**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





T **ANNUAL REPORT UNDER SECTION 13**


**OR
      15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**


**FOR
      THE YEAR ENDED DECEMBER 31, 2005**





**Commission
      File No. 0-17973**


________________




**C2
      GLOBAL TECHNOLOGIES INC.**


(Name
      of
      Registrant as Specified in Its Charter)





**Florida**
            **52-2291344**(State
                or Other Jurisdiction
            (I.R.S.
                Employerof
                Incorporation or Organization)
            Identification
                No.)**3200
                - 40 King St. West, Toronto, Ontario, Canada**
            **M5H
                3Y2**(Address
                of Principal Executive Offices)
            (Zip
                Code)





**(416)
      866-3000**


(Registrant’s
      Telephone Number, Including Area Code)





Securities
      registered pursuant to Section 12(b) of the Exchange Act: **None.**





Securities
      registered pursuant to Section 12(g) of the Exchange Act: **Common
      Stock, $0.01 par value.**





Indicate
      by check mark whether the registrant is a well-known seasoned issuer, as defined
      in Rule 405 of the Securities Act. Yes £ No R





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes £ No R





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes R No £





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. £





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule
      12b-2).




Large
                Accelerated Filer£
            Accelerated
                Filer£
            Non-Accelerated
                FilerR





Indicate
      by check mark if the registrant is a shell company (as defined in Rule 12b-2
      of
      the Exchange Act. Yes £ No R





The
      aggregate market value of Common Stock held by non-affiliates based upon the
      closing price of $0.38 per share on June 30, 2005, as reported by the OTC -
      Bulletin Board, was approximately $654,000.





As
      of
      March 7, 2006, there were 19,237,135 shares of Common Stock, $0.01 par value,
      outstanding.










**TABLE
      OF CONTENTS**


PAGEPART
                IItem
                1.
            Business.
            3Item
                1A.
            Risk
                Factors
            10Item
                1B.
            Unresolved
                Staff Comments
            13Item
                2.
            Properties.
            13Item
                3.
            Legal
                Proceedings.
            13Item
                4.
            Submission
                of Matters to a Vote of Security Holders.
            15PART
                IIItem
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities.
            16Item
                6.
            Selected
                Financial Data.
            18Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations.
            20Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk.
            28Item
                8.
            Financial
                Statements and Supplementary Data.
            28Item
                9.
            Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure.
            28Item
                9A.
            Controls
                and Procedures.
            28Item
                9B.
            Other
                Information.
            29PART
                IIIItem
                10.
            Directors
                and Executive Officers of the Registrant.
            30Item
                11.
            Executive
                Compensation.
            33Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.
            37Item
                13.
            Certain
                Relationships and Related Transactions.
            38Item
                14.
            Principal
                Accountant Fees and Services.
            42PART
                IVItem
                15.
            Exhibits
                and Financial Statement Schedules.
            44





2


**PART
      I**





(All
      dollar amounts are presented in thousands of USD, unless otherwise indicated,
      except per share amounts)





**Item
      1. Business.**





**Overview
      and Recent Developments**





C2
      Global
      Technologies Inc. (“C2” or the “Company”) was incorporated in the State of
      Florida in 1983 under the name “MedCross, Inc.” which was changed to “I-Link
      Incorporated” in 1997 and to “Acceris Communications Inc.” in 2003. Subsequent
      to the receipt of shareholder approval of the proposed name change at the 2005
      Annual Shareholder Meeting held on August 5, 2005, the Company amended its
      Articles of Incorporation to effect the name change from “Acceris Communications
      Inc.” to “C2 Global Technologies Inc.” The new name reflects a change in the
      strategic direction of the Company in light of the disposition of its
      Telecommunications business in the third quarter of 2005, as discussed below.





C2
      owns
      certain patents, detailed below under “History and Development of the Business”
and “Intellectual Property”, including two foundational patents in voice over
      internet protocol (“VoIP”) technology - U.S. Patent Nos. 6,243,373 and 6,438,124
      (together the “VoIP Patent Portfolio”), which it seeks to license. Subsequent to
      the disposition of its Telecommunications business, licensing of intellectual
      property constitutes the primary business of the Company. C2’s target market
      consists of carriers, equipment manufacturers, service providers and end users
      in the internet protocol (“IP”) telephone market who are using C2’s patented
      VoIP technologies by deploying VoIP networks for phone-to-phone communications.
      The Company has engaged, and intends to engage, in licensing agreements with
      third parties domestically and internationally. At present, no royalties are
      being paid to the Company. The Company plans to obtain licensing and royalty
      revenue from its target market by enforcing its patents, with the assistance
      of
      outside counsel, in order to realize value from its intellectual property.
      In
      this regard, in the third quarter of 2005, the Company retained legal counsel
      with expertise in the enforcement of intellectual property rights.





The
      table
      below presents information about the net loss and assets of the Company as
      of
      and for the three years ended December 31, 2005. Effective with the sale of
      the
      Telecommunications business in the third quarter of 2005, the Company no longer
      has distinct operating segments, as were reported in prior years. The Company’s
      consolidated financial statements, included in Item 15 of this Annual Report
      on
      Form 10-K, have been restated to include the Telecommunications operations
      as
      discontinued operations, as required by accounting principles generally accepted
      in the United States (“GAAP”).




**For
                the Year Ended December 31,****2005**
            
            **2004**
            
            **2003**Revenues
                from external customers
            
            $
            —
            
            $
            540
            
            $
            2,164Other
                income, net
            
            
            1,084
            
            
            1,487
            
            
            1,138Interest
                expense - related party
            
            
            12,154
            
            
            8,488
            
            
            10,175Interest
                expense - third party
            
            
            658
            
            
            65
            
            
            875Loss
                from continuing operations
            
            
            14,934
            
            
            11,105
            
            
            12,264Loss
                from discontinued operations
            
            
            3,555
            
            
            11,678
            
            
            19,164Total
                assets
            
            
            3,490
            
            
            24,009
            
            
            39,054




A **going
      concern qualification** has been
      included by the Company’s independent registered public accounting firms in
      their audit opinions for each of 2003, 2004 and 2005. Readers are encouraged
      to
      take due care when reading the independent registered public accountants’
reports included in Item 15 of this report and Management’s Discussion and
      Analysis included in Item 7 of this report. In the absence of licensing revenues
      or a substantial infusion of capital, the Company may not be able to continue
      as
      a going concern.





Since
      2001, the Company has restated its consolidated financial statements three
      times. It has also reported material weaknesses in internal controls, the most
      recent of which occurred in the second quarter of 2004, and all of which have
      since been remedied.





**History
      and Development of the Business**





In
      1994,
      we began operating as an Internet service provider and quickly identified that
      the emerging IP environment was a promising basis for enhanced service delivery.
      We soon turned to designing and building an IP telecommunications platform
      consisting of proprietary software, hardware and leased telecommunications
      lines. The goal was to create a platform with the quality and reliability
      necessary for voice transmission.




3


In
      1997,
      we started offering enhanced services over a mixed IP-and-circuit-switched
      network platform. These services offered a blend of traditional and enhanced
      communication services and combined the inherent cost advantages of an IP-based
      network with the reliability of the existing Public Switched Telephone Network
      (“PSTN”).





In
      August 1997, we acquired MiBridge, Inc. (“MiBridge”), a communications
      technology company engaged in the design, development, integration and marketing
      of a range of software telecommunications products that support multimedia
      communications over the PSTN, local area networks (“LANs”) and IP networks. The
      acquisition of MiBridge permitted us to accelerate the development and
      deployment of IP technology across our network platform.





In
      1998,
      we first deployed our real-time IP communications network platform. With this
      new platform, all core operating functions such as switching, routing and media
      control became software-driven. This new platform represented the first
      nationwide, commercially viable VoIP platform of its kind. Following the launch
      of our software-defined VoIP platform in 1998, we continued to refine and
      enhance the platform to make it even more efficient and capable for our partners
      and customers.





In
      2002,
      the U.S. Patent and Trademark Office issued a patent (No. 6,438,124, the “C2
      Patent”) for the Company’s Voice Internet Transmission System. Filed in 1996,
      the C2 Patent reflects foundational thinking, application, and practice in
      the
      VoIP Services market. The C2 Patent encompasses the technology that allows
      two
      parties to converse phone-to-phone, regardless of the distance, by transmitting
      voice/sound via the Internet. No special telephone or computer is required
      at
      either end of the call. The apparatus that makes this technically possible
      is a
      system of Internet access nodes, or Voice Engines (VoIP Gateways). These local
      Internet Voice Engines provide digitized, compressed, and encrypted duplex
      or
      simplex Internet voice/sound. The end result is a high-quality calling
      experience whereby the Internet serves only as the transport medium and as
      such,
      can lead to reduced toll charges. Shortly after the issuance of our core C2
      Patent, we disposed of our domestic U.S. VoIP network in a transaction with
      Buyers United, Inc. (“BUI”), which closed on May 1, 2003. The sale included
      the physical assets required to operate our nationwide network using our
      patented VoIP technology (constituting the core business of the I-Link
      Communications Inc. (“ILC”) business) and included a fully paid non-exclusive
      perpetual license to our proprietary software-based network convergence solution
      for voice and data. The sale of the ILC business removed essentially all
      operations that did not pertain to our proprietary software-based convergence
      solution for voice and data. As part of the sale, we retained all of our
      intellectual and property rights and patents.





In
      2003,
      we added to our VoIP patent holdings when we acquired U.S. Patent No. 6,243,373
      (the “VoIP Patent”), which included a corresponding foreign patent and related
      international patent applications. The VoIP Patent, together with the existing
      C2 Patent and its related international patent applications, form our
      international VoIP Patent Portfolio that covers the basic process and technology
      that enables VoIP communication as it is used in the market today.
      Telecommunications companies that enable their customers to originate a phone
      call on a traditional handset, transmit any part of that call via IP, and then
      terminate the call over the traditional telephone network, are utilizing C2’s
      patented technology.





The
      comprehensive nature of the VoIP Patent, which is titled *“Method
      and Apparatus for Implementing a Computer Network/Internet Telephone
      System”* ,
      is
      summarized in the patent’s abstract, which, in pertinent part, describes the
      technology as follows: *“A
      method and apparatus are provided for communicating audio information over
      a
      computer network. A standard telephone connected to the PSTN may be used to
      communicate with any other PSTN-connected telephone, where a computer network,
      such as the Internet, is the transmission facility instead of conventional
      telephone transmission facilities.”* As part
      of the consideration for the acquisition of the VoIP Patent, we agreed to give
      the vendor 35% of the net earnings from our VoIP Patent Portfolio.





Revenue
      and contributions from Technologies operations to date have been based on the
      sales and deployments of our VoIP solutions, which we are no longer directly
      marketing, rather than on the receipt of licensing fees and royalties. The
      timing and sizing of various projects has resulted in a continued pattern of
      fluctuating financial results. We expect to generate licensing and royalty
      revenue in this business as we gain recognition of the underlying value in
      our
      VoIP Patent Portfolio through the enforcement of our intellectual property
      rights.





The
      Company has conducted its own research and development activities related to
      its
      patents, investing $442 and $389 in 2004 and 2005, respectively.





At
      the
      end of September 2005, C2 entered into a 12 year royalty agreement with a
      company controlled by an employee, in exchange for a loan of $140, with
      repayment contingent upon future royalties. Additionally, in the third quarter
      of 2005, C2 contracted for continued consulting services from the employee
      until
      April 30, 2006. As of the date of this Annual Report on Form 10-K, no royalties
      have been received by the Company. At the end of September 2005, due to the
      absence of certainty pertaining to any future economic benefits, the Company
      expensed the loan.


4


**Intellectual
      Property**





In
      the
      fourth quarter of 2005, the Company was awarded patents for the VoIP Patent
      from
      the People’s Republic of China and in Canada, and also received a Notice of
      Allowance in Canada for the C2 Patent. In addition to the C2 and VoIP Patents,
      which cover the foundation of any VoIP system, our patent portfolio
      includes:




**Private
      IP Communication Network Architecture (Pending) -** A
      disclosed Internet Linked Network Architecture delivers telecommunication type
      services across a network utilizing digital technology. The unique breadth
      and
      flexibility of telecommunication services offered by the Internet Linked Network
      Architecture flow directly from the network over which they are delivered and
      the underlying design principles and architectural decisions employed during
      its
      creation.




C2
      also
      owns intellectual property that solves teleconferencing problems:




**Delay
      Synchronization in Compressed Audio Systems** - This
      invention eliminates objectionable popping and clicking when switching between
      parties (conferees) in a communications conferencing system employing signal
      compression techniques to reduce bandwidth requirements.




**Volume
      Control Arrangement for Compressed Information Signal** s
      - This
      invention allows for modifying amplitude, frequency or phase characteristics
      of
      an audio or video signal in a compressed signal system without altering the
      encoder or decoder employed by each conferee in a conferencing setting, so
      that
      individuals on the conference call can each adjust their own gain levels without
      signal degradation.




Below
      is
      a summary of the Company’s issued and pending patents:




**Type**
            **Title**
            **Numbe**r
            **Status****VoIP
                Architecture**
            Computer
                Network/Internet Telephone System
              (VoIP
                Patent)
            U.S.
                No. 6,243,373
              
              
              Australia
                No. 716096
              
              
              People’s
                Republic of
              China
                ZL96199457.6
              
              Canada
                No. 2,238,867
            Issued:
                June 5, 2001
              Expires:
                November 1, 2015
              
              Issued:
                June 1, 2000
              Expires:
                October 29, 2016
              
              Issued:
                December 14, 2005
              Expires:
                October 29, 2016
              
              Issued:
                October 18, 2005
              Expires:
                October 29, 2016Internet
                Transmission System
              (C2
                Patent)
            U.S.
                No. 6,438,124
              
              
              People’s
                Republic of
              China
                No. ZL97192954.8
              
              Canada
            Issued:
                August 20, 2002
              Expires:
                July 22, 2018
              
              Issued:
                May 21, 2004
              Expires:
                February 5, 2017
              
              Notice
                of Allowance received
              December
                2005Private
                IP Communication
              Network
                Architecture
            Confidential
            Pending**Conferencing**
            Delay
                Synchronization in
              Compressed
                Audio System
            U.S.
                No. 5,754,534
            Issued:
                May 19, 1998
              Expires:
                May 6, 2016Volume
                Control Arrangement
              for
                Compressed Information
              Signal
                Delays
            U.S.
                No. 5,898,675
            Issued:
                April 27, 1999
              Expires:
                April 29, 2016**Fax**
            Facsimile
                Transmission System
            Confidential
            Pending


5


**Disposition
      of the Telecommunications Business**




Commencing
      in 2001, the Company entered the Telecommunications business, acquiring certain
      assets of the estate of WorldxChange Communications Inc. from bankruptcy. In
      2002, the Company also acquired certain assets of the estate of RSL.COM USA
      Inc.
      from bankruptcy, and in 2003 the Company acquired Local Telcom Holdings LLC.
      Together, these assets made up the Telecommunications segment of the Company’s
      business, which was owned through the Company’s wholly-owned subsidiary, Acceris
      Communications Corp. (“ACC”, originally known as WorldxChange
      Corp.).




In
      June
      2004, the Company began an evaluation process that led to the disposition of
      its
      Telecommunications business. CIT Capital Securities LLC, along with C2’s
      management, examined the markets in which the Telecommunications business
      operated in order to assess potential merger and acquisition opportunities.
      In
      this process C2 contacted more than 60 potential partners. Having assessed
      various market opportunities, C2 management’s negotiations with a number of
      potential targets, and with C2 management’s recommendation, C2’s Board of
      Directors determined that a sale of the Telecommunications business to Acceris
      Management and Acquisition LLC (“AMA”) was in the best interests of C2’s
      stockholders.




The
      Company therefore entered into an Asset Purchase Agreement (“APA”), dated as of
      May 19, 2005, to sell substantially all of the assets and to transfer certain
      liabilities of ACC to AMA, a Minnesota limited liability company and
      wholly-owned subsidiary of North Central Equity LLC (“NCE”). In addition, on May
      19, 2005, the parties executed a Management Services Agreement (“MSA”), Security
      Agreement, Note, Proxy and Guaranty. Upon receipt of the requisite approvals,
      including shareholder approval, this transaction was completed on September
      30,
      2005. Subsequent to the sale, ACC’s name was changed to WXC Corp.
      (“WXCC”).




The
      sale
      resulted in a gain on disposition of $6,387, net of disposition and business
      exit costs. In accordance with GAAP, this gain, and the WXCC operations for
      the
      year ended December 31, 2005, as well as for all prior periods included in
      the
      consolidated financial statements included in Item 15 of this Annual Report
      on
      Form 10-K, have been reported in discontinued operations.




At
      the
      closing of the asset sale transaction, C2’s controlling shareholder, Counsel
      Corporation (together with its subsidiaries, “Counsel”), agreed to provide a
      $585 loan to NCE. This loan is being repaid over six months on a straight-line
      basis. The loan is subject to a holdback, the amount of which was $320 at
      closing, reduced to $200 at December 31, 2005, relating to recorded liabilities
      of C2 that had not been settled at closing. On September 30, 2005, in
      conjunction with the closing of the asset sale transaction and the expiration
      of
      the MSA, referenced above, the Company and AMA entered into a second Management
      Services Agreement (“MSA2”) under which the Company agreed to continue to
      provide services in certain states where AMA, at closing, had not obtained
      authorization to provide telecommunications services. The Company is charged
      a
      management fee by AMA which is equal to the revenue earned from providing these
      services. During the fourth quarter of 2005, the Company’s revenue and
      offsetting management fee totaled $1,439, both of which have been recorded
      as
      components of discontinued operations. As of December 31, 2005, AMA had obtained
      authorization to provide telecommunications services in all states except
      Hawaii, and the Company expects the MSA2 to remain in effect until such time
      as
      authorization is obtained.




The
      following tables provide additional information with respect to the assets
      that
      were disposed of and the liabilities that were assumed in the September 30,
      2005
      transaction, the gain on the sale, and the operating results of the discontinued
      operations for the years ending December 31, 2005, 2004 and 2003:




6





**Assets
                disposed of and liabilities assumed**
            
            **September
                30,**
              **2005**Cash
                and cash equivalents
            
            $
            1,184Accounts
                receivable, net
            
            
            10,288Other
                current assets
            
            
            1,021**Total
                current assets**
            
            
            12,493Furniture,
                fixtures, equipment and software, net
            
            
            1,766Intangible
                assets, net
            
            
            809Goodwill
            
            
            947Other
                assets
            
            
            617**Total
                assets**
            
            
            16,632Senior
                secured revolving credit facility
            
            
            5,431Accounts
                payable and accrued liabilities
            
            
            12,710Unearned
                revenue
            
            
            622Subordinated
                note payable
            
            
            4,000Current
                portion of notes payable to third parties
            
            
            199**Total
                current liabilities**
            
            
            22,962Notes
                payable to third parties, less current portion
            
            
            500**Total
                liabilities**
            
            
            23,462**Net
                liabilities**
            
            $
            6,830




The
      gain
      on the sale of the ACC business was determined as follows:





Consideration
                received:Assumption
                of liabilities by AMA
            
            $
            23,462Less:
                Book value of assets disposed
            
            
            (16,632
            )6,830Less:Investment
                banker fees associated with disposition
            
            
            (279
            )Other
                costs associated with disposition
            
            
            (164
            )**Net
                gain on sale of business**
            
            $
            6,387




7




**Statements
                of Operations -Discontinued
                Operations**




**2005**3
            
            **2004**
            
            **2003**Revenues
            
            $
            65,154
            
            $
            112,595
            
            $
            133,765Operating
                costs and expenses:Telecommunications
                network expense1
            
            
            39,308
            
            
            60,067
            
            
            86,006Selling,
                general and administrative
            
            
            29,232
            
            
            50,313
            
            
            52,754Provision
                for doubtful accounts
            
            
            2,216
            
            
            5,229
            
            
            5,432Depreciation
                and amortization
            
            
            2,988
            
            
            6,956
            
            
            7,125Total
                operating costs and expenses
            
            
            73,744
            
            
            122,565
            
            
            151,317Operating
                loss
            
            
            (8,590
            )
            
            (9,970
            )
            
            (17,552
            )Other
                income (expense):Interest
                expense
            
            
            (1,394
            )
            
            (2,796
            )
            
            (2,219
            )Interest
                and other income
            
            
            42
            
            
            984
            
            
            78Total
                other income (expense)
            
            
            (1,352
            )
            
            (1,812
            )
            
            (2,141
            )Loss
                before gain on sale of business
            
            
            (9,942
            )
            
            (11,782
            )
            
            (19,693
            )Gain
                on sale of business (net of $0 tax)2
            
            
            6,387
            
            
            104
            
            
            529**Net
                loss - discontinued operations (net of $0 tax)**
            
            $
            (3,555
            )
            $
            (11,678
            )
            $
            (19,164
            )





1 Exclusive of depreciation expense on telecommunications network assets of
      $1,545, $5,056 and $3,918 for the years ended December 31, 2005, 2004 and 2003,
      respectively, included in depreciation and amortization.





2 In 2005,
      this represents the gain on the sale of the ACC business. In 2004 and 2003,
      this
      is related to the gain on the sale of the ILC operations.




3 Includes
      post-closing activities in the fourth quarter, related to the Telecommunications
      business sold on September 30, 2005.




**Employees**





As
      of
      December 31, 2005, as a result of the sale of the Telecommunications business
      and the cessation of its Technologies-related research and development
      activities, C2 had five employees, four of whom are also employees of Counsel,
      whose salaries are paid by Counsel. Under the terms of a management services
      agreement (the “Agreement”), as described in Item 11 of this Annual Report on
      Form 10-K, the Counsel employees provide management and administrative services
      to C2 and the associated costs are allocated to C2. The Company expects to
      hire
      additional employees in 2006 as it pursues its patent licensing strategy,
      although there are no specific plans at this time.





**Industry**





Historically,
      the communications services industry has transmitted voice and data over
      separate networks using different technologies. Traditional carriers have
      typically built telephone networks based on circuit switching technology, which
      establishes and maintains a dedicated path for each telephone call until the
      call is terminated.





The
      communications services industry continues to evolve, both domestically and
      internationally, providing significant opportunities and risks to the
      participants in these markets. Factors that have been driving this change
      include:




•
              entry
                  of new competitors and investment of substantial capital in existing
                  and
                  new services, resulting in significant price
                  competition
 
 •
              technological
                  advances resulting in a proliferation of new services and products
                  and
                  rapid increases in network capacity
 
 •
              The
                  Telecommunications Act of 1996 Act; as amended (“1996 Act”),
                  and
 
 •
              growing
                  deregulation of communications services markets in the United States
                  and
                  in selected countries around the
                  world.




8


VoIP
      is a
      technology that can replace the traditional telephone network. This type of
      data
      network is more efficient than a dedicated circuit network because the data
      network is not restricted by the one-call, one-line limitation of a traditional
      telephone network. This improved efficiency creates cost savings that can be
      either passed on to the consumer in the form of lower rates or retained by
      the
      VoIP provider. In addition, VoIP technology enables the provision of enhanced
      services such as unified messaging.





**Competition**





We
      are
      seeking to have telecommunications service providers (“TSPs”), equipment
      suppliers (“ESs”) and end users license our patents. In this regard, our
      competition is existing technology, outside the scope of our patents, which
      allows TSPs and ESs to deliver communication services to their
      customers.





VoIP
      is
      becoming a widespread and accepted telecommunications technology, with a variety
      of applications in the telecommunications and other industries. While we and
      many others believe that we will see continued proliferation of this technology
      in the coming years, and while we believe that this proliferation will occur
      within the context of our patents, there is no certainty that this will occur,
      or that it will occur in a manner that requires organizations to license our
      patents.





**Government
      Regulation**





As
      a
      result of, and subsequent to, the disposition of our Telecommunications
      business, we are no longer subject to various regulatory requirements, at the
      federal, state and local levels, which were applicable to our operations in
      prior years. However, the following remain relevant to our
      operations:





**VoIP
      Notice of Proposed Rule Making**





In
      February 2004, the Federal Communications Commission (“FCC”) issued the VoIP
      Notice of Proposed Rulemaking (the “VoIP NPRM”) to solicit comments on many
      aspects of the regulatory treatment of VoIP services. The FCC continues to
      consider the possibility of regulating access to IP-based services, but has
      not
      yet decided on the appropriate level of regulatory intervention for IP-based
      service applications. It has, through several decisions, sought to exercise
      its
      pre-emptive authority to designate VoIP as an interstate service, thus
      pre-empting state regulation of VoIP and placing the FCC as the sole regulator
      of the service - a position that has been challenged by several state public
      utility commissions. Further, the VoIP NPRM will likely address the
      applicability of access charges to VoIP services. Access charges provide
      compensation to local exchange carriers for traffic that originates or
      terminates on their networks. Certain LECs have argued that certain types of
      VoIP carriers provide the same basic functionality as traditional telephone
      service carriers, in that they carry a customer’s call from an origination point
      to a termination destination. Any ruling or decision from the FCC requiring
      VoIP
      carriers to pay access charges to ILECs for local loop use may adversely affect
      our ability to license our VoIP technology to TSPs, ESs and end users, as
      described above.





**Other
      Legislation**





Recent
      legislation in the United States including the Sarbanes-Oxley Act of 2002 has
      increased regulatory and compliance costs as well as the scope and cost of
      work
      provided to us by our independent registered public accountants and legal
      advisors. Based on the current timetable, the Company will be subject to Section
      404 reporting in 2007. As implementation guidelines continue to evolve, we
      expect to incur costs, which may or may not be material, in order to comply
      with
      legislative requirements or rules, pronouncements and guidelines by regulatory
      bodies, thereby reducing profitability.








**Available
      Information**





C2
      is
      subject to the informational requirements of the Securities Exchange Act of
      1934, as amended (the “Exchange Act”), which requires that C2 file reports,
      proxy statements and other information with the Securities and Exchange
      Commission (“SEC”). The SEC maintains a website on the Internet at *http://www.sec.gov* that
      contains reports, proxy and information statements, and other information
      regarding issuers, including C2, which file electronically with the SEC. In
      addition, C2’s Exchange Act filings may be inspected and copied at the SEC’s
      Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public
      may obtain information on the operation of the Public Reference Room by calling
      the SEC at 1-800-SEC-0330. The Company makes available free of charge through
      its Internet web site, *http://www.c-2technologies.com* (follow
      Investor Relations tab to link to “SEC Filings”) its annual report on Form 10-K,
      quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
      to
      those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
      Exchange Act as soon as reasonably practicable after such material has been
      electronically filed with, or furnished to, the SEC.


9




**Item
      1A. Risk Factors.**





*You
      should carefully consider and evaluate these risk factors, as any of them could
      materially and adversely affect our business, financial condition and results
      of
      operations, which, in turn, can adversely affect the price of our
      securities.*





**Reports
      of our independent registered accountants have been qualified and make reference
      to the going concern risk.**





In
      each
      of their audit reports for the years ended December 31, 2003, 2004 and 2005,
      our
      independent registered public accounting firm has made reference to the
      substantial doubt of our ability to continue as a going concern. Before
      considering making an investment or becoming a stakeholder in C2, you should
      carefully review the aforementioned accountants’ reports and ensure that you
      have read, understood and obtained relevant advice from consultation with your
      financial and other advisors.





**We
      are primarily dependent upon an ongoing commitment from Counsel to fund, through
      long-term intercompany advances or equity contributions, all of our capital
      investment, working capital or other operational cash requirements through
      December 31, 2006.**





Counsel
      is the 91% equity holder and 95% debt holder of the Company at December 31,
      2005. Counsel has committed to fund the operating cash requirements of the
      Company through December 31, 2006. C2 may be unable to meet its obligations
      as
      they come due should Counsel be unable or unwilling to meet its commitment
      to
      provide financial support as necessary through December 31, 2006.  See the
      section entitled “Certain Relationships and Related Transactions” in Item 13 of
      this report.





**We
      have no commitments in place to fund operations beyond December 31,
      2006**





Management’s
      forecasts do not anticipate the Company achieving breakeven cash flows by
      December 31, 2006. Accordingly, the Company will need to obtain third party
      financing in order to continue operations beyond this date. As of the date
      of
      this report, management has not attempted to arrange additional financing beyond
      the maturity of the Counsel Keep Well, which expires on December 31, 2006,
      and
      there is no assurance that management will be able to obtain financing on
      favorable financial terms to fund the operations of the Company beyond this
      date. Management, with the assistance of legal counsel, is looking to realize
      on
      the value of its intellectual property in the form of licensing or royalty
      payments from third parties. There is no certainty that the Company’s strategy
      will be successful.





**We
      may need to settle our convertible notes in cash.**





Conversion
      of existing convertible notes is primarily at the option of the holders. Should
      the holders decide not to convert or should other conditions not be met
      regarding stock price, the Company may be required to deliver cash to settle
      amounts due in respect of interest, and/or principal at various times in the
      future. There can be no assurance that we will be able to generate sufficient
      cash from operations or from third party financing in order to be able to do
      so.





**Our
      assets serve as collateral under both a convertible note and loans from related
      parties. If we were to default on any of these loans, the secured lenders could
      foreclose on our assets. In that event, we would be unable to continue our
      operations as they are presently conducted, if at all.**





Laurus
      Master Fund, Ltd. (“Laurus”) holds a $3,235 secured convertible note (the
“Note”) which is collateralized by a blanket security interest in our assets.
      The Note matures in October 2007. At December 31, 2005, our assets also secure
      all debt to Counsel **.** All
      Counsel debt is subordinated in favor of the Note. Our aggregate total debt
      to
      Counsel at December 31, 2005 of $73,646 may need to be restructured in the
      event
      that the Company is unable to satisfy these obligations in cash.





**We
      are subject to litigation.**





We
      are,
      from time to time, involved in various claims, legal proceedings and complaints
      arising in the ordinary course of business. The significant litigation matters
      facing us at this time are detailed below, in Item 3 of this Annual Report
      on
      Form 10-K.





**We
      may be required to make cash payments to dissenting
      stockholders.**





At
      our
      Adjourned Meeting of Stockholders held on December 30, 2003, our
      stockholders, among other things, approved an amendment to our Articles of
      Incorporation, deleting Article VI thereof (regarding liquidations,
      reorganizations, mergers and the like). Stockholders who were entitled to vote
      at the meeting and advised us in writing, prior to the vote on the amendment,
      that they dissented and intended to demand payment for their shares if the
      amendment was effectuated, were entitled to exercise their appraisal rights
      and
      obtain payment in cash for their shares under Sections 607.1301 - 607.1333
      of the Florida Business Corporation Act (the “Florida Act”), provided their
      shares were not voted in favor of the amendment.





In
      January 2004, we sent appraisal notices in compliance with Florida
      corporate statutes to all stockholders who had advised us of their intention
      to
      exercise their appraisal rights. The appraisal notices included our estimate
      of
      fair value of our shares, at $4.00 per share on a post-split basis. These
      stockholders had until February 29, 2004 to return their completed
      appraisal notices along with certificates for the shares for which they were
      exercising their appraisal rights. Approximately 33 stockholders holding
      approximately 74,000 shares of our stock returned completed appraisal notices
      by
      February 29, 2004. A stockholder of 20 shares notified us of his acceptance
      of our offer of $4.00 per share, while the stockholders of the remaining shares
      did not accept our offer. Subject to the qualification that, in accordance
      with
      the Florida Act, we may not make any payment to a stockholder seeking appraisal
      rights if, at the time of payment, our total assets are less than our total
      liabilities, stockholders who accepted our offer to purchase their shares at
      the
      estimated fair value will be paid for their shares within 90 days of our
      receipt of a duly executed appraisal notice. If we should be required to make
      any payments to dissenting stockholders, Counsel will fund any such amounts
      through advances to C2. Stockholders who did not accept our offer were required
      to indicate their own estimate of fair value, and if we do not agree with such
      estimates, the parties are required to go to court for an appraisal proceeding
      on an individual basis, in order to establish fair value. Because we did not
      agree with the estimates submitted by most of the dissenting stockholders,
      we
      have sought a judicial determination of the fair value of the common stock
      held
      by the dissenting stockholders. On June 24, 2004, we filed suit against the
      dissenting stockholders seeking a declaratory judgment, appraisal and other
      relief in the Circuit Court for the 17 th Judicial
      District in Broward County, Florida. On February 4, 2005, the declaratory
      judgment action was stayed pending the resolution of the direct and derivative
      lawsuits filed in California. This decision was made by the judge in the Florida
      declaratory judgment action due to the similar nature of certain allegations
      brought by the defendants in the declaratory judgment matter and the California
      lawsuits. On March 7, 2005, the dissenting shareholders appealed the decision
      of
      the District Court judge to the Fourth District Court of Appeals for the State
      of Florida, which denied the appeal on June 21, 2005. When the declaratory
      judgment matter resumes, there is no assurance that this matter will be resolved
      in our favor and an unfavorable outcome of this matter could have a material
      adverse impact on our business, results of operations, financial position or
      liquidity.


10


**We
      may fail either to adequately protect our proprietary technology and processes,
      or to succeed in enforcing our intellectual property rights, which would allow
      competitors to take advantage of our development efforts.**





Included
      in the Company’s VoIP Patent Portfolio are United States Patents No. 6,243,373
      and No. 6,438,124. The value of these patents has yet to be determined. If
      we
      fail to obtain or maintain adequate protections, or are unsuccessful in
      enforcing our patent rights, we may not be able to carry out our business
      strategy or prevent third parties from benefiting from those patents without
      benefit to the Company. Any currently pending or future patent applications
      may
      not result in issued patents. In addition, any issued patents may not have
      priority over any patent applications of others or may not contain claims
      sufficiently broad to protect us against third parties with similar
      technologies, products or processes.





**Our
      principal stockholder, Counsel, has voting control over us and certain of our
      executive officers are employees of Counsel.**





Counsel
      owns approximately 91% of our outstanding common stock. As a result, Counsel
      controls all matters requiring approval by the stockholders including the
      election of the Board of Directors and significant corporate transactions.
      Our
      Board of Directors establishes corporate policies and has the sole authority
      to
      nominate and elect our officers to carry out those policies. Our Chief Executive
      Officer, President, Chief Financial Officer, Vice President of Accounting and
      Corporate Secretary are all employees of Counsel. Our Chief Executive Officer
      has a supplemental employment contract with C2. Services of Counsel staff
      working at C2 (excluding the CEO) are paid for pursuant to a management services
      agreement that exists between Counsel and C2. The control by Counsel could
      delay
      or prevent a change in control of C2, impede a merger, consolidation, takeover
      or other business combination involving us and discourage a potential acquirer
      from making a tender offer or otherwise attempting to obtain control of C2.
      Other stockholders therefore will have limited participation in our affairs.
      The
      four member Board of Directors has three members independent of Counsel. The
      Board established a special committee of independent directors of the Board
      in
      2004 to consider recommendations of the Company’s management for potential
      merger, acquisitions and financing activities.





**Provisions
      in our Articles of Incorporation, as amended, could prevent or delay
      stockholders' attempts to replace or remove current
      management.**





Our
      Articles of Incorporation, as amended, provide for staggered terms for the
      members of our Board of Directors. The Board of Directors is divided into three
      staggered classes, and each director serves a term of three years. At each
      annual stockholders’ meeting only those directors comprising one of the three
      classes will have completed their term and stand for re-election or
      replacement.





The
      use
      of a staggered Board of Directors and the ability to issue "blank check"
      preferred stock are traditional anti-takeover measures. These provisions may
      be
      beneficial to our management and the Board of Directors in a hostile tender
      offer, and may have an adverse impact on stockholders who may want to
      participate in such a tender offer, or who may want to replace some or all
      of
      the members of the Board of Directors.





