued
without registration under the Securities Act of 1933, as amended (the Securities Act), in reliance upon the exemption set forth in Section 4(2) thereunder. The Company based such reliance upon factual representations made to the Company
concerning each recipients investment intent and sophistication, among other things.



In April 2005, the Company issued to one individual and to four corporations options and warrants to purchase 394,332 shares of Common Stock. The options and warrants vest over a three-year period and have exercise
prices ranging from $.96 to $1.00. The warrants were issued without registration under the Securities Act, in reliance upon the exemption set forth in Section 4(2). The Company based such reliance upon factual representations made to the Company
concerning each recipients investment intent and sophistication, among other things.



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##### Table of Contents

Item 6. Exhibits



The exhibits
required to be filed with this Quarterly Report are set forth on the Exhibit Index filed herewith.



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SIGNATURE



In accordance with the
requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                   |  |                               
|------------------ |  | ------------------------------
|                   |  | i2 TELECOM INTERNATIONAL, INC.
|                   | 
|Date: May 16, 2005 |  | /s/ Paul R. Arena             
|                   |  | Paul R. Arena                 
|                   |  | Chief Executive Officer       
|                   |  | (duly authorized signatory and
|                   |  | Principal Executive Officer)  



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##### Table of Contents

EXHIBIT INDEX



|4.1 | Warrant dated April 7, 2005 to purchase 125,000 shares of the Companys common stock granted to Hubert G. Phipps. (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on April 12, 2005.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.2 | Registration Rights Agreement dated as of April 7, 2005 between the Company and Hubert G. Phipps. (Incorporated by reference to Exhibit 4.2 to the Companys Current Report on
Form 8-K filed on April 12, 2005.)
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.3 | Warrant dated April 19, 2005 to purchase 52,083 shares of the Companys common stock granted to Midsouth Investor Fund, LP. (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on April 25, 2005.)
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.4 | Registration Rights Agreement dated as of April 19, 2005 between the Company and Midsouth Investor Fund, LP. (Incorporated by reference to Exhibit 4.2 to the Companys Current
Report on Form 8-K filed on April 25, 2005.)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.5 | Warrant dated April 25, 2005 to purchase 156,249 shares of the Companys common stock granted to Vestal Venture Capital. (Incorporated by reference to Exhibit 4.3 to the
Companys Current Report on Form 8-K filed on April 25, 2005.)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.6 | Registration Rights Agreement dated as of April 25, 2005 between the Company and Vestal Venture Capital. (Incorporated by reference to Exhibit 4.4 to the Companys Current
Report on Form 8-K filed on April 25, 2005.)
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.1 | Settlement Agreement dated February 24, 2005, between the Company and Anthony F. Zalenski. (Incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form
8-K filed on March 2, 2005.)
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.2 | Employment Agreement dated as of April 6, 2005, between the Company and James Rose. Represents an executive compensatory plan or arrangement. (Incorporated by reference to Exhibit
99.1 to the Companys Current Report on Form 8-K filed on April 11, 2005.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.3 | Promissory Note dated April 7, 2005 issued by the Company in favor of Hubert G. Phipps in principal amount of $250,000. (Incorporated by reference to Exhibit 99.1 to the
Companys Current Report on Form 8-K filed on April 12, 2005.)
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.4 | Promissory Note dated April 19, 2005 issued by the Company in favor of Midsouth Investor Fund, LP in principal amount of $100,000. (Incorporated by reference to Exhibit 99.1 to the
Companys Current Report on Form 8-K filed on April 25, 2005.)
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.5 | Promissory Note dated April 25, 2005 issued by the Company in favor of Vestal Venture Capital in principal amount of $300,000. (Incorporated by reference to Exhibit 99.2 to the
Companys Current Report on Form 8-K filed on April 25, 2005.)
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|10.6 | Employment Agreement between the Company and James R. Fultz dated May 2, 2005. (Incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed on
May 6, 2005.)
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|31.1 | Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Executive Officer.
|---- | --------------------------------------------------------------------------------



|31.2 | Rule 13a-14(a)/15d-14(a) Certification by the Companys Chief Financial Officer.
|---- | --------------------------------------------------------------------------------



|32.1 | Section 1350 Certification by the Companys Chief Executive Officer.
|---- | --------------------------------------------------------------------



|32.2 | Section 1350 Certification by the Companys Chief Financial Officer
|---- | -------------------------------------------------------------------



26