**Our
      Board of Directors may issue additional shares of preferred stock without
      stockholder approval.**





Our
      Articles of Incorporation, as amended, authorize the issuance of up to
      10,000,000 shares of preferred stock, $10.00 par value per share. The Board
      of
      Directors is authorized to determine the rights and preferences of any
      additional series or class of preferred stock. The Board of Directors may,
      without stockholder approval, issue shares of preferred stock with dividend,
      liquidation, conversion, voting or other rights which are senior to our shares
      of common stock or which could adversely affect the voting power or other rights
      of the existing holders of outstanding shares of preferred stock or common
      stock. The issuance of additional shares of preferred stock may also hamper
      or
      discourage an acquisition or change in control of C2.


11


**We
      may conduct future offerings of our common stock and preferred stock and pay
      debt obligations with our common and preferred stock which may diminish our
      investors’ pro rata ownership and depress our stock price.**





We
      reserve the right to make future offers and sales, either public or private,
      of
      our securities including shares of our preferred stock, common stock or
      securities convertible into common stock at prices differing from the price
      of
      the common stock previously issued.





We
      have
      $18,270 of convertible debt owing to Counsel as of December 31, 2005,
      convertible into over 3,600,000 shares of our common stock (subject to the
      effects of anti-dilution, including the effect of the potential conversion
      of
      the Laurus Note). We also have $55,375 of non-convertible debt owed to Counsel
      at December 31, 2005 which may need to be restructured into convertible debt
      or
      converted into equity in the event that the Company is unable to satisfy these
      obligations in cash.





In
      addition, the Laurus Note is convertible into approximately 3,676,000 shares
      of
      common stock. Laurus also holds a Warrant to acquire 1,000,000 shares of common
      stock of the Company. The Laurus Note is guaranteed by Counsel.





There
      can
      be no assurance that we will be able to successfully complete any such future
      offerings. In the event that any such future sales of securities are effected
      or
      we use our common or preferred stock to pay principal or interest on our debt
      obligations, an investor’s pro rata ownership interest in us may be reduced to
      the extent of any such issuances and, to the extent that any such sales are
      effected at consideration which is less than that paid by the investor, the
      investor may experience dilution and a diminution in the market price of the
      common stock.





**Our
      internal disclosure controls may not reduce to a relatively low level the risk
      that a material error in our financial statements may go
      undetected.**





Our
      Chief
      Executive Officer and Chief Financial Officer (the “Certifying Officers”) are
      responsible for establishing and maintaining disclosure controls and procedures
      (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for C2. Accordingly,
      the Certifying Officers designed such disclosure controls and procedures, or
      caused such disclosure controls and procedures to be designed under their
      supervision, to ensure that material information relating to C2, including
      our
      consolidated subsidiaries, is made known to the Certifying Officers by others
      within those entities. We regularly evaluate the effectiveness of disclosure
      controls and procedures and report our conclusions about the effectiveness
      of
      the disclosure controls quarterly on our Form 10-Q and annually on our Form
      10-K. In completing such reporting we disclose, as appropriate, any significant
      change in our internal control over financial reporting that occurred during
      our
      most recent fiscal period that has materially affected, or is reasonably likely
      to materially affect, our internal control over financial reporting. This
      disclosure, based on our most recent evaluation of our disclosure controls
      and
      procedures, is made to our independent accountants and the audit committee
      of
      our Board of Directors. All material weaknesses in the design or operation
      of
      internal control over financial reporting which are reasonably likely to
      adversely affect our ability to record, process, summarize and report financial
      information on a timely basis are reported in our public filings. Additionally,
      any fraud, whether or not material, that involves management or other employees
      who have a significant role in our internal control over financial reporting,
      is
      reported on such filings as applicable.





Over
      the
      last three years, the Certifying Officers have reported three separate events
      of
      control deficiencies, constituting material weaknesses. Control deficiencies
      were last reported in the second quarter of 2004. Since that time, the
      Certifying Officers have reported that the disclosure controls and procedures
      are effective. We have undertaken specific measures to cure or mitigate the
      ineffective controls and procedures identified in our prior filings. Such
      measures include making significant systems, process and control changes and
      we
      have implemented new technologies to achieve an effective system of controls
      and
      procedures as of the quarter ended September 30, 2004 and through the date
      of
      this Report on Form 10-K. The three control deficiencies are detailed in the
      following filings:


·
              Form
                  10-Q for the quarter ended September 30, 2003, as
                  amended;
 ·
              Form
                  10-K for the year ended December 31, 2003, as amended;
                  and
 ·
              Form
                  10-Q for the quarter ended June 30, 2004.


While
      management is responsible for ensuring an effective control environment and
      has
      taken steps to ensure that the internal control environment remains free of
      significant deficiencies and/or material weaknesses, the inherent nature of
      our
      business and rapidly changing environment may affect management’s ability to be
      successful with this initiative.





**The
      telecommunications industry in which we operate is subject to government
      regulation.**





As
      a
      result of, and subsequent to, the disposition of the telecommunications
      business, we are no longer subject to various regulatory requirements. However,
      we remain subject to certain government regulation at federal, state and local
      levels. Any change in current government regulation regarding telecommunications
      pricing, system access, consumer protection or other relevant legislation could
      have a material impact on our results of operations. Most of the operations
      of
      our target market are subject to regulation by the FCC under the Communications
      Act of 1934, as amended. In addition, certain of our target market’s operations
      are subject to regulation by state public utility or public service commissions.
      Changes in the regulation of, or the enactment of changes in interpretation
      of,
      legislation affecting us could negatively impact the operations of our target
      market and therefore negatively affect our opportunities to license our
      intellectual property.


12


**The
      telecommunications market is volatile.**





During
      the last several years, the telecommunications industry has been very volatile
      as a result of overcapacity, which has led to price erosion and bankruptcies.
      If
      our potential licensees cannot control their subscriber and customer attrition
      through maintaining competitive services and pricing, our revenue could decrease
      significantly as the licensees become unable to meet their financial
      obligations.





**There
      is a limited public trading market for our common stock; the market price of
      our
      common stock has been volatile and could experience substantial fluctuations.**





Our
      common stock is currently quoted on the OTC Bulletin Board and there is a
      limited public trading market for the common stock. Without an active trading
      market, there can be no assurance of any liquidity or resale value of the common
      stock. In addition, the market price of our common stock has been, and may
      continue to be, volatile. Such price fluctuations may be affected by general
      market price movements or by reasons unrelated to our operating performance
      or
      prospects such as, among other things, announcements concerning us or our
      competitors, technological innovations, government regulations, and litigation
      concerning proprietary rights or other matters. In addition, in recent years,
      the stock market in general, and the market for telecommunications companies
      in
      particular, have experienced significant price and volume fluctuations. This
      volatility has affected the market prices of securities issued by many companies
      and it may adversely affect the price of our common stock.





**We
      may not be able to utilize income tax loss carryforwards.**





Restrictions
      in our ability to utilize income tax loss carry forwards have occurred in the
      past due to the application of certain changes in ownership tax rules in the
      United States. There is no certainty that the application of these rules may
      not
      reoccur or that future merger, acquisition and/or disposition transactions
      may
      cause further restrictions on our income tax loss carryforwards existing at
      a
      particular time. Any such additional limitations could require us to pay income
      taxes in the future and record an income tax expense to the extent of such
      liability. We could be liable for income taxes on an overall basis while having
      unutilized tax loss carryforwards since these losses may be applicable to one
      jurisdiction and/or particular line of business while earnings may be applicable
      to a different jurisdiction and/or line of business. Additionally, income tax
      loss carryforwards may expire before we have the ability to utilize such losses
      in a particular jurisdiction and there is no certainty that current income
      tax
      rates will remain in effect at the time when we have the opportunity to utilize
      reported tax loss carry forwards.





**We
      have not declared any dividends on our common stock to date and have no
      intention of doing so in the foreseeable future.**





The
      payment of cash dividends on our common stock rests within the discretion of
      our
      Board of Directors and will depend, among other things, upon our earnings,
      unencumbered cash, capital requirements and our financial condition, as well
      as
      other relevant factors. Payments of dividends on our outstanding shares of
      preferred stock must be paid prior to the payment of dividends on our common
      stock. To date, we have not paid dividends on our common stock nor do we
      anticipate that we will pay dividends in the foreseeable future. As of December
      31, 2005, we do not have any preferred stock outstanding which has any
      preferential dividends. So long as 25% of principal amount of the Note held
      by
      Laurus remains outstanding, we may not pay any dividends on our common stock.
      Additionally, under the Florida Act, we cannot pay dividends while we have
      negative stockholders’ equity.





**Item
      1B. Unresolved Staff Comments**





None.





**Item
      2. Properties.**





The
      Company does not currently lease or rent premises in the U.S. All operations
      are
      carried out from the corporate office of its majority stockholder, Counsel,
      located in Toronto, Ontario, Canada. The Company is not required to pay rent
      or
      other occupancy costs to Counsel. The Company expects to occupy properties
      in
      the U.S. in 2006 as it pursues its patent licensing strategy.





**Item
      3. Legal Proceedings.**





On
      April 16, 2004, certain stockholders of the Company (the “Plaintiffs”)
      filed a putative derivative complaint in the Superior Court of the State of
      California in and for the County of San Diego, (the “Complaint”) against the
      Company, WorldxChange Corporation (sic), Counsel Communications LLC, and Counsel
      Corporation as well as four present and former officers and directors of the
      Company, some of whom also are or were directors and/or officers of the other
      corporate defendants (collectively, the “Defendants”). The Complaint alleges,
      among other things, that the Defendants, in their respective roles as
      controlling stockholder and directors and officers of the Company committed
      breaches of the fiduciary duties of care, loyalty and good faith and were
      unjustly enriched, and that the individual Defendants committed waste of
      corporate assets, abuse of control and gross mismanagement. The Plaintiffs
      seek
      compensatory damages, restitution, disgorgement of allegedly unlawful profits,
      benefits and other compensation, attorneys’ fees and expenses in connection with
      the Complaint. The Company believes that these claims are without merit and
      intends to continue to vigorously defend this action. There is no assurance
      that
      this matter will be resolved in the Company’s favor and an unfavorable outcome
      of this matter could have a material adverse impact on its business, results
      of
      operations, financial position or liquidity.


13


The
      Company, Counsel Communications LLC, Counsel Corporation and four of its current
      and former executives and board members were named in a securities action filed
      in the Superior Court of the State of California in and for the County of San
      Diego (the “Court”) on April 16, 2004, in which the plaintiffs made claims
      nearly identical to those set forth in the Complaint in the derivative suit
      described above. The Company believes that these claims are without merit and
      intends to vigorously defend this action. There is no assurance that this matter
      will be resolved in the Company’s favor and an unfavorable outcome of this
      matter could have a material adverse impact on its business, results of
      operations, financial position or liquidity. In February 2006, the plaintiffs
      in
      both this action and the derivative action described above changed attorneys.
      Consequently, the trial date set for June 16, 2006 has been vacated; a new
      date
      has not yet been set.





In
      connection with the Company’s efforts to enforce its patent rights, C2
      Communications Technologies Inc., our wholly owned subsidiary, filed a patent
      infringement lawsuit against ITXC Corp. (“ITXC”) in the United States District
      Court of the District of New Jersey on April 14, 2004. The complaint
      alleged that ITXC’s VoIP services and systems infringed the Company’s U.S.
      Patent No. 6,243,373, entitled *“Method
      and Apparatus for Implementing a Computer Network/Internet Telephone
      System.”* On
      May 7, 2004, ITXC filed a lawsuit against C2 Communications Technologies
      Inc., and the Company, in the United States District Court for the District
      of
      New Jersey for infringement of five ITXC patents relating to VoIP technology,
      directed generally to the transmission of telephone calls over the Internet
      and
      the completion of telephone calls by switching them off the Internet and onto
      a
      public switched telephone network. On March 17, 2006, the litigation between
      C2
      and ITXC was terminated as a result of the Court approving a Consent Order
      whereby all claims and counterclaims were dismissed with prejudice as a result
      of C2’s covenanting not to sue ITXC. The Consent Order was not based on the
      determination of the merits of any issue in the lawsuits. C2 concluded, based
      upon information suggesting that the nature and magnitude of the business being
      conducted through the network at issue do not justify the litigation from an
      economic standpoint, that it would not be fiscally prudent or beneficial to
      continue this litigation. The termination of this litigation will allow C2
      to
      pursue other options to realize value from its intellectual
      property.





At
      our
      Adjourned Meeting of Stockholders held on December 30, 2003, our
      stockholders, among other things, approved an amendment to our Articles of
      Incorporation, deleting Article VI thereof (regarding liquidations,
      reorganizations, mergers and the like). Stockholders who were entitled to vote
      at the meeting and advised us in writing, prior to the vote on the amendment,
      that they dissented and intended to demand payment for their shares if the
      amendment was effectuated, were entitled to exercise their appraisal rights
      and
      obtain payment in cash for their shares under Sections 607.1301 - 607.1333
      of the Florida Business Corporation Act (the “Florida Act”), provided their
      shares were not voted in favor of the amendment.





In
      January 2004, we sent appraisal notices in compliance with Florida
      corporate statutes to all stockholders who had advised us of their intention
      to
      exercise their appraisal rights. The appraisal notices included our estimate
      of
      fair value of our shares, at $4.00 per share on a post-split basis. These
      stockholders had until February 29, 2004 to return their completed
      appraisal notices along with certificates for the shares for which they were
      exercising their appraisal rights. Approximately 33 stockholders holding
      approximately 74,000 shares of our stock returned completed appraisal notices
      by
      February 29, 2004. A stockholder of 20 shares notified us of his acceptance
      of our offer of $4.00 per share, while the stockholders of the remaining shares
      did not accept our offer. Subject to the qualification that, in accordance
      with
      the Florida Act, we may not make any payment to a stockholder seeking appraisal
      rights if, at the time of payment, our total assets are less than our total
      liabilities, stockholders who accepted our offer to purchase their shares at
      the
      estimated fair value will be paid for their shares within 90 days of our
      receipt of a duly executed appraisal notice. If we should be required to make
      any payments to dissenting stockholders, Counsel will fund any such amounts
      through advances to C2. Stockholders who did not accept our offer were required
      to indicate their own estimate of fair value, and if we do not agree with such
      estimates, the parties are required to go to court for an appraisal proceeding
      on an individual basis, in order to establish fair value. Because we did not
      agree with the estimates submitted by most of the dissenting stockholders,
      we
      have sought a judicial determination of the fair value of the common stock
      held
      by the dissenting stockholders. On June 24, 2004, we filed suit against the
      dissenting stockholders seeking a declaratory judgment, appraisal and other
      relief in the Circuit Court for the 17 th Judicial
      District in Broward County, Florida. On February 4, 2005, the declaratory
      judgment action was stayed pending the resolution of the direct and derivative
      lawsuits filed in California. This decision was made by the judge in the Florida
      declaratory judgment action due to the similar nature of certain allegations
      brought by the defendants in the declaratory judgment matter and the California
      lawsuits described above. On March 7, 2005, the dissenting shareholders appealed
      the decision of the District Court judge to the Fourth District Court of Appeals
      for the State of Florida, which denied the appeal on June 21, 2005. When the
      declaratory judgment matter resumes, there is no assurance that this matter
      will
      be resolved in our favor and an unfavorable outcome of this matter could have
      a
      material adverse impact on our business, results of operations, financial
      position or liquidity.


14


The
      Company is involved in various other legal matters arising out of its operations
      in the normal course of business, none of which are expected, individually
      or in
      the aggregate, to have a material adverse effect on the Company.





**Item
      4. Submission of Matters to a Vote of Security Holders**





None













15




**PART
      II**





**Item
      5. Market for Registrant’s Common Equity, Related Stockholder
      Matters**  **and
      Issuer Purchases of Equity Securities.**





**Price
      Range of Common Stock**





Shares
      of
      C2’s common stock, $0.01 par value per share, are traded on the OTC Bulletin
      Board (“OTCBB”) under the symbol COBT.OB.





The
      following table sets forth the high and low prices for our common stock for
      the
      period as quoted on the OTCBB, from January 1, 2004 through December 31, 2005,
      based on inter-dealer quotations, without retail markup, markdown, commissions
      or adjustments, and may not represent actual transactions:


**Quarter
                  Ended**
              ****
              **High**
              ****
              **Low**March
                  31, 2004
              
              $
              5.10
              
              $
              2.12June
                  30, 2004
              
              
              3.70
              
              
              1.45September
                  30, 2004
              
              
              1.60
              
              
              0.75December
                  31, 2004
              
              
              1.04
              
              
              0.52March
                  31, 2005
              
              $
              1.01
              
              $
              0.52June
                  30, 2005
              
              
              0.60
              
              
              0.35September
                  30, 2005
              
              
              0.51
              
              
              0.26December
                  31, 2005
              
              
              1.50
              
              
              0.22





On
      March
      7, 2006, the closing price for a share of the Company’s common stock was
      $0.70.





**Holders**





As
      of
      March 7, 2006, the Company had approximately 937 holders of common stock of
      record.





**Dividends**





To
      date,
      we have not paid dividends on our common stock nor do we anticipate that we
      will
      pay dividends in the foreseeable future. As of December 31, 2005, we do not
      have
      any preferred stock outstanding which has any preferential dividends. So long
      as
      25% of the principal amount of the Note held by Laurus Master Fund, Ltd. remains
      outstanding, we may not pay any dividends on our common stock. Additionally,
      under the Florida Business Corporation Act (the “Florida Act”), we cannot pay
      dividends while we have negative stockholders’ equity.









16




**Securities
      Authorized for Issuance Under Equity Compensation Plans**





The
      following table sets forth, as of December 31, 2005, information with respect
      to
      equity compensation plans (including individual compensation arrangements)
      under
      which the Company’s securities are authorized for issuance.




**Plan
                Category**
            
            **Number
                of Securities to be issued upon exercise of outstanding
                options**
            
            **Weighted-average
                exercise price of outstanding options**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))****(a)**
            
            **(b)**
            
            **(c)****Equity
                compensation plans approved by security
                holders:**2003
                Stock Option and Appreciation Rights Plan
            
            
            338,250
            
            
            $
            1.88
            
            
            
            1,661,7501997
                Recruitment Stock Option Plan
            
            
            14,611
            
            
            
            31.06
            
            
            
            355,3891995
                Directors Stock Option and Appreciation Rights Plan
            
            
            7,500
            
            
            
            22.50
            
            
            
            2,0001995
                Employee Stock Option and Appreciation Rights Plan
            
            
            —
            
            
            
            —
            
            
            
            14,037Director
                Stock Option Plan
            
            
            —
            
            
            
            —
            
            
            
            —**Equity
                compensation plans not approved by security
                holders:**Issuance
                of non-qualified options to employees and outside consultants
                (1)
            
            
            366,665
            
            
            
            70.99
            
            
            
            —Total
            
            
            727,026
            
            
            $
            37.50
            
            
            
            2,033,176





(1)
            For
                a description of the material terms of these options, see Note 17
                in the
                Company’s audited financial statements included in Item 15 of this Report
                on Form 10-K.




**Recent
      Sales of Unregistered Securities; Use of Proceeds from
      Registered**  **Securities.**





During
      the twelve months ended December 31, 2005, 39,600 options were granted to
      employees, directors and consultants under the 2003 Employee Stock Option and
      Appreciation Rights Plan. These options were issued with exercise prices that
      equalled or exceeded fair market value on the date of the grant and vest over
      a
      4-year period subject to the grantee’s continued employment with the
      Company **.** The
      Company relied on an exemption from registration under Section 4(2) of the
      Securities Act of 1933, as amended (the “1933 Act”).





We
      did
      not make any stock repurchases during the last quarter of 2005.


17




**Item
      6. Selected Financial Data.**





The
      following selected consolidated financial information was derived from the
      audited consolidated financial statements and notes thereto. Prior periods
      have
      been amended to reclassify the Telecommunications business as discontinued
      operations, as discussed in Item 1. The information set forth below is not
      necessarily indicative of the results of future operations and should be read
      in
      conjunction with Item 7, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” as well as the Consolidated Financial
      Statements and Notes thereto included in Item 15 in this report.





**2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****Statement
                of Operations Data :**Revenues:Technology
                licensing and development
            
            $
            —
            
            $
            540
            
            $
            2,164
            
            $
            2,837
            
            $
            5,697Operating
                costs and expenses:Selling,
                general, administrative and other
            
            
            2,785
            
            
            4,117
            
            
            4,516
            
            
            4,281
            
            
            10,229Research
                and development
            
            
            389
            
            
            442
            
            
            —
            
            
            1,399
            
            
            2,332Depreciation
                and amortization
            
            
            32
            
            
            20
            
            
            —
            
            
            56
            
            
            4,123Total
                operating costs and expenses
            
            
            3,206
            
            
            4,579
            
            
            4,516
            
            
            5,736
            
            
            16,684Operating
                loss
            
            
            (3,206
            )
            
            (4,039
            )
            
            (2,352
            )
            
            (2,899
            )
            
            (10,987
            )Other
                income (expense):Interest
                expense - related party
            
            
            (12,154
            )
            
            (8,488
            )
            
            (10,175
            )
            
            (2,397
            )
            
            (1,823
            )Interest
                expense - third party
            
            
            (658
            )
            
            (65
            )
            
            (875
            )
            
            (2,540
            )
            
            (371
            )Other
                income
            
            
            1,084
            
            
            1,487
            
            
            1,138
            
            
            37
            
            
            670Other
                income (expense), net
            
            
            (11,728
            )
            
            (7,066
            )
            
            (9,912
            )
            
            (4,900
            )
            
            (1,524
            )Loss
                from continuing operations
            
            
            (14,934
            )
            
            (11,105
            )
            
            (12,264
            )
            
            (7,799
            )
            
            (12,511
            )Loss
                from discontinued operations
            
            
            (3,555
            )
            
            (11,678
            )
            
            (19,164
            )
            
            (20,039
            )
            
            (31,986
            )Net
                loss
            
            $
            (18,489
            )
            $
            (22,783
            )
            $
            (31,428
            )
            $
            (27,838
            )
            $
            (44,497
            )Income
                (loss) from continuing operations applicable to common
                stockholders
            
            $
            (14,934
            )
            $
            (11,105
            )
            $
            (12,264
            )
            $
            (7,799
            )
            $
            2,705Basic
                and diluted weighted average shares outstanding
            
            
            19,237
            
            
            19,256
            
            
            7,011
            
            
            5,828
            
            
            4,959Net
                income (loss) per common share - basic and diluted:Income
                (loss) from continuing operations
            
            $
            (0.78
            )
            $
            (0.57
            )
            $
            (1.75
            )
            $
            (1.34
            )
            $
            0.55Loss
                from discontinued operations
            
            
            (0.18
            )
            
            (0.61
            )
            
            (2.73
            )
            
            (3.44
            )
            
            (6.45
            )Net
                loss per common share
            
            $
            (0.96
            )
            $
            (1.18
            )
            $
            (4.48
            )
            $
            (4.78
            )
            $
            (5.90
            )**Balance
                Sheet Data:**Working
                capital deficit
            
            $
            (78,055
            )
            $
            (21,352
            )
            $
            (26,576
            )
            $
            (17,244
            )
            $
            (40,812
            )Intangible
                assets, net
            
            
            60
            
            
            80
            
            
            100
            
            
            —
            
            
            1,158Goodwill
            
            
            173
            
            
            173
            
            
            173
            
            
            173
            
            
            173Total
                assets
            
            
            3,490
            
            
            24,009
            
            
            39,054
            
            
            41,446
            
            
            46,780Total
                current liabilities
            
            
            80,073
            
            
            36,362
            
            
            50,887
            
            
            40,852
            
            
            64,117Total
                long-term obligations:Related
                party
            
            
            —
            
            
            46,015
            
            
            28,717
            
            
            43,881
            
            
            11,528Third
                party
            
            
            1,359
            
            
            2,952
            
            
            —
            
            
            —
            
            
            753Discontinued
                liabilities
            
            
            —
            
            
            645
            
            
            2,403
            
            
            14,529
            
            
            7,380Stockholders’
                deficit
            
            
            (77,942
            )
            
            (61,965
            )
            
            (42,953
            )
            
            (57,816
            )
            
            (36,998
            )




2003
      Reverse Stock Split





On
      November 26, 2003, C2 stockholders approved a 1-for-20 reverse stock split.
      Accordingly, the earnings per share for years prior to 2003 have been restated
      to reflect the reverse split. All references to share numbers reflect the
      reverse stock split unless otherwise noted. In connection with the reverse
      stock
      split, the par value of the Company’s common stock changed from $0.007 to
      $0.01.


18





Adoption
      of Significant Accounting Pronouncements





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued a
      revision to SFAS No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123R”). SFAS No. 123R supersedes Accounting Principles Board (“APB”) Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations. SFAS No. 123R requires that all stock-based
      compensation, including options, be expensed at fair value as of the grant
      date
      over the vesting period. Companies will be required to use an option pricing
      model (e.g.: Black-Scholes or Binomial) to determine compensation expense,
      consistent with the model used in the already required disclosures of SFAS
      No.
      148, *Accounting
      for Stock-Based Compensation-Transition and Disclosure* .
      In
      April 2005, the SEC issued a release to amend the effective date of compliance
      with SFAS No. 123R to the first quarter of the first fiscal year beginning
      after
      June 15, 2005. The Company expects to adopt SFAS No. 123R on January 1, 2006.
      The Company does not expect the adoption of SFAS No. 123R to have a material
      effect on the Company’s financial position, operations or cash
      flow.





In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* (“SFAS
      No. 154”). SFAS No. 154 supersedes APB Opinion No. 20, *Accounting
      Changes* (“APB
      No.
      20”), and related Interpretations, and is effective for fiscal years beginning
      after December 15, 2005. SFAS No. 154 requires that voluntary changes in
      accounting principles be applied retrospectively, with the cumulative effect
      of
      the change taken into opening retained earnings for the earliest period
      presented, and the prior years’ statements restated to reflect the effect of the
      new accounting principle. Previously, APB No. 20 required that the cumulative
      effect of a change in accounting principle be recognized in net income in the
      year of the change. Although SFAS No. 154 now requires that a change in
      accounting principle be treated substantially the same as a correction of an
      error in prior periods, retrospective application is not required if it is
      impracticable to determine the effects on a specific period or the cumulative
      effect of the change on all prior periods presented in the financial statements.
      SFAS No. 154 does not change the transition provisions of any existing
      accounting pronouncements, and the Company does not expect adoption of SFAS
      No.
      154 to have a material effect on its financial position, operations or cash
      flow.





In
      2005,
      the FASB’s Emerging Issues Task Force (“EITF”) reached consensus on EITF Issue
      No. 05-2, *The
      Meaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19,
‘Accounting for Derivative Financial Instruments Indexed to, Potentially Settled
      In, a Company’s Own Stock’ ”* (“EITF
      No. 05-2”). Under EITF No. 05-2, instruments that provide the holder with an
      option to convert into a fixed number of shares (or equivalent amount of cash
      at
      the discretion of the issuer) for which the ability to exercise the option
      is
      based on the passage of time or a contingent event should be considered
      conventional, and convertible preferred stock with a mandatory redemption date
      may qualify as conventional if the economic characteristics indicate the
      instrument is more akin to debt than equity. EITF No. 05-2 is effective for
      new
      instruments entered into and instruments modified in reporting periods beginning
      after June 29, 2005. The Company does not expect the adoption of EITF No. 05-2
      to have a material effect on the Company’s financial position, operations or
      cash flow.





Significant
      Risks and Material Uncertainties





Significant
      risks and material uncertainties exist in C2’s business model and environment
      that may cause the data reflected herein to not be indicative of the Company’s
      future operations and financial condition. These risks and uncertainties
      include, but are not limited to, those presented above in Item 1A, entitled
      “Risk Factors”, and below in Item 7, entitled “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations”. Readers are
      encouraged to read and to obtain the necessary advice in their circumstances
      before becoming a stockholder in the Company.


19




**Item
      7. Management’s Discussion and Analysis of Financial Condition and
      Results**  **of
      Operations.**





**Forward-Looking
      Information**





*This
      report contains certain “forward-looking statements” within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E of
      the Exchange Act of 1934, as amended, that are based on management’s exercise of
      business judgment as well as assumptions made by, and information currently
      available to, management. When used in this document, the words “may”,* " *will”,
      “anticipate”, “believe”, “estimate”, “expect”, “intend”, and words of similar
      import, are intended to identify any forward-looking statements. You should
      not
      place undue reliance on these forward-looking statements. These statements
      reflect our current view of future events and are subject to certain risks
      and
      uncertainties as noted below. Should one or more of these risks or uncertainties
      materialize, or should underlying assumptions prove incorrect, our actual
      results could differ materially from those anticipated in these forward-looking
      statements. We undertake no obligation and do not intend to update, revise
      or
      otherwise publicly release any revisions to these forward-looking statements
      to
      reflect events or circumstances after the date hereof or to reflect the
      occurrence of any unanticipated events. Although we believe that our
      expectations are based on reasonable assumptions, we can give no assurance
      that
      our expectations will materialize.*





**Business
      Overview, Recent Developments and Outlook**





(All
      dollar amounts are presented in thousands USD, unless otherwise indicated,
      except per share amounts)





Please
      see Item 1, above, of this report for an overview of the Company’s business and
      development, including information regarding the sale of the Telecommunications
      business in the third quarter of 2005. Please see Item 1A, above, for
      description of risk factors that have the potential to impact the Company’s
      current and future operations, and financial condition.




**Liquidity
      and Capital Resources**





As
      a
      result of our substantial operating losses and negative cash flows from
      operations, we had a stockholders’ deficit of $77,942 (2004 - $61,965) and
      negative working capital of $78,055 (2004 - $21,352) at December 31, 2005.
      The
      increase in the working capital deficit during 2005 is primarily due to the
      classification as current, at December 31, 2005, of related party debt of
      $72,022 (2004 - $46,015) that matures December 31, 2006. It is partially offset
      by the reduction in current liabilities that resulted from the disposition
      of
      the Telecommunications business in the third quarter of 2005. Both continuing
      and discontinued operations in 2005 were primarily financed through increased
      related party debt. However, discontinued operations for the period May 1 to
      September 30, 2005, were financed by the purchaser of the Telecommunications
      business through advances which, at the closing date of September 30, 2005,
      formed additional consideration for the assets disposed of by the
      Company.





The
      Company had gross third party debt of $3,516 at December 31, 2005, a reduction
      from the $5,325 owed at December 31, 2004. The third party debt is held by
      Laurus Master Fund, Ltd. (“Laurus”), and at December 31, 2005 is comprised of a
      convertible note (the “Note”) in the amount of $3,235 and a warrant with a fair
      value of $281. The debt to Laurus is secured by all assets of the Company and
      is
      guaranteed by Counsel through its maturity of October 2007.





Gross
      related party debt owing to our 91% common stockholder, Counsel, at December
      31,
      2005 is $73,646 compared to $52,100 at December 31, 2004. Interest on the
      related party debt is capitalized, at the end of each quarter, and added to
      the
      principal amounts outstanding.  During 2005, in conjunction with the
      disposition of the Telecommunications business, described above, Counsel
      extended the maturity of its debt to December 31, 2006. This debt is
      supplemented by Counsel’s Keep Well, which requires Counsel to fund, through
      intercompany advances or equity contributions, all capital investment, working
      capital or other operational cash requirements of C2 until December 31,
      2006.  The Keep Well is not expected to be extended beyond its current
      maturity.





Counsel,
      in addition to guaranteeing the Laurus Note, has also agreed to subordinate
      all
      of its debt owed by the Company, and to subrogate all of its related security
      interests, in favor of Laurus. Counsel has further agreed to pledge all of
      its
      shares owned in C2 as security for the Laurus debt. In accordance with the
      Laurus agreement, C2 cannot repay amounts owing to Counsel while the debt with
      Laurus remains outstanding. Additionally, so long as C2’s debt to Laurus remains
      outstanding, Counsel may not, without the written consent of Laurus, take any
      enforcement action to collect its loans owing by C2. Notwithstanding this,
      Counsel is not expected to extend the maturity date of its loans beyond December
      31, 2006. In the event that C2’s debt to Laurus is either prepaid in full or
      settled by conversion of such debt into shares of C2, Counsel’s subordination
      agreement shall be terminated with immediate effect.


20





A
      summary
      of the Company’s outstanding debt, including a related common stock warrant, is
      as follows:





**Maturity
                Date**
            
            **December
                31, 2005**
            
            **December
                31, 2004****Gross**
              **debt**
            
            **Discounts**
            
            **Reported**
              **debt**
            
            **Gross**
              **debt**
            
            **Discounts**
            
            **Reported**
              **debt**Convertible
                note payable1
            
            
            October
                14, 2007
            
            $
            3,235
            
            $
            (392
            )
            $
            2,843
            
            $
            5,003
            
            $
            (605
            )
            $
            4,398Subordinated
                notes payable to a related party
            
            
            December
                31, 2006
            
            
            73,646
            
            
            (1,624
            )
            
            72,022
            
            
            52,100
            
            
            (6,085
            )
            
            46,015Common
                stock warrant
            
            
            October
                13, 2009
            
            
            281
            
            
            —
            
            
            281
            
            
            322
            
            
            —
            
            
            322Total
                outstanding debt
            
            
            
            
            $
            77,162
            
            $
            (2,016
            )
            $
            75,146
            
            $
            57,425
            
            $
            (6,690
            )
            $
            50,735





1 On
      September 30, 2005, the Company, in conjunction with the completion of the
      sale
      of the Telecommunications business, agreed to modifications to the security
      interest in the Company held by Laurus as follows: (a) release of the security
      interest in the assets being disposed of in the sale of the Telecommunications
      business, (b) conversion of the security interest of the convertible Note to
      the
      senior debt position, (c) payment of $1,800 into a restricted cash account
      for
      the benefit of Laurus, which may be applied toward scheduled monthly payments
      of
      the note. As at December 31, 2005, the balance of the restricted cash account
      was $1,506.





The
      independent registered public accounting firms’ reports on the consolidated
      financial statements included in the Company’s annual report on Form 10-K for
      each of the years ended December 31, 2003, 2004 and 2005 contained an
      explanatory paragraph wherein they stated the uncertainty about the Company’s
      ability to continue as a going concern.  Readers are encouraged to take due
      care when reading the independent registered public accountants’ report included
      in Item 15 of this report.  Readers are urged to obtain the necessary
      advice before becoming or continuing as a stockholder in the Company.





There
      is
      significant doubt about the Company’s ability to obtain additional financing
      beyond December 31, 2006 to support its operations once the Keep Well from
      Counsel expires. Additionally, management believes that the Company does not,
      at
      this time, have an ability to obtain additional financing in order to pursue
      expansion through acquisition. The Company must therefore realize value from
      its
      intellectual property, as discussed in Item 1, in order to continue as a going
      concern. There is no certainty that the Company will be successful in its
      strategy of generating revenue by realizing value on its intellectual
      property.




*Ownership
      Structure and Capital Resources*





·
            The
                Company is approximately 91% owned by Counsel. The remaining 9% is
                owned
                by public stockholders.





·
            The
                Company has aggregate gross debt, including a related common stock
                warrant, of $77,162 at December 31, 2005. 95% or $73,646 of this
                debt is
                owed to Counsel. The remainder of this debt, including the common
                stock
                warrant, is held by Laurus, and is guaranteed by Counsel. As discussed
                above, on September 30, 2005, in conjunction with the sale of the
                Telecommunications business, the Company placed $1,800 into a restricted
                cash account for the benefit of the Note holder, which may be applied
                toward scheduled monthly payments of the Note. At December 31, 2005,
                the
                balance of the restricted cash account was
                $1,506.





·
            Since
                becoming controlling stockholder in 2001, Counsel has invested over
                $100,000 in C2 to fund the development of C2’s technology and its
                Telecommunications business. In 2005, Counsel loaned net $15,365
                to C2,
                capitalized $6,180 of interest, and continues to have a commitment
                to
                provide the necessary funding to ensure the continued operations
                of the
                Company through December 31, 2006. In addition, Counsel has subordinated
                its debt, and guaranteed C2’s obligations to Laurus. The disposition of
                the Telecommunications business in the third quarter of 2005 significantly
                reduced both the complexity and the funding requirements of the Company’s
                operations, and the Company does not anticipate that Counsel’s investment
                in 2006 will be comparable to its investment in prior
                years.




21




*Cash
      Position*





Cash,
      cash equivalents and restricted cash as of December 31, 2005 were $1,833
      compared to $44 in 2004 and $(5) in 2003. Of the $1,833, $1,506 is restricted
      cash that is on deposit with Laurus; it is reduced each month by the $147
      principal payment due on the Note.





*Cash
      utilized in operating activities*





Our
      working capital deficit increased to $78,055 at December 31, 2005 from $21,352
      as of December 31, 2004. The increase in working capital deficit is primarily
      related to the reclassification, at December 31, 2005, of related party debt
      of
      $72,022 (2004 - $46,015) from long-term to current liabilities. It is partially
      offset by the reduction of the working capital deficit related to discontinued
      operations, from $17,619 in 2004 to $3,763 in 2005, and an increase in cash
      and
      cash equivalents from $44 in 2004 to $1,833 in 2005. Although the Company’s
      existing capital resources (due to the Counsel Keep Well) are adequate to
      finance operations until December 31, 2006, the Company’s long-term viability
      depends upon success in the pursuit of licensing arrangements and/or the ability
      to raise additional funds to meet its business objectives.





Cash
      used
      in operating activities (excluding discontinued operations) during 2005 was
      $2,138 (2004 - $4,163; 2003 - $4,857). Although the net loss from continuing
      operations increased $3,829 to $14,934 in 2005 compared to $11,105 in 2004,
      there was a net reduction in operating cash requirements. The
      loss
      from discontinued operations decreased $8,123 in 2005 as compared to 2004,
      primarily due to the gain of $6,387 on the sale of the Telecommunications
      business at September 30, 2005, and the consequent inclusion of only nine months
      of Telecommunications operations in 2005 as compared to a full year in
      2004.Significant
      changes in non-cash items were a $1,948 increase in the amortization
      of debt discounts, from $4,237 in 2004 to $6,185 in 2005, and an increase of
      $1,876 in the accrued interest added to the debt owing to Counsel. In 2004
      the
      Company recognized a gain of $1,376 on the sale of an investment in common
      stock; there were no similar transactions in 2005.





*Cash
      provided by investing activities*





Net
      cash
      provided by investing activities (excluding discontinued operations) during
      2005
      was $0 (2004 -$3,581, 2003 - $4). In 2004, cash provided by investing activities
      related to the proceeds from the disposition of securities held in Buyers United
      Inc. (“BUI”) of $3,581. In 2003, we paid $100 in cash and gave up 35% of the net
      earnings from our VoIP Patent Portfolio as consideration for the purchase price
      of U.S. Patent No. 6,243,373.





*Cash
      provided by financing activities*





Financing
      activities (excluding discontinued operations) provided net cash of $12,092
      (2004 - $17,162; 2003 - $8,028). The decrease is largely due to a reduction
      in
      third-party financing, and the segregation of $1,506 of cash to provide for
      future payments to Laurus. In 2004, the Company received net proceeds of $4,773
      from Laurus. There were no similar transactions in 2005, and in addition there
      were payments of $1,767 made to Laurus in 2005, for a net decrease of $6,540.
      This was partially offset by increased financing from Counsel. In 2005, the
      Company received net $15,365 in financing from Counsel, compared to $12,584
      in
      2004, an increase of $2,781. Due to the reduction of complexity in the Company’s
      operations following the sale of the Telecommunications business, the Company
      expects to receive less financing from Counsel during 2006.




*Contractual
      Obligations*





We
      have
      no contractual commitments other than our debt. The following table summarizes
      our contractual obligations, including estimated interest payable, at December
      31, 2005:




**Payment
                due by period****Contractual
                obligations:**
            
            **Total**
            
            **Less
                than 1**
              **year**
            
            **1-3**
              **years**
            
            **3-5**
              **years**
            
            **More
                than 5**
              **years**Subordinated
                notes payable to a related party
            
            $
            81,049
            
            $
            81,049
            
            $
            —
            
            $
            —
            
            $
            —Convertible
                note payable to a third party
            
            
            3,599
            
            
            2,044
            
            
            1,555
            
            
            —
            
            
            —Warrant
                to purchase common stock1
            
            
            281
            
            
            —
            
            
            —
            
            
            281
            
            
            —Total
            
            $
            84,929
            
            $
            83,093
            
            $
            1,555
            
            $
            281
            
            $
            —





1 The
      warrant is reported at fair value, as determined at the end of each
      quarter.


22




**Consolidated
      Results of Operations**





Key
      selected financial data for the three years ended December 31, 2005, 2004 and
      2003 are as follows:




**Percentage
                Change****2005**
            
            **2004**
            
            **2003**
            
            **2005
                vs. 2004**
            
            **2004
                vs. 2003**Revenues:Technology
                licensing and development
            
            $
            —
            
            $
            540
            
            $
            2,164
            
            
            %
                N/A
            
            
            
            %
                (75
            )Operating
                costs and expenses:Selling,
                general, administrative and other
            
            
            2,785
            
            
            4,117
            
            
            4,510
            
            
            (32
            )
            
            
            (9
            )Provision
                for doubtful accounts
            
            
            —
            
            
            —
            
            
            6
            
            
            N/A
            
            
            
            N/AResearch
                and development
            
            
            389
            
            
            442
            
            
            —
            
            
            (12
            )
            
            
            N/ADepreciation
                and amortization
            
            
            32
            
            
            20
            
            
            —
            
            
            60
            
            
            
            N/ATotal
                operating costs and expenses
            
            
            3,206
            
            
            4,579
            
            
            4,516
            
            
            (30
            )
            
            
            1Operating
                loss
            
            
            (3,206
            )
            
            (4,039
            )
            
            (2,352
            )
            
            (21
            )
            
            
            72Other
                income (expense):Interest
                expense - related party
            
            
            (12,154
            )
            
            (8,488
            )
            
            (10,175
            )
            
            43
            
            
            
            (17
            )Interest
                expense - third party
            
            
            (658
            )
            
            (65
            )
            
            (875
            )
            
            912
            
            
            
            (93
            )Other
                income
            
            
            1,084
            
            
            1,487
            
            
            1,138
            
            
            (27
            )
            
            
            31Total
                other expense, net
            
            
            (11,728
            )
            
            (7,066
            )
            
            (9,912
            )
            
            66
            
            
            
            (29
            )Loss
                from continuing operations
            
            
            (14,934
            )
            
            (11,105
            )
            
            (12,264
            )
            
            34
            
            
            
            (9
            )Loss
                from discontinued operations, net of $0 tax
            
            
            (3,555
            )
            
            (11,678
            )
            
            (19,164
            )
            
            (70
            )
            
            
            (39
            )Net
                loss
            
            $
            (18,489
            )
            $
            (22,783
            )
            $
            (31,428
            )
            
            (19
            )
            
            
            (28
            )




***2005
      Compared to 2004***





In
      order
      to more fully understand the comparison of the results of continuing operations
      for 2005 as compared to 2004, it is important to note the significant change
      that occurred in 2005. On May 19, 2005, we entered into an agreement to sell
      substantially all of the assets, and to transfer certain liabilities, of ACC
      to
      Acceris Management and Acquisition LLC, an unrelated third party. The sale
      closed on September 30, 2005. In accordance with GAAP, the operational results
      related to ACC were reclassified as discontinued operations in 2005 and prior
      years, and accordingly are not included in the following analysis of continuing
      operations for 2005.





**Technologies
      revenue** is
      derived from licensing and related services revenue. Utilizing our patented
      technology, VoIP enables telecommunications customers to originate a phone
      call
      on a traditional handset, transmit any part of that call via the Internet,
      and
      then terminate the call over the traditional telephone network. Our VoIP Patent
      Portfolio is an international patent portfolio covering the basic process and
      technology that enables VoIP communications. The Company has engaged, and
      intends to engage, in licensing agreements with third parties domestically
      and
      internationally. At present, no royalties are being paid to the Company. The
      Company plans to obtain licensing and royalty revenue from its target market
      by
      enforcing its patents, with the assistance of outside counsel, in order to
      realize value from its intellectual property. In this regard, in the third
      quarter of 2005, the Company retained legal counsel with expertise in the
      enforcement of intellectual property rights.





Revenue
      and contributions from this business to date have been based on the sales and
      deployments of our VoIP solutions, which we are no longer directly marketing,
      rather than on the receipt of licensing fees and royalties. The timing and
      sizing of various projects has resulted in a continued pattern of fluctuating
      financial results. We expect to generate licensing and royalty revenue in this
      business as we gain recognition of the underlying value in our VoIP Patent
      Portfolio through the enforcement of our intellectual property
      rights.





Technologies
      revenues were $0 in 2005 compared to $540 in 2004. The revenues in 2004 relate
      to a contract that was entered into with a Japanese company in 2003. For this
      contract, revenue of $600 was recognized in 2003 and revenue of $540 was
      recognized in 2004.





In
      connection with the 2003 acquisition of U.S. Patent No. 6,243,373, the Company
      agreed to remit, to the former owner of the patent, 35% of the net proceeds
      from
      future revenue derived from the licensing of the VoIP Patent Portfolio, composed
      of U.S. Patent Nos. 6,243,373 and 6,438,124. Net proceeds are defined as revenue
      from licensing the VoIP Patent Portfolio less costs necessary to obtain the
      licensing arrangement. To date, no payments have been made to the former owner
      of the patent. As we earn patent licensing revenues, we expect to incur the
      associated costs.


23


**Selling,
      general, administrative and other expense** was
      $2,785 for the year ended December 31, 2005 as compared to $4,117 for the year
      ended December 31, 2004. The significant changes included:





·
            Compensation
                expense was $275 compared to $356 in 2004, including bonuses of $69
                in
                2005 and $0 in 2004. The reduction is primarily attributable to the
                reduction, effective July 1, 2005, in the salary earned by the CEO
                of C2,
                reflecting the reduced complexity of the Company’s operations following
                the sale of the Telecommunications business in the third quarter
                of
                2005.





·
            Management
                fee expense charged by our majority stockholder, Counsel, was $450
                in 2005
                and $280 in 2004. See Item 13 of this Annual Report on Form 10-K
                for
                details regarding these management
                fees.





·
            Legal
                expenses in 2005 were $845 compared to $1,619 in 2004. The decrease
                in
                legal expenses resulted primarily from a lower level of activity
                in the
                Company’s patent litigation with ITXC.





·
            Accounting
                and tax consulting expenses in 2005 were $251 compared to $411 in
                2004.
                The decrease reflects the reduced complexity of operations in 2005
                as
                compared to 2004. As well, in 2004 the Company changed independent
                auditors and restated prior years’ financial statements, both of which
                resulted in atypically high costs for accounting and tax
                consulting.





·
            Travel
                and entertainment expenses in 2005 were $240 compared to $275 in
                2004.
                Travel expenses in 2006 are expected to be less than in prior years,
                reflecting the decreased complexity of operations following the sale
                of
                the Telecommunications business in the third quarter of
                2005.





·
            Fees
                paid to the members of our Board of Directors were $168 in 2005 compared
                to $214 in 2004. The decrease reflects the fact that the Board was
                reduced
                from eight members during 2004 to four members in the first quarter
                of
                2005.





·
            Directors
                and officers insurance expense was $150 in both 2005 and
                2004.





·
            We
                incurred restructuring expenses of $152 in 2005, relating to severance
                costs paid to former employees in the third quarter of 2005. There
                were no
                similar expenses in 2004.





·
            Consulting
                expenses in 2004 relating to our Technologies operations were $227.
                As
                well, in 2004 we incurred consulting expenses of $90 relating to
                the
                restatement of prior years’ financial statements. There were no similar
                expenses in 2005.





·
            SEC
                filing expenses in 2004 relating to the restatement of prior years’
                financial statements were $72. There were no similar expenses in
                2005.





**Depreciation
      and amortization** - This
      expense was $32 in 2005 compared to $20 in 2004. In 2005, the Company incurred
      depreciation expense on equipment that it acquired in December 2004. In 2004,
      this expense consisted solely of amortization of the VoIP patent.





**Research
      and development costs (“R&D”)** - In
      2004, the Company resumed R&D activities related to its VoIP technology
      platform. The Company ceased its investment in R&D in the third quarter of
      2005 in conjunction with its decision to focus all business efforts on the
      realization of licensing fees associated with its intellectual property. R&D
      expense was $389 in 2005 compared to $442 in 2004.





The
      changes in **other
      income (expense)** are
      primarily related to the following:





·
            Related
                party interest expense - This totaled $12,154 in 2005 compared to
                $8,488
                in 2004. The increase of $3,666 is largely attributable to a larger
                average loan balance with our majority stockholder and major creditor,
                Counsel, due to net advances of $15,365 during 2005. Included in
                related
                party interest expense in 2005 is $5,973 of amortization of the beneficial
                conversion feature, related to Counsel’s ability to convert $18,270 of
                debt at $5.02 per share. In 2004, amortization of the beneficial
                conversion feature was $4,126 on $16,714 of debt due to Counsel,
                convertible at $5.02 per share.


24


·
            Third
                party interest expense - This totaled $658 in 2005 compared to $65
                in
                2004. The increase of $593 is due to the fact that the Note with
                Laurus,
                entered into on October 14, 2004, was outstanding for all of
                2005.





·
            Other
                income - This totaled $1,084 for 2005, as compared to $1,487 for
                2004. In
                the third and fourth quarters of 2005, the Company entered into settlement
                agreements with certain carriers, which resulted in the recovery
                of $1,115
                of receivables that were fully reserved against when acquired in
                2001 as
                part of the acquisition of the assets of WorldxChange Communications
                Inc.
                from bankruptcy. This was partially offset by a charge of $38 when
                fixed
                assets were transferred to a former employee in return for future
                royalty
                revenues. In 2004, the other income was primarily comprised of gains
                of
                $1,376 recognized on the disposition of the Company’s ownership in
                BUI.




***2004
      Compared to 2003***





When
      considering the review of the results of continuing operations for 2004 compared
      to 2003, it is important to note the significant change that occurred in 2003.
      On December 6, 2002, we entered into an agreement to sell substantially all
      of
      the assets and customer base of ILC. The sale closed on May 1, 2003. As a result
      of the agreement, the operational results related to ILC were reclassified
      as
      discontinued operations in 2003 and prior years, and accordingly are not
      included in the following analysis of continuing operations for
      2003.





**Technology
      licensing and development revenues** decreased $1,624 to $540 in 2004 from $2,164 in 2003. The decrease was related
      to having revenue from one contract outstanding in 2004 compared to two
      contracts in 2003. In 2003, revenue of $1,564 was recognized from a services
      and
      licensing contract that was entered into and completed in 2003. A second
      contract was entered into in 2003, with a Japanese company. Revenue of $600
      was
      recognized in 2003, and $540, the remaining revenue, was recognized in 2004.
      Technology licensing revenues are project-based and, as such, these revenues
      have varied from year to year based on the timing and size of the projects
      and
      related payments.





**Selling,
      general, administrative and other expense** was
      $4,117 for the year ended December 31, 2004 as compared to $4,510 for the year
      ended December 31, 2003. The significant changes included:





·
            Compensation
                expense in 2004 was $356 compared to $2,160 in 2003, including bonuses
                of
                $0 in 2004 and $339 in 2003. The reduction is primarily attributable
                to
                lower staff levels in 2004 compared to 2003. As well, the 2003 expense
                includes $849 of compensation expense for employees who performed
                research
                and development activities in 2004, and whose 2004 salaries were
                therefore
                allocated to research and development expense in
                2004.





·
            Management
                fee expense charged by our majority stockholder, Counsel, was $280
                in 2004
                and $130 in 2003. See Item 13 of this Annual Report on Form 10-K
                for
                details regarding these management
                fees.





·
            Legal
                expenses in 2004 were $1,619 compared to $402 in 2003. The increase
                in
                legal expenses primarily related to the Company’s patent litigation with
                ITXC, and legal fees associated with the direct and derivative actions
                against the Company.





·
            Accounting
                and tax consulting expenses in 2004 were $411, compared to $312 in
                2003.
                The increase is primarily related to the change in the Company’s
                independent accountants in 2004, as well as the restatement, in 2004,
                of
                prior years’ financial results.





·
            Travel
                and entertainment expenses were comparable in 2004 and 2003, at $275
                and
                $288, respectively.





·
            Fees
                paid to the members of our Board of Directors were $214 in 2004 compared
                to $55 in 2003. Beginning in June 2004, Board compensation was increased
                to include an annual retainer of $20,000 to each board member, and
                additional retainers to committee chairs and members, in addition
                to fees
                for each meeting attended. Prior to this change in compensation,
                Board
                compensation consisted solely of fees for each meeting
                attended.





·
            Directors
                and officers insurance expense was $150 in 2004, compared to $315
                in 2003.
                The decrease is due to reduced
                premiums.




25


·
            We
                incurred consulting expenses of $227 in 2004, relating to our Technologies
                operations, compared to $32 in 2003. In 2004 we also incurred consulting
                expenses of $90 relating to the restatement of prior years’ financial
                statements. Similar expenses in 2003 were $33. Other consulting expenses
                were approximately $50 in 2004, compared to approximately $250 in
                2003.





·
            We
                incurred SEC filing expenses of $72 in 2004 that were related to
                the
                restatement of the prior years’ financial statements. Similar expenses in
                2003 were $15.





·
            We
                incurred agent commission expenses of $54 in 2003, with $33 relating
                to
                our Technologies operations and the remainder to Buyers United
                transactions. There were no similar expenses in 2004.





·
            Facilities
                expense was $24 in 2004, compared to $120 in 2003. The decrease of
                $96 was
                primarily due to lower rent expense in 2004.




**Depreciation
      and amortization** - This
      expense was $20 in 2004 compared to $0 in 2003. The 2004 expense related to
      amortization of the VoIP Patent.





**Research
      and development costs** - We had
      R&D expenses of $442 in 2004, compared to no R&D expense in 2003. We
      resumed investing in R&D in the second quarter of 2004, after having ceased
      R&D activities in 2002.





The
      changes in **other
      income (expense)** were
      primarily related to the following:





·
            Related
                party interest expense - This totaled $8,488 in 2004 compared to
                $10,175
                in 2003. The reduction of $1,687 is largely attributable to a lower
                average loan balance with Counsel, due to the fact that $40,673 of
                debt
                was converted to equity in November 2003. Included in related party
                interest expense in 2004 is $4,126 of amortization of the beneficial
                conversion feature, related to Counsel’s ability to convert $16,714 of
                debt at $5.02 per share. In 2003, amortization of the beneficial
                conversion feature was $5,590 on $15,291 of debt due to Counsel,
                convertible at $6.15 per share. The Counsel debt that was converted
                carried an interest rate of 10%; therefore the conversion led to
                approximately $4,000 in annual interest savings. Such savings were
                reduced
                by increases in debt due to advances by Counsel during
                2004.





·
            Third
                party interest expense - This totaled $65 in 2004 compared to $875
                in
                2003, due to a reduction in third party
                debt.





Other
      income - This totaled $1,487 for 2004, as compared to $1,138 for 2003. In 2004,
      the other income was primarily comprised of gains of $1,376 recognized on the
      disposition of the Company’s ownership in BUI. In 2003, the other income was
      primarily related to the discharge of obligations associated with two settlement
      agreements totaling $1,141.





**Recent
      Accounting Pronouncements**





See
      Item
      6 of this report for a discussion of recent accounting pronouncements and their
      impact on our financial statements.





**Critical
      Accounting Policies**





Our
      consolidated financial statements have been prepared in accordance with
      accounting principals generally accepted in the United States (“GAAP”). This
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities, the disclosure of contingent assets and
      liabilities at the date of the financial statements, and the reported amounts
      of
      revenues and expenses during the reporting period. Actual results could differ
      from those estimates.





Significant
      estimates include revenue recognition, purchase accounting (including the
      ultimate recoverability of intangibles and other long-lived assets), valuation
      of deferred tax assets, and contingencies surrounding litigation. These policies
      have the potential to have a significant impact on our financial statements,
      either because of the significance of the financial statement item to which
      they
      relate, or because they require judgment and estimation due to the uncertainty
      involved in measuring, at a specific point in time, events which are continuous
      in nature. On an on-going basis, management evaluates its estimates and
      judgments, including those related to intangible assets, contingencies,
      collectibility of receivables and litigation. Management bases its estimates
      and
      judgments on historical experience and various other factors that are believed
      to be reasonable under the circumstances, the results of which form the basis
      for making judgments about the carrying value of assets and liabilities that
      are
      not readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions.


26


**Revenue
      recognition**





Revenue
      is recognized when persuasive evidence of an arrangement exists, delivery has
      occurred or services have been rendered, the Company’s price to the customer is
      fixed and determinable, and collection of the resulting receivable is reasonably
      assured. Revenues where collectibility is not assured are recognized when the
      total cash collections to be retained by the Company are finalized.





When
      a
      license of C2 technology requires continued support or involvement of C2,
      contract revenues are spread over the period of the required support or
      involvement. In the event that collectibility is in question, revenue is
      recorded only to the extent of cash receipts.





**Use
      of estimates**





The
      Company accounts for intangible assets in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 141, *Business
      Combinations* (“SFAS
      141”) and SFAS No. 142, *Goodwill
      and Other Intangible Assets* (“SFAS
      142”). All business combinations are accounted for using the purchase method.
      Goodwill and intangible assets with indefinite useful lives are not amortized,
      but are tested for impairment at least annually. Intangible assets are recorded
      based on estimates of fair value at the time of the acquisition.





The
      Company assesses the fair value of goodwill based upon the fair value of the
      Company as a whole, with the Company’s valuation being based upon its market
      capitalization. If the carrying amount of the assets exceeds the Company’s
      estimated fair value, goodwill impairment may be present. The Company measures
      the goodwill impairment loss based upon the fair value of the underlying assets
      and liabilities, including any unrecognized intangible assets, and estimates
      the
      implied fair value of goodwill. An impairment loss is recognized to the extent
      that the Company’s recorded goodwill exceeds the implied fair value of
      goodwill.





Goodwill
      is tested for impairment annually, and will be tested for impairment between
      annual tests if an event occurs or circumstances change that more likely than
      not would indicate the carrying amount may be impaired. No impairment was
      present upon the performance of these tests in 2005 and 2004. We cannot predict
      the occurrence of future events that might adversely affect the reported value
      of goodwill. Such events may include, but are not limited to, strategic
      decisions made in response to economic and competitive conditions, judgments
      on
      the validity of the Company’s VoIP Patent Portfolio, or other factors not known
      to management at this time.





Regularly,
      the Company evaluates whether events or circumstances have occurred that
      indicate the carrying value of its other amortizable intangible assets may
      not
      be recoverable. When factors indicate an asset may not be recoverable, the
      Company compares the related future net cash flows to the carrying value of
      the
      asset to determine if impairment exists. If the expected future net cash flows
      are less than carrying value, impairment is recognized to the extent that the
      carrying value exceeds the fair value of the asset.





The
      Company assesses the value of its deferred tax asset, which has been generated
      by a history of net operating losses, at least annually, and determines the
      necessity for a valuation allowance. The Company evaluates which portion, if
      any, will more likely than not be realized by offsetting future taxable income.
      The determination of that allowance includes a projection of its future taxable
      income, as well as consideration of any limitations that may exist on its use
      of
      its net operating loss carryforwards.





The
      Company is involved from time to time in various legal matters arising out
      of
      its operations in the normal course of business. On a case by case basis, the
      Company evaluates the likelihood of possible outcomes for this litigation.
      Based
      on this evaluation, the Company determines whether a liability accrual is
      appropriate. If the likelihood of a negative outcome is probable, and the amount
      is estimable, the Company accounts for the liability in the current period.
      A
      change in the circumstances surrounding any current litigation could have a
      material impact on the financial statements.





**Investments**





Dividends
      and realized gains and losses on equity securities are included in other income
      in the consolidated statements of operations.





Investments
      are accounted for under the cost method, as the equity securities or the
      underlying common stock are not readily marketable and the Company’s ownership
      interest does not allow it to exercise significant influence over the entity.
      The Company monitors its investments for impairment by considering current
      factors including economic environment, market conditions, operational
      performance, and other specific factors relating to the business underlying
      the
      investment, and will record impairments in carrying values if appropriate.
      The
      fair values of the securities are estimated using the best available information
      as of the evaluation date, including the quoted market prices of comparable
      public companies, recent financing rounds of the investee and other investee
      specific information.




27


**Income
      taxes**





The
      Company records deferred taxes in accordance with SFAS No. 109, *Accounting
      for Income Taxes* (“SFAS
      109”). This statement requires recognition of deferred tax assets and
      liabilities for temporary differences between the tax bases of assets and
      liabilities and the amounts at which they are carried in the financial
      statements, based upon the enacted tax rates in effect for the year in which
      the
      differences are expected to reverse. The Company establishes a valuation
      allowance when necessary to reduce deferred tax assets to the amount expected
      to
      be realized.




**Discontinued
      Operations**





In
      accordance with the provisions of the Financial Accounting Standards Board
      (“FASB”) SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      the
      operations and related losses on operations sold, or identified as held for
      sale, have been presented as discontinued operations in the Consolidated
      Statements of Operations for all years presented. Gains are recognized when
      realized.





This
      discussion and analysis should be read in conjunction with our Consolidated
      Financial Statements and Notes thereto included in Item 8 of this report. These
      policies have the potential to have a significant impact on our financial
      statements, either because of the significance of the financial statement item
      to which they relate, or because they require judgment and estimation due to
      the
      uncertainty involved in measuring, at a specific point in time, events which
      are
      continuous in nature.





**Item
      7A. Quantitative and Qualitative Disclosures about Market
      Risk.**





Our
      exposure to market risk is limited to interest rate sensitivity, which is
      affected by changes in the general level of United States interest rates. Our
      cash equivalents are invested with high quality issuers and we limit the amount
      of credit exposure to any one issuer. Due to the short-term nature of the cash
      equivalents, we believe that we are not subject to any material interest rate
      risk as it relates to interest income. As to interest expense, we have one
      debt
      instruments that has a variable interest rate. Our variable interest rate
      convertible note provides that the principal amount outstanding bears interest
      at the prime rate as published in the Wall St. Journal (“WSJ interest rate”,
      7.25% at December 31, 2005) plus 3% (but not less than 7.0% in total),
      decreasing by 2% (but not less than 0%) for every 25% increase in the Market
      Price (as defined therein) above the fixed conversion price of $0.88 following
      the effective date (January 18, 2005) of the registration statement covering
      the
      Common Stock issuable upon conversion. Assuming the debt amount on the variable
      interest rate convertible note at December 31, 2005 was constant during the
      next
      twelve-month period, the impact of a one percent increase in the interest rate
      would be an increase in interest expense of approximately  $32  for
      that
      twelve-month period. In respect of the variable interest rate convertible note,
      should the price of the Company’s common stock increase and maintain a price
      equal to 125% of $0.88 for a twelve month period, the Company would benefit
      from
      a reduced interest rate of 2%, resulting in lower interest costs of up to
      approximately $64 for that twelve-month period. We do not believe that we are
      subject to material market risk on our fixed rate debt with Counsel in the
      near
      term.





We
      did
      not have any foreign currency hedges or other derivative financial instruments
      as of December 31, 2005. We do not enter into financial instruments for trading
      or speculative purposes and do not currently utilize derivative financial
      instruments. Our operations are conducted primarily in the United States and
      as
      such are not subject to material foreign currency exchange rate risk.





**Item
      8. Financial Statements and Supplementary Data.**





See
      Consolidated Financial Statements and supplementary data beginning on pages
      F-1
      and S-1.





**Item
      9. Changes In and Disagreements With Accountants on Accounting
      and**  **Financial
      Disclosure.**





None.





**Item
      9A. Controls and Procedures.**





As
      of the
      end of the period covered by this Annual Report, the Chief Executive Officer
      and
      Chief Financial Officer of the Company (the “Certifying Officers”) conducted
      evaluations of the Company’s disclosure controls and procedures. As defined
      under Sections 13a-15(e) and 15d-15(e) of the Exchange Act, the term “disclosure
      controls and procedures” means controls and other procedures of an issuer that
      are designed to ensure that information required to be disclosed by the issuer
      in the reports that it files or submits under the Exchange Act is recorded,
      processed, summarized and reported, within the time periods specified in the
      Commission’s rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed by an issuer in the reports that it files or submits
      under the Exchange Act is accumulated and communicated to the issuer’s
      management, including the Certifying Officers, to allow timely decisions
      regarding required disclosure. Based on this evaluation, the Certifying Officers
      have concluded that the Company’s disclosure controls and procedures are
      effective.


28


Further,
      there were no changes in the Company’s internal control over financial reporting
      during the fourth fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





**Item
      9B. Other Information.**





None.


















29





**PART
      III**





**Item
      10. Directors and Executive Officers of the Registrant.**





C2’s
      Articles of Incorporation, as amended, provide that the Board of Directors
      shall
      be divided into three
      classes, and that the total number of directors shall not be less than five
      and
      not more than nine. Each director shall serve a term of three years. As of
      the
      date hereof, the Board of Directors consists of four members: one Class I
      director (Mr. Shimer) and three Class II directors (Messrs. Toh, Heaton, and
      Silber). The following table sets forth the names, ages and positions with
      C2 of
      the persons who currently serve as our directors and executive officers. There
      are no family relationships between any present executive officers and
      directors.





**Name**
            
            **Age
                (1)**
            
            **Title**Allan
                C. Silber
            
            57
            
            Chairman
                of the Board and Chief Executive OfficerHal
                B. Heaton
            
            55
            
            DirectorHenry
                Y.L. Toh
            
            48
            
            DirectorSamuel
                L. Shimer
            
            42
            
            DirectorKelly
                D. Murumets
            
            42
            
            PresidentStephen
                A. Weintraub
            
            58
            
            Executive
                Vice President, Corporate Secretary and Chief Financial
                Officer


_______________


(1)
            
            As
                of December 31, 2005.





Set
      forth
      below are descriptions of the backgrounds of the executive officers and
      directors of the Company and their principal occupations for the past five
      years:





**Allan
      C. Silber** ,
      Chairman of the Board and Chief Executive Officer. Mr. Silber was elected to
      the
      Board of Directors as a Class II director in September 2001. He was appointed
      as
      Chairman of the Board in November 2001, a position he held until October, 2004,
      and was again appointed as Chairman of the Board in March 2005, following the
      resignation of James J. Meenan from the Board. Mr. Silber is the Chairman and
      CEO of Counsel Corporation, which he founded in 1979. Mr. Silber attended
      McMaster University and received a Bachelor of Science degree from the
      University of Toronto.





**Hal
      B. Heaton** ,
      Director. Dr. Heaton was appointed by the Board of Directors as a Class II
      director on June 14, 2000 to fill a board vacancy. In March 2005, Mr. Heaton
      was
      appointed as Chairman of the Special Committee of Independent Directors. From
      1982 to present he has been a professor of Finance at Brigham Young University
      and between 1988 and 1990 was a visiting professor of Finance at Harvard
      University. Dr. Heaton is a director of MITY Enterprises, Inc., a publicly
      traded manufacturer of furniture in Orem, Utah. Dr. Heaton holds a Bachelor’s
      degree in Computer Science/Mathematics and a Master’s in Business Administration
      from Brigham Young University, as well as a Master’s degree in Economics and a
      Ph.D. in Finance from Stanford University.





**Henry
      Y.L. Toh** ,
      Director. The Board of Directors elected Mr. Toh as a Class II director and
      as
      Vice Chairman of the Board of Directors in April 1992. Mr. Toh became President
      of C2 in May 1993, Acting Chief Financial Officer in September 1995 and Chairman
      of the Board in May 1996, and served as such through September 1996. Mr. Toh
      was
      appointed as Chairman of the Audit Committee in March 2005. Mr. Toh serves
      as a
      director of: National Auto Credit, Inc. (previously an originator of sub-prime
      automobile financing that is transitioning into new lines of business) since
      December 1998; Teletouch Communications, Inc., a retail provider of Internet,
      cellular and paging services, beginning in November 2001; Isolagen, Inc., a
      biotechnology company, since 2003; Crown Financial Group, Inc., a publicly
      traded registered broker-dealer, (March 2004 - October 2005); and Vaso Active
      Pharmaceuticals Inc., a development stage company formed for the purpose of
      marketing and distributing over the counter pharmaceuticals, since August 2004.
      He has also served as a director and Chief Executive Officer of Four M
      International Inc., a private investment firm, and as a director and Chief
      Executive Officer of Amerique Investments since 1992. He is a graduate of Rice
      University.





**Samuel
      L. Shimer** ,
      Director. Mr. Shimer was appointed by the Board of Directors as a Class I
      director on April 15, 2001 to fill a board vacancy and was appointed Senior
      Vice
      President, Mergers & Acquisitions and Business Development on February 12,
      2003. From 1997 to February 2003 he was employed by Counsel Corporation, serving
      as a Managing Director since 1998. From 1991 to 1997, Mr. Shimer worked at
      two
      merchant banking funds affiliated with Lazard Frères & Co., Center Partners
      and Corporate Partners, ultimately serving as a Principal. Mr. Shimer earned
      a
      Bachelor of Science in Economics degree from The Wharton School of the
      University of Pennsylvania, and a Master’s of Business Administration degree
      from Harvard Business School. Mr. Shimer terminated his employment with the
      Company on February 27, 2004 to join Whitney & Co., an asset management
      company. He remains a member of the Board.


30


**Kelly
      D. Murumets** Ms.
      Murumets became a Class III director in February 2003, a position she held
      until
      March 2005, at which time the Board was reconfigured to reflect the reduced
      complexity of operations following the expected sale of the Telecommunications
      business. Ms. Murumets joined Counsel Corporation as Executive Vice President
      in
      February 2002 and was appointed President of C2 in November 2003. Prior to
      joining Counsel and C2, Ms. Murumets was a Vice President with Managerial Design
      where she was a valued advisor to clients throughout North America giving
      leaders the insight and guidance required to implement change, achieve results
      and improve profitability. Ms. Murumets received her BA from Bishop’s
      University, her MBA from the University of Western Ontario’s Ivey School of
      Business and her MSW from Wilfrid Laurier University, where she was the
      recipient of the Gold Medal and Governor General’s Award. Ms. Murumets resigned
      as President of the Company effective March 3, 2006, and as Executive Vice
      President of Counsel effective March 31, 2006.





**Stephen
      A. Weintraub** ,
      Executive Vice President, Corporate Secretary and Chief Financial Officer.
      Mr.
      Weintraub was appointed Senior Vice President and Secretary of C2 in December
      2002. Mr. Weintraub was elected as a Class I director on November 26, 2003,
      and
      served as a director until June 15, 2004. He became an Executive Vice President
      in October 2005 and was appointed Chief Financial Officer in December 2005,
      following the resignation of Mr. Gary Clifford. Mr. Weintraub joined Counsel
      in
      June 1983 as Vice President, Finance and Chief Financial Officer. He has been
      and is an officer and director of various Counsel subsidiaries. He has been
      Secretary of Counsel since 1987 and was appointed Senior Vice President in
      1989.
      In December 2004, Mr. Weintraub was promoted to Executive Vice President and
      Secretary and became Chief Financial Officer again in December 2005. From 1980
      to 1983 he was Secretary-Treasurer of Pinetree Development Co. Limited, a
      private real estate developer and investor. From 1975 to 1980 he was Treasurer
      and CFO of Unicorp Financial Corporation, a public financial management and
      holding company. Mr. Weintraub received a Bachelor’s degree in Commerce from the
      University of Toronto in 1969, qualified as a Chartered Accountant with
      Clarkson, Gordon (now Ernst & Young LLP) in 1972 and received his law degree
      (LL.B.) from Osgoode Hall Law School, York University in 1975. Mr. Weintraub
      is
      a director of Counsel Corporation, the parent company of C2.





Each
      officer of C2 is appointed by the Board of Directors and holds his/her office
      at
      the pleasure and direction of the Board of Directors.





C2
      and
      four of C2’s current and former executives and board members were named in
      derivative and securities actions filed in the Superior Court of the State
      of
      California in and for the County of San Diego on April 16, 2004, as described
      above. The Company believes that these claims are without merit and intends
      to
      vigorously defend these actions. There is no assurance that these matters will
      be resolved in the Company’s favor and an unfavorable outcome of these matters
      could have a material adverse impact on its business, results of operations,
      financial position or liquidity. See “Item 3 - Legal Proceedings.”





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires our officers and directors, and persons
      who
      own more than ten percent of a registered class of our equity securities, to
      file reports of ownership and changes in ownership of equity securities of
      C2
      with the SEC. Officers, directors, and greater than ten percent stockholders
      are
      required by the SEC regulation to furnish us with copies of all Section 16(a)
      forms that they file.





Based
      solely upon a review of Forms 3 and Forms 4 furnished to us pursuant to Rule
      16a-3 under the Exchange Act during our most recent fiscal year, and Forms
      5
      with respect to our most recent fiscal year, we believe that all such forms
      required to be filed pursuant to Section 16(a) were timely filed as necessary,
      by the executive officers, directors and security holders required to file
      same
      during the fiscal year ended December 31, 2005, except that Catherine Moran,
      C2’s Vice President of Accounting and Corporate Controller, failed to file a
      timely Form 3. As of the date of filing this Annual Report, Ms. Moran is in
      compliance with Section 16(a) reporting requirements.




**The
      Board of Directors**





The
      Board
      of Directors oversees the business affairs of the Company and monitors the
      performance of management. The Board of Directors held 12 meetings during the
      fiscal year ended December 31, 2005. The Board of Directors has designated
      three
      standing committees: the Audit Committee, the Compensation Committee, and the
      Special Committee of Independent Directors. We do not have a nominating or
      a
      corporate governance committee. However, corporate governance functions are
      included in the Audit Committee Charter, and Board nominations are considered
      by
      the full Board.





**Committees
      of the Board of Directors**





**Audit
      Committee.** The
      Audit Committee is responsible for making recommendations to the Board of
      Directors concerning the selection and engagement of independent accountants
      and
      for reviewing the scope of the annual audit, audit fees, results of the audit
      and independent registered public accounting firm’s independence. The Audit
      Committee is also responsible for corporate governance, and reviews and
      discusses with management and the Board of Directors such matters as accounting
      policies, internal accounting controls and procedures for preparation of
      financial statements. Its membership is currently comprised of Mr. Toh
      (chairman) and Mr. Heaton, both independent directors. The Audit Committee
      held
      four meetings during the last fiscal year. On June 9, 2000, the Board of
      Directors approved C2’s Audit Committee Charter, which was subsequently revised
      and amended on July 10, 2001 and again on February 12, 2003 in order to
      incorporate certain updates in light of the most recent regulatory developments,
      including the Sarbanes-Oxley Act of 2002. A copy of the current Audit Committee
      Charter was attached to the Company’s Definitive Proxy Statement sent to
      stockholders in October 2003 in connection with the 2003 Annual Meeting of
      Stockholders. The Audit Committee Charter is reviewed annually and was last
      reviewed by the Board of Directors on March 23, 2004, at which time no
      amendments were proposed.




31


*Audit
      Committee Financial Expert*





The
      Board
      of Directors has determined that Mr. Henry Y.L. Toh is an audit committee
      financial expert as defined by Item 401(h) of Regulation S-K under the
      Securities Act and is independent within the meaning of Item 7(d)(3)(iv) of
      Schedule 14A under the Exchange Act.





**Compensation
      Committee.** The
      Compensation Committee reviews and approves the compensation for executive
      employees. Its membership is currently comprised of Messrs. Toh and Heaton,
      both
      independent directors. The Compensation Committee held no meetings during the
      last fiscal year.





**Special
      Committee of Independent Directors.** The
      Special Committee of Independent Directors reviews and makes recommendations
      to
      the Board of Directors on potential merger and acquisition activities of the
      business and potential financings. The Committee was formed on December 7,
      2004
      and is comprised of Messrs. Heaton (Chairman) and Toh. Mr. Heaton joined the
      committee on March 30, 2005. The Special Committee held four meetings during
      the
      last fiscal year.




**Code
      of Ethics**





C2
      has
      adopted a code of ethics that applies to its principal executive, financial
      and
      accounting officers. The C2 Code of Conduct (the “Code”) can be found on the
      Company’s website at *http://www.c-2technologies.com* (follow
      Corporate Governance link to Governance Documents tab). The Company intends
      to
      satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding any
      amendments to, or waivers from, a provision of the Code that applies to its
      principal executive, financial and accounting officers by posting such
      information on its website at the website address set forth above. The Code
      of
      Conduct is modified from time to time and is signed annually by all employees
      of
      the Company in conjunction with annual performance reviews.











32





**Item
      11. Executive Compensation.**





The
      following table sets forth the aggregate cash compensation paid for services
      rendered during the last three years by each person serving as our Chief
      Executive Officer during the last year and the four most highly compensated
      executive officers during the year ended December 31, 2005 whose compensation
      was in excess of $100,000 (“Named Executive Officers”).




**Long-Term
                  Compensation****Annual
                  Compensation**
                **(in
                  absolute dollars)**
              
              **Awards**
              
              
              **Payouts****Name
                  and**
                **Principal
                  Position(5)**
              
              **Year**
              
              
              **Salary($)**
              
              
              **Bonus($)**
              
              **Other**
                **Annual**
                **Compensation
                  ($)**
              
              **Restricted**
                **Stock**
                **Awards**
                **($)**
              
              **Securities**
                **Underlying**
                **Options
                  (#)**
              
              
              **LTIP**
                **Payouts**
                **($)**
              
              **All
                  Other**
                **Compensation**
                **($)
                  (6)**Allan
                  Silber(1)
              
              2005
              
              $
              206,250
              
              $
              —
              
              $
              —
              
              $
              —
              
              —
              
              $
              —
              
              $
              —Chairman
                  of the Board and
              
              2004
              
              
              275,000
              
              
              —
              
              
              —
              
              
              —
              
              —
              
              
              —
              
              
              —Chief
                  Executive Officer
              
              2003
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              —
              
              
              —
              
              
              —James
                  G. Ducay (2)
              
              2005
              
              $
              214,719
              
              $
              —
              
              $
              —
              
              $
              —
              
              —
              
              $
              —
              
              $
              114,583Executive
                  Vice President,
              
              2004
              
              
              275,000
              
              
              100,000
              
              
              450
              
              
              —
              
              —
              
              
              —
              
              
              —Chief
                  Operating Officer
              
              2003
              
              
              275,000
              
              
              —
              
              
              —
              
              
              —
              
              150,000
              
              
              —
              
              
              —Kenneth
                  L. Hilton (3)
              
              2005
              
              $
              118,998
              
              $
              —
              
              $
              —
              
              $
              —
              
              —
              
              $
              —
              
              $
              275,000Executive
                  Vice President,
              
              2004
              
              
              275,000
              
              
              —
              
              
              2,010
              
              
              —
              
              —
              
              
              —
              
              
              —Sales
                  and Marketing
              
              2003
              
              
              275,000
              
              
              55,000
              
              
              —
              
              
              —
              
              150,000
              
              
              —
              
              
              —David
                  B. Silverman(4)
              
              2005
              
              $
              136,534
              
              $
              —
              
              $
              —
              
              $
              —
              
              —
              
              $
              —
              
              $
              95,000Senior
                  Vice President and
              
              2004
              
              
              133,864
              
              
              60,000
              
              
              200
              
              
              —
              
              75,000
              
              
              —
              
              
              —General
                  Counsel
              
              2003
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              —
              
              
              —
              
              
              —


(1)
            
            Mr.
                Silber was appointed interim Chief Executive Officer and President
                of C2
                as of December 19, 2002. Until June 30, 2005, Mr. Silber was entitled
                to
                an annual salary of $275,000 and a discretionary bonus equal to 100%
                of
                his base salary. Effective July 1, 2005, his salary was adjusted
                to
                $137,500, with a discretionary bonus equal to 100% of his base salary,
                to
                reflect the reduced complexity of operations following the sale of
                the
                Telecommunications business. For 2004 and 2003, no bonus was awarded.
                As
                of the filing of this Annual Report on 10-K, Mr. Silber’s discretionary
                bonus amount for 2005 has not been determined. In 2003, Mr. Silber
                elected
                to assign his salary payable at December 31, 2003 of $275,000 to
                Counsel.
                On November 26, 2003, Kelly D. Murumets was appointed President,
                succeeding Mr. Silber in his capacity as President.(2)
            
            Mr.
                Ducay became the President of the Enterprise customer base of C2
                on
                December 10, 2002. In October 2003, Mr. Ducay became the Executive
                Vice-President and Chief Operating Officer for C2. Mr. Ducay’s employment
                with C2 was terminated as of July 31, 2005. His termination was not
                for
                cause.(3)
            
            Mr.
                Hilton became the Executive Vice President, Sales and Marketing,
                of C2 on
                January 1, 2003. Mr. Hilton’s employment with C2 was terminated as of May
                30, 2005. His termination was not for cause.(4)
            
            Mr.
                Silverman became Senior Vice President and General Counsel of C2
                in April
                2004. Mr. Silverman’s employment with C2 was terminated as of August 31,
                2005. His termination was not for cause.(5)
            
            Ms.
                Kelly Murumets (President), Mr. Gary Clifford (Vice President of
                Finance
                and Chief Financial Officer until December 15, 2005), Mr. Stephen
                Weintraub (Senior Vice President, Corporate Secretary and Chief Financial
                Officer) and Ms. Catherine Moran (Vice President of Accounting and
                Corporate Controller) did not receive any direct compensation from
                C2 in
                2003, 2004 or 2005. On December 31, 2004, C2. entered into a management
                services agreement (the “Agreement”) with Counsel Corporation, the
                Company’s majority stockholder, and its wholly-owned subsidiaries
                (collectively, “Counsel”). Under the terms of the Agreement, the Company
                agreed to make payment to Counsel for the past and future services
                to be
                provided by Counsel personnel (excluding Allan C. Silber, Counsel’s
                Chairman, President and Chief Executive Officer and the Company’s Chairman
                of the Board and Chief Executive Officer) to the Company for the
                calendar
                years of 2004 and 2005. The basis for such services charged was an
                allocation, on a cost basis, based on time incurred, of the base
                compensation paid by Counsel to those employees providing services
                to the
                Company. The cost of such services was $450,000 for the year ended
                December 31, 2005, and $280,000 for the year ended December 31, 2004.
                The
                cost for 2006 is estimated to be $225,000, reflecting the reduced
                complexity of C2 operations following the sale of the Telecommunications
                business. For each fiscal quarter, Counsel provides the details of
                the
                charge for services by individual, including respective compensation
                and
                their time allocated to the Company.In
                accordance with the Laurus agreement, amounts owing to Counsel cannot
                be
                repaid while amounts remain owing to Laurus.The foregoing fees for 2004 and 2005 are due and payable within 30
                days
                following the respective year ends, subject to applicable restrictions.
                Any unpaid fee amounts bear interest at 10% per annum commencing
                on the
                day after such year end.




33




In the
              event of a
              change of control, merger or similar event of the Company, all amounts
              owing, including fees incurred up to the date of the event, will become
              due and payable immediately upon the occurrence of such event. The
              Agreement does not guarantee the personal services of any specific
              individual at the Company throughout the term of the agreement and
              the
              Company will have to enter into a separate personal services arrangement
              with such individual should their specific services be required. The
              Company’s Board of Directors approved the Agreement on December 23,
              2004.Counsel
              entered
              into compensation arrangements with Ms. Murumets relating to the retention
              of her services through the disposition of C2’s Telecommunications
              business in the third quarter of 2005. Counsel also entered into a
              contract with Ms. Murumets related to the disposition. The total fair
              value of these contracts is $1,000,000 and, as required under GAAP,
              they
              were recorded by the Company as a conferral of a $1,000,000 benefit
              to the
              Company from its controlling shareholder in the third quarter of 2005.
              The
              amount has been reported as an expense of the discontinued operations,
              with an offsetting credit to contributed surplus. There are no economic
              consequences to C2 as the result of this conferral of
              benefit.Ms.
              Murumets
              resigned from the Company on March 3, 2006. The Company has chosen
              not to
              appoint another President at this time, but to distribute Ms. Murumets’
              responsibilities among the Company’s other executives.(6)
            
            Represents
                severance paid according to employment
                contract.





**Option
      Grants in Last Fiscal Year (2005)**





There
      were no stock option grants to the Named Officers during fiscal
      2005.





**Aggregated
      Option Exercises in Last Fiscal Year and Fiscal Year-End
      Option**  **Values:**





The
      following table shows information about the value realized on option exercises
      for each of the Named Officers during fiscal 2005, and the value of their
      unexercised options at the end of fiscal 2005. Value realized, or gain, is
      measured as the difference between the exercise price and market value or the
      price at which the shares were sold on the date of exercise.





**Name**
            
            **Shares
                Acquired On**
              **Exercise
                (#)**
            
            **Value
                Realized ($)**
            
            **Number
                of Securities**
              **Underlying
                Unexercised**
              **Options
                At Fiscal Year-**
              **End
                (#)**
              **Exercisable/Unexercisable**
            
            **Value
                of Unexercised In-**
              **The-Money
                Options At**
              **Fiscal
                Year-End ($)**
              **Exercisable/Unexercisable**
              **(1)**Allan
                C. Silber
            
            —
            
            —
            
            —
            /
            —
            
            —
            /
            —Kenneth
                L. Hilton
            
            —
            
            —
            
            —
            /
            —
            
            —
            /
            —James
                G. Ducay
            
            —
            
            —
            
            75,000
            /
            75,000
            
            —
            /
            —David
                B. Silverman
            
            —
            
            —
            
            18,750
            /
            56,250
            
            —
            /
            —





(1)
      None
      of the unexercised options above are in the money, based on the closing price
      of
      the Company’s common stock on December 30, 2005, which was $0.61 per
      share.





**Long-Term
      Incentive Plan Awards in Last Fiscal Year**





There
      were no long-term incentive plan awards made to the Named Officers during fiscal
      2005.





**Director
      Compensation**





Commencing
      in June 2004, Board members who are not employed by C2 or Counsel receive a
      $20,000 per year cash retainer, $1,000 per meeting attended in person or by
      telephone, and a grant of stock options to purchase 10,000 shares of common
      stock each year. In addition, the Chairman of the Audit Committee receives
      a
      cash retainer of $10,000 per year, Audit Committee members who are not the
      chair
      receive a cash retainer of $5,000 per year, and other committee chairpersons
      receive an annual cash retainer of $2,000 per annum. The directors were also
      eligible to receive options under our stock option plans at the discretion
      of
      the Board of Directors. No discretionary stock options were awarded to directors
      during 2005.





**Employment
      Contracts and Termination of Employment and
      Change-in-Control**  **Arrangements**





*Kenneth
      L. Hilton Employment Contract.* C2
      and
      Kenneth L. Hilton entered into an employment agreement pursuant to which Mr.
      Hilton became the Executive Vice President, Sales and Marketing, of C2,
      effective January 1, 2003. Mr. Hilton’s annual salary was $275,000, and he was
      eligible for a discretionary bonus of up to 100% of his annual salary in an
      amount to be determined pursuant to a performance management system, based
      on
      performance criteria established at the beginning of each fiscal year.
      Additionally, in June 2002, the Company made a relocation loan of $100,000
      to
      Mr. Hilton. The loan was due on the earlier of August 1, 2005 or upon sale
      of
      Mr. Hilton’s former residence. Mr. Hilton’s employment was terminated effective
      as of May 30, 2005. The termination was not for cause, and Mr. Hilton was
      entitled to payment of one year’s salary. As of October 31, 2005, Mr. Hilton had
      received all payments due to him, and the relocation loan had been repaid in
      full.


34


*James
      G. Ducay Employment Contract.* C2
      and
      James G. Ducay entered into an employment agreement, which became effective
      on
      January 1, 2004. Mr. Ducay’s annual salary was $275,000, and he was eligible for
      a discretionary bonus of up to 100% of his annual salary in an amount to be
      determined pursuant to a performance management system, based on performance
      criteria established at the beginning of each fiscal year. For 2004, Mr. Ducay
      received a bonus of $100,000. Mr. Ducay’s employment was terminated effective as
      of July 31, 2005. The termination was not for cause, and Mr. Ducay was entitled
      to payment of one year’s salary. As of the date of this Annual Report on Form
      10-K, Mr. Hilton had received payment of $114,583.34, and the balance will
      be
      paid in 2006.




*David
      B. Silverman Employment Contract.* C2 and
      David B. Silverman entered into an employment agreement, effective April 4,
      2004, pursuant to which Mr. Silverman became the Senior Vice President and
      General Counsel of C2. Mr. Silverman’s annual salary was $190,000, and he was
      eligible for a discretionary bonus of up to 60% of his annual salary in an
      amount to be determined pursuant to a performance management system, based
      on
      performance criteria established at the beginning of each fiscal year. For
      2004,
      Mr. Silverman received a bonus of $60,000. Mr. Silverman’s employment was
      terminated effective as of August 31, 2005. The termination was not for cause,
      and Mr. Silverman was entitled to payment of six months’ salary. As of September
      1, 2005, Mr. Silverman had received all payments due to him.




**Stock
      Option Plans**





At
      December 31, 2005, the Company has several stock-based employee compensation
      plans. All share amounts disclosed below reflect the effect of the 1-for-20
      reverse stock split which was approved by the stockholders on November 26,
      2003.





Director
      Stock Option Plan





The
      Company’s Director Stock Option Plan authorized the grant of stock options to
      directors of the Company. In connection with the adoption of the 1995 Director
      Plan, the Board of Directors authorized the termination of future grants of
      options under the Director Stock Option Plan; however, outstanding options
      continued to be governed by the terms thereof until exercise or expiration
      of
      such options. Options granted under the Director Stock Option Plan were
      non-qualified stock options exercisable at a price equal to the fair market
      value per share of common stock on the date of any such grant. Options granted
      under the Director Stock Option Plan were exercisable not less than six months
      or more than ten years after the date of grant.





As
      of
      December 31, 2005, no options were outstanding. In 2004, options for the
      purchase of 117 shares of common stock at a price of $17.50 were outstanding.
      In
      2005, these 117 options expired.





1995
      Director Stock Option and Appreciation Rights Plan





The
      1995
      Director Stock Option and Appreciation Rights Plan (the “1995 Director Plan”)
      provides for the issuance of incentive stock options, non-qualified stock
      options and stock appreciation rights (“SARs”) to directors of the Company up to
      12,500 shares of common stock (subject to adjustment in the event of stock
      dividends, stock splits, and other similar events).





The
      1995
      Director Plan also provides for the grant of non-qualified options, on a
      discretionary basis, to each member of the Board of Directors then serving,
      to
      purchase 500 shares of common stock at an exercise price equal to the fair
      market value per share of the common stock on that date. Each option is
      immediately exercisable for a period of ten years from the date of grant. The
      Company has 9,500 shares of common stock reserved for issuance under the 1995
      Director Plan. As of December 31, 2005, options to purchase 7,500 (2004 - 8,500)
      shares of common stock at a price of $22.50 (2004 - $20.00 to $25.00) per share
      are outstanding and exercisable. No options were granted or exercised under
      this
      plan in 2005 and 2004. In 2005, 1,000 options expired (2004 - nil).





1995
      Employee Stock Option and Appreciation Rights Plan





The
      1995
      Employee Stock Option and Appreciation Rights Plan (the “1995 Employee Plan”)
      provides for the issuance of incentive stock options, non-qualified stock
      options, and SARs. Directors of the Company are not eligible to participate
      in
      the 1995 Employee Plan. The 1995 Employee Plan provides for the grant of stock
      options which qualify as incentive stock options under Section 422 of the
      Internal Revenue Code, to be issued to officers who are employees and other
      employees, as well as non-qualified options to be issued to officers, employees
      and consultants. In addition, SARs may be granted in conjunction with the grant
      of incentive and non-qualified options.





The
      1995
      Employee Plan provides for the grant of incentive options, non-qualified options
      and SARs of up to 20,000 shares of common stock (subject to adjustment in the
      event of stock dividends, stock splits, and other similar events). To the extent
      that an incentive option or non-qualified option is not exercised within the
      period of exercisability specified therein, it will expire as to the then
      unexercisable portion. If any incentive option, non-qualified option or SAR
      terminates prior to exercise thereof and during the duration of the 1995
      Employee Plan, the shares of common stock as to which such option or right
      was
      not exercised will become available under the 1995 Employee Plan for the grant
      of additional options or rights to any eligible employee. The shares of common
      stock subject to the 1995 Employee Plan may be made available from either
      authorized but unissued shares, treasury shares or both. The Company has 20,000
      shares of common stock reserved for issuance under the 1995 Employee Plan.
      As of
      December 31, 2005, there were no options outstanding under the 1995 Employee
      Plan. No options were granted or exercised in 2005 or 2004 under the 1995
      Employee Plan.


35


1997
      Recruitment Stock Option Plan





In
      October 2000, the stockholders of the Company approved an amendment of the
      1997
      Recruitment Stock Option Plan (the “1997 Plan”) which provides for the issuance
      of incentive stock options, non-qualified stock options and SARs up to an
      aggregate of 370,000 shares of common stock (subject to adjustment in the event
      of stock dividends, stock splits, and other similar events). The price at which
      shares of common stock covered by the option can be purchased is determined
      by
      the Company’s Board of Directors; however, in all instances the exercise price
      is never less than the fair market value of the Company’s common stock on the
      date the option is granted.





As
      of
      December 31, 2005, there were options to purchase 14,611 shares (2004 - 56,736
      shares) of the Company’s common stock outstanding under the 1997 Plan. The
      outstanding options vest over three years at exercise prices of $1.40 to $111.26
      per share (2004 - $1.40 to $127.50 per share). Options issued under the 1997
      Plan must be exercised within ten years of grant and can only be exercised
      while
      the option holder is an employee of the Company. The Company has not awarded
      any
      SARs under the 1997 Plan. During 2005 and 2004, options to purchase 42,125
      and
      3,744 shares of common stock, respectively, were forfeited or expired. There
      were no options granted or exercised during 2005 or 2004.





2000
      Employee Stock Purchase Plan





During
      2000, the Company obtained approval from its stockholders to establish the
      2000
      Employee Stock Purchase Plan. The Stock Purchase Plan provides for the purchase
      of common stock, in the aggregate, up to 125,000 shares. This plan allows all
      eligible employees of the Company to have payroll withholding of 1 to 15 percent
      of their wages. The amounts withheld during a calendar quarter are then used
      to
      purchase common stock at a 15 percent discount off the lower of the closing
      sale
      price of the Company’s stock on the first or last day of each quarter. This plan
      was approved by the Board of Directors, subject to stockholder approval, and
      was
      effective beginning the third quarter of 2000. The Company issued 1,726 shares
      to employees based upon payroll withholdings during 2001. There have been no
      issuances since 2001.





The
      purpose of the Stock Purchase Plan is to provide incentives for all eligible
      employees of C2 (or any of its subsidiaries), who have been employees for at
      least three months, to participate in stock ownership of C2 by acquiring or
      increasing their proprietary interest in C2. The Stock Purchase Plan is designed
      to encourage employees to remain in the employ of C2. It is the intention of
      C2
      to have the Stock Purchase Plan qualify as an “employee stock purchase plan”
within the meaning of Section 423 of the Internal Revenue Code, as amended
      to
      issue shares of common stock to all eligible employees of C2 (or any of C2’s
      subsidiaries) who have been employees for at least three months.





2003
      Stock Option and Appreciation Rights Plan





In
      November 2003, the stockholders of the Company approved the 2003 Stock Option
      and Appreciation Rights Plan (the “2003 Plan”) which provides for the issuance
      of incentive stock options, non-qualified stock options and stock appreciation
      rights (“SARs”) up to an aggregate of 2,000,000 shares of common stock (subject
      to adjustment in the event of stock dividends, stock splits, and other similar
      events). The price at which shares of common stock covered by the option can
      be
      purchased is determined by the Company’s Board of Directors or its committee;
      however, in the case of incentive stock options the exercise price shall not
      be
      less than the fair market value of the Company’s common stock on the date the
      option is granted. As of December 31, 2005, there were options to purchase
      338,250 shares (2004 - 1,359,625 shares) of the Company’s common stock
      outstanding under the 2003 Plan. The outstanding options vest over four years
      at
      exercise prices ranging from $0.56 to $3.00 per share. During 2005, options
      to
      purchase 1,060,975 shares (2004 - 433,726 shares) of common stock were forfeited
      or expired. There were no options exercised during 2005 and 2004, and no SARs
      have been issued under the 2003 Plan.





**Compensation
      Committee Interlocks and Insider Participation**





Mr.
      Toh
      was formerly an officer of the Company, as described above. No Compensation
      Committee members or other directors served as a member of the compensation
      committee of another entity, whose executive officers served as a director
      of
      C2.


36





**Item
      12. Security Ownership of Certain Beneficial Owners and Management
      and**  **Related
      Stockholder Matters.**





The
      following table sets forth information regarding the ownership of our common
      stock as of March 7, 2006 by: (i) each director; (ii) each of the
      Named Executive Officers in the Summary Compensation Table; (iii) all
      executive officers and directors of the Company as a group; and (iv) all
      those known by us to be beneficial owners of more than five percent of our
      common stock. As of March 7, 2006, there are 19,237,135 shares of common stock
      and 618 shares of Series N Preferred stock issued and outstanding. Each share
      of
      Series N Preferred Stock is entitled to 40 votes.





**Name
                and Address of**
              **Beneficial
                Owner (1)**
            
            **Number
                of Shares**
              **Beneficially
                Owned (2)**
            
            **Percentage**
              **of
                Common Stock**
              **Beneficially
                Owned**Allan
                C. Silber
            
            0
            (3)
            
            *
            %Hal
                B. Heaton
            
            12,073
            (4)
            
            *
            %Henry
                Y.L. Toh
            
            21,663
            (5)
            
            *
            %Stephen
                A. Weintraub
            
            0
            (6)
            
            *
            %Samuel
                L. Shimer
            
            5,000
            (7)
            
            *
            %Counsel
                Corporation and subsidiaries
              40
                King Street West
              Scotia
                Plaza, Suite 3200
              Toronto,
                Ontario M5H3Y2
            
            21,217,767
            (8)
            
            92
            %All
                Executive Officers and Directors as a Group (5 people)
            
            38,736
            
            
            *
            %





*
            
            Indicates
                less than one percent(1)
            
            Unless
                otherwise noted, all listed shares of common stock are owned of record
                by
                each person or entity named as beneficial owner and that person or
                entity
                has sole voting and dispositive power with respect to the shares
                of common
                stock owned by each of them. All addresses are c/o C2 Global Technologies
                Inc. unless otherwise indicated.(2)
            
            As
                to each person or entity named as beneficial owners, that person’s or
                entity’s percentage of ownership is determined based on the assumption
                that any options or convertible securities held by such person or
                entity
                which are exercisable or convertible within 60 days have been exercised
                or
                converted, as the case may be.(3)
            
            Mr.
                Silber is Chairman, Chief Executive Officer and President of Counsel,
                and
                a beneficial owner of approximately 4,843,976 shares or 10.3% of
                the
                outstanding stock of Counsel. In September 2001, Mr. Silber became
                a
                Director of C2. Mr. Silber was appointed Chairman in November 2001.
                Mr.
                Silber was appointed Chief Executive Officer and Interim President
                of C2
                in December 2002 and served as such until November 2003 when the
                Board
                appointed Kelly Murumets to succeed Mr. Silber as President. Mr.
                Silber
                was succeeded as Chairman of the Board by Mr. James Meenan in October
                2004. Mr. Silber remained a Director and Chief Executive Officer
                of C2
                until March 2005, at which time he was re-appointed Chairman when
                Mr.
                Meenan resigned from the board in connection with the Company’s expected
                sale of the Telecommunications segment. Mr. Silber disclaims beneficial
                ownership of the shares of C2’s common stock beneficially owned by
                Counsel.(4)
            
            Represents
                shares of common stock issuable pursuant to options.(5)
            
            Represents
                shares of common stock issuable pursuant to options. Does not include
                shares held of record by Four M International, Ltd., of which Mr.
                Toh is a
                director. Mr. Toh disclaims any beneficial ownership of such
                shares.(6)
            
            Mr.
                Weintraub is Executive Vice President, Secretary and Chief Financial
                Officer of Counsel and a beneficial owner of 306,102 shares in Counsel,
                which represents less than 1% beneficial ownership of Counsel. At
                the
                December 6, 2002 meeting of the Board of Directors of C2, Mr. Weintraub
                was appointed to the office of Senior Vice President and Secretary
                of C2.
                Mr. Weintraub became an Executive Vice President of C2 in October
                2005 and
                was appointed Chief Financial Officer of the Company effective December
                15, 2005. Mr. Weintraub disclaims beneficial ownership of the shares
                of
                C2’s common stock beneficially owned by Counsel.(7)
            
            Mr.
                Shimer is not an employee of C2; however he is a member of the Board
                of
                Directors. He was previously a managing director of Counsel. He is
                a
                beneficial owner of 819,011 shares in Counsel, which represents a
                1.7%
                beneficial ownership of Counsel.(8)
            
            Includes
                3,700,372 shares of common stock issuable upon conversion of debt
                pursuant
                to a Senior Convertible Loan and Security Agreement, dated March
                1, 2001,
                as amended, in the amount (including accrued interest) of approximately
                $18,576 as of March 7, 2006. In accordance with the Laurus Master
                Fund,
                Ltd. (“Laurus”) agreement, amounts owing to Counsel cannot be repaid while
                amounts remain owing to Laurus. All of Counsel’s shares have been pledged
                as security for the Laurus indebtedness, and Counsel has guaranteed
                the
                Laurus debt.




37


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





**Transactions
      with Management and Others**





See
      Item
      11 hereof for descriptions of the terms of employment, consulting and other
      agreements between the Company and certain officers, directors and other related
      parties.





**Transactions
      with Counsel**





*Initial
      Acquisition of C2 and Senior Convertible Loan*





On
      March
      1, 2001, C2 entered into a Senior Convertible Loan and Security Agreement,
      (the
“Senior Loan Agreement”) with Counsel. Pursuant to the terms and provisions of
      the Senior Loan Agreement, Counsel agreed to make periodic loans to C2 in the
      aggregate principal amount not to exceed $10,000, which was subsequently
      increased to $12,000 through amendment on May 8, 2001. Advances against the
      Senior Loan Agreement were structured as a 3-year convertible note with interest
      at 9% per annum, compounded quarterly. Counsel initially could convert the
      loan
      into shares of common stock of C2 at a conversion price of $11.20 per common
      share. The terms of the Senior Loan Agreement also provide that at any time
      after September 1, 2002, the outstanding debt including accrued interest will
      automatically be converted into common stock using the then current conversion
      rate, on the first date that is the twentieth consecutive trading day that
      the
      common stock has closed at a price per share that is equal to or greater than
      $20.00 per share. The Senior Loan Agreement also provides that the conversion
      price is in certain cases subject to adjustment and includes traditional
      anti-dilution protection for the lender and is subject to certain events of
      default, which may accelerate the repayment of principal plus accrued interest.
      Total proceeds available to the Company were $12,000, less debt issuance costs
      of $600, amortized over three years. The Senior Loan Agreement has been amended
      several times and the maturity date of the loan plus accrued interest has been
      extended to December 31, 2006. As a result of the application of the
      anti-dilution provisions of the Senior Loan Agreement, the conversion price
      has
      been adjusted to $5.02 per common share. As of December 31, 2005, the total
      outstanding debt under the Senior Loan Agreement (including principal and
      accrued interest) was $18,270 which is convertible into approximately 3,639,412
      shares of common stock *.*





In
      connection with the above Senior Loan Agreement, C2 granted Counsel a security
      interest in all of C2’s assets owned at the time of execution of the Senior Loan
      Agreement or subsequently acquired, including but not limited to C2’s accounts
      receivable, intangibles, inventory, equipment, books and records, and negotiable
      instruments held by the Company (collectively, the “Collateral”).





In
      addition to the foregoing agreements, C2 and Counsel executed a Securities
      Support Agreement, dated March 1, 2001 (the “Support Agreement”) for the purpose
      of providing certain representations and commitments by C2 to Counsel, including
      demand registration rights for common stock issuable upon conversion of the
      related loan.





Under
      the
      Support Agreement of March 1, 2001, C2 also agreed to engage appropriate
      advisors and proceed to take all steps necessary to merge Nexbell
      Communications, Inc. (a subsidiary of Counsel) into C2. The Company acquired
      Nexbell on April 17, 2001 and Counsel received 871,724 shares of common stock
      in
      C2 as consideration.





In
      October 2004, Counsel agreed to subordinate its loan and security interest
      to
      that of Wells Fargo Foothill, Inc., (“Foothill”), the Company’s asset-based
      lender, and Laurus Master Fund, Ltd. (“Laurus”), a third party financier, in
      connection with the Senior Convertible Loan. On June 30, 2005, Foothill assigned
      its senior lending facility, and its rights thereunder, to Acceris Management
      and Acquisition, LLC (“AMA”), a wholly-owned subsidiary of North Central Equity
      LLC, in connection with the sale of substantially
      all the assets of the Company’s wholly-owned subsidiary, Acceris Communications
      Corp .
      (“ACC”), to AMA.
      Specifically, C2, ACC and AMA executed an amendment to the Foothill Loan
      Agreement (the “Amendment”). The Amendment was executed in connection with the
      execution and delivery of a certain Assignment and Acceptance Agreement between
      Foothill and AMA. On September 30, 2005, upon the closing of the sale of ACC’s
      assets, AMA released ACC and C2 from any obligations pursuant to the senior
      lending facility. Following the sale, all of Counsel’s loan and security
      interests remain subordinated to the Laurus debt.


38


*Assignment
      of Winter Harbor Common Stock and Debt Interests*





Pursuant
      to the terms of a settlement between Counsel and Winter Harbor and First Media
      L.P., a limited partnership and the parent company of Winter Harbor
      (collectively, the “Winter Harbor Parties”), effective August 29, 2003, the
      Winter Harbor Parties relinquished their right to 118,750 shares of the common
      stock of C2 to Counsel. These shares were released from escrow and delivered
      to
      Counsel.





The
      Winter Harbor Parties further assigned to Counsel all of their rights with
      respect to a note payable by C2 of $1,999 drawn down pursuant to a Letter of
      Credit issued November 3, 1998 to secure certain obligations of C2 together
      with
      any accrued interest thereon. The assigned amount together with accrued interest
      amounted to $2,577 on August 29, 2003. As a result of the settlement and
      assignment, C2 entered into a new loan agreement with Counsel the terms of
      which
      provided that from August 29, 2003 the loan balance of $2,577 would bear
      interest at 10% per annum compounded quarterly with the aggregate balance of
      principal and accrued interest payable on maturity of the loan. This loan
      agreement was subsequently amended and restated to increase the principal of
      the
      loan by a further $100 for funding provided by Counsel to enable C2 to acquire
      a
      Voice over Internet Protocol patent in December 2003 and to allow for the making
      of further periodic advances thereunder at Counsel’s discretion. The loan
      increased due to operating advances of $1,546 and $1,918 in 2003 and 2004,
      respectively. The maturity date of the loan plus accrued interest has been
      amended several times, including in connection with the sale of substantially
      all the assets of ACC to AMA, and currently has been extended to December 31,
      2006. There are no conversion features associated with this loan. The terms
      of
      the loan agreement provide that certain events of default may accelerate the
      repayment of principal plus accrued interest. As of December 31, 2005, the
      total
      outstanding debt under the loan (including principal and accrued interest)
      was
      $7,515.





In
      October of 2004, Counsel agreed to subordinate its loan repayment rights to
      the
      Foothill and Laurus debts. On
      June
      30, 2005, Foothill assigned its senior lending facility to AMA, and on September
      30, 2005, upon the closing of the sale of ACC’s assets, AMA released ACC and C2
      from any obligations pursuant to the senior lending facility. Following the
      sale, Counsel’s loan remains subordinated to the Laurus debt.





*Loan
      and Security Agreement and Amended Debt Restructuring*





On
      June
      6, 2001, C2 and Counsel entered into a Loan and Security Agreement (the “Loan
      Agreement”). Any funds advanced to C2 between June 6, 2001 and April 15, 2002,
      (not to exceed $10,000) were governed by the Loan Agreement and due on June
      6,
      2002. The loan was secured by all of the assets of C2. As of December 31, 2001,
      advances under this loan agreement totaled $10,000. On June 27, 2002 the Loan
      Agreement was amended to an amount of $24,307, which included additional capital
      advances from Counsel to C2 made from December 31, 2001 through June 6, 2002.
      The amended agreement also further provided for additional advances as needed
      to
      C2, which advances totaled $2,087 through December 31, 2002 and $650 through
      November 30, 2003.





On
      July
      25, 2002, C2 and Counsel entered into a Debt Restructuring Agreement (“Debt
      Restructuring Agreement”) which was amended on October 15, 2002 pursuant to an
      Amended and Restated Debt Restructuring Agreement (“Amended Agreement”). The
      Amended Agreement included the following terms:





1)
            Principal
                ($24,307) and associated accrued interest ($2,284), as of October
                15,
                2002, under the Loan Agreement, as amended, would be exchanged for
                common
                stock of C2 at $3.77 per share (representing the average closing
                price of
                C2’s common stock during May 2002).




2)
            Funding
                provided by Counsel pursuant to the Loan Agreement, as amended ($2,087),
                and associated accrued interest ($1,996), from October 15, 2002 to
                December 31, 2002, would be exchanged for common stock of C2 at $3.77
                per
                share (representing the average closing price of C2’s common stock during
                May 2002).




3)
            Counsel
                would advance to C2 all amounts paid or payable by C2 to its stockholders
                that exercised their dissenters’ rights in connection with the
                transactions subject to the debt restructuring transactions and advance
                the amount of the annual premium to renew the existing directors
                and
                officers’ insurance coverage through November
                2003.




4)
            Counsel
                would reimburse C2 for all costs, fees and expenses, in connection
                with
                the Debt Restructuring Agreement and the Amended Agreement and
                transactions contemplated thereby including all expenses incurred
                and yet
                to be incurred, including the Special Committee’s costs to negotiate these
                agreements and costs related to obtaining stockholder approval. During
                2003 and 2002, Counsel reimbursed C2 $132 and $499, respectively,
                for
                certain reimbursable expenses, which were recorded as additional
                paid-in
                capital.


39




5)
            The
                issuance of common stock by C2 pursuant to this Agreement would result
                in
                a weighted average conversion price adjustment pursuant to the provisions
                of the March 1, 2001 Loan Agreement. Whereas the conversion price
                for the
                March 1, 2001 Loan Agreement had initially been $11.20, the new conversion
                price would be adjusted as a result of the anti-dilution provisions
                of the
                Senior Loan Agreement. At December 31, 2005, the conversion price
                was
                $5.02 per common share*.*





Effective
      November 30, 2003, 8,681,096 shares of common stock were issued to Counsel
      in
      settlement of the underlying debt and accrued interest totaling $32,721 on
      the
      date of the conversion.





*Convertible
      Promissory Note to Fund RSL.COM USA, Inc. (“RSL”) Acquisition*





In
      connection with the acquisition of certain assets of RSL in December 2002,
      C2
      issued a $7,500 convertible note payable (the “Convertible Note”) to Counsel,
      bearing interest at 10% per annum compounded quarterly which, as amended, was
      due on June 30, 2005. The Convertible Note was convertible into common stock
      of
      C2 at a conversion rate of $1.68 per share. Effective November 30, 2003, Counsel
      exercised its right to convert the Convertible Note plus accrued interest to
      that date totaling $7,952 into common stock of C2. This resulted in the issuance
      of 4,747,522 shares of C2 common stock.





*Collateralized
      Promissory Note and Loan Agreement*





During
      the fourth quarter of 2003, Counsel advanced the sum of $5,600 to C2, evidenced
      by a promissory note. In January 2004, C2 and Counsel entered into a loan
      agreement and an amended and restated promissory note pursuant to which an
      additional $2,000 was loaned to C2 and pursuant to which additional periodic
      loans may be made from time to time (collectively and as amended, the
“Promissory Note”). The Promissory Note accrues interest at 10% per annum
      compounded quarterly from the date funds are advanced. The loan has been amended
      several times and the maturity date of the loan plus accrued interest has been
      extended to December 31, 2006. The Promissory Note is secured by the assets
      of
      the Company and is subject to certain events of default which may accelerate
      the
      repayment of principal plus accrued interest. There are no conversion features
      associated with the Promissory Note. The loan increased primarily due to
      operating advances in 2004 and 2005 of $10,662 and $15,365, respectively. The
      outstanding balance at December 31, 2005 (including principal and accrued
      interest) was $35,692.





In
      October of 2004, Counsel agreed to subordinate its loan and security interest
      in
      connection with the issuance of the Promissory Note to that of Foothill and
      Laurus.  On
      June
      30, 2005, Foothill assigned its senior lending facility to AMA, and on September
      30, 2005, upon the closing of the sale of ACC ’ s
      assets,
      AMA released ACC and C2 from any obligations pursuant to the senior lending
      facility. Following the sale, Counsel ’ s
      loan
      remains subordinated to the Laurus debt.





*Secured
      Loan to C2*





To
      fund
      the acquisition of the WorldxChange Communications, Inc. assets purchased and
      liabilities assumed by C2, on June 4, 2001 Counsel provided a loan (the “Initial
      Loan”) to C2 in the aggregate amount of $15,000. The loan was subordinated to a
      revolving credit facility with Foothill, was collateralized by all the assets
      of
      the Company and, as amended, had a maturity date of June 30, 2005. On October
      1,
      2003 Counsel assigned the balance owed in connection with the Initial Loan
      of
      $9,743, including accrued interest (“the Assigned Loan”), to C2 in exchange for
      a new loan bearing interest at 10% per annum compounded quarterly and payable
      on
      maturity of the loan (“the New Loan”). The New Loan has been amended several
      times and the maturity date of the loan plus accrued interest has been extended
      to December 31, 2006. Consistent with the terms of the Initial Loan, subject
      to
      certain conditions, the New Loan provides for certain mandatory prepayments
      upon
      written notice from Counsel including an event resulting in the issuance of
      new
      shares by C2 to a party unrelated to Counsel where the funds are not used for
      an
      approved expanded business plan, the purchase of the Company’s accounts
      receivable by a third party or where C2 has sold material assets in excess
      of
      cash proceeds of $1,000 and certain other events. The New Loan is subject to
      certain events of default which may accelerate the repayment of principal plus
      accrued interest. Pursuant to a Stock Pledge Agreement as amended, the New
      Loan
      is secured by the common stock held directly by C2 in its operating subsidiary.
      There are no conversion features associated with the New Loan. As of December
      31, 2005, the total outstanding debt under the New Loan (including principal
      and
      accrued interest) was $12,168.





Effective
      October 2004, Counsel’s loan and security interest were subordinated in favor of
      Foothill and Laurus.  On
      June
      30, 2005, Foothill assigned its senior lending facility to AMA, and on September
      30, 2005, upon the closing of the sale of ACC ’ s
      assets,
      AMA released ACC and C2 from any obligations pursuant to the senior lending
      facility. Following the sale, Counsel ’ s
      loan
      remains subordinated to the Laurus debt.





*Counsel
      Keep Well*





Counsel
      has committed to fund, through intercompany advances or equity contribution,
      all
      capital investment, working capital or other operational cash requirements
      of C2
      through December 31, 2006 (the “Keep Well”). Counsel is not expected to extend
      the Keep Well beyond its current maturity.


40


*Counsel
      Guarantee, Subordination and Stock Pledge*





Counsel
      has guaranteed the debt that the Company owes to Laurus. Counsel has also agreed
      to subordinate all of its debt owed by the Company, and to subrogate all of
      its
      related security interests in favor of Laurus. Counsel further agreed to pledge
      all of its shares owned in C2 as security for the related debts. In accordance
      with the Laurus agreement, amounts owing to Counsel cannot be repaid while
      amounts remain owing to Laurus. Notwithstanding this, Counsel is not expected
      to
      extend the maturity date of its loans beyond December 31, 2006. In accordance
      with Counsel’s subordination agreement with Laurus, so long as C2’s debt to
      Laurus remains outstanding, Counsel may not, without the written consent of
      Laurus, take any enforcement action to collect its loans owing by the Company.
      In the event that the C2 debt to Laurus is either prepaid in full or settled
      via
      conversion of such debt into shares of the Company, the subordination agreement
      shall be terminated with immediate effect.





*Counsel
      Management Services*





In
      December 2004, C2 entered into a management services agreement (the “Agreement”)
      with Counsel. Under the terms of the Agreement, C2 agreed to make payment to
      Counsel for the past and future services to be provided by certain Counsel
      personnel to C2 for each of 2004 and 2005. The basis for such services charged
      is an allocation, based on time incurred, of the cost of the base compensation
      paid by Counsel to those employees providing services to C2. For the years
      ended
      December 31, 2004 and 2005, the cost of such services was $280 and $450,
      respectively. The cost for 2006 is estimated to be $225, reflecting the reduced
      complexity of C2 operations following the sale of the Telecommunications
      business. The foregoing fees for 2004 and 2005 are due and payable within 30
      days following the respective year ends, subject to any subordination
      restrictions then in effect. Any unpaid fee amounts will bear interest at 10%
      per annum commencing on the day after such year-end. In the event of a change
      of
      control, merger or similar event of the Company, all amounts owing, including
      fees incurred up to the date of the event, will become due and payable
      immediately upon the occurrence of such event, subject to any subordination
      restrictions then in effect. In accordance with the Laurus agreement, amounts
      owing to Counsel cannot be repaid while amounts remain owing to
      Laurus.




Counsel
      provided management services to C2 in 2003, for which no amounts were charged
      to
      C2, resulting in the conferral of a benefit of $130.










41




**Item
      14. Principal Accountant Fees and Services.**





In
      May
      2004 the Company’s Audit Committee engaged BDO Seidman, LLP as the independent
      registered public accounting firm of the Company for the fiscal years ended
      December 31, 2004 and 2005. Previously, the Company’s independent registered
      public accounting firm was PricewaterhouseCoopers LLP.





Fees
      paid
      to BDO Seidman, LLP, our independent registered public accounting firm for
      the
      period May 19 - December 31, 2004, and for all of 2005, are set forth below.
      All
      fees paid to our independent registered public accounting firm were pre-approved
      by the Audit Committee.





**Year
                Ended December 31,**
              **(in
                thousands)****2005**
            
            **2004**Audit
                fees
            
            $
            423
            
            $
            676Audit-related
                fees
            
            
            80
            
            
            61Tax
                fees
            
            
            113
            
            
            106All
                other fees
            
            
            —
            
            
            —Total
            
            $
            616
            
            $
            843








Fees
      paid
      to PricewaterhouseCoopers LLP, our independent registered public accountant
      for
      the period January 1 - May 4, 2004 are set forth below, together with fees
      paid
      in 2005. All fees paid to PwC were pre-approved by the Audit
      Committee.





**Year
                Ended December 31,**
              **(in
                thousands)****2005**
            
            **2004**Audit
                fees
            
            $
            64
            
            $
            834Audit-related
                fees
            
            
            —
            
            
            —Tax
                fees
            
            
            2
            
            
            23All
                other fees
            
            
            —
            
            
            —Total
            
            $
            66
            
            $
            857





***Audit
      Fees***





Audit
      fees were for professional services rendered for the audit of our annual
      financial statements for the years ended December 31, 2004 and 2005, the reviews
      of the financial statements included in our quarterly reports on Form 10-Q
      for
      the years ended December 31, 2004 and 2005, and services in connection with
      our
      statutory and regulatory filings for the years ended December 31, 2004 and
      2005.
      They amounted to $1,510 and $487, respectively.





***Audit-Related
      Fees***





Audit
      related fees were for assurance and related services rendered that are
      reasonably related to the audit and reviews of our financial statements for
      the
      years ended December 31, 2004 and 2005, exclusive of the fees disclosed as
      Audit
      Fees above. These fees include benefit plan audits, accounting consultations,
      and audits in connection with acquisitions, which amounted to $61 and $80,
      for
      the respective years.





***Tax
      Fees***





Tax
      fees
      were for services related to tax compliance, consulting and planning services
      rendered during the years ended December 31, 2004 and 2005 and included
      preparation of tax returns, review of restrictions on net operating loss
      carryforwards and other general tax services. Tax fees paid amounted to $129
      and
      $115, for the respective years.





***All
      Other Fees***





We
      did
      not incur fees for any services, other than the fees disclosed above relating
      to
      audit, audit-related and tax services, rendered during the years ended December
      31, 2004 and 2005.


42


**Audit
      and Non-Audit Service Pre-Approval Policy**





In
      accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the
      rules
      and regulations promulgated thereunder, the Audit Committee has adopted an
      informal approval policy that it believes will result in an effective and
      efficient procedure to pre-approve services performed by the independent
      registered public accounting firm.





**Audit
      Services.** Audit
      services include the annual financial statement audit (including quarterly
      reviews) and other procedures required to be performed by the independent
      registered public accounting firm to be able to form an opinion on our financial
      statements. The Audit Committee pre-approves specified annual audit services
      engagement terms and fees and other specified audit fees. All other audit
      services must be specifically pre-approved by the Audit Committee. The Audit
      Committee monitors the audit services engagement and may approve, if necessary,
      any changes in terms, conditions and fees resulting from changes in audit scope
      or other items.





**Audit-Related
      Services.** Audit-related
      services are assurance and related services that are reasonably related to
      the
      performance of the audit or review of our financial statements which
      historically have been provided to us by the independent registered public
      accounting firm and are consistent with the SEC’s rules on auditor independence.
      The Audit Committee pre-approves specified audit-related services within
      pre-approved fee levels. All other audit-related services must be pre-approved
      by the Audit Committee.





**Tax
      Services.** The
      Audit
      Committee pre-approves specified tax services that the Audit Committee believes
      would not impair the independence of the independent registered public
      accounting firm and that are consistent with SEC rules and guidance. All other
      tax services must be specifically approved by the Audit Committee.





**All
      Other Services.** Other
      services are services provided by the independent registered public accounting
      firm that do not fall within the established audit, audit-related and tax
      services categories. The Audit Committee pre-approves specified other services
      that do not fall within any of the specified prohibited categories of
      services.





**Procedures** .
      All
      requests for services to be provided by the independent registered public
      accounting firm which must include a detailed description of the services to
      be
      rendered and the amount of corresponding fees, are submitted to the Chief
      Financial Officer. The Chief Financial Officer authorizes services that have
      been pre-approved by the Audit Committee. If there is any question as to whether
      a proposed service fits within a pre-approved service, the Audit Committee
      chair
      is consulted for a determination. The Chief Financial Officer submits requests
      or applications to provide services that have not been pre-approved by the
      Audit
      Committee, which must include an affirmation by the Chief Financial Officer
      and
      the independent registered public accounting firm that the request or
      application is consistent with the SEC’s rules on auditor independence, to the
      Audit Committee (or its Chair or any of its other members pursuant to delegated
      authority) for approval.





43


**PART
      IV**





**Item
      15. Exhibits and Financial Statement Schedules**





(a)
            The
                following financial statements and those financial statement schedules
                required by Item 8 hereof are filed as part of this
                report:





1.
            Financial
                Statements:





Reports
      of Independent Registered Public Accounting Firms





Consolidated
      Balance Sheets as of December 31, 2005 and 2004





Consolidated
      Statements of Operations for the years ended December 31, 2005, 2004 and
      2003





Consolidated
      Statement of Changes in Stockholders’ Deficit for the years ended December 31,
      2005, 2004 and 2003





Consolidated
      Statements of Cash Flows for the years ended December 31, 2005, 2004 and
      2003





Notes
      to
      Consolidated Financial Statements





2.
            Financial
                Statement Schedule:





Schedule
      II - Valuation and Qualifying Accounts





All
      other
      schedules are omitted because of the absence of conditions under which they
      are
      required or because the required information is presented in the Financial
      Statements or Notes thereto.





(b)
            The
                following exhibits are filed as part of this Annual Report:





**Exhibit
                Number**
            
            **Title
                of Exhibit**3.1(i)
            
            Amended
                and Restated Articles of Incorporation. (1)3.2(ii)
            
            Bylaws
                as amended (2)4.1
            
            Senior
                Convertible Loan and Security Agreement by and between C2 and Counsel
                Communications LLC, dated March 1, 2001. (3)4.2
            
            Loan
                Note by and between Counsel Communications LLC and C2 dated as of
                March 1,
                2001. (3)4.3
            
            Security
                Agreement by and between C2, MiBridge Inc and Counsel Communications
                LLC,
                dated March 1, 2001. (3)10.1*
            
            1997
                Recruitment Stock Option Plan. (4)10.2*
            
            2001
                Stock Option and Appreciation Rights Plan. (5)10.2.1*
            
            2003
                Stock Option and Appreciation Rights Plan. (6)10.3*
            
            Employment
                agreement with James Ducay, dated January 1, 2004. (7)10.4*
            
            Employment
                agreement with Kenneth Hilton, dated May 1, 2002. (8)10.5
            
            Form
                of Asset Purchase Agreement by and between Counsel Springwell
                Communications LLC and RSL COM U.S.A. Inc. (9)10.6
            
            Form
                of Amendment No. 1 to Asset Purchase Agreement between Counsel Springwell
                Communications LLC and RSL U.S.A., Inc. (9)




44




**Exhibit
                Number**
            
            **Title
                of Exhibit**10.7
            
            Amended
                and Restated Debt Restructuring Agreement, dated October 15, 2002.
                (8)10.8
            
            Form
                of Asset Purchase Agreement between Buyer’s United Inc., I-Link
                Communications Inc., and C2, dated December 6, 2002. (8)10.9
            
            C2
                Convertible Promissory Note for $7,500,000 between C2 and Counsel
                Corporation (U.S.) dated December 10, 2002. (8)10.10
            
            Securities
                Support Agreement by and between Counsel Communications, LLC and
                C2 dated
                as of March 1, 2001. (3)10.11
            
            Promissory
                note dated as of August 29, 2003, for $2,577,070 issued to Counsel
                Corporation. (7)10.12
            
            Promissory
                note dated March 10, 2004 for $1,546,532 issued to Counsel Corporation
                (U.S.). (7)10.13
            
            Loan
                Agreement dated as of January 26, 2004 between C2 and Counsel Corporation.
                (7)10.14
            
            Loan
                Agreement dated as of October 1, 2003, between C2 and Counsel Corporation
                (U.S.). (7)10.15
            
            Amended
                and Restated Stock Pledge Agreement dated as of January 30, 2004
                between
                C2 and Counsel Corporation (U.S.). (7)10.16
            
            Amended
                and Restated Secured Promissory Note dated as of October 1, 2003,
                for
                $9,743,479 issued to Counsel Corporation (U.S.). (7)10.17
            
            Amended
                and Restated Promissory Note dated January 26, 2004 for $7,600,000
                issued
                to Counsel Corporation. (7)10.18
            
            Amended
                and Restated Loan Agreement dated as of January 30, 2004 between
                C2 and
                Counsel Corporation (U.S.). (7)10.19
            
            Third
                Amendment to Senior Convertible Loan and Security Agreement dated
                as of
                November 1, 2003 between C2 and Counsel Corporation. (7)10.20
            
            Amended
                and Restated Stock Pledge Agreement dated January 26, 2004 between
                C2 and
                Counsel. (10)10.21
            
            Promissory
                Note for $917,095 dated March 31, 2004 between C2 and Counsel Corporation
                (U.S.). (10)10.22
            
            Promissory
                Note for $2,050,000 dated March 12, 2004 between C2 and Counsel
                Corporation. (10)10.23
            
            $1
                million Note dated May 26, 2004. (11)10.24
            
            $248,020
                Promissory Note dated June 30, 2004. (11)10.25
            
            $3.2
                million Promissory Note dated June 30, 2004. (11)10.26
            
            First
                Amendment to Loan Agreement dated October 1, 2003. (11)10.27
            
            Fourth
                Amendment to Senior Convertible Loan and security Agreement dated
                March 1,
                2001. (12)




45




**Exhibit
                Number**
            
            **Title
                of Exhibit**10.28
            
            First
                Amendment to Amended and Restated Loan Agreement dated January 30,
                2004.
                (11)10.29
            
            First
                Amendment to Loan Agreement dated January 26, 2004.
                (11)10.30
            
            Amended
                and Restated Promissory Note ($2.05 million). (11)10.31
            
            Amended
                and Restated Promissory Note ($7.6 million). (11)10.32
            
            Securities
                Purchase Agreement dated as of October 14, 2004. (12)10.33
            
            Secured
                Convertible Term Note dated October 14, 2004. (12)10.34
            
            Master
                Security Agreement dated October 14, 2004 by the Company, C2
                Communications Technologies, Inc. and Acceris Communications Corp.
                (12)10.35
            
            Registration
                Rights Agreement dated as of October 14, 2004. (12)10.36
            
            Common
                Stock Purchase Warrant issued October 14, 2004. (12)10.37
            
            Stock
                Pledge Agreement dated as of October 14, 2004. (12)10.38
            
            Guaranty
                dated as of October 14, 2004. (12)10.39*
            
            Employment
                Agreement with David Silverman (14)10.40*
            
            Employment
                Agreement with Kenneth Hilton, as amended (14)10.41*
            
            Counsel
                Management Agreement. (13)10.42*
            
            Employment
                Agreement with Eric Lipscomb (15)10.43
            
            $300,000
                Promissory Note dated December 31, 2004 (16)10.44
            
            $577,992.45
                Promissory Note dated December 31, 2004 (16)10.45
            
            Third
                Amendment to Amended and Restated Loan Agreement between C2 Global
                Technologies Inc. and Counsel Corporation (US) dated January 30,
                2004,
                dated as of April 28, 2005 (17)10.46
            
            Third
                Amendment to Loan Agreement between C2 Global Technologies Inc. and
                Counsel Corporation (US)  dated June 4, 2001, dated as of April 28,
                2005 (17)10.47
            
            Sixth
                Amendment to Senior Convertible Loan and Security Agreement between
                C2
                Global Technologies Inc. and Counsel Corporation and Counsel Capital
                Corporation dated March 1, 2001, dated as of April 28, 2005
                (17)10.48
            
            Third
                Amendment to Loan Agreement between C2 Global Technologies Inc. and
                Counsel Corporation dated January 26, 2004, dated as of April 28,
                2005
                (17)




46




**Exhibit
                Number**
            
            **Title
                of Exhibit**10.49
            
            Promissory
                Note for $6,845,692.00 dated March 31, 2005 between C2 and Counsel
                Corporation. (19)10.50
            
            Promissory
                Note for $187,062.03 dated March 31, 2005 between C2 and Counsel
                Corporation. (19)10.51
            
            Promissory
                Note for $112,500.00 dated March 31, 2005 between C2 and Counsel
                Corporation. (19)10.52
            
            Promissory
                Note for $194,672.61 dated March 31, 2005 between C2 and Counsel
                Corporation. (19)10.53
            
            Asset
                Purchase Agreement, dated as of May 19, 2005 (18)10.54
            
            Management
                Services Agreement, dated as of May 19, 2005 (18)10.55
            
            Letter
                from Counsel Corporation dated as of May 16, 2005 (18)10.56
            
            Security
                Agreement, dated as of May 19, 2005 (18)10.57
            
            Secured
                Promissory Note, dated as of May 19, 2005 (18)10.58
            
            Irrevocable
                Proxy, dated as of May 19, 2005 (18)10.59
            
            Guaranty,
                dated as of May 19, 2005 (18)10.60
            
            Fourth
                Amendment to Amended and Restated Loan Agreement between C2 Global
                Technologies Inc. and Counsel Corporation (US) dated January 30,
                2004,
                dated as of July 6, 2005 (19)10.61
            
            Fourth
                Amendment to Loan Agreement between C2 Global Technologies Inc. and
                Counsel Corporation (US) dated June 4, 2001, dated as of July 6,
                2005
                (19)10.62
            
            Seventh
                Amendment to Senior Convertible Loan and Security Agreement between
                C2
                Global Technologies Inc. and Counsel Corporation and Counsel Capital
                Corporation dated March 1, 2001, dated as of July 6, 2005
                (19)10.63
            
            Fourth
                Amendment to Loan Agreement between C2 Global Technologies Inc. and
                Counsel Corporation dated January 26, 2004, dated as of July 6, 2005
                (19)10.64
            
            Tenth
                Amendment to Loan and Security Agreement among Acceris Management
                and
                Acquisition, LLC, Acceris Communications Corp., C2 Global Technologies
                Inc. and Wells Fargo Foothill, Inc., dated December 10, 2001, dated
                June
                22, 2005 (19)10.65
            
            Promissory
                Note for $2,643,390.59 dated June 30, 2005 between C2 and Counsel
                Corporation. (19)10.66
            
            Promissory
                Note for $112,500.00 dated June 30, 2005 between C2 and Counsel
                Corporation. (19)10.67
            
            Promissory
                Note for $115,394.60 dated June 30, 2005 between C2 and Counsel
                Corporation. (19)10.68
            
            Promissory
                Note for $4,198,865.30 dated September 30, 2005 between C2 Global
                Technologies Inc. and Counsel Corporation. (20)10.69
            
            Promissory
                Note for $112,500.00 dated September 30, 2005 between C2 Global
                Technologies Inc. and Counsel Corporation.
                (20)




47




**Exhibit
                Number**
            
            **Title
                of Exhibit**10.70
            
            Promissory
                Note for $37,999.28 dated September 30, 2005 between C2 Global
                Technologies Inc. and Counsel Corporation. (20)10.71
            
            First
                Amendment to Asset Purchase Agreement dated September 30, 2005, by
                and
                among C2 Global Technologies Inc., Acceris Communications Corp.,
                Counsel
                Corporation, Acceris Management and Acquisition LLC, and North Central
                Equity LLC (20)10.72
            
            Management
                Services Agreement (With Respect to Specified State Customer Bases)
                dated
                September 30, 2005, by and among C2 Global Technologies Inc., Acceris
                Communications Corp., Counsel Corporation, Acceris Management and
                Acquisition LLC, and North Central Equity LLC (20)10.73
            
            Amended
                and Restated Master Security Agreement dated September 30, 2005,
                by and
                among C2 Global Technologies Inc. and certain of its subsidiaries,
                and
                Laurus Master Fund, Ltd. (20)10.74
            
            Cash
                Collateral Deposit Agreement dated September 30, 2005, by and between
                C2
                Global Technologies Inc. and Laurus Master Fund, Ltd.
                (20)10.75
            
            Promissory
                Note for $1,073,180.00 dated December 31, 2005 between C2 Global
                Technologies Inc. and Counsel Corporation. (included
                herewith)10.76
            
            Promissory
                Note for $112,500.00 dated December 31, 2005 between C2 Global
                Technologies Inc. and Counsel Corporation. (included
                herewith)10.77
            
            Promissory
                Note for $203,539.34 dated December 31, 2005 between C2 Global
                Technologies Inc. and Counsel Corporation. (included
                herewith)14
            
            C2
                Global Technologies Inc. Code of Conduct. (7)21
            
            List
                of subsidiaries. (7)23.1
            
            Consent
                of BDO Seidman LLP (included herewith)23.2
            
            Consent
                of PricewaterhouseCoopers, LLP (included herewith)31.1
            
            Certification
                of the CEO pursuant to Rule 13a-14(a) or Rule 14(d)-14(a) (included
                herewith)31.2
            
            Certification
                of the CFO pursuant to Rule 13a-14(a) or Rule 14(d)-14(a) (included
                herewith)32.1
            
            Certification
                pursuant to 18 U.S.C 1350 as adopted pursuant to Section 906 of the
                Sarbanes Oxley Act of 2002 (included herewith)32.2
            
            Certification
                pursuant to 18 U.S. C. 1350 as adopted pursuant to Section 906 of
                the
                Sarbanes Oxley Act of 2002 (included
                herewith)




*         Indicates
      a management contract or compensatory plan required to be filed as an exhibit.





(1)
            Incorporated
                by reference to our Annual Report on Form 10-K for the year ended
                December
                31, 1998, file number 0-17973.


48




(2)
            Incorporated
                by reference to our Quarterly Report on Form 10-Q for the period
                ended
                September 30, 1998, file number
                0-17973.





(3)
            Incorporated
                by reference to our Current Report on Form 8-K filed on March 16,
                2001,
                file number 0-17973.





(4)
            Incorporated
                by reference to our Annual Report on Form 10-KSB for the year ended
                December 31, 1996, file number 0-17973.





(5)
            Incorporated
                by reference to our Quarterly Report on Form 10-Q for the period
                ended
                September 30, 2001, file number 0-17973.





(6)
            Incorporated
                by reference to our Definitive Proxy Statement for the November 26,
                2003
                annual stockholder meeting.





(7)
            Incorporated
                by reference to our Annual Report on Form 10-K/A#1 for the year ended
                December 31, 2003.





(8)
            Incorporated
                by reference to our Annual Report on Form 10-K/A#3 for the year ended
                December 31, 2002, file number 0-17973.





(9)
            Incorporated
                by reference to our Current Report on Form 8-K filed on December
                26, 2002,
                file number 0-17973.





(10)
            Incorporated
                by reference to our Quarterly Report on Form 10-Q for the period
                ended
                March 31, 2004.





(11)
            Incorporated
                by reference to our Current Report on Form 8-K filed on July 19,
                2004.





(12)
            Incorporated
                by reference to our Current Report on Form 8-K filed on October 20,
                2004.





(13)
            Incorporated
                by reference to our Current Report on Form 8-K filed on January 6,
                2005





(14)
            Incorporated
                by reference to our registration statement on Form S-1, as amended
                (No.
                333-120512).





(15)
            Incorporated
                by reference to our Current Report on Form 8-K filed on March 11,
                2005





(16)
            Incorporated
                by reference to our Annual Report on Form 10-K for the year ended
                December
                31, 2004.





(17)
            Incorporated
                by reference to our Quarterly Report on Form 10-Q for the period
                ended
                March 31, 2005





(18)
            Incorporated
                by reference to our Current Report on Form 8-K filed on May 25,
                2005





(19)
            Incorporated
                by reference to our Quarterly Report on Form 10-Q for the period
                ended
                June 30, 2005





(20)
            Incorporated
                by reference to our Quarterly Report on Form 10-Q for the period
                ended
                September 30, 2005





49




**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      Registrant has duly caused this report to be signed on our behalf by the
      undersigned, hereunto duly authorized.




C2
                GLOBAL TECHNOLOGIES INC.
              (Registrant)Dated:
              March 28, 2006
            By:
            /s/ Allan
              C.
              SilberAllan
              C. SilberChairman
              of the Board and Chief Executive Officer




In
      accordance with Section 13 of the Securities Exchange Act of 1934, this report
      has been signed by the following persons on behalf of the registrant and in
      the
      capacities and on the dates indicated.







**Signature**
            
            **Title**
            
            **Date**/s/
                Allan C. Silber
            
            Chairman
                of the Board of Directors and Chief
            
            March
                28, 2006Allan
                C. Silber
            
            Executive
                Officer/s/Stephen
                A. Weintraub
            
            Chief
                Financial Officer and Corporate Secretary
            
            March
                28, 2006Stephen
                A. Weintraub/s/
                Catherine A. Moran
            
            Vice
                President of Accounting and Controller
            
            March
                28, 2006Catherine
                A. Moran/s/
                Hal B. Heaton
            
            Director
            
            March
                28, 2006Hal
                B. Heaton/s/
                Samuel L. Shimer
            
            Director
            
            March
                28, 2006Samuel
                L. Shimer/s/
                Henry Y. L. Toh
            
            Director
            
            March
                28, 2006Henry
                Y.L. Toh






50


(c)
      Financial Statement Schedules





The
      following Schedules are included in our Financial Statements:





Schedule
      of Valuation and Qualifying Accounts








51





**INDEX
      OF FINANCIAL STATEMENTS & SUPPLEMENTAL SCHEDULE**





**Title
      of Document**





**Page**Reports
                of Independent Registered Public Accounting Firms
            F-2Consolidated
                Balance Sheets as of December 31, 2005 and 2004
            F-4Consolidated
                Statements of Operations for the years ended December 31, 2005, 2004
                and
                2003
            F-5Consolidated
                Statement of Changes in Stockholders’ Deficit for the years ended December
                31, 2005, 2004 and 2003
            F-6Consolidated
                Statements of Cash Flows for the years ended December 31, 2005, 2004
                and
                2003
            F-7Notes
                to Consolidated Financial Statements
            F-9Schedule
                of Valuation and Qualifying Accounts
            S-1














F-1





**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Stockholders of


C2
      Global
      Technologies Inc.


Toronto,
      Ontario, Canada





We
      have
      audited the accompanying consolidated balance sheets of C2
      Global
      Technologies Inc. and its subsidiaries (formerly Acceris Communications Inc.) as
      of
      December 31, 2005 and 2004 and the related consolidated statements of
      operations, stockholders’ deficit, and cash flows for each of the two years in
      the period ended December 31, 2005. We have also audited the financial statement
      schedule listed in the accompanying index for the years ended December 31,
      2005
      and 2004. These consolidated financial statements and financial statement
      schedule are the responsibility of the Company’s management. Our responsibility
      is to express an opinion on these consolidated financial statements and
      financial statement schedule based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements and financial statement schedule are free
      of
      material misstatement. The Company is not required to have, nor were we engaged
      to perform, an audit of its internal control over financial reporting. Our
      audits included consideration of internal control over financial reporting
      as a
      basis for designing audit procedures that are appropriate in the circumstances,
      but not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the consolidated financial statements
      and financial statement schedule, assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of C2 Global Technologies
      Inc.
      at December 31, 2005 and 2004, and the results of its operations and its cash
      flows for each of the two years in the period ended December 31,
      2005 **,** in
      conformity with accounting principles generally accepted in the United States
      of
      America.





Also,
      in
      our opinion, the financial statement schedule listed in the accompanying index
      presents fairly, in all material respects, the information set forth therein
      for
      the years ended December 31, 2005 and 2004.




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










/s/
      BDO Seidman, LLP





BDO
      Seidman, LLP


Houston,
      Texas





March 27,
      2006


F-2




**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Stockholders of


C2
      Global
      Technologies Inc., formerly Acceris Communications Inc.:




In
      our
      opinion, the consolidated statements of operations, changes in stockholders
      deficit and of cash flows for the year ended December 31, 2003 listed in the
      accompanying index present fairly, in all material respects, the results of
      operations and cash flows of C2 Global Technologies Inc. (formerly Acceris
      Communications Inc.) and its subsidiaries for the year ended December 31, 2003,
      in conformity with accounting principles generally accepted in the United States
      of America. In addition, in our opinion, the financial statement schedule for
      the year ended December 31, 2003 listed in the accompanying index presents
      fairly, in all material respects, the information set forth therein when read
      in
      conjunction with the related consolidated financial statements. These financial
      statements and financial statement schedule are the responsibility of the
      Company's management. Our responsibility is to express an opinion on these
      financial statements and financial statement schedule based on our audit. We
      conducted our audit of these statements in accordance with the standards of
      the
      Public Company Accounting Oversight Board (United States). Those standards
      require that we plan and perform the audit to obtain reasonable assurance about
      whether the financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, and evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.




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








/s/
      PricewaterhouseCoopers, LLP





PricewaterhouseCoopers
      LLP


San
      Diego, California


April
      14,
      2004, except for the restatement described


in
      Note 3
      (not presented herein) to the consolidated


financial
      statements appearing under Item 8 of the


Company's
      Annual Report on Form 10-K


Amendment
      No. 1 for the year ended December 31,


2003,
      as
      to which the date is September 28, 2004


and
      except for the effects of the discontinued


operations
      discussed in Note 6, as to which the date


is
      March
      27, 2006








F-3


**C2
      GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES**


**(FORMERLY
      ACCERIS COMMUNICATIONS INC.)**


**CONSOLIDATED
      BALANCE SHEETS**


**as
      of December 31, 2005 and 2004**


**(In
      thousands of dollars, except share and per share amounts)**





**2005**
            
            **2004**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            327
            
            $
            44Restricted
                cash (Note 9)
            
            
            1,506
            
            
            —Non-trade
                accounts receivable
            
            
            172
            
            
            —Other
                current assets
            
            
            13
            
            
            1Net
                assets of discontinued operations (Note 6)
            
            
            —
            
            
            14,965Total
                current assets
            
            
            2,018
            
            
            15,010Furniture,
                fixtures, equipment and software, net (Note 7)
            
            
            —
            
            
            50Other
                assets:Intangible
                assets, net (Note 8)
            
            
            60
            
            
            80Goodwill
                (Note 8)
            
            
            173
            
            
            173Investments
                (Note 5)
            
            
            1,100
            
            
            1,100Other
                assets
            
            
            139
            
            
            211Assets
                of discontinued operations, less current portion (Note 6)
            
            
            —
            
            
            7,385Total
                assets
            
            $
            3,490
            
            $
            24,009LIABILITIES
                AND STOCKHOLDERS’ DEFICITCurrent
                liabilities:Accounts
                payable and accrued liabilities (Note 7)
            
            $
            2,523
            
            $
            2,010Convertible
                note payable, net of unamortized discount (Note 9)
            
            
            1,765
            
            
            1,768Subordinated
                notes payable to a related party, net of unamortized discount (Note
                9)
            
            
            72,022
            
            
            —Liabilities
                of discontinued operations (Note 6)
            
            
            3,763
            
            
            32,584Total
                current liabilities
            
            
            80,073
            
            
            36,362Convertible
                note payable, less current portion and net of unamortized discount
                (Note
                9)
            
            
            1,078
            
            
            2,630Warrant
                to purchase common stock (Note 9)
            
            
            281
            
            
            322Subordinated
                notes payable to a related party, less current portion and net of
                unamortized discount (Note 9)
            
            
            —
            
            
            46,015Liabilities
                of discontinued operations, less current portion (Note 6)
            
            
            —
            
            
            645Total
                liabilities
            
            
            81,432
            
            
            85,974Commitments
                and contingencies (Note 10 and 11)Stockholders’
                deficit:Preferred
                stock, $10.00 par value, authorized 10,000,000 shares, issued and
                outstanding 618; liquidation preference of $618
            
            
            6
            
            
            6Common
                stock, $0.01 par value, authorized 300,000,000 shares, issued and
                outstanding 19,237,135
            
            
            192
            
            
            192Additional
                paid-in capital
            
            
            189,162
            
            
            186,650Accumulated
                deficit
            
            
            (267,302
            )
            
            (248,813
            )Total
                stockholders’ deficit
            
            
            (77,942
            )
            
            (61,965
            )Total
                liabilities and stockholders’ deficit
            
            $
            3,490
            
            $
            24,009





The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-4




**C2
      GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES**


**(FORMERLY
      ACCERIS COMMUNICATIONS INC.)**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**for
      the years ended December 31, 2005, 2004 and 2003**


**(In
      thousands of dollars, except per share amounts)**


**2005**
                
                **2004**
                
                **2003**Revenues:Technology
                    licensing and development
                
                $
                —
                
                $
                540
                
                $
                2,164Total
                    revenues
                
                
                —
                
                
                540
                
                
                2,164Operating
                    costs and expenses:Selling,
                    general and administrative
                
                
                2,785
                
                
                4,117
                
                
                4,510Provision
                    for doubtful accounts
                
                
                —
                
                
                —
                
                
                6Research
                    and development
                
                
                389
                
                
                442
                
                
                —Depreciation
                    and amortization
                
                
                32
                
                
                20
                
                
                —Total
                    operating costs and expenses
                
                
                3,206
                
                
                4,579
                
                
                4,516Operating
                    loss
                
                
                (3,206
                )
                
                (4,039
                )
                
                (2,352
                )Other
                    income (expense):Interest
                    expense - related party (Note 9)
                
                
                (12,154
                )
                
                (8,488
                )
                
                (10,175
                )Interest
                    expense - third party
                
                
                (658
                )
                
                (65
                )
                
                (875
                )Other
                    income
                
                
                1,084
                
                
                1,487
                
                
                1,138Total
                    other expense
                
                
                (11,728
                )
                
                (7,066
                )
                
                (9,912
                )Loss
                    from continuing operations
                
                
                (14,934
                )
                
                (11,105
                )
                
                (12,264
                )Loss
                    from discontinued operations (Note 6)
                
                
                (3,555
                )
                
                (11,678
                )
                
                (19,164
                )Net
                    loss
                
                $
                (18,489
                )
                $
                (22,783
                )
                $
                (31,428
                )Basic
                    and diluted weighted average shares outstanding
                
                
                19,237
                
                
                19,256
                
                
                7,011Net
                    loss per common share - basic and diluted: (Note 3 and 4)Loss
                    from continuing operations
                
                $
                (0.78
                )
                $
                (0.57
                )
                $
                (1.75
                )Loss
                    from discontinued operations
                
                
                (0.18
                )
                
                (0.61
                )
                
                (2.73
                )Net
                    loss per common share
                
                $
                (0.96
                )
                $
                (1.18
                )
                $
                (4.48
                )





The
      accompanying notes are an integral part of these consolidated financial
      statements


F-5





**C2
      GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES**


**(FORMERLY
      ACCERIS COMMUNICATIONS INC.)**


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT**


**for
      the years ended December 31, 2005, 2004 and 2003**


**(In
      thousands of dollars, except share amounts)(1)**





**Preferred
                stock**
            
            **Common
                stock**
            
            **Additional
                paid-**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **in
                capital**
            
            **Deficit****Balance
                at December 31, 2002**
            
            
            769
            
            $
            7
            
            
            5,827,477
            
            $
            58
            
            $
            136,721
            
            $
            (194,602
            )Conversion
                of related party debt to common stock
            
            
            —
            
            
            —
            
            
            13,428,618
            
            
            134
            
            
            40,539
            
            
            —Conversion
                of Class N preferred stock to common stock
            
            
            (150
            )
            
            (1
            )
            
            6,000
            
            
            —
            
            
            1
            
            
            —Beneficial
                conversion feature on certain convertible notes payable to related
                party
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            5,354
            
            
            —C2
                costs paid by majority stockholder
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            132
            
            
            —Management
                expense from majority stockholder
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            130
            
            
            —Issuance
                of options to purchase common stock to non-employee
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2
            
            
            —Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (31,428
            )**Balance
                at December 31, 2003**
            
            
            619
            
            
            6
            
            
            19,262,095
            
            
            192
            
            
            182,879
            
            
            (226,030
            )Conversion
                of Class N preferred stock to common stock
            
            
            (1
            )
            
            —
            
            
            40
            
            
            —
            
            
            —
            
            
            —Cancellation
                of common stock (2)
            
            
            —
            
            
            —
            
            
            (25,000
            )
            
            —
            
            
            (21
            )
            
            —Beneficial
                conversion feature on certain convertible notes payable to related
                party
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,771
            
            
            —C2
                costs paid by majority stockholder
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            16
            
            
            —Issuance
                of options to purchase common stock to non-employee
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            5
            
            
            —Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (22,783
            )**Balance
                at December 31, 2004**
            
            
            618
            
            
            6
            
            
            19,237,135
            
            
            192
            
            
            186,650
            
            
            (248,813
            )Beneficial
                conversion feature on certain convertible notes payable to related
                party
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,511
            
            
            —Conferral
                of benefit from majority stockholder(Note
                13)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,000
            
            
            —Issuance
                of options to purchase common stock to non-employee
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1
            
            
            —Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (18,489
            )**Balance
                at December 31, 2005**
            
            
            618
            
            $
            6
            
            
            19,237,135
            
            $
            192
            
            $
            189,162
            
            $
            (267,302
            )





(1)  All
      amounts shown as if the reverse stock split described more fully in Note 4
      had
      occurred on December 31, 2002.


(2)
      The
      Company received and cancelled 25,000 common shares of the Company pursuant
      to
      the partial settlement of a prior claim over a third party.






The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-6


**C2
      GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES**


**(FORMERLY
      ACCERIS COMMUNICATIONS INC.)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**for
      the years ended December 31, 2005, 2004 and 2003**


**(In
      thousands of dollars)**




**2005**
            
            **2004**
            
            **2003****Cash
                flows from operating activities:**Net
                loss
            
            $
            (18,489
            )
            $
            (22,783
            )
            $
            (31,428
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Loss
                from discontinued operations
            
            
            3,555
            
            
            11,678
            
            
            19,164Depreciation
                and amortization
            
            
            32
            
            
            20
            
            
            —Amortization
                of discount and debt issuance costs on subordinated notes payable
                to
                related party
            
            
            5,973
            
            
            4,186
            
            
            5,782Amortization
                of discount on convertible note payable
            
            
            212
            
            
            51
            
            
            —Allowance
                for doubtful accounts
            
            
            —
            
            
            —
            
            
            6Accrued
                interest added to loan principal of related party debt
            
            
            6,180
            
            
            4,304
            
            
            5,461Expense
                associated with issuance of options to purchase common stock to
                non-employee
            
            
            1
            
            
            5
            
            
            2Imputed
                management services provided by majority stockholder
            
            
            —
            
            
            —
            
            
            130Gain
                on sale of investment in common stock
            
            
            —
            
            
            (1,376
            )
            
            —Loss
                on disposal of furniture, fixtures, equipment and software
            
            
            38
            
            
            4
            
            
            —Mark
                to market adjustment to warrant
            
            
            (41
            )
            
            (108
            )
            
            —Preferred
                stock received on sale of technology license
            
            
            —
            
            
            —
            
            
            (1,100
            )Gain
                on settlement of note payable
            
            
            —
            
            
            —
            
            
            (1,141
            )Cancellation
                of common stock
            
            
            —
            
            
            (21
            )
            
            —(2,539
            )
            
            (4,040
            )
            
            (3,124
            )Increase
                (decrease) in operating assets and liabilities:Accounts
                receivable
            
            
            —
            
            
            5
            
            
            1,242Other
                assets
            
            
            (112
            )
            
            218
            
            
            21Accounts
                payable and accrued liabilities
            
            
            513
            
            
            (346
            )
            
            (2,499
            )Net
                cash used in operating activities by continuing operations
            
            
            (2,138
            )
            
            (4,163
            )
            
            (4,360
            )Net
                cash used in operating activities by discontinued
                operations
            
            
            (12,702
            )
            
            (4,465
            )
            
            (2,744
            )Net
                cash used in operating activities
            
            
            (14,840
            )
            
            (8,628
            )
            
            (7,104
            )**Cash
                flows from investing activities:**Cash
                received from sale of investments in common stock, net
            
            
            —
            
            
            3,581
            
            
            —Cash
                received from sale of other assets
            
            
            —
            
            
            —
            
            
            108Purchases
                of furniture, fixtures, equipment and software
            
            
            —
            
            
            —
            
            
            (4
            )Purchase
                of patent rights
            
            
            —
            
            
            —
            
            
            (100
            )Net
                cash provided by investing activities of continuing
                operations
            
            
            —
            
            
            3,581
            
            
            4Net
                cash used in investing activities of discontinued
                operations
            
            
            (127
            )
            
            (731
            )
            
            (1,831
            )Net
                cash provided by (used in) investing activities
            
            
            (127
            )
            
            2,850
            
            
            (1,827
            )**Cash
                flows from financing activities:**Proceeds
                from issuance of subordinated notes payable to a related
                party
            
            
            15,365
            
            
            12,584
            
            
            7,896Segregation
                of cash for future payments of convertible note payable
            
            
            (1,506
            )
            
            —
            
            
            —Proceeds
                from issuance of convertible note payable
            
            
            —
            
            
            4,773
            
            
            —Payment
                of notes payable to third parties
            
            
            (1,767
            )
            
            —
            
            
            —Finance
                costs on convertible note payable
            
            
            —
            
            
            (211
            )
            
            —Costs
                paid by majority stockholder
            
            
            —
            
            
            16
            
            
            132Net
                cash provided by financing activities of continuing
                operations
            
            
            12,092
            
            
            17,162
            
            
            8,028Net
                cash provided by (used in) financing activities of discontinued
                operations
            
            
            3,158
            
            
            (11,335
            )
            
            527Net
                cash provided by financing activities
            
            
            15,250
            
            
            5,827
            
            
            8,555Increase
                (decrease) in cash and cash equivalents
            
            
            283
            
            
            49
            
            
            (376
            )Cash
                and cash equivalents at beginning of year
            
            
            44
            
            
            (5
            )
            
            371Cash
                and cash equivalents at end of year
            
            $
            327
            
            $
            44
            
            $
            (5
            )





The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-7





**C2
      GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES**


**(FORMERLY
      ACCERIS COMMUNICATIONS INC.)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (continued)**


**for
      the years ended December 31, 2005, 2004 and 2003**


**(In
      thousands of dollars)**





**2005**
            
            **2004**
            
            **2003****Supplemental
                schedule of non-cash investing and financing
                activities:**Disposition
                of telecommunications business in exchange for assumption of
                liabilities
            
            $
            8,014
            
            $
            —
            
            $
            —Warrant
                to purchase common stock issued to convertible note holder
            
            
            —
            
            
            430
            
            
            —Fees
                to the lender in connection with convertible note payable
            
            
            —
            
            
            226
            
            
            —Discount
                in connection with convertible notes payable to related
                parties
            
            
            1,511
            
            
            3,771
            
            
            5,354Conversion
                of notes payable to a related party and associated accrued interest
                to
                common stock
            
            
            —
            
            
            —
            
            
            40,673Preferred
                stock received in exchange for assets of discontinued
                operations
            
            
            —
            
            
            —
            
            
            1,691Issuance
                of options to purchase common stock to non-employee
            
            
            —
            
            
            —
            
            
            142**Supplemental
                cash flow information:**Taxes
                paid
            
            
            4
            
            
            11
            
            
            —Interest
                paid
            
            
            417
            
            
            136
            
            
            293





The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-8




**C2
      GLOBAL TECHNOLOGIES INC.**


**(FORMERLY
      ACCERIS COMMUNICATIONS INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(amounts
      in thousands, except where specifically indicated, and share and per share
      amounts)





**Note
      1 - Description of Business and Principles of Consolidation**





The
      consolidated financial statements include the accounts of C2 Global Technologies
      Inc. (formerly Acceris Communications Inc.), and its wholly-owned subsidiaries
      WXC Corp. (“WXCC”, formerly Acceris Communications Corp.), I-Link Communications
      Inc. (“ILC”), and C2 Communications Technologies Inc. (formerly Acceris
      Communications Technologies Inc.). These entities, on a combined basis, are
      referred to as “C2”, the “Company”, or “we” in these consolidated financial
      statements. Our consolidated financial statements were prepared in conformity
      with accounting principles generally accepted in the United States of America
      (“GAAP”) and include the assets, liabilities, revenues, and expenses of all
      majority-owned subsidiaries over which C2 exercises control.





C2
      owns
      certain patents, including two foundational patents in voice over internet
      protocol (“VoIP”) technology - U.S. Patent Nos. 6,243,373 and 6,438,124
      (together the “VoIP Patent Portfolio”), which it seeks to license. Subsequent to
      the disposition of its Telecommunications business, as discussed in Note 6
      to
      these financial statements, licensing of intellectual property constitutes
      the
      primary business of the Company. C2’s target market consists of carriers,
      equipment manufacturers, service providers and end users in the internet
      protocol (“IP”) telephone market who are using C2’s patented VoIP technologies
      by deploying VoIP networks for phone-to-phone communications. The Company has
      engaged, and intends to continue to engage, in licensing agreements with third
      parties domestically and internationally. At present, no royalties are being
      paid to the Company. The Company plans to obtain licensing and royalty revenue
      from its target market by enforcing its patents, with the assistance of outside
      counsel, in order to realize value from its intellectual property.





All
      significant intercompany accounts and transactions have been eliminated upon
      consolidation.





**Note
      2 - Liquidity and Capital Resources**





**Liquidity
      and Capital Resources:**





As
      a
      result of our substantial operating losses and negative cash flows from
      operations, we had a stockholders’ deficit of $77,942 (2004 - $61,965) and
      negative working capital of $78,055 (2004 - $21,352) at December 31, 2005.
      The
      increase in the working capital deficit during 2005 is primarily due to the
      classification as current, at December 31, 2005, of related party debt of
      $72,022 (2004 - $46,015) that matures on December 31, 2006. It is partially
      offset by the reduction in current liabilities that resulted from the
      disposition of the Telecommunications business in the third quarter of 2005.
      Both continuing and discontinued operations in 2005 were primarily financed
      through increased related party debt. However, discontinued operations for
      the
      period May 1 to September 30, 2005, were financed by the purchaser of the
      Telecommunications business through advances which, at the closing date of
      September 30, 2005, formed additional consideration for the assets disposed
      of
      by the Company.





The
      Company had gross third party debt of $3,516 at December 31, 2005, a reduction
      from the $5,325 owed at December 31, 2004. The third party debt is held by
      Laurus Master Fund, Ltd. (“Laurus”), and at December 31, 2005 is comprised of a
      convertible note (the “Note”) in the amount of $3,235 and a warrant with a fair
      value of $281. The debt to Laurus is secured by all assets of the Company and
      guaranteed by the Company’s majority stockholder, Counsel Corporation
      (collectively, with its subsidiaries, “Counsel”) through its maturity of October
      2007.





Gross
      related party debt owing to our 91% common stockholder, Counsel, at December
      31,
      2005 is $73,646 compared to $52,100 at December 31, 2004.  Interest on the
      related party debt is capitalized, at the end of each quarter, and added to
      the
      principal amounts outstanding. During 2005, in conjunction with the disposition
      of the Telecommunications business, described below, Counsel extended the
      maturity of its debt to December 31, 2006. This debt is supplemented by
      Counsel’s Keep Well, which requires Counsel to fund, through intercompany
      advances or equity contributions, all capital investment, working capital or
      other operational cash requirements of C2 until December 31, 2006. The Keep
      Well
      is not expected to be extended beyond its current maturity.





Counsel,
      in addition to guaranteeing the Laurus Note, has also agreed to subordinate
      all
      of its debt owed by the Company, and to subrogate all of its related security
      interests, in favor of Laurus. Counsel has further agreed to pledge all of
      its
      shares owned in C2 as security for the Laurus debt. In accordance with the
      Laurus agreement, C2 cannot repay amounts owing to Counsel while the debt with
      Laurus remains outstanding. Additionally, so long as C2’s debt to Laurus remains
      outstanding, Counsel may not, without the written
      consent of Laurus, take any enforcement action to collect its loans owing by
      C2.
      Notwithstanding this, Counsel is not expected to extend the maturity date of
      its
      loans beyond December 31, 2006. In the event that C2’s debt to Laurus is either
      prepaid in full or settled by conversion of such debt into shares of C2,
      Counsel’s subordination agreement shall be terminated with immediate
      effect.





F-9


On
      September 30, 2005, the Company, in conjunction with the completion of the
      sale
      of the Telecommunications business, described below, agreed to modifications
      to
      the security interest in the Company held by Laurus as follows: (a) release
      of
      the security interest in the assets being disposed of in the sale of the
      Telecommunications business; (b) conversion of the security interest of the
      Note
      to the senior debt position; (c) payment of $1,800 into a restricted cash
      account for the benefit of Laurus, which may be applied toward scheduled monthly
      payments of the note. At December 31, 2005, the balance of the restricted cash
      account was $1,506.





There
      is
      significant doubt about the Company’s ability to obtain additional financing
      beyond December 31, 2006 to support its operations once the Keep Well from
      Counsel expires. Additionally, management believes that the Company does not,
      at
      this time, have an ability to obtain additional financing in order to pursue
      expansion through acquisition. The Company must therefore realize value from
      its
      intellectual property, as discussed above, in order to continue as a going
      concern. There is no certainty that the Company will be successful in its
      strategy of generating revenue by realizing value on its intellectual
      property.




Ownership
      Structure and Capital Resources:





·
            The
                Company is approximately 91% owned by Counsel. The remaining 9% is
                owned
                by public stockholders.





·
            The
                Company has aggregate gross debt, including a related common stock
                warrant, of $77,162 at December 31, 2005. 95% or $73,646 of this
                debt is
                owed to Counsel. The remainder of this debt, including the common
                stock
                warrant, is held by Laurus, and is guaranteed by Counsel. As discussed
                above, on September 30, 2005, in conjunction with the sale of the
                Telecommunications business, the Company placed $1,800 into a restricted
                cash account for the benefit of the Note holder, which may be applied
                toward scheduled monthly payments of the Note. At December 31, 2005,
                the
                balance of the restricted cash account was
                $1,506.





·
            Since
                becoming controlling stockholder in 2001, Counsel has invested over
                $100,000 in C2 to fund the development of C2’s technology and its
                Telecommunications business. In 2005, Counsel loaned net $15,365
                to C2,
                capitalized $6,180 of interest, and continues to have a commitment
                to
                provide the necessary funding to ensure the continued operations
                of the
                Company through December 31, 2006. In addition, Counsel has subordinated
                its debt, and guaranteed C2’s obligations to Laurus. The disposition of
                the Telecommunications business at September 30, 2005 significantly
                reduced both the complexity and the funding requirements of the Company’s
                operations, and the Company does not anticipate that Counsel’s investment
                in 2006 will be comparable to its investment in prior
                years.





**Note
      3 - Summary of Significant Accounting Policies**





**Revenue
      recognition**





Revenue
      is recognized when persuasive evidence of an arrangement exists, delivery has
      occurred or services have been rendered, the Company’s price to the customer is
      fixed and determinable, and collection of the resulting receivable is reasonably
      assured. Revenues where collectibility is not assured are recognized when the
      total cash collections to be retained by the Company are finalized.





When
      a
      license of C2 technology requires continued support or involvement of C2,
      contract revenues are spread over the period of the required support or
      involvement. In the event that collectibility is in question, revenue is
      recorded only to the extent of cash receipts.





**Use
      of estimates**





The
      preparation of financial statements in conformity with GAAP requires management
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.




F-10





Significant
      estimates include revenue recognition, purchase accounting (including the
      ultimate recoverability of intangibles and other long-lived assets), valuation
      of deferred tax assets and contingencies surrounding litigation. These policies
      have the potential to have a significant impact on our financial statements,
      either because of the significance of the financial statement item to which
      they
      relate, or because they require judgment and estimation due to the uncertainty
      involved in measuring, at a specific point in time, events which are continuous
      in nature.





The
      Company accounts for intangible assets in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 141, *Business
      Combinations* (“SFAS
      141”) and SFAS No. 142, *Goodwill
      and Other Intangible Assets* (“SFAS
      142”). All business combinations are accounted for using the purchase method.
      Goodwill and intangible assets with indefinite useful lives are not amortized,
      but are tested for impairment at least annually. Intangible assets are recorded
      based on estimates of fair value at the time of the acquisition.





The
      Company assesses the fair value of goodwill based upon the fair value of the
      Company as a whole, with the Company’s valuation being based upon its market
      capitalization. If the carrying amount of the assets exceeds the Company’s
      estimated fair value, goodwill impairment may be present. The Company measures
      the goodwill impairment loss based upon the fair value of the underlying assets
      and liabilities, including any unrecognized intangible assets, and estimates
      the
      implied fair value of goodwill. An impairment loss is recognized to the extent
      that the Company’s recorded goodwill exceeds the implied fair value of
      goodwill.





Goodwill
      is tested for impairment annually, and will be tested for impairment between
      annual tests if an event occurs or circumstances change that more likely than
      not would indicate the carrying amount may be impaired. No impairment was
      present upon the performance of these tests in 2005 and 2004. We cannot predict
      the occurrence of future events that might adversely affect the reported value
      of goodwill. Such events may include, but are not limited to, strategic
      decisions made in response to economic and competitive conditions, judgments
      on
      the validity of the Company’s VoIP Patent Portfolio or other factors not known
      to management at this time.





Regularly,
      the Company evaluates whether events or circumstances have occurred that
      indicate the carrying value of its other amortizable intangible assets may
      not
      be recoverable. When factors indicate an asset may not be recoverable, the
      Company compares the related future net cash flows to the carrying value of
      the
      asset to determine if impairment exists. If the expected future net cash flows
      are less than carrying value, impairment is recognized to the extent that the
      carrying value exceeds the fair value of the asset





The
      Company assesses the value of its deferred tax asset, which has been generated
      by a history of net operating losses, at least annually, and determines the
      necessity for a valuation allowance. The Company evaluates which portion, if
      any, will more likely than not be realized by offsetting future taxable income.
      The determination of that allowance includes a projection of its future taxable
      income, as well as consideration of any limitations that may exist on its use
      of
      its net operating loss carryforwards.





The
      Company is involved from time to time in various legal matters arising out
      of
      its operations in the normal course of business. On a case by case basis, the
      Company evaluates the likelihood of possible outcomes for this litigation.
      Based
      on this evaluation, the Company determines whether a liability accrual is
      appropriate. If the likelihood of a negative outcome is probable, and the amount
      is estimable, the Company accounts for the liability in the current period.
      A
      change in the circumstances surrounding any current litigation could have a
      material impact on the financial statements.





**Cash
      and cash equivalents**





The
      Company considers all highly liquid investments with an original maturity of
      three months or less to be cash equivalents. The Company maintains its cash
      and
      cash equivalents primarily with financial institutions in Toronto, Canada.
      These
      accounts may from time to time exceed federally insured limits. The Company
      has
      not experienced any losses on such accounts.





**Furniture,
      fixtures, equipment and software**





Furniture,
      fixtures, equipment and software are stated at cost. Depreciation is calculated
      using the straight-line method over the following estimated useful
      lives:





Telecommunications
                network equipment
            3-5
                yearsFurniture,
                fixtures and office equipment
            3-10
                yearsSoftware
                and information systems
            3
                yearsLeasehold
                improvements
            Shorter
                of estimated life or lease term





F-11




Long-lived
      assets that are to be disposed of by sale are carried at the lower of book
      value
      or estimated net realizable value less costs to sell. Betterments and renewals
      that extend the life of the assets are capitalized. Other repairs and
      maintenance charges are expensed as incurred. The cost and related accumulated
      depreciation applicable to assets retired are removed from the accounts and
      the
      gain or loss on disposition is recognized in operations. The Company regularly
      evaluates whether events or circumstances have occurred that indicate the
      carrying value of its furniture, fixtures, equipment and software may not be
      recoverable. When factors indicate the asset may not be recoverable, the Company
      compares the related future net cash flows to the carrying value of the asset
      to
      determine if impairment exists. If the expected future net cash flows are less
      than the carrying value, impairment is recognized to the extent that the
      carrying value exceeds the fair value of the asset.





**Investments**





Dividends
      and realized gains and losses on equity securities are included in other income
      in the consolidated statements of operations.





Investments
      are accounted for under the cost method, as the equity securities or the
      underlying common stock are not readily marketable and the Company’s ownership
      interest does not allow it to exercise significant influence over the entity.
      The Company monitors its investments for impairment by considering current
      factors including economic environment, market conditions, operational
      performance and other specific factors relating to the business underlying
      the
      investment, and will record impairments in carrying values if appropriate.
      The
      fair values of the securities are estimated using the best available information
      as of the evaluation date, including the quoted market prices of comparable
      public companies, recent financing rounds of the investee and other investee
      specific information.





**Research
      and development costs**





The
      Company expenses internal research and development costs, which primarily
      consist of salaries, when they are incurred.





**Income
      taxes**





The
      Company records deferred taxes in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      This
      Statement requires recognition of deferred tax assets and liabilities for
      temporary differences between the tax bases of assets and liabilities and the
      amounts at which they are carried in the financial statements, based upon the
      enacted tax rates in effect for the year in which the differences are expected
      to reverse. The Company establishes a valuation allowance when necessary to
      reduce deferred tax assets to the amount expected to be realized.





**Stock-based
      compensation**





At
      December 31, 2005, the Company has several stock-based compensation plans,
      which
      are described more fully in Note 17. The Company accounts for these plans under
      the recognition and measurement principles of Accounting Principles Board
      Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations (collectively, “APB 25”). Stock-based employee
      compensation cost is not reflected in net loss, as all options granted under
      those plans had an exercise price equal to the market value of the underlying
      common stock on the date of grant. In December 2004, the Financial Accounting
      Standards Board (“FASB”) issued a revision to SFAS No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123R”). SFAS No. 123R supersedes APB 25. SFAS No. 123R requires that all
      stock-based compensation, including options, be expensed at fair value as of
      the
      grant date over the vesting period. Companies will be required to use an option
      pricing model (e.g.: Black-Scholes or Binomial) to determine compensation
      expense, consistent with the model used in the already required disclosures
      of
      SFAS No. 148, *Accounting
      for Stock-Based Compensation-Transition and Disclosure* (“SFAS
      No. 148”). In April 2005, the SEC issued a release to amend the effective date
      of compliance with SFAS No. 123R to the first quarter of the first fiscal year
      beginning after June 15, 2005. The Company expects to adopt SFAS No. 123R on
      January 1, 2006. The Company does not expect the adoption of SFAS No. 123R
      to
      have a material effect on the Company’s financial position, operations or cash
      flow.





In
      accordance with SFAS No. 123, as amended by SFAS No. 148, see below for a
      tabular presentation of the pro forma stock-based compensation cost, net loss
      and loss per share as if the fair value-based method of expense recognition
      and
      measurement prescribed by SFAS 123 had been applied to all employee options.
      Options granted to non-employees (excluding options granted to non-employee
      members of the Company’s Board of Directors for their services as Board members)
      are recognized and measured using the fair value-based method prescribed by
      SFAS
      123.


F-12




**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Net
                loss as reported
            
            $
            (18,489
            )
            $
            (22,783
            )
            $
            (31,428
            )Deduct:Total
                compensation cost determined under fair value based method for all
                awards,
                net of $0 tax
            
            
            (198
            )
            
            (559
            )
            
            (92
            )Pro
                forma net loss
            
            $
            (18,687
            )
            $
            (23,342
            )
            $
            (31,520
            )Loss
                per shareBasic
                and diluted - as reported
            
            $
            (0.96
            )
            $
            (1.18
            )
            $
            (4.48
            )Basic
                and diluted - pro forma
            
            $
            (0.97
            )
            $
            (1.21
            )
            $
            (4.50
            )





The
      fair
      value of each option grant is estimated on the date of the grant using the
      Black-Scholes option pricing model with the following weighted average
      assumptions: expected volatility in 2005 - 81% (2004 - 81% to 98%, 2003 - 98%),
      risk free rates ranging from 3.73% to 3.75%, 3.10% to 3.83%, and 2.76% to 3.00%
      in 2005, 2004 and 2003, respectively, expected lives of four years in 2005,
      2004, and 2003, and dividend yield of zero for each year.





**Fair
      Value of Financial Instruments**





The
      fair
      value of the financial instruments is the amount at which the instruments could
      be exchanged in a current transaction between willing parties, other than in
      a
      forced sale or liquidation. The carrying value at December 31, 2005 and 2004
      for
      the Company’s financial instruments, which include cash, accounts receivable,
      deposits, and accounts payable and accrued liabilities, approximates fair value.
      The carrying value of the Company’s debt is lower than the fair value of the
      debt due to the discounts set out in Note 9.





**Segment
      reporting**





The
      Company reports its segment information based upon the internal organization
      that is used by management for making operating decisions and assessing the
      Company’s performance. The Company currently operates in a single business
      segment, technology licensing. Therefore, the Company has concluded that
      supplementary segment reporting will not provide useful information to the
      reader of this Annual Report on Form 10-K.





**Discontinued
      Operations**





In
      accordance with the provisions of the Financial Accounting Standards Board
      (“FASB”) SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      the
      operations and related losses on operations sold, or identified as held for
      sale, have been presented as discontinued
      operations in the Consolidated Statements of Operations for all years presented.
      Gains are recognized when realized.





**Recent
      accounting pronouncements**





In
      December 2004, the FASB issued a revision to SFAS No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123R”). SFAS No. 123R supersedes Accounting Principles Board (“APB”) Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations. SFAS No. 123R requires that all stock-based
      compensation, including options, be expensed at fair value as of the grant
      date
      over the vesting period. Companies will be required to use an option pricing
      model (e.g.: Black-Scholes or Binomial) to determine compensation expense,
      consistent with the model used in the already required disclosures of SFAS
      No.
      148, *Accounting
      for Stock-Based Compensation-Transition and Disclosure* .
      In
      April 2005, the SEC issued a release to amend the effective date of compliance
      with SFAS No. 123R to the first quarter of the first fiscal year beginning
      after
      June 15, 2005. The Company expects to adopt SFAS No. 123R on January 1, 2006.
      The Company does not expect the adoption of SFAS No. 123R to have a material
      effect on the Company’s financial position, operations or cash
      flow.





In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* (“SFAS
      No. 154”). SFAS No. 154 supersedes APB Opinion No. 20, *Accounting
      Changes* (“APB
      No.
      20”), and related Interpretations, and is effective for fiscal years beginning
      after December 15, 2005. SFAS No. 154 requires that voluntary changes in
      accounting principles be applied retrospectively, with the cumulative effect
      of
      the change taken into opening retained earnings for the earliest period
      presented, and the prior years’ statements restated to reflect the effect of the
      new accounting principle. Previously, APB No. 20 required that the cumulative
      effect of a change in accounting principle be recognized in net income in the
      year of the change. Although SFAS No. 154 now requires that a change in
      accounting principle be treated substantially the same as a correction of an
      error in prior periods, retrospective application is not required if it is
      impracticable to determine the effects on a specific period or the cumulative
      effect of


F-13


the
      change on all prior periods presented in the financial statements. SFAS No.
      154
      does not change the transition provisions of any existing accounting
      pronouncements, and the Company does not expect adoption of SFAS No. 154 to
      have
      a material effect on its financial position, operations or cash
      flow.





In
      2005,
      the FASB’s Emerging Issues Task Force (“EITF”) reached consensus on EITF Issue
      No. 05-2, *The
      Meaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19,
‘Accounting for Derivative Financial Instruments Indexed to, Potentially Settled
      In, a Company’s Own Stock’ ”* (“EITF
      No. 05-2”). Under EITF No. 05-2, instruments that provide the holder with an
      option to convert into a fixed number of shares (or equivalent amount of cash
      at
      the discretion of the issuer) for which the ability to exercise the option
      is
      based on the passage of time or a contingent event should be considered
      conventional, and convertible preferred stock with a mandatory redemption date
      may qualify as conventional if the economic characteristics indicate the
      instrument is more akin to debt than equity. EITF No. 05-2 is effective for
      new
      instruments entered into and instruments modified in reporting periods beginning
      after June 29, 2005. The Company does not expect the adoption of EITF No. 05-2
      to have a material effect on the Company’s financial position, operations or
      cash flow.





**Note
      4 - Net Loss per Share and Reverse Stock Split**





Basic
      earnings (loss) per share is computed based on the weighted average number
      of
      common shares outstanding during the period. Options, warrants, convertible
      preferred stock and convertible debt are included in the calculation of diluted
      earnings (loss) per share, except when their effect would be anti-dilutive.
      As
      the Company had a net loss from continuing operations for 2005, 2004 and 2003,
      basic and diluted loss per share are the same.





On
      December 6, 2002, the Board of Directors approved a 1-for-20 reverse split
      of
      C2’s common stock (the “Stock Split”). The stockholders of C2 approved the Stock
      Split by stockholder vote on November 26, 2003. In connection with the Stock
      Split the par value of the common stock was changed from $0.007 to $0.01 per
      share. The Stock Split reduced the shares of common stock outstanding at that
      time by 365,977,409 shares. The basic and diluted net loss per common share
      and
      all other share amounts in these financial statements are presented as if the
      reverse stock split had occurred on December 31, 2001. Contemporaneous with
      the
      Stock Split, Counsel exercised its right to convert certain debt instruments
      into shares of the Company’s common stock. As a result of the conversion, the
      Company issued to Counsel 13,428,492 shares of common stock on a post-split
      basis.





In
      January 2003, 150 shares of the Company’s Class N preferred stock held by an
      unrelated third party were converted into 6,000 shares of common stock. In
      November 2004, 1 share of the Company’s Class N preferred stock held by an
      unrelated third party was converted into 40 shares of common stock.





Potential
      common shares that were not included in the computation of diluted earnings
      (loss) per share because they would have been anti-dilutive are as follows
      as at
      December 31:





**2005**
            
            **2004**
            
            **2003**Assumed
                conversion of Class N preferred stock
            
            
            24,720
            
            
            24,720
            
            
            24,760Assumed
                conversion of convertible debt
            
            
            3,639,412
            
            
            3,329,482
            
            
            2,486,299Assumed
                conversion of Laurus convertible debt
            
            
            3,676,471
            
            
            5,681,818
            
            
            —Assumed
                exercise of options and warrant to purchase shares of common
                stock
            
            
            1,727,029
            
            
            3,441,643
            
            
            1,807,8799,067,632
            
            
            12,477,663
            
            
            4,318,938




**Note
      5 - Investments**





The
      Company’s investments as of December 31, 2005 consist of a convertible preferred
      stock holding in AccessLine Communications Corporation, a privately-held
      corporation. This stock was received as consideration for a licensing agreement
      (reflected in technology licensing and related services revenues) in the second
      quarter of 2003, the estimated fair value of which was determined to be $1,100.
      The fair value of the securities is estimated using the best available
      information as of the evaluation date, including the quoted market prices of
      comparable public companies, recent financing rounds of the investee, and other
      investee specific information. The Company has concluded that as of December
      31,
      2005, there has been no impairment in the fair value of the
      investment.





Prior
      to
      June 21, 2004, the Company held an investment in the common stock of Buyers
      United Inc. (“BUI”), which investment was acquired as consideration received
      related to the sale of the operations of ILC. At the time of the sale of the
      ILC
      business, the purchase price consideration paid by BUI was in the form of
      convertible preferred stock, with additional shares of preferred stock received
      subsequently based on contingent earn out provisions in the purchase agreement.
      In addition, common stock dividends were earned
      on
      the preferred stock holding. During 2004, the Company converted its preferred
      stock into 1,500,000 shares of BUI common stock. Through several open market
      transactions during 2004, the Company sold the BUI common stock, resulting
      in a
      gain of approximately $1,376.





F-14





**Note
      6 - Discontinued Operations**





**Disposition
      of the Telecommunications Business**




Commencing
      in 2001, the Company entered the Telecommunications business, acquiring certain
      assets of the estate of WorldxChange Communications Inc. from bankruptcy. In
      2002, the Company also acquired certain assets of the estate of RSL.COM USA
      Inc.
      from bankruptcy, and in 2003 the Company acquired Local Telcom Holdings, LLC.
      Together, these assets made up the Telecommunications segment of the Company’s
      business, which was owned through the Company’s wholly-owned subsidiary, Acceris
      Communications Corp. (“ACC”, originally known as WorldxChange
      Corp.).




In
      June
      2004, the Company began an evaluation process that led to the disposition of
      its
      Telecommunications business. CIT Capital Securities LLC, along with C2’s
      management, examined the markets in which the Telecommunications business
      operated in order to assess potential merger and acquisition opportunities.
      In
      this process C2 contacted more than 60 potential partners. Having assessed
      various market opportunities, C2 management’s negotiations with a number of
      potential targets, and with C2 management’s recommendation, C2’s Board of
      Directors determined that a sale of the Telecommunications business to Acceris
      Management and Acquisition LLC (“AMA”) was in the best interests of C2’s
      stockholders.




The
      Company therefore entered into an Asset Purchase Agreement (“APA”), dated as of
      May 19, 2005, to sell substantially all of the assets and to transfer certain
      liabilities of ACC to AMA, a Minnesota limited liability company and
      wholly-owned subsidiary of North Central Equity LLC (“NCE”). In addition, on May
      19, 2005, the parties executed a Management Services Agreement (“MSA”), Security
      Agreement, Note, Proxy and Guaranty. Upon receipt of the requisite approvals,
      including shareholder approval, this transaction was completed on September
      30,
      2005. Subsequent to the sale, ACC’s name was changed to WXC Corp.
      (“WXCC”).




The
      sale
      resulted in a gain on disposition of $6,387, net of disposition and business
      exit costs. Revenues of ACC operations were $65,154, $112,595 and $133,765
      in
      2005, 2004 and 2003, respectively, and pre-tax losses were $3,555 (including
      the
      gain on disposition of $6,387), $11,782 and $19,693 in 2005, 2004 and 2003,
      respectively. In accordance with GAAP, the ACC operations for the year ended
      December 31, 2005, as well as for all prior periods included in the consolidated
      financial statements included in Item 15 of this Annual Report on Form 10-K,
      have been reported in discontinued operations.




In
      connection with the sale, the Company incurred one-time termination costs of
      $697. $496 of these costs were paid during 2005, and the remaining $201 will
      be
      paid during 2006. The Company recorded these costs as an expense of discontinued
      operations.




At
      the
      closing of the asset sale transaction, C2’s controlling shareholder, Counsel,
      agreed to provide a $585 loan to NCE. This loan is being repaid over six months
      on a straight-line basis. The loan is subject to a holdback, the amount of
      which
      was $320 at closing, reduced to $200 at December 31, 2005, relating to recorded
      liabilities of C2 that had not been settled at closing. On September 30, 2005,
      in conjunction with the closing of the asset sale transaction and the expiration
      of the MSA, referenced above, the Company and AMA entered into a second
      Management Services Agreement (“MSA2”) under which the Company agreed to
      continue to provide services in certain states where AMA, at closing, had not
      obtained authorization to provide telecommunications services. The Company
      is
      charged a management fee by AMA, which is equal to the revenue earned from
      providing these services. During the fourth quarter of 2005, the Company’s
      revenue and offsetting management fee totaled $1,439, both of which have been
      recorded as components of discontinued operations. As of December 31, 2005,
      AMA
      had obtained authorization to provide telecommunications services in all states
      except Hawaii, and the Company expects the MSA2 to remain in effect until such
      time as authorization is obtained.




**Sale
      of Assets of ILC**




On
      December 6, 2002, the Company entered into an agreement to sell
      substantially all of the assets and customer base of ILC to BUI. The sale
      included the physical assets required to operate C2’s nationwide network using
      its patented VoIP technology (constituting the core business of ILC) and a
      license in perpetuity to use C2’s proprietary software platform. The sale closed
      on May 1, 2003 and provided for a post closing cash settlement between the
      parties. The sale price consisted of 300,000 shares of Series B convertible
      preferred stock (8% dividend) of BUI, subject to adjustment in certain
      circumstances, of which 75,000 shares are subject to an earn-out provision
      (contingent consideration) based on future events related to ILC’s single
      largest customer. The earn- out
      took
      place on a monthly basis over a fourteen-month period which began
      January 2003. The Company recognized the value of the earn-out shares as
      additional sales proceeds when earned. During the year ending December 31,
      2003, 64,286 shares of the contingent consideration were earned and were
      included as a component of gain (loss) from discontinued operations. The
      fair value of the 225,000 shares (non-contingent consideration to be received)
      of Buyers United convertible preferred stock was determined to be $1,350 as
      of
      December 31, 2002. As of December 31, 2003, the combined fair value of
      the original shares (225,000) and the shares earned from the contingent
      consideration (64,286 shares) was determined to be $1,916. The value of the
      shares earned from the contingent consideration was included in the calculation
      of gain from discontinued operations for the year ended December 31, 2003.
      As additional contingent consideration was earned, it was recorded as a gain
      from discontinued operations. In the first quarter of 2004, the Company recorded
      a gain from discontinued operations of $104. This gain was due to the receipt
      in
      January 2004 of the remaining 10,714 shares of common stock as contingent
      consideration, which is recorded as additional gain from discontinued
      operations.


F-15




Upon
      closing of the sale, BUI assumed all operational losses since December 6,
      2002. Accordingly, the gain of $529 for the year ended December 31, 2003,
      included the increase in the sales price for the losses incurred since
      December 6, 2002. No income tax provision or benefit was recorded on
      discontinued operations.




The
      assets and liabilities of discontinued operations relating to the
      Telecommunications business consisted of the following at December 31:




**Assets
                and liabilities - Discontinued Operations**
            
            **2005**
            
            **2004**Cash
                and cash equivalents
            
            $
            —
            
            $
            414Accounts
                receivable, net
            
            
            —
            
            
            13,079Other
                current assets
            
            
            —
            
            
            1,472**Total
                current assets**
            
            
            —
            
            
            14,965Furniture,
                fixtures, equipment and software, net
            
            
            —
            
            
            4,102Intangible
                assets, net
            
            
            —
            
            
            1,324Goodwill
            
            
            —
            
            
            947Other
                assets
            
            
            —
            
            
            1,012**Total
                assets**
            
            
            —
            
            
            22,350Senior
                secured revolving credit facility
            
            
            —
            
            
            4,725Accounts
                payable and accrued liabilities
            
            
            3,763
            
            
            25,299Unearned
                revenue
            
            
            —
            
            
            959Current
                portion of notes payable to third parties
            
            
            —
            
            
            160Obligations
                under capital leases
            
            
            —
            
            
            1,441**Total
                current liabilities**
            
            
            3,763
            
            
            32,584Notes
                payable to third parties, less current portion
            
            
            —
            
            
            645**Total
                liabilities**
            
            
            3,763
            
            
            33,229**Net
                liabilities**
            
            $
            3,763
            
            $
            10,879


F-16




**Note
      7 - Composition of Certain Financial Statement Captions**





Furniture,
      fixtures, equipment and software consisted of the following at December
      31:





**2005**
            
            **2004**Telecommunications
                network equipment
            
            $
            —
            
            $
            37Computer
                equipment
            
            
            —
            
            
            16Software
                and information systems
            
            
            —
            
            
            8—
            
            
            61Less
                accumulated depreciation and amortization
            
            
            —
            
            
            (11
            )$
            —
            
            $
            50





Accounts
      payable and accrued liabilities consisted of the following at December
      31:





**2005**
            
            **2004**Regulatory
                and legal fees
            
            $
            477
            
            $
            998Accounting,
                auditing and tax consulting
            
            
            295
            
            
            35Telecommunications
                and related costs
            
            
            295
            
            
            —Accrued
                restructuring costs
            
            
            201
            
            
            —Obligations
                to equipment suppliers
            
            
            524
            
            
            524Sales
                and other taxes
            
            
            316
            
            
            87Payroll
                and benefits
            
            
            142
            
            
            87Other
            
            
            273
            
            
            279$
            2,523
            
            $
            2,010








**Note
      8 - Intangible Assets and Goodwill**





Intangible
      assets consisted of the following at December 31:





**December
                31, 2005****Amortization**
              **period**
            
            **Cost**
            
            **Accumulated**
              **amortization**
            
            **Net**Intangible
                assets subject to amortization:Patent
                rights
            
            
            60
                months
            
            
            100
            
            
            (40
            )
            
            60Goodwill
            
            
            
            
            
            173
            
            
            —
            
            
            173Total
                intangible assets and goodwill
            
            
            
            
            $
            273
            
            $
            (40
            )
            $
            233





**December
                31, 2004****Amortization**
              **period**
            
            **Cost**
            
            **Accumulated**
              **amortization**
            
            **Net**Intangible
                assets subject to amortization:Patent
                rights
            
            
            60
                months
            
            
            100
            
            
            (20
            )
            
            80Goodwill
            
            
            
            
            
            173
            
            
            —
            
            
            173Total
                intangible assets and goodwill
            
            
            
            
            $
            273
            
            $
            (20
            )
            $
            253





The
      Company’s goodwill relates to an investment in a subsidiary company that holds
      the rights to some of the Company’s patents. Aggregate amortization expense of
      intangibles for the years ended December 31, 2005, 2004 and 2003 was $20, $20
      and $0, respectively.


F-17




**Note
      9 - Debt**





Debt,
      including a related common stock warrant, consists of the following at December
      31:





**2005**
            
            **2004****Gross
                debt**
            
            **Discounts
                (1****)**
            
            **Reported
                debt**
            
            **Gross
                debt**
            
            **Discounts
                (1)**
            
            **Reported
                debt**Subordinated
                notes payable to Counsel, interest at 10.0%
            
            $
            55,376
            
            $
            —
            
            $
            55,376
            
            $
            35,386
            
            $
            —
            
            $
            35,386Subordinated
                note payable to Counsel, convertible to common stock, interest at
                9.0%
            
            
            18,270
            
            
            (1,624
            )
            
            16,646
            
            
            16,714
            
            
            (6,085
            )
            
            10,629Convertible
                Note, convertible to common stock, interest at WSJ plus 3.0% (10.25%
                at
                December 31, 2005)
            
            
            3,235
            
            
            (392
            )
            
            2,843
            
            
            5,003
            
            
            (605
            )
            
            4,398Warrant
                to purchase common stock
            
            
            281
            
            
            —
            
            
            281
            
            
            322
            
            
            —
            
            
            32277,162
            
            
            (2,016
            )
            
            75,146
            
            
            57,425
            
            
            (6,690
            )
            
            50,735Less
                current portion
            
            
            (75,411
            )
            
            1,624
            
            
            (73,787
            )
            
            (1,768
            )
            
            —
            
            
            (1,768
            )Long-term
                debt, less current portion
            
            $
            1,751
            
            $
            (392
            )
            $
            1,359
            
            $
            55,657
            
            $
            (6,690
            )
            $
            48,967





(1)
      Accretions associated with Beneficial Conversion Feature, detachable warrant,
      costs associated with raising facilities and imputed interest.





**Payment
                due by period****Contractual
                obligations**
            
            **Total**
            
            **Less
                than 1**
              **year**
            
            **1-3**
              **years**
            
            **3-5**
              **years**
            
            **More
                than 5**
              **years**Subordinated
                notes payable to a related party
            
            $
            73,646
            
            $
            73,646
            
            $
            —
            
            $
            —
            
            $
            —Convertible
                note payable to a third party
            
            
            3,235
            
            
            1,765
            
            
            1,470
            
            
            —
            
            
            —Warrant
                to purchase common stock1
            
            
            281
            
            
            —
            
            
            —
            
            
            281
            
            
            —Total
            
            $
            77,162
            
            $
            75,411
            
            $
            1,470
            
            $
            281
            
            $
            —





1 The
      warrant is reported at fair value, as determined at the end of each
      quarter.





Counsel
      is the controlling stockholder of the Company and is also the major debt holder
      of the Company, owning 95% of the Company’s debt as at December 31, 2005. The
      third party debt is held by Laurus. Counsel has guaranteed the debt to Laurus
      through its maturity in October 2007. Counsel has also subordinated its debt
      position and pledged its ownership interest in C2 in favor of
      Laurus.





Subordinated
      notes payable to a related party





The
      related party notes owing to Counsel mature on December 31, 2006. They are
      subject to acceleration in certain circumstances including certain events of
      default. Interest on related party debt accrues to principal quarterly, and
      accordingly the Company has no cash payment obligations to Counsel prior to
      the
      debt’s maturity. During 2005, Counsel advanced $15,365 (2004 - $12,584; 2003 -
      $7,896) and accrued interest added to principal was $6,180 (2004 - $4,304;
      2003
      - $5,667). Advances have been made to fund operations, to finance working
      capital, to fund acquisitions and to pay down third party debt. Counsel, via
      a
“Keep Well” agreement, has agreed to fund the cash requirements of C2 until
      December 31, 2006. At this time, the Company does not expect this guarantee
      will
      be extended past that date.





In
      accordance with the Laurus agreement, C2 cannot repay amounts owing to Counsel
      while the debt with Laurus remains outstanding. Additionally, in accordance
      with
      Counsel’s subordination agreement with Laurus, so long as C2’s debt to Laurus
      remains outstanding, Counsel may not, without the written consent of Laurus,
      take any enforcement action to collect its loans owing by C2. Notwithstanding
      this, Counsel is not expected to extend the maturity date of its loans beyond
      December 31, 2006. In the event that C2’s debt to Laurus is either prepaid in
      full or settled by conversion of such debt into shares of C2, Counsel’s
      subordination agreement shall be terminated with immediate effect.





One
      of
      the notes payable to Counsel is convertible into common stock. Anti-dilution
      events have impacted the conversion price and the number of shares issuable
      upon
      conversion of this debt. As well, accumulated unpaid interest costs, which
      are
      required by the terms of the debt to be added to the principal balance, are
      also
      convertible upon the same terms. These anti-dilution events and deemed “paid in
      kind” interest periodically result in the recognition of a beneficial conversion
      feature (“BCF”). In accordance with Emerging
      Issues Task Force Issue No. 00-27, *Application
      of Issue 98-5 to Certain Convertible Instruments* (“EITF
      00-27”), in 2005 the Company recorded a BCF of $1,511 (2004 - $3,771; 2003 -
      $5,354) as paid-in capital. The aggregate BCF is amortized over the term of
      the
      debt, using the effective interest rate method, through a charge to the
      statement of operations. For further discussion of notes payable and other
      transactions with Counsel, see Note 2, above, and Note 13, below.


F-18





Convertible
      note payable to a third party





On
      October 14, 2004, the Company issued a convertible note (the “Note”) with a
      detachable warrant to Laurus, in the principal amount of $5,000, due October
      14,
      2007. The Note provides that the principal amount outstanding bears interest
      at
      the prime rate as published in the Wall Street Journal plus 3% (but not less
      than 7% per annum) decreasing by 2% (but not less than 0%) for every 25%
      increase in the Market Price (as defined therein) above the fixed conversion
      price following the effective date of the registration statement covering the
      common stock issuable upon conversion of the Note. Should the Company default
      under the agreement and fail to remedy the default on a timely basis, interest
      under the Note will increase by 2% per month and the Note may become immediately
      due inclusive of a 20% premium to the then outstanding principal. Interest
      is
      payable monthly in arrears. Principal is payable at the rate of approximately
      $147 per month, in cash or registered common stock. Payment amounts will be
      converted into stock if (i) the average closing price for five trading days
      immediately preceding the repayment date is at least 100% of the Fixed
      Conversion Price, (ii) the amount of the conversion does not exceed 25% of
      the
      aggregate dollar trading volume for the 22-day trading period immediately
      preceding the repayment date, (iii) a registration statement is effective
      covering the issued shares and (iv) no Event of Default exists and is
      continuing. In the event the monthly payment must be paid in cash, then the
      Company pays 102% of the amount due. The Company has the right to prepay the
      Note, at any time by giving seven business days written notice and paying 120%
      of the outstanding principal amount of the Note. Laurus may convert the Note,
      in
      whole or in part, into shares of common stock at any time upon one business
      day’s prior written notice. The Note is convertible into shares of the Company’s
      common stock at a fixed conversion price of $0.88 per share of common stock
      (105% of the average closing price for the 30 trading days prior to the issuance
      of the Note) not to exceed, however, 4.99% of the outstanding shares of common
      stock of the Company (including issuable shares from the exercise of the
      warrant, payments of interest, or any other shares owned). However, upon an
      Event of Default as defined in and in respect of the Note, the 4.99% ownership
      restriction is automatically rendered null and void. Laurus may also revoke
      the
      4.99% ownership restriction upon 75 days prior notice to the Company. In
      accordance with Statement of Financial Accounting Standards No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* (“SFAS
      133”) and Emerging Issues Task Force Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock* (“EITF
      00-19”), the
      Company analyzed the various embedded derivative elements of the debt at
      inception of the Note and concluded that all of the individual elements should
      be characterized as debt for accounting purposes and that the embedded
      derivative elements had nominal value. The value of the embedded derivative
      elements of the debt is reassessed on a quarterly basis on a mark-to-market
      basis. At the end of 2004 and 2005, the Company concluded that the value of
      the
      embedded derivatives remained nominal.





The
      embedded derivative elements include: (1) a variable interest rate component
      dependent on the WSJ prime rate, (2) an interest rate forward contract
      component, which adjusts the interest rate downward if certain conditions are
      achieved related to the Company’s common stock, (3) a call option allowing the
      Company an option to prepay the Note, (4) a put option requiring the Company
      to
      repay the Note if certain events, including an event of default, occur, (5)
      an
      equity-forward element, which requires the monthly principal, interest and
      other
      fees to be paid in common stock if certain market conditions related to the
      Company’s common stock occur, and (6) a conversion option permitting Laurus to
      convert the Note into common stock of the Company. At December 31, 2005, the
      aggregate debt was convertible into 3,676,471 shares of the common stock of
      the
      Company.





In
      the
      event that, in the future, either the conversion price in respect of the Note
      is
      reduced as a result of certain anti-dilution provisions that may cause the
      aggregate number of shares issuable to Laurus to increase, or value is ascribed
      to the embedded derivative components of the Note, the Company may need to
      record a beneficial conversion feature (“BCF”) associated with the Note as a
      credit to paid-in-capital. The aggregate BCF would then be amortized over the
      term of the debt, using the effective interest rate method, through a charge
      to
      the statement of operations.





Warrant
      to purchase common stock





In
      addition, the Company issued a common stock purchase warrant (the “Warrant”) to
      Laurus, entitling Laurus to purchase up to one million shares of common stock,
      subject to adjustment. The Warrant entitles the holder to purchase the stock
      through the earlier of (i) October 13, 2009 or (ii) the date on
      which the average closing price for any consecutive ten trading dates shall
      equal or exceed 15 times the Exercise Price. The Exercise Price shall equal
      $1.00 per share as to the first 250,000 shares, $1.08 per share for the next
      250,000 shares and $1.20 per share for the remaining 500,000 shares, or 125%,
      135% and 150% of the average closing price for ten trading days immediately
      prior to the date of the Warrant, respectively. The value of the Warrant is
      reassessed on a quarterly basis on a mark-to-market basis. The Company adjusted
      the value of the Warrant to $322 at the end of 2004 and to $281 at the end
      of
      2005, and recorded $108 and $41, respectively, in income.


F-19




In
      connection with the Note, the Company recorded a debt discount of $656,
      comprising $430 relating to the warrant allocation and $226 of financing costs
      to Laurus, which was deducted from the amount advanced on closing. The debt
      discount is being amortized over the term of the debt using the effective
      interest method through a charge to the statement of operations. At December
      31,
      2005, the amount of the debt discount was $392.





The
      Company filed a registration statement under the Securities Act of 1933, as
      amended, to register the 6,681,818 shares issuable upon conversion of the Note
      as well as those issuable pursuant to the Warrant. This registration statement
      was declared effective by the SEC on January 18, 2005.





Pursuant
      to a Master Security Agreement, as amended, entered into in connection with
      the
      issuance of the Note, the Company granted a blanket lien on all its property
      and
      that of certain of its subsidiaries to secure repayment of the obligation.
      Pursuant to a Stock Pledge Agreement, as amended, Counsel Communications LLC
      and
      Counsel Corporation (US) pledged the shares of the Company held by them as
      further security. Pursuant to a subsidiary Stock Pledge Agreement, the Company,
      WebTotel Inc., CPT-1 Holdings Inc. and WXC Corp. pledged their respective
      stockholdings in subsidiary companies, controlled by C2, to Laurus. In addition,
      C2 Communications Technologies, Inc., WXC Corp., WebTotel Inc., Mibridge Inc.,
      Counsel Corporation, Counsel Communications LLC and Counsel Corporation
      (US) jointly and severally guaranteed the obligation to Laurus. So long as
      25% of principal amount of the Note is outstanding, the Company agreed, among
      other things, that it will not pay dividends on its common stock.





On
      September 30, 2005, the Company, in conjunction with the completion of the
      sale
      of the Telecommunications business, described in Note 6 of these consolidated
      financial statements, agreed to modifications to the security interest in the
      Company held by the Note holder as follows: (a) release of the security interest
      in the assets being disposed of in the sale of the Telecommunications assets;
      (b) conversion of the security interest of the Note to the senior debt position;
      (c) payment of $1,800 into a restricted cash account for the benefit of the
      Note
      holder, which may be applied toward scheduled monthly payments of the Note.
      As
      at December 31, 2005, the balance of the restricted cash account was
      $1,506.





**Note
      10 - Commitments**





At
      December 31, 2005, C2 has no commitments other than its debt, as described
      above
      in Note 9.




**Note
      11 - Patent Residual**




In
      the
      fourth quarter of 2003, C2 acquired Patent No. 6,243,373 from a third
      party. Consideration provided was $100 plus a 35% residual payable to the third
      party relating to the net proceeds from future licensing and/or enforcement
      actions from the C2 VoIP Patent Portfolio (U.S. Patent Nos. 6,243,373 and
      6,438,124). Net proceeds are defined as amounts collected from third parties
      net
      of the direct costs associated with putting the licensing or enforcement in
      place and related collection costs. As of the date of these financial
      statements, no payments are being made as there have as yet been no net
      proceeds.





**Note
      12 - Income Taxes**





The
      Company recognized no income tax benefit from its losses in 2005, 2004 and
      2003.
      The reported tax benefit varies from the amount that would be provided by
      applying the statutory U.S. Federal income tax rate to the loss from continuing
      operations before taxes for the following reasons:





**2005**
            
            **2004**
            
            **2003**Expected
                federal statutory tax benefit
            
            $
            (5,078
            )
            $
            (3,776
            )
            $
            (4,170
            )Increase
                (reduction) in taxes resulting from:State
                income taxes
            
            
            (269
            )
            
            (175
            )
            
            (78
            )Foreign
                loss not subject to domestic tax
            
            
            —
            
            
            2
            
            
            5Non-deductible
                interest on certain notes
            
            
            2,560
            
            
            1,893
            
            
            3,364Change
                in valuation allowance attributable to continuing
                operations
            
            
            2,786
            
            
            1,728
            
            
            883Other
            
            
            1
            
            
            328
            
            
            (4
            )$
            —
            
            $
            —
            
            $
            —





The
      change in the valuation allowance, including discontinued operations, was
      $3,123, $6,139, and $6,076 for the years ended 2005, 2004 and 2003,
      respectively.


F-20




At
      December 31, 2005, the Company had total net operating loss carryforwards for
      federal income tax purposes of approximately $192,000. The Company has recorded
      a full valuation allowance in respect of the tax effect of these losses. These
      net operating loss carryforwards expire between 2006 and 2025.





The
      Company’s utilization of approximately $157,000 of its available net operating
      loss carryforwards against future taxable income is restricted pursuant to
      the
“change in ownership” rules in Section 382 of the Internal Revenue Code. These
      rules in general provide that an ownership change occurs when the percentage
      shareholdings of 5% direct or indirect stockholders of a loss corporation have
      in aggregate increased by more than 50 percentage points during the immediately
      preceding three years.





Restrictions
      in net operating loss carryforwards occurred in 2001 as a result of the
      acquisition of the Company by Counsel. Further restrictions may have occurred
      as
      a result of subsequent changes in the share ownership and capital structure
      of
      the Company and Counsel and disposition of business interests by the Company.
      Pursuant to Section 382 of the Internal Revenue Code, annual usage of the
      Company’s net operating loss carryforwards, prior to the sale of the Company’s
      Telecommunications business, was limited to approximately $6,700 per annum
      until
      2008 and $1,700 per annum thereafter as a result of previous cumulative changes
      of ownership resulting in a change of control of the Company. After the
      completion of sale of the Company’s Telecommunications business, the annual
      usage of the Company’s net operating loss carryforwards is limited to
      approximately $2,500 per annum until 2008 and $1,700 per annum thereafter.
      There
      is no certainty that the application of these “change in ownership” rules may
      not reoccur resulting in further restrictions on the Company’s income tax loss
      carry forwards existing at a particular time. In addition, further restrictions
      or reductions in net operating loss carryforwards may occur through future
      merger, acquisition and/or disposition transactions. Any such additional
      limitations could require the Company to pay income taxes in the future and
      record an income tax expense to the extent of such liability despite the
      existence of net operating loss carryforwards.





Due
      to
      the expiration of the Company’s net operating loss carryforwards and the above
      possible usage restrictions, it is estimated that only $74,000 of the total
      $192,000 of net operating loss carryforwards otherwise available will be able
      to
      be utilized in the event the Company were to generate taxable income in the
      future.





The
      Company also has net operating loss carryforwards for state income tax purposes
      in those states where it has conducted business. Available state tax loss
      carryforwards however may differ substantially by jurisdiction and in general
      are subject to the same or similar restrictions as to expiry and usage described
      above. The Company is subject to state income tax in multiple
      jurisdictions.





The
      components of the deferred tax asset and liability as of December 31, 2005
      and
      2004 are as follows:





**2005**
            
            **2004**Deferred
                tax assets:Tax
                net operating loss carryforwards
            
            $
            71,800
            
            $
            67,610Acquired
                in-process research and development and intangible assets
            
            
            2,288
            
            
            3,595Accrued
                interest
            
            
            1,645
            
            
            505Accrued
                liabilities
            
            
            1,342
            
            
            212Accrued
                vacation
            
            
            2
            
            
            358Investments
            
            
            53
            
            
            —Reserve
                for accounts receivable
            
            
            2
            
            
            714Other
            
            
            164
            
            
            109Fixed
                assets
            
            
            —
            
            
            1,070Valuation
                allowance
            
            
            (77,296
            )
            
            (74,173
            )Total
                deferred tax asset
            
            
            —
            
            
            —Deferred
                tax liabilities
            
            
            —
            
            
            —Net
                deferred tax asset
            
            $
            —
            
            $
            —





As
      the
      Company has not generated taxable income in the past, a valuation allowance
      has
      been provided at December 31, 2005 and 2004 to reduce the total deferred tax
      asset to nil, the amount considered more likely than not to be realized. The
      change in the valuation allowance in the year is due primarily to an increase
      in
      the Company’s net operating loss carryforwards.




F-21


**Note
      13 - Transactions with Controlling Stockholder**





**Transactions
      with Counsel:**





Initial
      Acquisition of C2 and Senior Convertible Loan





On
      March
      1, 2001, C2 entered into a Senior Convertible Loan and Security Agreement,
      (the
“Senior Loan Agreement”) with Counsel. Pursuant to the terms and provisions of
      the Senior Loan Agreement, Counsel agreed to make periodic loans to C2 in the
      aggregate principal amount not to exceed $10,000, which was subsequently
      increased to $12,000 through amendment on May 8, 2001. Advances against the
      Senior Loan Agreement were structured as a 3-year convertible note with interest
      at 9% per annum, compounded quarterly. Counsel initially could convert the
      loan
      into shares of common stock of C2 at a conversion price of $11.20 per common
      share. The terms of the Senior Loan Agreement also provide that at any time
      after September 1, 2002, the outstanding debt including accrued interest will
      automatically be converted into common stock using the then current conversion
      rate, on the first date that is the twentieth consecutive trading day that
      the
      common stock has closed at a price per share that is equal to or greater than
      $20.00 per share. The Senior Loan Agreement also provides that the conversion
      price is in certain cases subject to adjustment and includes traditional
      anti-dilution protection for the lender and is subject to certain events of
      default, which may accelerate the repayment of principal plus accrued interest.
      Total proceeds available to the Company were $12,000, less debt issuance costs
      of $600, amortized over three years. The Senior Loan Agreement has been amended
      several times and the maturity date of the loan plus accrued interest has been
      extended to December 31, 2006. As a result of the application of the
      anti-dilution provisions of the Senior Loan Agreement, the conversion price
      has
      been adjusted to $5.02 per common share. As of December 31, 2005, the total
      outstanding debt under the Senior Loan Agreement (including principal and
      accrued interest) was $18,270 which is convertible into approximately 3,639,412
      shares of common stock *.*





In
      connection with the above Senior Loan Agreement, C2 granted Counsel a security
      interest in all of C2’s assets owned at the time of execution of the Senior Loan
      Agreement or subsequently acquired, including but not limited to C2’s accounts
      receivable, intangibles, inventory, equipment, books and records, and negotiable
      instruments held by the Company (collectively, the “Collateral”).





In
      addition to the foregoing agreements, C2 and Counsel executed a Securities
      Support Agreement, dated March 1, 2001 (the “Support Agreement”) for the purpose
      of providing certain representations and commitments by C2 to Counsel, including
      demand registration rights for common stock issuable upon conversion of the
      related loan.





Under
      the
      Support Agreement of March 1, 2001, C2 also agreed to engage appropriate
      advisors and proceed to take all steps necessary to merge Nexbell
      Communications, Inc. (a subsidiary of Counsel) into C2. The Company acquired
      Nexbell on April 17, 2001 and Counsel received 871,724 shares of common stock
      in
      C2 as consideration.





In
      October 2004, Counsel agreed to subordinate its loan and security interest
      to
      that of Wells Fargo Foothill, Inc., (“Foothill”), the Company’s asset-based
      lender, and Laurus Master Fund, Ltd. (“Laurus”), a third party financier, in
      connection with the Senior Convertible Loan. On June 30, 2005, Foothill assigned
      its senior lending facility, and its rights thereunder, to Acceris Management
      and Acquisition, LLC (“AMA”), a wholly-owned subsidiary of North Central Equity
      LLC, in connection with the sale of substantially
      all the assets of the Company’s wholly-owned subsidiary, ACC Corp .
      (“ACC”), to AMA.
      Specifically, C2, ACC and AMA executed an amendment to the Foothill Loan
      Agreement (the “Amendment”). The Amendment was executed in connection with the
      execution and delivery of a certain Assignment and Acceptance Agreement between
      Foothill and AMA. On September 30, 2005, upon the closing of the sale of ACC’s
      assets, AMA released ACC and C2 from any obligations pursuant to the senior
      lending facility. Following the sale, all of Counsel’s loan and security
      interests remain subordinated to the Laurus debt.





Assignment
      of Winter Harbor Common Stock and Debt Interests





Pursuant
      to the terms of a settlement between Counsel and Winter Harbor and First Media
      L.P., a limited partnership and the parent company of Winter Harbor
      (collectively, the “Winter Harbor Parties”), effective August 29, 2003, the
      Winter Harbor Parties relinquished their right to 118,750 shares of the common
      stock of C2 to Counsel. These shares were released from escrow and delivered
      to
      Counsel.





The
      Winter Harbor Parties further assigned to Counsel all of their rights with
      respect to a note payable by C2 of $1,999 drawn down pursuant to a Letter of
      Credit issued November 3, 1998 to secure certain obligations of C2 together
      with
      any accrued interest thereon. The assigned amount together with accrued interest
      amounted to $2,577 on August 29, 2003. As a result of the settlement and
      assignment, C2 entered into a new loan agreement with Counsel the terms of
      which
      provided that from August 29, 2003 the loan balance of $2,577 would bear
      interest at 10% per annum compounded quarterly with the aggregate balance of
      principal and accrued interest payable on maturity of the loan. This loan
      agreement was amended and restated to increase the principal of the loan by
      a
      further $100 for funding
      provided by Counsel to enable C2 to acquire a Voice over Internet Protocol
      patent in December 2003 and to allow for the making of further periodic advances
      thereunder at Counsel’s discretion. The loan increased due to operating advances
      of $1,546 and $1,918 in 2003 and 2004, respectively. The maturity date of the
      loan plus accrued interest has been amended several times, including in
      connection with the sale of substantially all the assets of ACC to AMA, and
      currently has been extended to December 31, 2006. There are no conversion
      features associated with this loan. The terms of the loan agreement provide
      that
      certain events of default may accelerate the repayment of principal plus accrued
      interest. As of December 31, 2005, the total outstanding debt under the loan
      (including principal and accrued interest) was $7,515.


F-22





In
      October of 2004, Counsel agreed to subordinate its loan repayment rights to
      the
      Foothill and Laurus debts. On June
      30, 2005, Foothill assigned its senior lending facility to AMA, and on September
      30, 2005, upon the closing of the sale of ACC’s assets, AMA released ACC and C2
      from any obligations pursuant to the senior lending facility. Following the
      sale, Counsel’s loan remains subordinated to the Laurus debt.





Loan
      and Security Agreement and Amended Debt Restructuring





On
      June
      6, 2001, C2 and Counsel entered into a Loan and Security Agreement (the “Loan
      Agreement”). Any funds advanced to C2 between June 6, 2001 and April 15, 2002,
      (not to exceed $10,000) were governed by the Loan Agreement and due on June
      6,
      2002. The loan was secured by all of the assets of C2. As of December 31, 2001,
      advances under this loan agreement totaled $10,000. On June 27, 2002 the Loan
      Agreement was amended to an amount of $24,307, which included additional capital
      advances from Counsel to C2 made from December 31, 2001 through June 6, 2002.
      The amended agreement also further provided for additional advances as needed
      to
      C2, which advances totaled $2,087 through December 31, 2002 and $650 through
      November 30, 2003.





On
      July
      25, 2002, C2 and Counsel entered into a Debt Restructuring Agreement (“Debt
      Restructuring Agreement”) which was amended on October 15, 2002 pursuant to an
      Amended and Restated Debt Restructuring Agreement (“Amended Agreement”). The
      Amended Agreement included the following terms:





1)
            Principal
                ($24,307) and associated accrued interest ($2,284), as of October
                15,
                2002, under the Loan Agreement, as amended, would be exchanged for
                common
                stock of C2 at $3.77 per share (representing the average closing
                price of
                C2’s common stock during May 2002).




2)
            Funding
                provided by Counsel pursuant to the Loan Agreement, as amended ($2,087),
                and associated accrued interest ($1,996), from October 15, 2002 to
                December 31, 2002, would be exchanged for common stock of C2 at $3.77
                per
                share (representing the average closing price of C2’s common stock during
                May 2002).




3)
            Counsel
                would advance to C2 all amounts paid or payable by C2 to its stockholders
                that exercised their dissenters’ rights in connection with the
                transactions subject to the debt restructuring transactions and advance
                the amount of the annual premium to renew the existing directors
                and
                officers’ insurance coverage through November
                2003.




4)
            Counsel
                would reimburse C2 for all costs, fees and expenses, in connection
                with
                the Debt Restructuring Agreement and the Amended Agreement and
                transactions contemplated thereby including all expenses incurred
                and yet
                to be incurred, including the Special Committee’s costs to negotiate these
                agreements and costs related to obtaining stockholder approval. During
                2003 and 2002, Counsel reimbursed C2 $132 and $499, respectively,
                for
                certain reimbursable expenses, which were recorded as additional
                paid-in
                capital.




5)
            The
                issuance of common stock by C2 pursuant to this Agreement would result
                in
                a weighted average conversion price adjustment pursuant to the provisions
                of the March 1, 2001 Loan Agreement. Whereas the conversion price
                for the
                March 1, 2001 Loan Agreement had initially been $11.20, the new conversion
                price would be adjusted as a result of the anti-dilution provisions
                of the
                Senior Loan Agreement. At December 31, 2005, the conversion price
                was
                $5.02 per common share*.*





Effective
      November 30, 2003, 8,681,096 shares of common stock were issued to Counsel
      in
      settlement of the underlying debt and accrued interest totaling $32,721 on
      the
      date of the conversion.





Convertible
      Promissory Note to Fund RSL.COM USA, Inc. (“RSL”) Acquisition





In
      connection with the acquisition of certain assets of RSL in December 2002,
      C2
      issued a $7,500 convertible note payable (the “Convertible Note”) to Counsel,
      bearing interest at 10% per annum compounded quarterly which, as amended, was
      due on June 30, 2005.
      The
      Convertible Note was convertible into common stock of C2 at a conversion rate
      of
      $1.68 per share. Effective November 30, 2003, Counsel exercised its right to
      convert the Convertible Note plus accrued interest to that date totaling $7,952
      into common stock of C2. This resulted in the issuance of 4,747,522 shares
      of C2
      common stock.


F-23





Collateralized
      Promissory Note and Loan Agreement





During
      the fourth quarter of 2003, Counsel advanced the sum of $5,600 to C2, evidenced
      by a promissory note. In January 2004, C2 and Counsel entered into a loan
      agreement and an amended and restated promissory note pursuant to which an
      additional $2,000 was loaned to C2 and pursuant to which additional periodic
      loans may be made from time to time (collectively and as amended, the
“Promissory Note”). The Promissory Note accrues interest at 10% per annum
      compounded quarterly from the date funds are advanced. The loan has been amended
      several times and the maturity date of the loan plus accrued interest has been
      extended to December 31, 2006 . The
      Promissory Note is secured by the assets of the Company and is subject to
      certain events of default which may accelerate the repayment of principal plus
      accrued interest. There are no conversion features associated with the
      Promissory Note. The loan increased primarily due to operating advances in
      2004
      and 2005 of $10,662 and $15,365, respectively. The outstanding balance at
      December 31, 2005 (including principal and accrued interest) was
      $35,692.





In
      October of 2004, Counsel agreed to subordinate its loan and security interest
      in
      connection with the issuance of the Promissory Note to that of Foothill and
      Laurus. On
      June
      30, 2005, Foothill assigned its senior lending facility to AMA, and on September
      3 0,
      2005, upon
      the
      closing of the sale of ACC ’ s
      assets,
      AMA released ACC and C2 from any obligations pursuant to the senior lending
      facility . Following
      the sale, Counsel ’ s
      loan
      and security interest remains subordinated to the Laurus debt.





Secured
      Loan to C2





To
      fund
      the acquisition of the WorldxChange Communications, Inc. assets purchased and
      liabilities assumed by C2, on June 4, 2001 Counsel provided a loan (the “Initial
      Loan”) to C2 in the aggregate amount of $15,000. The loan was subordinated to a
      revolving credit facility with Foothill, was collateralized by all the assets
      of
      the Company and, as amended, had a maturity date of June 30, 2005. On October
      1,
      2003 Counsel assigned the balance owed in connection with the Initial Loan
      of
      $9,743, including accrued interest (“the Assigned Loan”), to C2 in exchange for
      a new loan bearing interest at 10% per annum compounded quarterly and payable
      on
      maturity of the loan (“the New Loan”). The New Loan has been amended several
      times and the maturity date of the loan plus accrued interest has been extended
      to December 31, 2006. Consistent with the terms of the Initial Loan, subject
      to
      certain conditions, the New Loan provides for certain mandatory prepayments
      upon
      written notice from Counsel including an event resulting in the issuance of
      new
      shares by C2 to a party unrelated to Counsel where the funds are not used for
      an
      approved expanded business plan, the purchase of the Company’s accounts
      receivable by a third party or where C2 has sold material assets in excess
      of
      cash proceeds of $1,000 and certain other events. The New Loan is subject to
      certain events of default which may accelerate the repayment of principal plus
      accrued interest. Pursuant to a Stock Pledge Agreement as amended, the New
      Loan
      is secured by the common stock held directly by C2 in its operating
      subsidiary.





Effective
      October 2004, Counsel’s loan and security interest were subordinated in favor of
      Foothill and Laurus. There are no conversion features associated with the New
      Loan. As of December 31, 2005, the total outstanding debt under the New Loan
      (including principal and accrued interest) was $12,168. On
      June
      30, 2005, Foothill assigned its senior lending facility to AMA, and on September
      3 0,
      2005, upon
      the
      closing of the sale of ACC ’ s
      assets,
      AMA released ACC and C2 from any obligations pursuant to the senior lending
      facility . Following
      the sale, Counsel ’ s
      loan
      and security interest remains subordinated to the Laurus debt.





Counsel
      Keep Well





Counsel
      has committed to fund, through intercompany advances or equity contribution,
      all
      capital investment, working capital or other operational cash requirements
      of C2
      through December 31, 2006 (the “Keep Well”). Counsel is not expected to extend
      the Keep Well beyond its current maturity.





Counsel
      Guarantee, Subordination and Stock Pledge





Counsel
      has guaranteed the debt that the Company owes to Laurus. Counsel has also agreed
      to subordinate all of its debt owed by the Company, and to subrogate all of
      its
      related security interests in favor of Laurus. Counsel further agreed to pledge
      all of its shares owned in C2 as security for the related debts. In accordance
      with the Laurus agreement, amounts owing to Counsel cannot be repaid while
      amounts remain owing to Laurus. Notwithstanding this, Counsel is not expected
      to
      extend the maturity date of its loans beyond December 31, 2006. In accordance
      with Counsel’s subordination agreement with Laurus, so long as C2’s debt to
      Laurus remains outstanding, Counsel may not, without the written consent of
      Laurus, take any enforcement action to collect its loans owing by the Company.
      In the event that the C2 debt to Laurus is either prepaid in full or settled
      via
      conversion of such debt into shares of the Company, the subordination agreement
      shall be terminated with immediate effect.


F-24




Conferral
      of benefit from Counsel





Counsel
      entered into compensation arrangements with one of its executive officers
      relating to the retention of their services through the disposition of C2’s
      Telecommunications business in the third quarter of 2005. Counsel also entered
      into a contract with the executive officer related to the disposition. The
      total
      fair value of these contracts is $1,000 and, as required under GAAP, they were
      recorded by the Company as a conferral of a $1,000 benefit to the Company from
      its controlling shareholder in the third quarter of 2005. The amount has been
      reported as an expense of the discontinued operations, with an offsetting credit
      to contributed surplus. There are no economic consequences to C2 as the result
      of this conferral of benefit.





Counsel
      Management Services




In
      December 2004, C2 entered into a management services agreement (the “Agreement”)
      with Counsel. Under the terms of the Agreement, C2 agreed to make payment to
      Counsel for the past and future services to be provided by certain Counsel
      personnel to C2 for each of 2004 and 2005. The basis for such services charged
      is an allocation, based on time incurred, of the cost of the base compensation
      paid by Counsel to those employees providing services to C2. For the years
      ended
      December 31, 2004 and 2005, the cost of such services was $280 and $450,
      respectively. The foregoing fees for 2004 and 2005 are due and payable within
      30
      days following the respective year ends, subject to any subordination
      restrictions then in effect. Any unpaid fee amounts will bear interest at 10%
      per annum commencing on the day after such year-end. In the event of a change
      of
      control, merger or similar event of the Company, all amounts owing, including
      fees incurred up to the date of the event, will become due and payable
      immediately upon the occurrence of such event, subject to any subordination
      restrictions then in effect. In accordance with the Laurus agreement, amounts
      owing to Counsel cannot be repaid while amounts remain owing to
      Laurus.




Counsel
      provided management services to C2 in 2003, for which no amounts were charged
      to
      C2, resulting in the conferral of a benefit of $130.





**Note
      14 - Legal Proceedings**





On
      April 16, 2004, certain stockholders of the Company (the “Plaintiffs”)
      filed a putative derivative complaint in the Superior Court of the State of
      California in and for the County of San Diego, (the “Complaint”) against the
      Company, WorldxChange Corporation (sic), Counsel Communications LLC, and Counsel
      Corporation as well as four present and former officers and directors of the
      Company, some of whom also are or were directors and/or officers of the other
      corporate defendants (collectively, the “Defendants”). The Complaint alleges,
      among other things, that the Defendants, in their respective roles as
      controlling stockholder and directors and officers of the Company committed
      breaches of the fiduciary duties of care, loyalty and good faith and were
      unjustly enriched, and that the individual Defendants committed waste of
      corporate assets, abuse of control and gross mismanagement. The Plaintiffs
      seek
      compensatory damages, restitution, disgorgement of allegedly unlawful profits,
      benefits and other compensation, attorneys’ fees and expenses in connection with
      the Complaint. The Company believes that these claims are without merit and
      intends to continue to vigorously defend this action. There is no assurance
      that
      this matter will be resolved in the Company’s favor and an unfavorable outcome
      of this matter could have a material adverse impact on its business, results
      of
      operations, financial position or liquidity.





The
      Company, Counsel Communications LLC, Counsel Corporation and four of its current
      and former executives and board members were named in a securities action filed
      in the Superior Court of the State of California in and for the County of San
      Diego (the “Court”) on April 16, 2004, in which the plaintiffs made claims
      nearly identical to those set forth in the Complaint in the derivative suit
      described above. The Company believes that these claims are without merit and
      intends to vigorously defend this action. There is no assurance that this matter
      will be resolved in the Company’s favor and an unfavorable outcome of this
      matter could have a material adverse impact on its business, results of
      operations, financial position or liquidity. In February 2006, the plaintiffs
      in
      both this action and the derivative action described above changed attorneys.
      Consequently, the trial date set for June 16, 2006 has been vacated; a new
      date
      has not yet been set.





In
      connection with the Company’s efforts to enforce its patent rights, C2
      Communications Technologies Inc., our wholly owned subsidiary, filed a patent
      infringement lawsuit against ITXC Corp. (“ITXC”) in the United States District
      Court of the District of New Jersey on April 14, 2004. The complaint
      alleged that ITXC’s VoIP services and systems infringed the Company’s U.S.
      Patent No. 6,243,373, entitled *“Method
      and Apparatus for Implementing a Computer Network/Internet Telephone
      System.”* On
      May 7, 2004, ITXC filed a lawsuit against C2 Communications Technologies
      Inc., and the Company, in the United States District Court for the District
      of
      New Jersey for infringement of five ITXC patents relating to VoIP technology,
      directed generally to the transmission of telephone calls over the Internet
      and
      the completion of telephone calls by switching them off the Internet and onto
      a
      public switched telephone network. On March 17, 2006, the litigation between
      C2
      and ITXC was terminated as a result of the Court approving a Consent Order
      whereby all claims and counterclaims were dismissed with prejudice as a result
      of C2’s covenanting not to sue ITXC.


F-25


The
      Consent Order was not based on the determination of the merits of any issue
      in
      the lawsuits. C2 concluded, based upon information suggesting that the nature
      and magnitude of the business being conducted through the network at issue
      do
      not justify the litigation from an economic standpoint, that it would not be
      fiscally prudent or beneficial to continue this litigation. The termination
      of
      this litigation will allow C2 to pursue other options to realize value from
      its
      intellectual property.





At
      our
      Adjourned Meeting of Stockholders held on December 30, 2003, our
      stockholders, among other things, approved an amendment to our Articles of
      Incorporation, deleting Article VI thereof (regarding liquidations,
      reorganizations, mergers and the like). Stockholders who were entitled to vote
      at the meeting and advised us in writing, prior to the vote on the amendment,
      that they dissented and intended to demand payment for their shares if the
      amendment was effectuated, were entitled to exercise their appraisal rights
      and
      obtain payment in cash for their shares under Sections 607.1301 - 607.1333
      of the Florida Business Corporation Act (the “Florida Act”), provided their
      shares were not voted in favor of the amendment.





In
      January 2004, we sent appraisal notices in compliance with Florida
      corporate statutes to all stockholders who had advised us of their intention
      to
      exercise their appraisal rights. The appraisal notices included our estimate
      of
      fair value of our shares, at $4.00 per share on a post-split basis. These
      stockholders had until February 29, 2004 to return their completed
      appraisal notices along with certificates for the shares for which they were
      exercising their appraisal rights. Approximately 33 stockholders holding
      approximately 74,000 shares of our stock returned completed appraisal notices
      by
      February 29, 2004. A stockholder of 20 shares notified us of his acceptance
      of our offer of $4.00 per share, while the stockholders of the remaining shares
      did not accept our offer. Subject to the qualification that, in accordance
      with
      the Florida Act, we may not make any payment to a stockholder seeking appraisal
      rights if, at the time of payment, our total assets are less than our total
      liabilities, stockholders who accepted our offer to purchase their shares at
      the
      estimated fair value will be paid for their shares within 90 days of our
      receipt of a duly executed appraisal notice. If we should be required to make
      any payments to dissenting stockholders, Counsel will fund any such amounts
      through advances to C2. Stockholders who did not accept our offer were required
      to indicate their own estimate of fair value, and if we do not agree with such
      estimates, the parties are required to go to court for an appraisal proceeding
      on an individual basis, in order to establish fair value. Because we did not
      agree with the estimates submitted by most of the dissenting stockholders,
      we
      have sought a judicial determination of the fair value of the common stock
      held
      by the dissenting stockholders. On June 24, 2004, we filed suit against the
      dissenting stockholders seeking a declaratory judgment, appraisal and other
      relief in the Circuit Court for the 17 th Judicial
      District in Broward County, Florida. On February 4, 2005, the declaratory
      judgment action was stayed pending the resolution of the direct and derivative
      lawsuits filed in California. This decision was made by the judge in the Florida
      declaratory judgment action due to the similar nature of certain allegations
      brought by the defendants in the declaratory judgment matter and the California
      lawsuits described above. On March 7, 2005, the dissenting shareholders appealed
      the decision of the District Court judge to the Fourth District Court of Appeals
      for the State of Florida, which denied the appeal on June 21, 2005. When the
      declaratory judgment matter resumes, there is no assurance that this matter
      will
      be resolved in our favor and an unfavorable outcome of this matter could have
      a
      material adverse impact on our business, results of operations, financial
      position or liquidity.





The
      Company is involved in various other legal matters arising out of its operations
      in the normal course of business, none of which are expected, individually
      or in
      the aggregate, to have a material adverse effect on the
      Company.





**Note
      15 - Class N Preferred Stock**





Each
      Class N preferred share has a voting entitlement equal to 40 common shares,
      votes with the common stock on an as-converted basis and is senior to all other
      preferred stock of the Company. Dividends, if any, will be paid on an
      as-converted basis equal to common stock dividends. The current conversion
      price
      in respect of each Class N preferred share is $25.00.





There
      were no conversions during 2005. During 2004, holders of the Class N preferred
      stock converted one of those shares into 40 shares of common stock. As of
      December 31, 2005 and 2004, there were 618 shares of Class N preferred stock
      issued and outstanding.





At
      December 31, 2005 and 2004, of the 10,000,000 shares of preferred stock
      authorized, 9,486,500 remain undesignated and unissued.





**Note
      16 -**  **Dividends**





To
      date,
      the Company has not paid dividends on its common stock nor is it anticipated
      that the Company will pay dividends in the foreseeable future.





As
      of
      December 31, 2005, the Company does not have any preferred stock outstanding
      which has any preferential dividends.


F-26





So
      long
      as 25% of principal amount of the Note held by Laurus, described in Note 9
      of
      these financial statements, remains outstanding, the Company may not pay any
      dividends on its common stock.





Additionally,
      under the Florida Act, the Company may not pay dividends while it has negative
      stockholders’ equity.











**Note
      17 - Stock-Based Compensation Plans**





In
      November 2003, the Company’s stockholders approved a 1-for-20 reverse stock
      split. Accordingly, all information presented below has been adjusted to reflect
      the reverse split.





2004
      Platinum Agent Warrant Program





During
      2004, the Company launched the Acceris Communications Inc. Platinum Agent
      Program (the "Agent Warrant Program"), which provided for the issuance of
      warrants to purchase up to 1,000,000 shares of common stock to independent
      agents who participated in the Agent Warrant Program. As at December 31, 2004,
      650,000 warrants had been issued at an exercise price of $3.50. At no time
      did
      these warrants meet the requirements for vesting. The Company discontinued
      its
      Agent Warrant Program during the third quarter of 2005, and, accordingly, all
      of
      the warrants were cancelled.





2003
      Stock Option and Appreciation Rights Plan





In
      November 2003, the stockholders of the Company approved the 2003 Stock Option
      and Appreciation Rights Plan (the “2003 Plan”) which provides for the issuance
      of incentive stock options, non-qualified stock options and stock appreciation
      rights (“SARs”) up to an aggregate of 2,000,000 shares of common stock (subject
      to adjustment in the event of stock dividends, stock splits, and other similar
      events). The price at which shares of common stock covered by the option can
      be
      purchased is determined by the Company’s Board of Directors or its committee;
      however, in the case of incentive stock options the exercise price shall not
      be
      less than the fair market value of the Company’s common stock on the date the
      option is granted. As of December 31, 2004, there were options to purchase
      338,250 shares (2004 - 1,359,625 shares) of the Company’s common stock
      outstanding under the 2003 Plan. The outstanding options vest over four years
      at
      exercise prices ranging from $0.56 to $3.00 per share. During 2005, options
      to
      purchase 1,060,975 shares (2004 - 433,726 shares) of common stock were forfeited
      or expired. There were no options exercised during 2005 and 2004, and no SARs
      have been issued under the 2003 Plan.





2000
      Employee Stock Purchase Plan





During
      2000, the Company obtained approval from its stockholders to establish the
      2000
      Employee Stock Purchase Plan. The Stock Purchase Plan provides for the purchase
      of common stock, in the aggregate, up to 125,000 shares. This plan allows all
      eligible employees of the Company to have payroll withholding of 1 to 15 percent
      of their wages. The amounts withheld during a calendar quarter are then used
      to
      purchase common stock at a 15 percent discount off the lower of the closing
      sale
      price of the Company’s stock on the first or last day of each quarter. This plan
      was approved by the Board of Directors, subject to stockholder approval, and
      was
      effective beginning the third quarter of 2000. The Company issued 1,726 shares
      to employees based upon payroll withholdings during 2001. There have been no
      issuances since 2001.





The
      purpose of the Stock Purchase Plan is to provide incentives for all eligible
      employees of C2 (or any of its subsidiaries) who have been employees for at
      least three months to encourage stock ownership of C2 by acquiring or increasing
      their proprietary interest in C2. The Stock Purchase Plan is designed to
      encourage employees to remain in the employ of C2. It is the intention of C2
      to
      have the Stock Purchase Plan qualify as an “employee stock purchase plan” within
      the meaning of Section 423 of the Internal Revenue Code, as amended to issue
      shares of common stock to all eligible employees of C2 (or any of C2’s
      subsidiaries) who have been employees for at least three months.







1997
      Recruitment Stock Option Plan





In
      October 2000, the stockholders of the Company approved an amendment of the
      1997
      Recruitment Stock Option Plan (the “1997 Plan”)which provides for the issuance
      of incentive stock options, non-qualified stock options and SARs up to an
      aggregate of 370,000 shares of common stock (subject to adjustment in the event
      of stock dividends, stock splits, and other similar events). The price at which
      shares of common stock covered by the option can be purchased is determined
      by
      the Company’s Board of Directors; however, in
      all
      instances the exercise price is never less than the fair market value of the
      Company’s common stock on the date the option is granted.


F-27





As
      of
      December 31, 2005, there were options to purchase 14,611 shares (2004 - 56,736
      shares) of the Company’s common stock outstanding under the 1997 Plan. The
      outstanding options vest over three years at exercise prices ranging from $1.40
      to $111.26 per share (2004 - $1.40 to $127.50) per share. Options issued under
      the 1997 Plan must be exercised within ten years of grant and can only be
      exercised while the option holder is an employee of the Company. The Company
      has
      not awarded any SARs under the 1997 Plan. During 2005 and 2004, options to
      purchase 42,125 and 3,744 shares of common stock, respectively, were forfeited
      or expired. There were no exercises during 2005 or 2004.





Director
      Stock Option Plan





The
      Company’s Director Stock Option Plan authorized the grant of stock options to
      directors of the Company. In connection with the adoption of the 1995 Director
      Plan, the Board of Directors authorized the termination of future grants of
      options under the Director Stock Option Plan; however, outstanding options
      continued to be governed by the terms thereof until exercise or expiration
      of
      such options. Options granted under the Director Stock Option Plan were
      non-qualified stock options exercisable at a price equal to the fair market
      value per share of common stock on the date of any such grant. Options granted
      under the Director Stock Option Plan are exercisable not less than six months
      or
      more than ten years after the date of grant.





As
      of
      December 31, 2005, no options were outstanding. In 2004, options for the
      purchase of 117 shares of common stock at a price of $17.50 per share were
      outstanding. In 2005, these 117 options expired.





1995
      Director Stock Option and Appreciation Rights Plan





The
      1995
      Director Stock Option and Appreciation Rights Plan (the “1995 Director Plan”)
      provides for the issuance of incentive options, non-qualified options and SARs
      to directors of the Company up to 12,500 shares of common stock (subject to
      adjustment in the event of stock dividends, stock splits, and other similar
      events).





The
      1995
      Director Plan also provides for the grant of non-qualified options on a
      discretionary basis, to each member of the Board of Directors then serving,
      to
      purchase 500 shares of common stock at an exercise price equal to the fair
      market value per share of the common stock on that date. Each option is
      immediately exercisable for a period of ten years from the date of grant. The
      Company has 9,500 shares of common stock reserved for issuance under the 1995
      Director Plan. As of December 31, 2005, options to purchase 7,500 shares (2004
      -
      8,500 shares) of common stock at a price of $22,50 (2004 - $20.00 to $25.00)
      per
      share are outstanding and exercisable. No options were granted or exercised
      under this plan in 2005 and 2004. In 2005, 1,000 options expired (2004 -
      nil).





1995
      Employee Stock Option and Appreciation Rights Plan





The
      1995
      Employee Stock Option and Appreciation Rights Plan (the “1995 Employee Plan”)
      provides for the issuance of incentive stock options, non-qualified stock
      options, and SARs. Directors of the Company are not eligible to participate
      in
      the 1995 Employee Plan. The 1995 Employee Plan provides for the grant of stock
      options which qualify as incentive stock options under Section 422 of the
      Internal Revenue Code, to be issued to officers who are employees and other
      employees, as well as non-qualified options to be issued to officers, employees
      and consultants. In addition, SARs may be granted in conjunction with the grant
      of incentive and non-qualified options.





The
      1995
      Employee Plan provides for the grant of incentive options, non-qualified options
      and SARs of up to 20,000 shares of common stock (subject to adjustment in the
      event of stock dividends, stock splits, and other similar events). To the extent
      that an incentive option or non-qualified option is not exercised within the
      period of exercisability specified therein, it will expire as to the then
      unexercisable portion. If any incentive option, non-qualified option or SAR
      terminates prior to exercise thereof and during the duration of the 1995
      Employee Plan, the shares of common stock as to which such option or right
      was
      not exercised will become available under the 1995 Employee Plan for the grant
      of additional options or rights to any eligible employee. The shares of common
      stock subject to the 1995 Employee Plan may be made available from either
      authorized but unissued shares, treasury shares or both. The Company has 20,000
      shares of common stock reserved for issuance under the 1995 Employee Plan.
      As of
      December 31, 2005, there were no options outstanding under the 1995 Employee
      Plan. No options were granted or exercised in 2005 or 2004 under the 1995
      Employee Plan.


F-28




Other
      options





In
      1996,
      the Company approved the issuance of 87,500 options to executives of the
      Company, as part of their employment agreements, and 3,200 options to a
      consultant. The options expire in 2006 and have an option price of $78.00.
      No
      options expired, were exercised or forfeited during 2005 or 2004. As of December
      31, 2005, there remained 78,200 options outstanding.





During
      1997, the Company issued options to purchase 60,500 shares of common stock
      (10,500 of which were issued under the 1997 recruitment stock option plan)
      to
      consultants at exercise prices ranging from $97.50 to $168.75 (repriced to
      $78.00 on December 13, 1998), which was based on the closing price of the stock
      at the grant date. No options expired, were exercised or forfeited during 2005
      or 2004. The remaining options must be exercised within ten years of the grant
      date. As of December 31, 2005 there remained 44,500 options
      outstanding.





During
      1997, the Company issued non-qualified options to purchase 114,750 shares of
      common stock to certain executive employees. The options must be exercised
      within ten years of the grant date and have an exercise price of $78.00. There
      were no options forfeited in 2005 or 2004. No options expired or were exercised
      during 2005 or 2004. As of December 31, 2005 there remained 105,915 options
      outstanding.





During
      1998, the Company issued non-qualified options to purchase 46,750 shares of
      common stock to certain executive employees at exercise prices ranging from
      $51.26 to $62.50, which price was based on the closing price of the stock at
      the
      grant date. The options must be exercised within ten years of the grant date.
      No
      options expired, were exercised or forfeited during 2005 or 2004. As of December
      31, 2005 there remained 40,470 options outstanding.





During
      1999, the Company issued non-qualified options to purchase 32,750 shares of
      common stock to certain executive employees at exercise prices ranging from
      $50.00 to 71.26, which price was based on the closing price of the stock at
      the
      grant date. The options must be exercised within ten years of the grant date.
      No
      options were exercised during 2005 or 2004. As of December 31, 2005, there
      remained 18,750 options outstanding.





During
      1999, the Company issued non-qualified options to purchase 10,000 shares of
      common stock to a consultant at an exercise price of $60.00, which was based
      on
      the closing price of the stock at the grant date. No options were exercised
      during 2005 or 2004. The fair value of the options issued was recorded as
      deferred compensation of $300,000 to be amortized over the expected period
      the
      services were to be provided. As of December 31, 2005 there remained 10,000
      options outstanding.





During
      2000, the Company issued non-qualified options to purchase 129,250 shares of
      common stock to certain executive employees at exercise prices ranging from
      $55.00 to $127.50, which price was based on the closing price of the stock
      at
      the grant date. The options must be exercised within ten years of the grant
      date. No options were exercised during 2005 or 2004. As of December 31, 2005,
      there remained 68,833 options outstanding.





The
      following table summarizes the changes in common stock options for the common
      stock option plans described above:





**2005**
            
            **2004**
            
            **2003****Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding
                at beginning of year
            
            
            1,791,643
            
            $
            42.46
            
            
            1,807,879
            
            $
            18.20
            
            
            1,258,463
            
            $
            36.40Granted
            
            
            39,600
            
            
            0.54
            
            
            421,350
            
            
            1.73
            
            
            1,377,662
            
            
            3.00Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Expired
            
            
            (1,117
            )
            
            21.98
            
            
            (116
            )
            
            77.50
            
            
            (828,246
            )
            
            20.46Forfeited
            
            
            (1,103,100
            )
            
            4.64
            
            
            (437,470
            )
            
            2.78
            
            
            —Outstanding
                at end of year
            
            
            727,026
            
            $
            37.50
            
            
            1,791,643
            
            $
            18.08
            
            
            1,807,879
            
            $
            18.20Options
                exercisable at year end
            
            
            516,463
            
            $
            53.39
            
            
            696,012
            
            $
            42.46
            
            
            435,880
            
            $
            66.05Weighted-average
                fair value of options granted during the year
            
            
            
            
            $
            0.39
            
            
            
            
            $
            1.34
            
            
            
            
            $
            2.07




F-29





The
      following table summarizes information about fixed stock options outstanding
      at
      December 31, 2005:





**Exercise
                price**
            
            **Options**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Remaining**
              **Life
                (years)**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$
                0.56 to $ 1.39
            
            
            185,000
            
            
            5.34
            
            $
            0.95
            
            
            38,750
            
            $
            1.04$
                1.40 to $ 3.00
            
            
            159,448
            
            
            4.67
            
            
            2.94
            
            
            82,010
            
            
            2.91$
                6.88 to $ 22.50
            
            
            10,465
            
            
            1.48
            
            
            20.37
            
            
            10,465
            
            
            20.37$42.50
                to $ 71.26
            
            
            137,666
            
            
            3.59
            
            
            58.21
            
            
            150,791
            
            
            57.53$78.00
                to $128.00
            
            
            234,447
            
            
            1.25
            
            
            78.50
            
            
            234,447
            
            
            78.50727,026
            
            
            3.23
            
            $
            37.50
            
            
            516,463
            
            $
            53.39




**Note
      18 - Summarized Quarterly Data (unaudited)**





Following
      is a summary of the quarterly results of operations for the years ended December
      31, 2005 and 2004.





**March
                31**
            
            **June
                30**
            
            **September
                30**
            
            **December
                31**Net
                sales:
            
            
            2005
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —2004
            
            
            450
            
            
            90
            
            
            —
            
            
            —Operating
                loss:
            
            
            2005
            
            $
            (996
            )
            $
            (1,322
            )
            $
            (587
            )
            $
            (301
            )2004
            
            
            (437
            )
            
            (828
            )
            
            (940
            )
            
            (1,834
            )Net
                loss from continuing operations
            
            
            2005
            
            $
            (3,627
            )
            $
            (4,830
            )
            $
            (2,522
            )
            $
            (3,955
            )2004
            
            
            (2,660
            )
            
            (1,726
            )
            
            (2,774
            )
            
            (3,945
            )Gain
                (loss) from discontinued operations
            
            
            2005
            
            $
            (4,481
            )
            $
            (3,278
            )
            $
            4,292
            
            $
            (88
            )2004
            
            
            1,452
            
            
            (6,490
            )
            
            (4,093
            )
            
            (2,547
            )Net
                gain (loss):
            
            
            2005
            
            $
            (8,108
            )
            $
            (8,108
            )
            $
            1,770
            
            $
            (4,043
            )2004
            
            $
            (1,208
            )
            $
            (8,216
            )
            $
            (6,867
            )
            $
            (6,492
            )Basic
                and diluted income (loss) from continuing operations per common
                share:
            
            
            2005
            
            $
            (0.19
            )
            $
            (0.25
            )
            $
            (0.13
            )
            $
            (0.21
            )2004
            
            
            (0.14
            )
            
            (0.09
            )
            
            (0.14
            )
            
            (0.20
            )Basic
                and diluted income (loss) per common share:
            
            
            2005
            
            $
            (0.42
            )
            $
            (0.42
            )
            $
            0.09
            
            $
            (0.21
            )2004
            
            
            (0.06
            )
            
            (0.43
            )
            
            (0.35
            )
            
            (0.34
            )











F-30







**C2
      GLOBAL TECHNOLOGIES INC.**


**SCHEDULE
      OF VALUATION AND QUALIFYING ACCOUNTS**








**Description**
            
            **Balance
                at**
              **Beginning**
              **of
                Period**
            
            **Charged
                to**
              **Costs
                and**
              **Expenses**
            
            **Deductions**
              **(a)**
            
            **Other**
            
            **Balance
                at**
              **End
                of**
              **Period**Allowance
                for doubtful accounts:December
                31, 2003
            
            $
            100
            
            $
            6
            
            $
            (100
            )
            $
            —
            
            $
            6December
                31, 2004
            
            $
            6
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            6December
                31, 2005
            
            $
            6
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            6


____________


(a)
            Deductions
                represents allowance amounts written off as uncollectible and recoveries
                of previously reserved amounts.








S-1